Those of you that used to follow this blog will have noticed that I’ve been somewhat absent over the last few months. It will therefore come as little surprise to hear that I’ve been extraordinarily busy but happily have found some time to sit down and pen another article. When I started this blog in 2015, I knew that finding time to write consistently was probably going to be my biggest challenge. Sure enough, five years later, and I can confirm I was right. Coming up with ideas for posts isn’t the hardest part but turning them into something readable surely is!
This may end up as the final post of the year for me – as as is traditional, I thought I’d recap my investing performance over the year and share some key learnings.
2019 was the year I felt I came on leaps and bounds in my investing strategy. Increasingly comfortable with stock picking (and the patience required for good analysis to be reflected in the markets), I found my portfolio alternative trundling and then exploding forward.
Cut your losses!
Without a doubt, one of the biggest mistakes I made in 2019 was not cutting losses early enough. Some investors advocate operating an automatic stop loss (which I do not – for reasons I’ve written about here), but as a result, I ended up holding onto a number of positions past their time. Having said that, I still find it difficult to identify exactly which positions are Mr. Market throwing a wobbly and which are actual reflections of a declining business. My success rate in calling these is somewhere around the 70/30 mark in my favour, which tells me that I clearly need to tighten up my analysis and make more of an effort to avoid good ‘investing stories’.
Taking profits
Although I’m generally good at taking profits, I had one position this year which doubled in value – and which I then sat and watched as it returned to purchase price and then dipped slightly under. It’s since made a partial recovery, but if I’d not got overexcited by the initial gains, my portfolio would have performed better over the year. In hindsight, I wonder whether I really understand the value of the company or if I was subconsciously rerating upwards at the stock increased in value. Although this can sometimes be justified over the mid to long-term, it’s worth saying that over a period of weeks a company’s fundamental value is unlikely to truly double. As such, either the initial purchase price was ludicrously low (sometimes the case), or, the market has become overexuberant regarding a potential opportunity (more likely).
In my early days as an investor, I often found it difficult to resist taking small profits but have since become increasingly comfortable letting real winners run. Despite this, I will have to work harder next year to ensure that I don’t give large wins back to the market!
Avoid Macro Perma-Bears
A good friend of mine pointed out my tendency to sound bearish throughout 2019. In truth, I’ve had a number of economic concerns throughout 2019 (and partially throughout 2018 as well) including global debt levels, the Trump trade wars, the Corbyn threat, UK house prices, wealth inequality, the seemingly permeant state of quantitative easing from Central Banks who seem to own more and more of our public markets (socialism by any other name?) and more.
As a result, I began to manage my risk much more tightly throughout 2019 than I did through 2018; I reduced my exposure to credit funds and leveraged products (including P2P investments), I reduced my non-listed exposure, I reduced my exposure to speculative investments and generally locked in profits where I could.
Having said this, I didn’t run out of the markets screaming and wailing about ‘the end of civilisation as we know it’. The risks listed above are/were real. They had the potential to totally capsize the economic system, but the point is that they didn’t. Identifying risks and reacting to them is part of sensible portfolio management. Allowing a few crank economic commentators to convince you to build a bunker and stack tinned beans and gold bars is madness. Avoid the perma-bears.
Being comfortable with your own strategy
Investors, by their very nature, tend towards certainty. If you are of a nervous, doubtful disposition, then picking stocks and managing a portfolio is probably somewhat akin to holding your hand in a pan of boiling water. There are, however, many, many valid methods and strategies for investing. Personally, I find value in segregating my portfolio in different ‘types’ of stocks and understand the part they all play together. I find value in taking profits and running a diversified set of positions as protection against my own inexperience and analytical mistakes. I find value in regular maintenance and management of my portfolio as opposed to try ‘buy and forget’ investors. I also recognise that what works for me will very likely not work for everyone else – nor do I need it to.
One investor I have an immense amount of respect for has less than a third of the positions I have (and at times has held less than a quarter). The skill required to accurately identify and back such a concentrated number of positions is far beyond my current skill level BUT I hope that in time I will become as skilled.
Ultimately, you need to be comfortable with whatever works for you. Markets do not care, investments do not care, but your bank balance will pay the price for inconsistency, lack of focus and poor analysis. I measure my performance against three benchmarks – a set percentage of the CPI/RPI index (whichever is greater), the Vanguard FTSE Global All Cap, and the FTSE UK All Share Index. I aim to always grow my money ahead of the first, and to outperform the others over three and five-year periods. They aren’t perfect benchmarks, but I believe them to be reasonable comparators.
Moving into 2020
As we begin a whole new decade, I wonder how much longer the rather bizarre investing conditions of the last decade can possibly continue. It seems hard to believe that ten years ago, a saver could easily achieve 4 or 5% interest on a savings account (you’re lucky to get even a tenth of that now!). Quantitative Easing (QE) was still a new and novel concept (and now seems like a never-ending pool of cash from Central Banks). The Euro looked at serious risk of collapse, Brexit wasn’t even dreamt of, the US was still squabbling over the debt ceiling and most investors had yet to experience what has been a pretty uninterrupted ten-year bull market.
Despite their best intentions, I do not believe that QE is going to end well for the average investor. The obviously inflationary effect on assets seems likely to reverse as Central Bank balance sheets are wound down (indeed, there have already been multiple instances of this around the world which were sharply reversed when markets collapsed). At some point, it seems inevitable that the party must come to an end – and when it does, I believe global markets will contract sharply. Anyone with money in tracker funds will likely see a huge devaluation of their portfolio and I suspect a great number of ’investors’ will be caught out by this.
I shall continue to invest in what I perceive to be undervalued opportunities – although I intend to continue an overall cautious stance until such time as I can more clearly determine the effects of unwinding QE on my portfolio.
I will also continue this blog – I hope to still be producing it in 2030, and no doubt will have expanded it significantly by that time. I aspire to add new material and develop the indexing functionality to make it more accessible. When I originally began the blog, the basic index and search functionality seemed adequate, but with well over 150 posts now in play, it is becoming increasingly difficult to find material and organise it in a sensible manner. I will also have to revisit some of the standard pages as the content has moved away from communications and politics towards more of an investing and economic tilt (although until a reader dives into the content they’re unlikely to recognise this!).