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OPINION

Slim pickings

Slim pickings
January 3, 2019
Slim pickings

One of the most common appraisals investors will make as the year begins is how well their portfolio has performed in the previous 12 months. Such benchmarking is a sensible way to make sure your equity investments are helping to achieve your financial targets, and we of course do the same with our share and fund Tips of the Year to see where things didn’t pan out as expected and what we could improve next time. However, a word of caution – short-term returns alone tell you precious little about how good you really are as an investor; a lucky call or two in a highly-concentrated portfolio may mean smashing the market one year, but in a very poor place to cope with what may follow. Indeed, if you are suffering portfolio envy as you hear of other investors earning double-digit returns when yours is down, console yourself with the thought that you have no idea of what additional risk they have taken to get there – punting everything on a highly speculative ‘story’ share may be the way to win most time-limited investing competitions, but it is not a strategy for long-term investing success.

Given the possibility of another difficult year for markets, we’ve taken a rather more cautious approach with our annual share tips this year and decided to simply focus our hunt on a combination of quality and value. Nevertheless, finding shares that fit our revised bill has proved somewhat tricky. A reader wrote to me last week complaining that the pre-set stock screening approaches that he regularly uses – Jim Slater’s Zulu Principle and the methods of Warren Buffett among them – have recently started to yield zero results. And indeed, our own search has led us into many investment culs-de-sac – either shares in good companies that are simply too expensive for the growth or defensiveness on offer, or seemingly attractively-priced shares that are on closer inspection cheap for a reason, whether that be stock- or sector-specific issues, or priced to reflect the possibility that they will be subject to a cyclical slowdown.

The temptation here is to loosen the selection criteria. Yet while this will yield more results it is potentially perilous. The trade-off for loosening valuation criteria and overpaying means a strong likelihood of lower future returns; loosen quality metrics, around debt or returns on capital, and you may simply end up buying duds. Of course, if such screens are used as a starting point for ideas generation this shouldn’t be a problem, as long as your follow-up research is all the more thorough – which is why in 2019 we’ll be spending even more time helping you fine-tune your analytical skills.