New Sunday Times Feature - Diary of a Private Investor

Discussion in 'Investments' started by Brendan Burgess, Sep 4, 2015.

  1. David Quinn

    David Quinn Frequent Poster

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    What is nonsense about a decent globally diverse equity portfolio that should be able to generate 3-3.5% income over the long term? Some offering 7% (Vodafone) and some producing 1% (Renishaw in your example).
     
  2. Brendan Burgess

    Brendan Burgess Founder

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    Nothing at all.

    This is the bit which makes no sense.

    There should be no distinction between capital gain and dividend income.

    For example, which would you prefer shares in company A which pays 5% dividend a year but does not rise in value or shares in Company B which pays no dividend but rises by 10% a year?

    For most people with shares , capital gain is taxed at a lower rate than dividend income.

    Brendan
     
  3. Colm Fagan

    Colm Fagan Frequent Poster

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    Lord, make me pure - but not just yet
    Diary of a Private Investor Update #5 12 July 2018


    June was a great month for sunshine but a bad month for my portfolio. Its value fell by more than 4%, wiping out most of May’s 5.2% gain. The prices of my top four stocks all fell, while the opposite happened to Tesla, in which I have a significant short position. Its share price rose by more than 20% in the month, contributing a negative 1.1% to June’s overall negative 4.3%.

    The good news is that I was spared an even worse outcome by acting on readers’ advice, as I’ll explain.

    Following last month’s revelation that some of my share purchases are funded by borrowings, I was roundly criticised by readers of the diary on www.askaboutmoney.com . They castigated me for taking excessive risks. I heeded their advice and sold enough shares, spread across the portfolio, to reduce the gearing level by more than 10%. The sales were completed over a few days immediately following the publication of the diary update on 11 June. I decided not to deleverage completely however, as I expect to earn an average return of at least 6% per annum on shares, compared with borrowing costs of only 3% per annum.

    I recognise that the expected additional return from investing in shares is not a free lunch. Far from it. The market value of the shares could fall significantly – and suddenly. A sharp fall in share prices could result in borrowings being called in at short notice, and at exactly the wrong time, when values are depressed. I’m satisfied that I can manage the risks - provided the leverage is low enough.

    I was fortunate in the timing of the share sales. All but one of the shares were sold at prices higher than those ruling at the end of May, and substantially higher than those ruling at the end of June. The loss in the month would have been much greater if I hadn’t deleveraged or had waited until later in the month to do so. Thank you, readers, for the advice.

    I made a firm resolution to be good in future, not to allow borrowing levels to increase again, and to continue selling shares as market conditions allowed, using the proceeds to repay borrowings. Sadly, my good intentions did not last long. An invitation from an old flame seduced me into putting my good intentions on hold – for the time being at least.

    The old flame, risen from the ashes as it were, was Phoenix Group Holdings, a UK life assurance group headed by Clive Bannister, son of the late great Sir Roger Bannister, the first sub-four-minute miler.

    I bought my first shares in Phoenix Group Holdings in May 2014. The main attraction was the dividend yield of 7.9%. After doing some advance homework, I concluded that the dividend could be maintained indefinitely, so the long-term return should be considerably above my minimum target return of 6% per annum. That was enough for me.

    Thus far, my faith has been rewarded. The dividend was maintained at its 2014 level in 2015; then it increased by 2.6% in 2016, by 10.5% in 2017, and is expected to increase a further 4.3% in 2018.

    Capital values haven’t followed a similarly smooth trajectory. Within a month of my initial purchase, the share price fell 7%. Most would see this as bad news, but it meant that the dividend yield on new purchases was an even more attractive 8.5%. I took the opportunity of the lower price to double my holding. Since then, I have exploited temporary price weaknesses to continue adding more Phoenix Group shares to my portfolio, to the point where it is now my second biggest holding (after Renishaw, which I’ve written about elsewhere).

    Allowing for rights issues (of which more anon), the Phoenix Group share price is now more than 30% above where it was when I made my first investment in the company in May 2014. Sterling has weakened considerably against the Euro in the meantime, which limits the gains, but I hedged my currency exposure to Phoenix Group and other UK-focused shares from mid-2015, so was spared the worst effects of sterling’s devaluation following the Brexit referendum in 2016.

    Just over a month ago, at the end of May, Phoenix Group announced a rights issue to help pay for the cost of buying Standard Life Assurance Company, which it agreed to purchase in February last. Existing shareholders were given the option of buying another 7 shares for every 15 already held, at the knock-down price of £5.18 a share, compared with £7.72 share when the rights issue was announced. The theoretical ex-rights share price was thus 691p.

    I felt the shares were good value, even though the prospective dividend yield was now less than 7%, compared with almost 8% when I bought my first shares in the company in 2014. I couldn’t resist the temptation to take up as much of the rights issue as possible, even though it meant straying from the path of righteousness I had vowed to follow only a short time previously. I used some of the liquidity in my portfolio, and increased my borrowing again, to buy as many of the rights issue shares as I could afford.

    I now feel like the financial equivalent of St. Augustine, aspiring to the purity of a debt-free portfolio – but not just yet.
     
  4. Brendan Burgess

    Brendan Burgess Founder

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    Hi Colm

    I am delighted that, so far, Askaboutmoney has helped you. You may well be cursing us in a couple of years though. It doesn't matter, deleveraging was right.

    In fact, I would say that the earlier deleveraging made this borrowing to buy Phoenix correct. I don't know the details of the Rights Issue, but I think it's usually a good idea to avail of it instead of selling the rights? I had to avail of a rights issue recently where it was not possible to sell the rights. So I sold some Renishaw to get the money. It also helped to rebalance my portfolio a little.

    Brendan
     
  5. Colm Fagan

    Colm Fagan Frequent Poster

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    Brendan. I feel the same, even for the simple reason that I didn't have to pay stamp duty or broker's commission on exercising the rights.
     
  6. Monksfield

    Monksfield Frequent Poster

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    I don't buy the distinction between the return from dividend and capital. If a company can reinvest free cash flow at a good enough rate of return I would not want them diverting it into dividends or buy-backs. I do have a general preference for companies which pay a reasonable dividend if for no other reason than it operates as a discipline on management.
     
  7. Colm Fagan

    Colm Fagan Frequent Poster

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    I agree! Here's what I wrote earlier in this thread (#229):
    What I'm saying in this diary entry is that I was happy that I would get more than my target rate of return from dividends alone on this particular investment, and I was confident that they could keep doing deals so that the dividend would be safe for years and years to come. Mind you, the ability to keep paying dividends many years into the future is an important consideration here, as Phoenix's main modus operandi (at least before the Standard Life deal) was to buy life assurance companies that were closed to new business and that would eventually die of old age, so in theory at least, the capital value would eventually fall to zero. In relation to the rest of your post, I have challenged management at a shareholder presentation on the preoccupation with increasing the dividend on a regular basis. If they paid a lower dividend, they would be able to afford more deals without having to look for so much from external finance, either from existing shareholders or by issuing bonds, thereby saving at least a proportion of the high fees that go to investment banks at present. Unfortunately for me, the so-called "professional" investors have put Phoenix Group into the "high dividend payers" bucket and demand regular increases in dividends.
     
  8. moneymakeover

    moneymakeover Frequent Poster

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    @Colm Fagan

    What do you think of the announcement to take Tesla private at $420
     
  9. Itchy

    Itchy Frequent Poster

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    I think the SEC investigation will be of some comfort!
     
  10. Bronte

    Bronte Frequent Poster

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    If that’s the case then one should stay away from investment managers.
     
  11. Bronte

    Bronte Frequent Poster

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    Last edited: Aug 12, 2018
    Phoenix
    I don't understand how you borrowed to invest in shares. I thought that was an absolute no no?

    And you did the same with Samsonite. In another currency.

    With Apple and Renishaw are you not doing the emotional bias thing you mentioned earlier. Holding onto them despite recognising that the future doesn't look good for them.
     
    Last edited: Aug 12, 2018
  12. Brendan Burgess

    Brendan Burgess Founder

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    Hi Bronte

    I think that Colm may be on holidays, so I will try to answer for him.

    He hasn't borrowed in the conventional sense by going to a bank and borrowing, say, HK$10,000.

    He has placed a leveraged spread bet with the borrowing equivalent of HK$10,000.

    It is very risky but Colm is aware of the risks.

    Brendan
     
  13. Bronte

    Bronte Frequent Poster

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    I'm at about page five and this thread is scaring the living day lights out of me. I'd like to know how much money he had in 2016, how much he has now and what incomes he got from shares in the meantime.

    What is very risky? Sounds absolutely crazy and as good as going into Paddy Power. I'd have had 5 heart attacks at page 5 and be dead by page 14!
     
  14. Brendan Burgess

    Brendan Burgess Founder

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    Hi Bronte

    I would not recommend it, but ...

    If the risk is controlled, then it's fair enough.

    I sold Bitcoin short which most people regarded as reckless, but I allocated only a very small part of my portfolio and put in an automatic stop to limit my losses.

    Brendan
     
  15. Bronte

    Bronte Frequent Poster

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    Last edited: Aug 13, 2018
    Sounds very like guys I've seen in the bookies. The one's in there all day every day.
     
    Last edited: Aug 13, 2018
    rob oyle likes this.
  16. Colm Fagan

    Colm Fagan Frequent Poster

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    Sorry for the delay in getting back to everyone, but I was busy writing my next instalment of the diary. Unfortunately, I can't share it with you now, as I've promised first dibs to the Sunday Times, who are going to publish it next Sunday (19 August). If enough people buy the paper, they might even give me a more regular slot!, so make sure to save up your shekels to buy the paper next Sunday!!!

    I'll now try to answer your questions:
    Lots of people have asked me about my short on Tesla (mentioned in update 2 of April 1 (what a day to choose!) post #163 on page 9 of this thread. The quick answer is that I'm still in there. Actually, I increased the short since then. Needless to say, I'm now sorry that I didn't cash my chips when the price was down at $266 (compared to the current $356 to close my position), but I'm still confident that I'll end up making money on it. As itchy says, there's a little matter of an SEC investigation following Elon's claim that he had the funding in place to take it private, a claim that was specifically denied by his fellow directors. I'm also encouraged by lots of other factors, most of which have been recounted in the media. One particular factor that hasn't received too much attention so far is that Elon has borrowed quite a lot on the security of his Tesla shares. If the company ceases to be publicly quoted, his lenders will look for a lot more security on his borrowings. It's surely the subject of another diary entry.

    Brendan is right. I did it through spread bets. Needless to say, that's not possible with my "pure" pension money, only with my retirement savings that are held outside the pension fund.

    I've to go now. I'll come back to Bronte's other questions later, hopefully later tonight.
     
  17. Colm Fagan

    Colm Fagan Frequent Poster

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    I don't recall ever saying that I thought the future looked bad for either Renishaw or Apple. I said I didn't think they could perform as well in the future as they have in the past. That was no more than a statement of the obvious, since both have performed truly remarkably since I first mentioned them in the diary. I still think both will deliver excellent returns over the medium to long term future and I'm happy to hang on to them. I did offload a small proportion of my Renishaw shares following the recent results announcement (at £56.85 a share) but that was just because even I recognise that Renishaw represents too high a proportion of my total portfolio. After the sale, it is still my biggest holding by some distance.
    The quick answer to the first question is that I have more now than I had in 2016, but there are a number of important clarifications/ qualifications:
    (1) I am loath to quote performance over a short time frame. I'm interested in performance over 5, 10, 20 years, definitely not over a few months or even a couple of years.
    (2) I've been very lucky with the performance of Renishaw and Apple, the two shares mentioned above by Bronte. I don't expect to be so lucky in future. Renishaw is my biggest holding. It has delivered excellent returns, not only over the last couple of years but over the 20 years since I first bought into it. It has trebled in value since 2015 (in sterling terms) and is now worth well more than ten times what I paid for my first shares 20 years ago. Apple, another of my major holdings, has also done very well both since I first bought it and over the last couple of years. I am not banking on similar results in future. On the contrary, the concentrated nature of my portfolio means that I'm quite likely to take a bath on one of my big investments sometime. I'm braced for that eventuality.
    (3) I have only calculated detailed returns for my total portfolio (ARF, AMRF and other investments) since the start of 2014. Since then, the overall return has been significantly better than professionally managed funds. According to Rubicon Investment Consulting (rubiconic.ie), the top performing active managed fund delivered an average return of 10.6% per annum over the 5 years to end July 2018. The average return on my portfolio over the 4 years, 7 months from the start of 2014 was significantly more than this. That's the good news. The bad news is that the volatility of my returns has been much higher than that of the quoted pension funds. In one month (June 2016), the value fell by more than 12%. We also have to factor in the luck element in the form of the excellent results for Renishaw, Apple, Phoenix and a few others, balanced by a few clangers - which include Tesla as at 31 July 2018!!!
    (4) It's fairly straightforward to calculate how well my ARF has done. Revenue rules have required me to take a (gross of tax) "income" of 6% of the fund every year since I took it out at the end of 2010. After the mandatory withdrawals, the ARF is now worth considerably more than when I took it out originally, even after adjusting for the transfers in of two relatively small paid-up policies from insurance companies, one in 2016 and one in 2017. I hope this also answers the question of what income I've got from the shares in the meantime.
    I honestly don't think I'm taking major long-term risks. Nearly all my purchases are good quality companies, with strong balance sheets. I am confident that they will deliver good quality results over the longer term. Yes, there are short-term risks in that the market can be ridiculously volatile in the short-term, but I see volatility as my friend, in that it occasionally creates wonderful buying opportunities when the price gets out of kilter with the fundamentals of the business. I'm still relatively new at shorting, and the jury is still out, but I'm hopeful that the same formula will work in reverse: bet that reality will eventually catch up with highly leveraged companies whose shares trade on false hopes of how they'll be able to trade out of their difficulties, or find a white knight somewhere who'll bail them out. Here we go on Tesla again!!
    And once again, be sure to buy next Sunday's Sunday Times!!
     
  18. Bronte

    Bronte Frequent Poster

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    If you want to take the long term view of 5 + years, it's 5 years since 2014. Anyway you've confirmed you've more money now then when you've started plus you've taken out more than 10% annually. Be that selling shares or dividends.

    I think you're very coy about your losses, and I wonder why. Why if you're doing a diary not be honest.

    I'm amazed at your being able to do better than the leading managed fund.

    If you dnt think R and A will go any further are you keeping them for the dividends?

    I don't understand the revenue rules. What business is it of theirs what you do with your money?
    I've been buying the ST for decades.
     
  19. Bronte

    Bronte Frequent Poster

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    Elon Musk is something of a maverick. What did he do with the money he borrowed based on the share price?
     
  20. Colm Fagan

    Colm Fagan Frequent Poster

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    @Bronte. More answers to your questions:
    I probably didn't make myself sufficiently clear. I didn't say that I'd taken out more than 10% annually. I said that the average return on the portfolio since the start of 2014 was well north of 10.6% a year. That calculation allows for changes in market values and cash outflows (and a few small inflows). Most of the return over the period came from unrealised capital gains. I wasn't forced to sell shares to get the return.
    That's not true. I've been very honest about my losses. The very first diary entry (ST of 6 September 2015) told of a share (Carclo) that had fallen to less than a quarter of what I paid by the time I sold. More recently, I told about WPP ( Update 3 of 8 May), which lost me a lot of money, and Samsonite (update 4 of 11 June), which is a loser at present, but which I haven't given up on. I've also recounted my adventures with Tesla (update 2 of 1 April), on which I'm losing money at the moment but which is still in mid-race as far as I'm concerned, so I'm not tearing up my slip. Of course there are other losers, but there are lots of other winners too that I haven't mentioned. The overall performance confirms that there have been far more winners (in value terms at least) than losers to date.
    Be amazed. In fairness, we're not comparing like with like. I'm comparing the performance of my portfolio with managed funds, which invest in a combination of equities and bonds, presumably with a dash of property thrown into the mix. My portfolio is almost completely in equities, which have had a very good run over the last few years. If the worm turns, then my relative performance will suffer. My column in next week's Sunday Times goes into more detail on what is an appropriate investment strategy.
    Once again, I mustn't have made myself sufficiently clear. I DO think that R(enishaw) and A(pple) will go further. In fact, I'm quite confident that, over the next five years or so, both stocks will deliver returns in excess of my target of 6% plus per annum (income and capital gains combined). I just don't think they'll repeat the phenomenal performance of the last five years.
    It's very much their business what I do with my money. They gave me very good tax relief when I was putting the money into my pension fund. They're entitled to get their pound of flesh when I'm taking the money out. One way they make sure they get their pound of flesh is by insisting that I take a minimum (taxable) income from the ARF every year.
    From what I read in the financial media, he used the borrowed money "to fund his extravagant lifestyle". You will probably have to read the tabloids to discover what his extravagant lifestyle involves.