Review 2022: Invasion, Inflation, Interest, Indecision
Performance
Top 5s
Distractions or Bear Market excuses
Am I worth it;
And Finally x2
For the third time, I am back on the back of no demand whatsoever - 3rd time's the charm - very interesting in the context of fool me twice.
2022 Performance
A picture is worth a thousand words & since I am typing this with my beer as I look out to the sea, I really want to limit the words (not something that comes naturally to me).
Fortunately for me and you, the laptop will likely die before my verbosity and my apologies because there will be even less proof reading and even more repetition/jumping back & forth than usual.
Green: Total portfolio: Time weighted return -1.2%
Yellow: Benchmark (ASX.TR) - Sharepad isn't showing me the time weighted comp but the lines seem pretty close. By my count, FTSE All share total return was +1.1.% ignoring contributions/withdrawals
Red: Total cash invested (cumulative)
Blue: Holdings Value
Grey: Cash Value: 22.9% & 23.4% at start/end of year (effective cash at end of year is higher due to a couple of merger arbitrage plays - quasi cash)
I guess being diversified makes me an all singing all dancing tracker but I managed to do this without holding bailout junkies (sorry Banks), Oil/Resources/Utilities.
Banks because we all have to draw the ethical line somewhere & others more to do with competence and a view developed from previous losses:
If I need to look up the country of operation on a map, avoid!
Do regret missing out on Telcom Plus in late 2022 though - couldn't bring myself to buy it 40% above my price anchor!
I run a fairly defensive portfolio - I prefer the term cautious to defensive/risk averse)
Anyway, I could make excuses about FTSE not representative and versus AIM/250/All world I am ahead but I will leave the excuses to the folks that get paid to do this for a living!
Point of the picture is to show how cash moved over the year.
Aggressively added in March (partly market timing, partly cash gets added in April).
Selling in summer months probably on lower conviction holdings which had been collected in all the volatility and portfolio sector concentrations.
H2 onwards cash withdrawals - Moving house and there are alternatives (more on this below).
Further, to reduce the cash drag in the event of recovery, added some names that are basically a levered bet on markets going up (Liontrust, Hargreaves Lansdowne & the new improved Vampire Squid (sorry Blackrock).
Liontrust is not going to stay long - horrible results and a management team that are in denial - it is kind of pathetic!
The CFO on the IMC call talked about how those adjustments were "just accounting" (hopefully their fund managers don't have that attitude).
Mr CFO - Those adjustments are there because you "just overpaid".
Another point is in terms of cash, I am reaching the stage where I will not be able to add (materially relative to portfolio value) to the portfolio when there is a dip to buy (like I could in Q2 2020 or Q4 2018), so to get cash to levels like March 2022, it would need to be a pretty compelling dip!
But a 20% drawdown will hurt a great deal more (maybe even outside my risk tolerance) compared to when I started out in 2012 and anticipated becoming a lot wealthier than I am.
Or as JayZ might have put it (around the same time):
Whats 50 grand to a MoFo like me, can you please remind me?
Well, nothing like ageing, not achieving your (unrealistic) objectives and a punch in the mouth to help jog the memory!
Bloomsbury up 25%
Today the holding is making me a little uncomfortable because of size but I am confident (PY virtually certain) that they will be beat expectations, although the quantum of the beat and outlook are less likely to sustain.
Property Franchise down 25%
I have been selling over the year. so didn't cause too much damage. If I was thinking as a fractional business owner, then I would certainly hold (and I still do) but they did make a sales & brokerage focused acquisitions near the top of the market.
I think 2022 results will be pretty solid, 2023 less certain. I'd contend it is getting cheap though but want to see the effect of Hunters properly
Tate & Lyle down down 8% (I'd put this primarily down to "beta") I do remember a broker downgrade causing a bit of a ruckus. Don't have access to the report unlike fund managers, so maybe there were very good reasons or maybe fund managers are not quite the high conviction long term holders they like to market themselves as.
Supreme down 60%, sold and cost me 2.5% of the portfolio & the 2022 clanger. Much like my golf would be so much better if I could just drop the 10 shot holes!
Calnex up 40% in the year, with my performance slightly better due to trading activity. Specifically, I sold part of this and replaced with SPT. Not going to work out exact numbers, but worked out better than not taking this action. Professionals may call it a relative value trade.
I was a bit nervous about Calnex with the illiquidity, size in portfolio & valuation & fund manager redemptions.
Much smaller now but sector exposure if roughly the same. Still feel a little uncomfortable especially since telecoms was one of the worst sectors this year but results do allay some of the discomfort
Other notable goods were selling out of all REITs at very attractive levels. As I said, Best of the Best made me reevaluate a lot of things and holding companies that fair value assets using ridiculous discount rates at a substantial premium because they offer inflation protection - what were you thinking?
If I was an institutional allocator, I would ask fund managers to explain this one!
Not sure any will read this blog, but my suggestion would be to say interest/discount rates were more transitory than inflation - OOPSIE!
Spectra Systems, British American Tobacco, Fonix mobile were other notable additions to performance - really wish I had not tinkered with Fonix but discretionary and I still find it all a little too good to be true.
Games Workshop a notable detractor (albeit I reduced at higher & lower levels than the current price). Finncap (should have been sold but loss aversion), Sanderson Design & Somero (haven't doubted myself despite Mark 2 Market loss) and being way too early with housebuilders were other notable detractors.
Not sure if this is valid but in terms of adding to losers versus cutting losers, I think if Mr Market is troubling me with a holding, cut the loser and if not, add to losers.
As I start 2023, the top 5 holdings ~22% of portfolio are:
Bloomsbury: As above
Bioventix: Reduced and then added during the year - Yay Me! - What a remarkable business although I get the feeling the mark is a little higher right now due to "influencers"
Side note:
Attended Mello May 2022 (couldn't attend November sadly). I saw a lot of people talk about how they were moving to more liquid, lower risk than they had typically been while building their influencer capabilities.
For some reason, a lot of the tweets post Mello would mention something like Gulf Marine Services or Serica Energy.
I may have said before and if there is anything you take from my ramblings,
Please, Please, Please
DO YOUR OWN RISK
Tate & Lyle: Pre broker downgrade, market was coming round to the view that this is higher growth/quality than a sugar producer. Without access to what the brokers are concerned about (maybe missing out on advisory fees), I am happy to hold.
Volvere: got/is very very cheap & they do come across as good capital allocators - taking losses on Indulgence for example. Buyback came in handy for the mark to market.
British American Tobacco: Part of the Supreme sales proceeds went here because they seem to have a better vaping business + $. This is my longest held stock and has been there pretty much from when I started tracking records. If I was the same person or investor I am now versus 10+ years ago, I am not sure I would be a holder but the endowment effect is powerful, especially when the stock price is going up.
For fund managers still pretending to be ESG:
We are facing a demographic time bomb so smoking is good!
There are probably kinder (and cheaper) ways to deal with the demographic timebomb than cigarettes but even I am struggling to justify a purge of the population on ESG grounds.
Distractions or Bear Market Excuses:
While the return is acceptable in the context of a tough market, I must say this has been a strange year.
Life has gotten in the way, whether that be holidays without internet, family, moving home and repeated backlogs due to the above factors.
Or are these excuses - lets be frank the game is a lot more fun when markets are going up.
Not sure there was the same competition to get in to investment management in the late 20th century compared to the early 21st century.
I can say this is probably the first time I was disconcerted by the volatility and fear of loss (or more accurately fear of drawdown/market).
My life has overlapped with the most spectacular bond bull market.
In my time investing in markets / observing markets, the market has been pumped & market participants repeatedly bailed out (the latter is still happening).
I paid too much attention to macro (and politics) not enough to the micro.
Specifically, with the backlog/distractions, the level of research to maintain conviction in down markets (sorry volatile markets) was sadly lacking.
I am confident I have missed out on some great opportunities & even in the context of 12 month performance, left money on the table especially in the September dramas, but I am not sure stocks were the best relative return compared with UK index linked bonds (see below re complexity).
As readers will know, I enjoy the macro (probably because it suits my desire to BS).
It got in the way this year and I wish it hadn't.
@BrilliantLeader (mentioned in my review two years in a row) said that towards the end he started ignoring it because it was too much (if only he could have been on Twin Petes a couple of months earlier).
FWIW, my macro calls - Inflation not turning out transitory didn't surprise me - Central Banks actually doing something about it (or at least trying to) did, especially the level of aggression (eventually!)
The phrase once bitten twice shy comes to mind.
So now we live in a world where there are alternatives, money is no longer free so if you worry about refinancing risk (because unlike pension funds and their counterparties, I won't get a bailout), then liquidity must be managed (the withdrawals from the portfolio were put on deposit) in case I need to make principal repayments to manage this risk.
For now, I am enjoying the arbitrage that comes from borrowing costs below that of the UK government / financial institutions.
Personally, I think it makes perfect sense because my credit risk is a lot lower than the UK Government or the financial institutions I lend to.
Really hope my flippancy doesn't come back to bite me in the posterior!
Beyond that, in a world where there are alternatives, portfolio management has become harder from an asset allocation perspective (I preferred the two state world where it was cash/equities).
Especially since holding cash had a far lower opportunity cost that risking 20% of 40% to earn a safe 0.1% didn't really make sense to me.
It would have probably made more sense if I was losing other people's money.
But now, that bonds offer a return, do you buy the equity dip or the bondholder bailout?
This Time is different is very dangerous - how about This Cycle is Different?
Portfolio Management/Style
I am still working on my investing style/concentration/approach. In the time I have been investing, I have dabbled in speculation, trading oversold securities and also managed to be a failed value investor, failed growth investor and a failed buy and hold investor.
So what am I, if I believe my stockopedia bubble charts, I am quality first with value/momentum more haphazard.
But I find momentum (or even technical analysis) is worth paying attention to. While I can't bring myself to admit that I don't really know/understand the fundamentals and even more so how market participants are going to interpret those fundamentals, I respect and admire those people that have that intellectual honesty.
When you have volatile markets the temptation for style drift (and sector drift) is strong as is the risk that you end up with too many holdings. I think that was the case for me, especially in the spate of activity in March and also during the year.
Some of these were trades over investments so fair enough but I do want to implement some rules.
I think I said I was happy with 25-40 holdings, so if I put some structure around it, I have decided (quite arbitrarily) to apply buckets in the range of 1-1.5%, 2.5-3% & 4.5-5%.
The likelihood of all 4.5 or all 1.5 is pretty low, so should end somewhere around 33 holdings, a number I am comfortable with.
Quality will be there across my holdings, but anything 1.5% holdings might be where I expect marked improvement in quality or holdings where the valuation is egregious but I am interested enough to follow.
Hopefully some of the bigger holdings will be where they acquired momentum during my holding period, but I will not be going against momentum unless I can clearly articulate why.
Similarly, if valuation is getting crazy and the business has not developed at the same rate as the share price, I should be looking to reduce.
The idea behind this approach - not too many holdings, reduced speculation/speculative holdings & if it is to watch, the holding is sufficient size to watch.
Nothing will be a hard and fast rule and nor should it be, but I think having a structure arbitrary as it might be, is better than not having a structure.
It will also force me to be more disciplined with decisions around selling/reducing/adding once an initial purchase is made
Am I worth it?
As of April 2022, I have been investing for 10 years (at least so far as records are concerned). I would contend that for most of the first 5 years I was speculating (safely) and then speculating idiotically.
I became a Stockopedia subscriber in late 2016 I think so that is probably a fair place to measure from or after the 2018 drawdown but that is cherry picking. At the same time, the portfolio is much bigger so when assessing time weighted returns, it probably makes sense to consider separate periods but manipulating data to get the answer you want is best left to the "mainstream media".
So April 2022 was when I reached 10 years of investment records so it was time to assess how I have done. Not quite compounding at 7.2% sadly but using a time weighted return, the latter years have more weight.
Last time I mention it (promise) but Best of the Best loss in 2021 has a far greater impact than a 4x on Redde from 2013.
When you add that my chosen index (pretty easy to beat historically, but this cycle is different) has been ripping me to shreds since November 2020, all sorts of doubts start creeping in.
I could change to a more representative index like the MSCI world, but then I would need to change the measurement period to outperform!
So of course, like any decent fund manager, rather than comparing myself to the index (because the index is hard to beat), I compared myself to other fund managers.
As it turns out on this measure in the post speculation (education) period, I am worth it.
As I said, I would rather underperform on the way up and outperform on the way down, which is broadly how it has worked out (FTSE 100 not being a representative index notwithstanding).
Howard Marks' Memo provided some nice confirmation (for the short term at least) that such managers have skill!
And since this cycle is different and fund managers insist that you can't rely on passive / beta for returns any more (unlike previous cycles when they insisted that passive was far more sensible), I guess I have no choice but to keep going.
Wife's portfolio for completeness
She is still not interested but she ended the year at -ve 8.3%
The approach for her - all world passive with some tinkering (with a slight commodity/energy/FTSE 100 overweight/US underweight/Cash overweight). Energy and more materials were added during the year - call it FOMO or the commodity super cycle.
She spent most of 2021 at 30% cash and as it turns out, she is at 35% but that is due to transfers of other pensions near the end of the year.
Given my concerns around passive, I did at the start of the year put some money into buy and hold investments, such that she would get a nice dividend stream without needing to drawdown by the time she withdraws her SIPP - should the worse happen to me.
Well that was stupid and should have been left in cash but fortunately she is not interested.
To be honest, I am not sure how this fits with the approach above but since it is a long term strategy, by the time I have to worry about it, I am dead!
But with better expected returns now, I think drip feeding into some form of 60/40 & taking benefits from cost averaging seems a lot more sensible than this time last year.
60/40 is dead, long live the new 60/40
By the time this is done, hopefully the long term will be kinder than 2022!
So there you are, a year where I have been troubled but that trouble was less a function of the portfolio returns and more a function of life & what I dare say will prove to be a more complex (if not more difficult) investing environment.
And Finally,
Fintwit has been a lot less active and some people seem to have pretty much disappeared (apart from the few instances of altruism) that tend to happen during a pump and dump effort or if the market has one of the rip your face of rallies.
Bear markets have silver linings from a learning perspective and it is great to have what I believe is a more informed view of whom to trust.
Those of you that did stick around (and those that started winding back in early 2021 because the bull was getting excessive) thank you very much for your honesty - misery loves company!
I'm happy to see that most of the people I follow/interact with are not fair weather Freddies.
I'd name and praise but you know who you are!
Thank you all and I wish you all a happy new year.
And also finally:
My phone fell out my pocket on the scooter on the street.
Someone found it, handed it in to a nearby hotel and the hotel called my wife.
Other than being grateful to Google that enabled this, I need to once again reiterate my faith in the goodness of people and why no matter whatever nonsensical actions governments take, we are all going to be just fine!
Now with that luck, how could 2023 be anything other than positive (or it could be all down hill from here)
I wish you a prosperous and fortunate 2023 - because as any smart person knows, it is better to be lucky than smart!
Adieu
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