Private investor’s diary: When it makes sense to sell

During these phases of range-bound markets it is tempting to get frustrated at the lack of progress and in short, try ‘too hard’. I don’t know what the second half has in store, but if it is more of the same my time will be best spent ensuring I am happy with the fundamentals and valuation of my existing holdings. Not getting carried away with the short-term gyrations in stock prices, but perhaps trimming back the odd holding that becomes overextended and adding to those going through a temporary bout of weakness. Collecting and reinvesting dividends is the key to the longer-term growth of my portfolio.

Running winners and cutting losers

Before looking at May in more detail I thought I would share some analysis of my portfolio prompted by my recent review of The Art of Execution by Lee Freeman-Shor. Since inception in January 2012, I have held 121 shares in my portfolio, including the current 26. Of those 121, 76 have made or are making money, while 45 are below water. The top five winners and top losers are shown below. The average gain from the top 20 winners is £8,544 and I still hold 10 of them. The average loss from the largest 20 losers is £2,450, with only five of them still in the portfolio.

Top five winners; profits in £000s in the portfolio since January 2012

Top five losers; losses in £000s in the portfolio since January 2012

Some observations

76 from 121 gives a hit rate of 62 per cent. ‘That’s pretty poor, surely I can do better than that’ was my first reaction. Considering, though, that the average hit rate quoted in The Art of Execution was 49 per cent, perhaps 62 per cent is not so bad. I think there is room for improvement but I need to be wary of getting too hung up on improving this particular statistic. I could end up being too cautious about what I buy, thus missing out on some great opportunities. Perhaps of greater significance, is improving my response to the losers and winners in the portfolio.

The average gain of £8,544 shows the importance of running your winners and perhaps even adding to them or ‘scaling in’ as one’s confidence in the holding grows.

I think the average loss of £2,450 demonstrates the importance of cutting quickly and not ending up with a portfolio of stocks where one is just hoping that things will recover: the ‘it has fallen so far there is no point in selling now’ syndrome. In my view there is always a point in selling now, especially if you have a better use for the money.

Are 121 positions over four-and-a-half years too many? It implies a holding period of just over one year on average. I could be accused of being short-termist. Looking behind the figures, though, six of the current 26 have been in the portfolio for over three years and four for over two years. The overall number of holdings has been magnified by my willingness to cut positions. This is one of the luxuries of managing your own portfolio. When I make a mistake, I can quite easily sell out, take my loss on the chin and move on to the next idea. Managers of big institutional funds will find it far more difficult to extricate themselves from a losing position, especially in mid-caps and smaller companies. With their large holdings, not only will liquidity in the stock work against them, but they will often also get difficult questions from directors/trustees of the fund, making it psychologically more difficult to act decisively.

Lastly, I should mention the cost of trading. ShareScope calculates that commission and stamp duty has cost the portfolio roughly 0.7 per cent a year. On top of that, the spread between the buying and selling price needs to be taken into account. In small companies it can be quite large at 2-3 per cent or more. At least by managing my portfolio myself I am not, except through my investment trust exposure, paying a management fee on top.

While I will endeavour to reduce the number of losers I introduce to the portfolio, if in four or five years’ time I have failed but the overall results for the portfolio are similar to the past four years or so, I will not be unhappy.

May review

Markets continued to grind higher during May, with the turbulence of January and February fading from memory. In commodity markets, oil continued to recover, with Brent crude up 4.6 per cent to just shy of $50 per barrel. Gold on the other hand gave up some of its recent gains, falling 5.9 per cent to $1,219 per ounce, probably in response to a stronger US dollar. Most major equity markets were up, with the Nikkei 225 leading the way with a 3.4 per cent gain. Japan benefited from some respite from the relentless strength of the yen, which weakened 4.1 per cent against the US dollar during the month. The German Dax was up 2.2 per cent, the S&P 500 up 1.5 per cent and the FTSE All-Share (total return) Index up 0.7 per cent. In the US the technology-heavy Nasdaq 100 rose 4.4 per cent with the likes of Amazon leading the way and, incredibly, hitting new all-time highs.

Elsewhere, India continued to perform well, gaining 4.1 per cent, while two of the best-performing markets in 2016, Russia and Brazil, gave up 4.0 per cent and 10.1 per cent respectively. In the year to date, however, both markets have still made strong gains, with Russia up 16.1 per cent and Brazil up 13.1 per cent.

Portfolio performance

My portfolio was down 0.3 per cent, lagging the performance of the FTSE All-Share (total return) index by 1.0 per cent over the month. Since 1 January it has fallen 4.0 per cent compared with the 1.4 per cent gain from the Index. Since inception in January 2012 my portfolio has returned 112.9 per cent, giving an annual compound rate of 18.7 per cent, compared with 40.6 per cent, or 8.0 per cent annualised, for the FTSE All-Share.

My portfolio is clearly not firing on all cylinders at the moment but I don’t think it is a cause for panic. In general, I am happy with its shape but acknowledge I am having to be a little more patient with some of the holdings than I would like.

Baillie Gifford Shin Nippon (BGS), up 13.2 per cent, topped the leader board, with InterQuest (ITQ) up 11.6 per cent, Character (CCT) up 5.8 per cent and Biotech Growth Trust (BIOG) up 5.4 per cent. Baillie Gifford Shin Nippon was helped by a better performance from the Japanese market during May. Character responded well to strong half-year results at the end of April. It said it was very encouraged by the strong demand for its new, recently launched Teletubbies range.

At the bottom of the board, BlackRock World Mining Trust (BRWM) fell 10.0 per cent as commodity prices, including gold, gave up some of the strong gains of the preceding few months. Matchtech (MTEC), down 7.7 per cent, Fairpoint (FRP) down 7.6 per cent and Renew (RNWH) down 7.5 per cent were the other notable losers during May. I think fears about the economic impact of an out vote in the European referendum were behind the fall in recruitment company Matchtech. Fairpoint seems friendless following a lacklustre trading update, which raised doubts about it achieving current forecasts for the year as a whole. The reaction to Renew’s half-year results was a little disappointing in light of the 18 per cent increase in the dividend and its strong order book.

Activity

No new holdings in May, but I did cut one position, Interserve (IRV), following a profit warning from the company on 6 May. Unfortunately, it had to take a £70m provision against cost overruns on its Glasgow energy waste contract. I was concerned that this might not be the end of the problem and, rather than wait and find out, I have decided to take my loss and move on. I added to existing holdings in Character, Conviviality (CVR), On The Beach (OTB) and Safestyle (SFE), all of which issued positive updates during the month.

Looking forward

Its nearly over! When I next write my next monthly report we will know the result of the referendum on the UK’s continued membership of the European Union. Until the last week or so the market seemed unmoved, with the FTSE 100 up during each of the past four months. Supporters of the ‘Leave’ campaign suggest this means markets are not daunted by the prospect of Brexit, while others believe it is because the market thinks there is little likelihood of the Leave vote winning. Who knows? I enjoy political debate, but in this case I really can’t wait until it’s over, whatever the result.

I have seen various pieces postulating on the likely market response to the referendum result with the authors placing hedges to ‘protect’ themselves. I don’t know what the result will be and neither do I know how the markets will react. Rather than take out some hedging, which could prove wrong and expensive, I have decided to take the long view and take the markets as they come in the next month or so. I guess I’ll start to see if that was the right decision on 24 June.

John Rosier’s portfolio (end May)