Private investor's diary: Useful lessons to learn

Performance

While it is nice to be up, the portfolio has not so far this year,been firing on all cylinders. The portfolio gained 1 per cent, and is thus down 4.9 per cent since 1 January compared with the -0.4 per cent return of the FTSE All-Share (TR) Index, but since inception in January 2012 is up 110.9 per cent against +38 per cent for the index. It is the second time since January 2012, the last being April-June 2012, that the portfolio has lagged behind the index three months on the trot, so I will be hoping for better things this month and for the remainder of 2016.

The best performing stocks were Vislink (VKL), +20.2 per cent, after posting better-than-anticipated 2015 full-year results, followed by InterQuest (ITQ), +17.8 per cent, also after reassuring results. The portfolio's largest holding, Baillie Gifford Shin Nippon (BGS), gained 10.8 per cent and Conviviality Retail (CVR) gained a further 9.6 per cent. On the debit side were Next (NXT), -20.2 per cent, brutally treated by the market following a cautious outlook statement by the chief executive, Lord Wolfson, Sprue Aegis (SPRP), -16.7 per cent, Fairpoint Group (FRP), -14.2 per cent and Bioventix (BVXP), -11.5 per cent.

Activity

Early in the month, I took some profits in Safestyle (SFE), reducing the holding to 3 per cent, after it hit my 280p price target; it was up 75 per cent in little over a year. I used the proceeds to add to two holdings that were new to the portfolio earlier this year; Character Group (CCT) and Sprue Aegis, the latter, unfortunately, the day before it announced a new agreement with its Chinese supplier, which on a long-term basis makes sense but in the short term will hit margins a little. I sold the holding in Centaur Media (CAU), booking a loss, and reassigned the proceeds to three existing holdings where I feel more confident about the valuation and growth prospects; namely Inland Homes (INL), Next and XLMedia (XLM). I added one new holding, On The Beach Group (OTP); it is currently just 0.7 per cent of the portfolio but I anticipate adding to the position in due course. I think it is well placed as a 'market disrupter' and hopefully will become to the travel industry what the likes of moneysupermarket (MONY) has been to consumer financial services and Rightmove (RMV) to the housing market.

Am I an assassin or a rabbit?

Last month, I enjoyed reading The Art of Execution; How the world's best investors get it wrong and still make millions by Lee Freeman-Shor. It was an excellent read and hopefully one that will help hone my investment skills.

Between 2006 and 2013, the author was responsible for appointing 45 investment managers to manage concentrated portfolios, valued between $20m and $150m. His instructions were that they should only invest in their best 10 ideas. Over the eight years, there was, perhaps unsurprisingly, a significant disparity in the performance of the managers. In this book he records his observations and concludes that in general, when it came to stock picking, all the managers were much of a muchness; of the 1866 investments made, only 49 per cent made money - but what separated the winning portfolios from the also-rans was execution.

He places the managers into five categories. When it came to handling losing investments they were either assassins, hunters or rabbits and when dealing with winners, either raiders or connoisseurs:

■ An assassin is an investor who deals promptly and unemotionally with his failures; cuts early, or at least at a predetermined level, and moves on.

■ A hunter tends to watch, analyse and then at the right time add, attempting to average down and salvage the investment. Many were successful with this strategy; never perhaps regaining the whole loss but at least reducing its magnitude.

■ A rabbit! Need I say more. They watched the investment continue to fall, neither cutting nor adding. The rabbits tended to have the worst performance by far.

■ Raiders snatched at any profit they made; 10-30 per cent was enough. The proceeds were then reinvested, but as mentioned earlier only with a slightly less than 50 per cent chance of success.

■ The connoisseur, however, lets the winners run, perhaps trimming now and then but at least having a decent exposure to the holding for the duration. These were the investors who made 100 per cent or more from investments.

The best combination was the assassin/connoisseur and by far the worst were the rabbit/raiders; they invariably ended up being fired.

Lesson for me; don't be a rabbit!

Over the past four years, since initiating my portfolio in January 2012, I reckon I have mostly been an assassin. I have cut some holdings quite quickly, say after a 20 per cent loss and in most cases those stocks have continued to drop. Realistically, whether they dropped further or promptly rebounded is slightly irrelevant; the point is, I sought to minimise damage to the overall portfolio and move on.

In a few cases, I have acted like a hunter, adding to losing positions where I think my original premise for buying still holds, but in truth I think my success rate here has been no more than 50:50. In the past six months or so I have noticed a few rabbit-like tendencies creeping in; today, I hold three stocks out of my 28 that are down more than 20 per cent. Centaur Media was down 33 per cent before I bit the bullet last month; the problem with a stock that is down 33 per cent is that it has to gain 50 per cent just to get back to break-even! In future, I will endeavour to banish any rabbit-like tendencies and keep my assassin's rifle loaded.

I will also rethink my strategy around 'stop-loss review levels'; it is all very well reviewing but there is always a good reason to put off doing something. Perhaps setting a firm stop-loss would remove the emotion. I have always found I get a wonderful feeling of release after cutting a losing position; I no longer waste an inordinate amount of time and energy worrying about what to do with the holding but can move on and reinvest the capital, hopefully in a winner.

A raider or a connoisseur?

When it comes to the winners, I have acted more like a connoisseur than a raider. I believe in running winners and if the position is not too large, adding. I have given some positions a 'haircut' when they have become too large; this locks in some profits as well as enabling me to pick up stock on any setback. I still have decent holdings in stocks such as Crawshaw (CRAW) (first bought in Nov 2013 at 13p), Baillie Gifford Shin Nippon (April 2013 at 280p), easyJet (EZJ) (Jan 2012 at 408p), AdEPT Telecom (ADT) (Sept 2013 at 125p) and Dixons Carphone (DC) (Oct 2012 at 138p) to name a few.

How many holdings?

The author found that the greatest success stories came from the fund managers' best ideas, which begs the question, why not put more money into the best ideas, rather than dilute one's efforts and returns by adding more stocks? Ultimately the number of stocks one holds is a personal choice, but in attempting to build a diversified portfolio I am wary of getting involved in an exercise of diworseification. Since January 2012, I have held between 22 and 30 stocks at any one time; at 31 March, I held 29, with the top 10 positions comprising 52.2 per cent of the portfolio. I think there is scope to rationalise the portfolio and bring the number of holdings down again, weeding out some of the losers, especially those where the answer to, 'would I buy now if I didn't already own it?' was 'no'.

Looking forward

Q1 was hard work, with the initial sell-off in January proving quite testing. Still, so far it looks as though holding my nerve was the correct course of action. There is still a lot of bearish talk around, but hopefully we will make further progress, scrambling up this wall of worry.