Diary of a private investor

Having returned 16.4 per cent in 2015 the portfolio is now up 121.8 per cent over the four years to 31 December 2015; over the respective time periods the FTSE All-Share (Total Return) Index returned -1.2 per cent and +38.7 per cent, respectively. Risk analysis by portfolio analysis software Statpro shows the annualised monthly volatility over the four years at 10.3 per cent, just below the FTSE All-Share at 10.5 per cent. The worst period was in the spring of 2012, when the Greek debt crisis hit the markets before ECB president, Mario Draghi, came to the rescue with his "whatever it takes" speech; the portfolio fell 12.6 per cent from peak to trough.

I am a fan of the approach championed by the late Jim Slater in his book The Zulu Principle and focus my efforts on searching for companies where the growth prospects are not reflected in the share price. I especially like companies that are beating expectations, providing the added benefit of a potential re-rating on upgraded forecasts. Most of my holdings meet the following criteria:

■ PE ratios in the low to mid-teens.

■ PEG ratios of less than one.

■ A growing dividend, that is well covered by earnings and cash flow.

■ Low to moderate debt levels.

Where possible I try to meet management and understand what makes them tick. If they have a decent stake in the business so much the better; our interests are aligned. I have between 20 and 30 holdings, including the investment trusts mentioned earlier. Finally, I am a great believer in re-investing dividends and allowing compounding to do its work over the long term: to quote Einstein: "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."

Many of my mistakes have been where I have let my discipline slip and been seduced by the excitement and prospects of 'blue-sky' companies where, as is so often the case, reality fails to live up to expectations; thankfully they have been few and far between. I try to run my winners and cut my losers; "water my flowers and cut my weeds" as Warren Buffett puts it. It is so often tempting to do the opposite.

I try not to get emotionally involved with individual companies; if I cut a holding and it immediately bounces, so be it. All that matters, is the overall return of the portfolio.

2015

Despite the summer turbulence, China finished the year in positive territory, with the FTSE China A All Share gaining 24.0 per cent. The Dax and the Nikkei 225 gained 9.5 per cent and 9.1 per cent respectively, but in the US the S&P 500 recorded its first negative year since 2008, falling 0.7 per cent, while the technology-heavy Nasdaq 100 added 8.4 per cent; Netflix (US;NFLX) was up 134 per cent, Amazon (US:AMZN) 118 per cent and Facebook (US:FB) 34 per cent. In the UK, the FTSE All-Share (TR) Index's gain of 1.1 per cent does not really tell the whole story; the FTSE 100 (TR) with its heavy exposure to resource stocks fell 1.3 per cent, while the FTSE 250 Mid-Cap (TR) Index gained 11.2 per cent, FTSE Small Cap 6.2 per cent and the FTSE Aim All Share 5.2 per cent. Gold did not provide protection in nervous markets, falling 10.4 per cent and now off some 44 per cent from the highs of September 2011.

My portfolio performance

In 2015, AdEPT Telecom (ADT), up 97 per cent, was the top contributor to performance (size of position x percentage gain), accounting for 4.3 per cent of the overall portfolio gain of 16.4 per cent. It was followed by: Japanese small cap investment trust Baillie Gifford Shin Nippon (BGS), which contributed 4.0 per cent; Crawshaw Group (CRAW), the rapidly growing Yorkshire-based butcher, up 51 per cent, contributed 2.3 per cent; Safestyle (SFE), the Bradford-based manufacturer of replacement windows, contributed 1.6 per cent; European Assets Trust (EAT) 1.3 per cent; Bioventix (BVXP) 1.2 per cent and Renew Holdings (RNWH) 1.1 per cent. The largest detractors from performance were BlackRock World Mining (BRWM), which impacted the overall portfolio return by 1.7 per cent, Vislink (VLK) by 0.8 per cent and Flowgroup (FLOW) by 0.7 per cent.

Lessons

Looking at the attribution, the size of the contributions from the 'winners' is generally a lot higher than the negative hit from the 'losers'. I think there are three main lessons from this; the importance of position sizing, of running winning positions and of cutting losing ones. When adding new stocks, I usually buy a small position, 1-2 per cent, and add to those holdings that start to deliver, both from an operational and, more importantly, from a share price point of view. My initial position in Crawshaw was 1.0 per cent and in AdEPT Telecom 2.0 per cent, before later adding at higher prices.

In my experience it has more often than not been costly to add to losing positions; I tried it with Flowgroup back in January before admitting my mistake and cutting the position in May; that investment cost me 0.7 per cent, but since I took my loss the share price has halved, which would have hit performance by a further 0.7 per cent.

Another lesson came from Tribal (TRB) which, having bought in May, I cut for a small loss (£100), in August. The warning signs were in its half-year results statement, in which it said profits in 2015 were expected to be strongly weighted towards the second half of the year. This was almost a carbon copy of its statement 12 months earlier, where management's optimism for a stronger second half did not materialise. I wasn't going to take the risk of the same thing happening again and sure enough in October and December it warned on 2015 profits.

Some mistakes

Buying BlackRock World Mining Trust, not cutting, because I let the dividend yield of more than 7.0 per cent and the discount to NAV of over 10 per cent (currently 15 per cent) sway my judgment; it will be interesting to see what the company says about the dividend at the final results in early March. I should have cut Gem Diamonds (GEMD) in the face of continuing weakness in diamond prices but felt the valuation too cheap, especially given a strong balance sheet and decent cash flow. I should have kicked out Vislink in July when the senior executives were awarded, in my and many others' opinion, an overly generous 'incentive' scheme. My trimming of Biotech Growth (BIOG) and Worldwide Healthcare (WWH) during the late summer pullback was badly timed and, having met the management of Trakm8 (TRAK) in mid-September I put it on my 'watch list' and then watched it double in price over the following three months, without buying any.

Recent activity

During December I made minor changes to the portfolio; I neither added any new positions nor sold out of any. I confined myself to realising some profits on Baillie Gifford Shin Nippon, trimming the position from 9.8 per cent to 9.0 per cent and adding to three existing holdings; Fairpoint Group at 156p and XLMedia (XLM) at 80.8p on 7 December and Next at 7,433p on 11 December. In fact, the last new stock I bought was Inland Homes in November at 68p. Inland is a south-east-based housebuilder and developer of brownfield sites; it acquires residential and mixed-use sites before seeking planning consent for development. I think there is scope for a substantial uplift in value over the next couple of years as after gaining planning consent on its existing sites, it realises value by selling some on to larger national housebuilders while developing others itself.

2016

As usual we enter the new year with lots to worry about; Middle East tensions, terrorism, the path of US interest rates, the oil price, the economic outlook in China, to name but a few. Warren Buffett again: "People talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in 2007, we just didn't know it was uncertain. It was uncertain on 10 September 2001. It was uncertain on 18 October 1987, you just didn't know it." I am generally happy with the overall composition of the portfolio and with my current investment trust holdings, giving me exposure to: Japan and Continental Europe, which hopefully will continue to benefit from loose monetary conditions; Asian markets, where valuations look attractive relative to more developed markets; and the healthcare/biotech theme where technological advances still abound. I will try to ignore much of the market 'noise', strive to be more disciplined, especially when it comes to cutting losers, and continue to search for the next AdEPT Telecom, Crawshaw or Bioventix.

Each month I will be reviewing the portfolio's progress; performance, any changes I have made and thoughts on the portfolio structure.