2020 Annual Review

Well. What a year. 2020 is going to be long remembered by many investors (myself included) for being their first ‘real’ bear market. According to my trading journal, my worst official month for the year was March, when I was down over 18% in a month and looking at a total decline of over 23%. If you looked at my portfolio about a week earlier, things looked even bleaker, with my portfolio down about 30%. To come back from that to a positive return of 6% for the year is no small thing – although I admit to being caught off-guard by the strength of the recovery, having spent most of the year hoping to crawl back to breakeven.

I’ve become more comfortable cutting my losers and adding to my winners this year, and have mentally split my portfolio into three ‘tranches’; the Leaders, the Followers, and the Laggards. The Leaders are my top ten picks; companies which I most strongly believe in, and which as part of my new strategy, now make up around 55% of my portfolio.

The Followers are the second portion of my portfolio, comprising 35-40%, or around 15-20 companies. These are companies which pass my initial screening method, but until I’ve held a company for some time (usually a minimum of 6 months) I tend not to add further capital to it until I gain confidence in its performance. They tend to operate in easy to understand markets, have negligible debt and generally be ‘set and forget’ holdings that I’m happy to leave alone throughout the year.

Finally, I have the Laggards. These are companies which are underperforming the market and consequently declining in value. These companies are top of my list for trimming or perhaps removing entirely from the portfolio. I aim to let these comprise no more than 10% of my overall portfolio value, minimising the risk that ‘turnarounds’ don’t turn around and instead continue to decline. Why not just sell them? Well, as in the case of Xaar, sometimes, turnarounds DO turnaround.

Xaar was a company I bought in 2018 at about £3 a share. Unfortunately, the share price collapsed shortly after as the company announced it has massively overinvested in a particular type of machine and that customers weren’t buying enough product to support the investment. I sat on the investment for about 18 months but decided to sell out of it in late 2019 at about 42p a share. Since then, the price has recovered somewhat, currently being worth about 4x my sale price at 169p a share and showing little sign of slowing down.

Although I sold Xaar, this situation is precisely why I don’t automatically sell shares at a predetermined stop loss and instead try to judge them on a case-by-case basis. As we enter 2021, the Laggards in my portfolio included Victrex (down 1.5%), Direct Line (down 4.5%), WPP (down 6%), Headlam (down 15%), MoneySupermarket (down 25%), Lloyds (down 34%), Babcock (down 48%), and Senior (down 49%).

At the other end of the spectrum, my Leaders include Anglo Asian Mining (down 3%), S&U (up 1%), Urban Logistics REIT (up 1%), Warehouse REIT (up 11%), EVRAZ (up 17%) ULS Technology (up 21%), Record Group (up 22%), SThree (up 33%), Trans-Siberian Gold (up 62%) and Sylvania Platinum (up 86%).

I should point out that these are not all companies I have bought or sold in the last 12 months, so these figures only represent the state of pay as of the end of 2020 compared to my original purcahse price. These figures also ignore dividends which would have pushed Victrex, Direct Line, WPP and Headlam into a positive return.

I’d like to add some more tech and healthcare companies to the portfolio over the next few years; I’ve had particular success with precious metal companies in 2020 as the price of commodities skyrocketed, but I’m not confident that this will be a sustainable source of long-term returns. I’m always wary of conflating success with luck and I’d be a terrible liar if I pretended that I had any idea that Trans-Siberian Gold or Sylvania Platinum would perform even half as well as they have this year. I’d done my research and felt they were high quality companies but both companies have easily joined the pantheon of top performers I’ve ever invested in.

Having said this, the spread of my results has caused me to reevaluate my buying technique throughout 2020. When I first started investing, I did my research, picked my companies and then bought them, regardless of technical analysis. This led to me buying great companies at terrible prices (not exactly the name of the game) but it’s taken me a few years to really get my head around the methods by which to evaluate the best time to buy.

In a nutshell, technical analysis is the process of studying price charts and market activity to time your purchases and sales of securities. At it’s most basic, it is better to sell into a rising market (lots of demand for the shares you want to get sell), and to buy when the price is on a dip (although perhaps not when the price is persistently falling week after week). A friend of mine runs an excellent blog series about this and I’ve spent a lot of time in 2020 poring over his articles to understand more. I don’t want to insult him by attempting to paraphrase his work and instead recommend readers click over to Wheelie Dealer’s blog and read for yourselves (just please come back afterwards!).

My turnover for the year is sharply down from last year (20% down from about 60% in 2019) but still higher than 2018’s 12%. I aim to keep this to a maximum of 15% in a year so more discipline needed! My returns for the year also sit about mid-way towards my target of 10-15% per annum.

Since I started investing, my returns have been fairly erratic, but thankfully positive thus far. As seen in the table below, I tend to hit my target every other year but long-term am right on my 9% per annum target.

Year

Annual Return

Average Yield

2015

7%

4.3%

2016

19%

5.1%

2017

10%

5.0%

2018

1%

6.7%

2019

12%

5.7%

2020

5%

3.8%

Average

9%

5.1%

I’ve written before that I don’t think Quantitative Easing is going to end well for the average investor and I’ll repeat that claim again now. Although it seems to be gallantly fighting off a long-term bear market in global equities, I believe the loose monetary policy of Central Banks is going to depress long-term growth in the real economy as more and more money goes towards propping up dying businesses and unproductive activities. If that 2010s were defined by a long-term bull market, I think most indices and ETFs are going to struggle through the 2020s and as such it will be more important than ever for investors to buy quality and pay careful attention to valuations.

Although I like to virtue of investing in green and socially responsible businesses, I feel the increased focus is likely to lead to a bubble in this space as more and more investors pile into what they see as a ‘sure thing’. Although I have eight renewable energy companies on my watch list, not a single one is close to my target buy price and several have started to suffer from write-downs in asset values.

I wouldn’t invest in oil and gas companies regardless of the price but just because I feel their market is in long-term structural decline, it doesn’t mean that renewable energy companies make a good investment at current valuations. A few hundred years ago, agriculture, food and transport companies made great investments, but over time the advance of technology has depressed their margins to a painful degree; today, most of them are poor investments, even if we all still need food and drink to survive.

In my opinion, energy is likely to undergo a similar structural transformation; indeed, I believe it started at the beginning of the century and will continue to accelerate as we move towards the year 2100 (and doesn’t THAT feel odd to write).

I also believe many other traditionally ‘defensive’ investments are likely to prove poor performers moving forwards. Fast moving consumer good firms such as Diageo and ‘sin stocks’ such as Imperial Brands and Coca Cola have been bid into the stratosphere as investors focus on historical growth and ignore upcoming generations moving away from alcohol consumption, cigarettes and sugar.

These companies may pivot; launching new brands and product lines – or they may continue to churn out increasingly tired, unloved products to a market that wants fresh new alternatives.

Successful investors will have to think increasingly hard about the direction of the markets, national demographics, debt and structural changes in the economy to make money. Likewise, using ‘quality at any cost’ or ‘technology over everything else’ as a strategy is also likely to end in tears for the incautious investor. I’ve seen more than one investment darling of Twitter crash into a brick wall this year when a ‘sure thing’ failed to perform.

Regardless, I’m looking forward to 2021 with enthusiasm and am grateful to all my readers and friends for continuing to support my blog. I hope you all have a fantastic break over the New Year and will hopefully (very hopefully!) be able to see a few of you for a pint or two in 2021!