Portfolio review

With another tax year under our belt, it’s time to pause for reflection, assess what we’ve learnt about investing, and hopefully boast about how our smarts led us to bag some big winners.

Unfortunately, I have nothing to boast about this year. My portfolio was down 6.2% during the (tax) year, compared to a positive return of 2.8% for the ASX (FTSE All-Share). I therefore lagged the the index by around 9%, a truly pitiful performance. I haven’t underperformed that bad since the 90’s.

What went badly?

  • Story stocks – specifically, an investment in PLE (Plethora), pharma company aimed at tackling premature ejaculation. I was convinced it was onto something big (no pun intended!), and in late stage development. Alas, so far it has turned out to be a typical AIM serial disappointer. The only saving grace is that it was only a small part of my portfolio, and I am hoping it will still come good. Try not to read too many double entendres into that. I should have followed Lynch’s advice: wait until a company turns a profit before investing
  • Catching falling knives. “It can’t possibly get any cheaper” has been the siren call that has lured me onto the rocks. Buying into miners was the main culprit. Buying companies that are of only mediocre cheapness was not a good idea. I bought NPT (Netplay) and SAL (SpaceandPeople) before their big fall.

I think, if you’re going to buy value stocks, you really need to buy them in deep discount territory. Buying them when they’re “merely OK” does not seem a particularly good strategy.

I am underwater in miner KAZ (KAZ Minerals), having bought in at 303p in June 2014. Price declines followed, and I bought again in January 2015 at 180p. The price has recovered to 220p at the time of writing. So buying cheap might work, or it might not.

LMI (Lonmin) has been another disappointing buy on my part. I’m down 31% on that one. It’s now on a PBV of 0.37, and I’m holding on because I think it represents good value. It’s loss-making, and the PBV is the lowest it’s been for a decade. The pain is possibly not yet over. GLEN (Glencore) has a big stake in LMI, which it plans to distribute to its shareholders later this year. There is therefore a major overhang on this stock, and I expect a major dumping of the shares when the distribution is made. I plan to buy more if things work out as I expect.

It’s painful, terribly painful, to watch your hard-earned disappear down the bowl. I am not an advocate of “chasing” stocks, and I generally discourage “averaging down”. There’s no point compounding one mistake with another. However, I think sometimes you can make an exception, and I’m willing to take a gamble that my logic is correct on this share. No guarantees, of course, but sometimes you can only do what you feel is right.

That’s the bad news. Now what about the good news?

I think momentum worked well for me. Buying quality growth shares at reasonable prices also worked well. That seems to be a category that has worked consistently well for me. Perhaps that’s something I should concentrate more on.

My shares in restaurant chain PRZ (Prezzo) were taken over, at a price that I feel were somewhat underbid. I had a great run from PRZ, and I think that shareholders can do well if they can find shares of similar quality.

Spinoffs. Encouraged by re-reading Greenblatt’s book, “You can be a stock market genius”, I decided that it was time to actually try my hand at it. It is too early to draw any firm conclusions, but my preliminary finding so far is: they’re awesome. I had been put off by the fact that most of the companies are US quoted. I decided to put my discomfort aside, and invest in a few that I thought were promising. So far, I haven’t regretted it.

I am happy with the performance of all my spinoffs so far, and it’s certainly looking like one area that a value investor can specialise in where there’s not much competition. I won’t go into any detail about what to look for (pfft, as if I really knew, anyway), that is more amply covered in Greenblatt’s book. Based on what I’ve seen, Greenblatt’s book deserves to be counted as one of the most important books on investing ever written, perhaps second only to Ben Graham’s Intelligent Investor.

General thing to look for include a disparity in size between the parent and the spinoff, growth at a reasonable price, or good value. There are other things, too.

My best performers in the spinoff area are the ones that look like you shouldn’t touch with a bargepole. I’ll mention pharma company IRV (Indivior). It manufactures drug for the treatment of addictions, and the big worry is its drugs coming off patent. It’s up 32% since I bought it in January.

Another great performer is CRC (California Resources), an independent oil and gas explorer. Now, the share price has hardly been smooth, and in fact had been in steep decline after about a month of it spinning off. By luck, rather than judgement, I didn’t buy at the outset. In January, I figured it was cheap, so I decided to buy some. It’s up 63% since then. Pretty good considering that “everybody knows” that oil is dead.

All my spinoffs are in profit – a stark contrast to the rest of my portfolio.

Again, it’s too early to draw any conclusions. The markets are a little crazy right now, so it’s difficult to know how long the good times will keep on rolling. But I’m hoping that I can hold the spinoffs for around 3 years without losing patience, or underperforming the market.

There’s one thing I would like to emphasise about spinoffs: it does, perhaps, requires a certain tolerance of ambiguity. Value investors tend to be intellectually rigorous, adopt a wait-and-see approach approach, and like everything to be nailed down. With spinoffs, I don’t think all facts are known. You can get some idea of revenues, assets, and soforth, from press releases, and from company filings themselves. Don’t be afraid to “wing it” a little. They’ll often be things you don’t like; debt levels for instance. I think it’s an area which requires that you’re able to “take a view” rather than demand perfection.

So if you take away only one thing from this post, it’s this: spinoffs are well worth a look, and you should read Greenblatt’s book.

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About mcturra2000

Computer programmer living in Scotland.
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