New Sunday Times Feature - Diary of a Private Investor

Colm Fagan

Frequent Poster
Messages
376
@Fella. We're not really that far apart. You just misunderstand what I'm saying. I never said that I thought I had an edge over the market. I feel like a broken record in saying that my ambition with every purchase is to earn a long-term return of around 6% to 7% a year. If I think one of my holdings will earn less than that in future, I sell, irrespective of how it's done in the past. Of course, I sometimes get it wrong, as I've readily admitted.
I don't care if the return from the overall portfolio is more or less than the market. It so happens that I've done better than the market over the last few years but that's beside the point.
Let's leave shorts out of it for the moment; in any event, I have a relatively small exposure to short positions. I'll articulate my logic with shorts some other time. I'll just concentrate on the long positions.
Take Apple, which you mentioned in your last post. If you read my original posting on Apple of 6 December 2015, when the share price was $92, I said why I thought its earnings would keep growing and that it was priced as if it was "a staid company in a mature industry", instead of being "arguably the leading technology companies of our age." I reckoned that it would deliver my target return - and it has.
I'll now have to re-do my sums to check if I think it will continue to deliver 6% pa in future from its current price. If I conclude that it will, I'll hold on. I won't sell even if I think something else will do better, which is what I'd do if I was trying to beat the market. I'm happy to hold on to shares that I think will deliver the required return in future. Full stop.
If you look at any of my analyses as published in this column, you should find with all of them that the question I'm trying to answer is the simple: "Do I think it will deliver the target 6%/7% pa?" not "How can I beat the market?"
 

Colm Fagan

Frequent Poster
Messages
376
Sorry! I quoted the wrong price above for Apple at the time I wrote my first column on it. The price at the time was $117, not $92. The conclusion is the same, even before allowing for the dividends received in the meantime.
 

dishwasher

Frequent Poster
Messages
72
Colm- My late father would have agreed with you 100% about researching companies, holding for the long term and only investing in a few. To be fair, I'm unsure as to how much is luck vs research but he did very well indeed over the long term - bought shares in the early 90s, died in 2015. Unlike you he was pretty secretive about his affairs so there was a lot involved in sorting out his affairs after he died. The craziest of all is the need for a Medallion Guarantee Stamp to transfer ownership of his US stocks into my mother's name to complete the probate. The shares are worth very significant $$ so have to be sent to a special section of the IRS in Batimore as the value is too high for the medallion guarantee service providers to deal with. Its been with the IRS for a year (backlog apparently and paper based service) and all the while his estate has been bearing the investment risk, which is not for the faint hearted given the amounts involved.

You said above that you would transfer your holdings to index tracking if it came to it - we did try this with my dad but he didn't want waste money paying the CGT as once he died there would be no CGT only IHT. He was UK based but presumably the same here.
 

Colm Fagan

Frequent Poster
Messages
376
there was a lot involved in sorting out his affairs after he died
Thanks for the tip!! @Sarenco made a similar point a few days ago. I think there's a big difference between my situation and that of your late father (and possibly also Sarenco's former client). My wife and I are almost completely dependent on the returns from our shares for our future income, for however long we may live. We don't have any other pension entitlement (except for one single person's OAP, which wouldn't go far in our house!) so I have to monitor their performance carefully. I suspect that wasn't the case for your dad, that he probably had another source of income, be it from property or whatever. Forgive me if I'm wrong.
The fact that our shares are held in nominee accounts eliminates the US problem you referred to (at least I think so).
I'm also aware of the CGT on death issue (it is the same in Ireland, to the best of my knowledge) but that only affects shares held outside the ARF/AMRF structures.
 

Colm Fagan

Frequent Poster
Messages
376
Fasten Your Seat Belts

Update 7 of “Diary of a Private Investor” Colm Fagan 10 September 2018

"We are experiencing some turbulence. Please stay in your seats and fasten your seat belts." We are familiar with such in-flight announcements, and they don’t worry us. It never occurred to me that the financial turbulence of owning shares in an airline company could be more worrying than the physical turbulence of flying in their planes.

My financial turbulence started shortly after I bought Ryanair shares in March 2016. I continued loading up over the next couple of months, at an average of €13.47 a share. By the start of June, Ryanair was my second-biggest holding, accounting for 18% of my portfolio, up from zero three months previously. Little did I know the turbulence that lay ahead.

My decision to buy heavily into Ryanair was based on a (personal) assessment that its shares could be worth €24 by 2024. Ryanair doesn't normally pay dividends, so the projection was based solely on projected growth in share price. Growth from €13.47 to €24 over an eight-year period would equate to a compound annual return of 7.5%, comfortably ahead of my target return of 6% to 7% a year. The core assumption underlying the projection was a belief that Ryanair’s management could deliver on its target of 180 million passengers by 2024, up from 106 million in Financial Year 2016, without sacrificing margin.

I was able to grow my holding quickly between March and June 2016 by employing something I had discovered only a short time previously: financial spread bets. With spread bets, I only had to pay 10% of the cost up front. Effectively, the spread betting firm would lend me the full cost of the shares, on the security of a 10% deposit. For larger companies, such as Apple, the deposit requirement was only 5%. For Ryanair, the margin increased to 20% above a certain level.

I was like a child with a new toy, fascinated by what it could do but oblivious to its dangers. I realised of course that a fall in the share price would result in a margin call, and I took the precaution of bolstering my deposit account, so that I would have ready access to funds in such an eventuality. I thought I had my risks covered. How naïve of me.

Then came the Brexit vote on Thursday, June 23. I stayed up well into the night, horrified as the results came in. I also had to do some last-minute packing for going on holidays the next day. At 7:30 on Friday morning, when I should have been winding down for the holiday, I got a call from the spread betting firm, demanding funds immediately or my position would be closed. He said that he expected Ryanair to be down about 15% from Thursday's closing price of €13.69 when the markets opened in half an hour. This was more than I had feared, even in my worst nightmares. To avoid having my holding liquidated, I would have to come up with more funds than I could withdraw in a single day without visiting my bank, which I had no intention of doing on the day I was going on holidays. I transferred enough to avoid immediate closure of my positions, but eventually bowed to the inevitable. In mid-morning, my entire Ryanair position was closed at €11.90 a share. The price was higher than I would have got first thing in the morning, so I was grateful for small mercies. Nevertheless, I had to swallow a major loss.

When the dust settled, I decided that Ryanair's prospects had not been that badly dented, so I started rebuilding my position. By the end of August 2016, I was back to where I was just before the Brexit vote and by September my Ryanair holding exceeded the previous peak. There were two big differences from before, though. Firstly, I was able to buy back at much cheaper prices: the average price for purchases between June and September was just €11.52 a share. Secondly, I made certain to over-fund the spread bet account by a significant margin, to avoid ever being caught the same way again. To date, my strategy has been successful, but I know there are greater tests to come.

It is hard to make sense of my purchases and sales of Ryanair since then. I have finally rationalised them by concluding that I have the same schizophrenic attitude to investing in Ryanair as I have to flying with it: I don't like it, but it's cheap (most of the time) and I end up buying, even though I don't really want to. I think it represents particularly good value at the current price (€13.20 at time of writing), so it’s now my third largest holding (after Renishaw and Phoenix).

Part of Ryanair’s attraction is the thermal uplift of share buybacks. To illustrate their impact, profits for FY2018 were up 10% on last year, but earnings per share were up 15%. The difference is because Ryanair generates lots of cash, but instead of paying dividends, it uses the spare cash to buy back shares from investors and then cancels them. The net result is that profits are being distributed to a smaller group of people, so we all get more. It gives a nice lift to earnings each year.

Profits are expected to fall by around 10% in 2019, but the thermal uplift of share buybacks means that earnings per share are likely to fall by less than 7%. (This forecast excludes losses on recently acquired Laudamotion, which I’ve excluded on the grounds that Ryanair bought the company in the belief that it will eventually add value. I’ve assumed – cautiously I hope - that the purchase will neither add to nor detract from Ryanair’s value). Even at the lower profits, I can expect an earnings yield of 8.5% from the current price. I believe that this represents excellent value ………

Unless there’s a hard Brexit, in which case I’d better fasten my seat belt for further turbulence.
 
Last edited:

cremeegg

Frequent Poster
Messages
3,081
As aside, I've never understood why some people boast about being 100% in equities. Why not 80% or 120%? What's so magical about 100%?
Why not 120%? Because leverage can get you carried out.
And I have just spotted this.

I got a call from the spread betting firm, demanding funds immediately or my position would be closed.
Many years ago I looked at a case study of a company which ran into trouble because it had mismatched the timescales on its assets and liabilities. It had borrowed on an overdraft to purchase assets intended to be used in the business over many years.

This sparked me to wonder could the opposite approach make me a fortune. The simple answer was yes. (A modest fortune admittedly )

As a young man I borrowed as much money as I knew I could easily repay from my salary. I borrowed it on a fixed term with known monthly repayments.

I then invested the borrowed money.

My ability to repay the borrowings was never dependant on the performance of the investment.

My investment strategy was never dictated by the need to meet repayments on the borrowings or (shudder) margin calls.
 
Last edited:

Colm Fagan

Frequent Poster
Messages
376
The market is overly swayed by short term news, and simple fashion. Anyone with a little maturity has an edge.
We've been over this ground many times before, but it's worth revisiting earlier discussions, as it is an important issue.

I don't necessarily think that I have an advantage over the market. For me, the big advantage of investing in a small number of individual stocks that I'm familiar with is that it makes me comfortable having a higher proportion of my net worth in the market. As readers of this column should know by now, I have more than 100% of my portfolio invested in the market. This strategy is sure to pay off in the long-term, provided that I can stay the course through bad times and good. Fear of short-term loss prevents the vast majority of us from following this winning strategy consistently. That fear can be mitigated, if not quite overcome, by investing in a small number of real life companies rather than funds.

In relation to your comment that I have no advantage over the market, I don't know if you're addressing that at me personally or at stock-pickers in general. I've already said in another post that I have beaten the market over the last number of years, but I accept that there may be an element of luck in this (in that my largest single investment for many years past has done extremely well), so I'm not going to disagree with you as far as my own personal performance is concerned. But if you're referring to stock-pickers in general, then you're wrong.

It's worth reading an article in today's FT entitled "How to pick a successful stockpicker". The author says that a consultant found that four in ten of a particular group of stockpickers out-perform their benchmark by 400 basis points or more a year, net of fees. The consultant also says: "I am strongly of the opinion that skill does exist in active management." Read it.
 

Colm Fagan

Frequent Poster
Messages
376
@cremeegg I don't know how you were attributed with the quote given at the top of my post ("The market is overly swayed ...."). I meant to post the quote:
"buying Apple or shorting Tesla, etc. "
 
Last edited:

Colm Fagan

Frequent Poster
Messages
376
The market is overly swayed by short term news, and simple fashion. Anyone with a little maturity has an edge.
Hi Cremeegg. Thanks! Sorry for misunderstanding your earlier post. Maybe you posted by accident before you'd finished. The one I saw initially only had the quote from @Fella, not your reaction to it.
I gather that we're on the same side!
 

spanners

Frequent Poster
Messages
58
@Colm Fagan when you say you have more than 100% of your portfolio in equities, is that taking account of the leveraged spread bets or do you also have other borrowings to invest like cremeegg?
 

Colm Fagan

Frequent Poster
Messages
376
when you say you have more than 100% of your portfolio in equities, is that taking account of the leveraged spread bets or do you also have other borrowings to invest like cremeegg?
No, it's just the spread bets. It's probably worth adding that, when I started with spread bets, I looked on them as "bets", which is how the spread bet companies present them, e.g. I made a "bet" of €10 a point (or whatever) on the Ryanair (or whoever) share price increasing. To some extent, that led to my downfall with Ryanair, as described in the diary. Then I changed how I looked at them and set up a spreadsheet, which recorded that I bought (say) €30,000 worth of Ryanair at the prevailing price, and I borrowed €30,000 to fund that purchase, so the €30,000 appeared on both sides of my "balance sheet", with a zero value on day 1 (actually, it had to be negative at the start because of the bid-offer spread). Of course, it then started varying because the loan remained the same but the asset value changed as the share price fluctuated. The alternate presentation has helped to reduce the risk of a repeat of what happened on Brexit night (In saying that, however, I recognise that we haven't had a similar seminal event since then; I thought we'd have one on the night Trump was elected but the major surprise is that nothing happened that night).
 

spanners

Frequent Poster
Messages
58
@Colm Fagan Interesting. I looked at spread betting and thought that if psychologically you can get past the 'bet' element, essentially it is a platform that offers to lend you money at approx 3-3.5% per annum to invest, with all capital gains and income being tax free.

If I was an experienced investor that would be a very attractive proposition.
 
Last edited:

Colm Fagan

Frequent Poster
Messages
376
Punched in the Mouth

Update 8 of “Diary of a Private Investor” 14 October 2018


Mike Tyson, the former world heavyweight boxing champion, famously said that everyone had a plan till they got punched in the mouth. I had a plan and yes, I got punched in the mouth. Actually, a barrage of punches.

As regular readers know, the core of my plan is to eschew so-called “safe” investments: I have no bonds and just enough cash to meet short-term liquidity needs. Everything – actually, by utilising leverage, more than everything – is in equities. The reasoning is simple: I expect to earn 6% a year on average from equities, compared with 2% (or less) from bonds and cash. I hope to be around for a while yet, possibly 15 years or more. Over that timeframe, an extra 4% a year will add more than 100% of its current value to the portfolio. Not to be sneezed at.

Share prices can fluctuate wildly. To prevent me from getting too excited when market values rise or too depressed when they fall – to “treat those two impostors just the same” - I have devised a smoothing approach that helps me to cope with fluctuations in the value of the portfolio. My long-term spending plans are based on smoothed values rather than market values. Of course, any sales to meet cash outflows – and sales are a regular occurrence now that I’m firmly in draw-down mode – must be at prevailing market prices. Over the last few years, the ratio of smoothed to market value has ranged from a high of 120% just after the Brexit referendum in Summer 2016, when market values collapsed, to a low of 75% in January this year, when the market was euphoric over the impact of Trump’s tax cuts. As recently as early June, the smoothed value was 85% of market value. Everything in the garden seemed rosy.

Then came a hefty punch in the mouth. The word “Renishaw” was emblazoned in big red letters on the glove.

Renishaw, a specialist engineering company with its headquarters in Gloucestershire, is my longest-standing and largest single holding. I bought my first shares in the company in 1998, at £4.05 a share. It’s my one and only “ten-bagger”, defined as a share worth ten times what was paid for it originally. It now accounts for more than 25% of my total portfolio.

Results for the year to 30 June were published on 26 July. The market liked what it heard and the share price, which had been rising steadily for weeks, reached a closing high of £56.60 the following day. I took advantage of the price rise and sold just over 10% of my holding at an average of £56.20 a share.

Then the price started falling. I wasn’t worried as I still considered it a sound investment. In fact, when the price fell, I couldn’t resist the temptation and bought back around a third of what I’d sold, at an average price of £51.13 a share.

Then, for no apparent reason, the price kept falling. It was down to £47.40 by the end of September and there was no respite as we moved into October. By 5th October it was at £45.56 and by Thursday last (11th) it had dipped below £40 a share - a fall of almost 30% from the July high. No wonder I was left reeling. On its own, the fall in Renishaw’s share price caused a 7.5% fall in the value of my total portfolio in just two months.

More worrying in some ways is that there is no apparent reason for the fall, other than general market malaise. The company has said nothing. The latest we have is the chairman’s July statement that the directors remain confident in the company’s long-term prospects.

I’ll find out soon if there’s bad news that no-one’s telling me. The AGM is on Thursday next (18th October) in the beautifully named Wotton-under-Edge, in the heart of rural Gloucestershire. I’ve booked my flights and plan to be there to hear the news: good, bad or indifferent. I also plan to speak at the AGM; the subject of my planned contribution may get a mention in a future diary update, but not now.

There was more bad news as I clung to the ropes, groggy from the Renishaw punch. Ryanair, which accounts for over 12.5% of my portfolio, is down 17% from the price at which I increased my holding only a few short weeks ago. In Ryanair’s case, I feel the pain more to my pride than my wallet: my diary update in September told why I thought it was a good buy at €13.79; it’s now down to €11.46.

I have managed to land the occasional counter-punch on Mr Market. My short position in Tesla, mentioned first in Diary Update Number 2 of April 1st, is looking good. I’ve cashed some of my Tesla profits but I’m hanging on to the bulk of my short position in the stock, in the hope of further price falls.

Last week, the market mayhem extended to most of my other holdings. It was particularly bad on Wednesday and Thursday last, when global markets fell sharply. I limped back to my corner at Friday’s closing bell, mauled but still standing.

I have used the weekend to take stock of where things stand now, and where I go from here, if the carnage continues into next week. The fall in market values means that the smoothed value of the portfolio is now back above 100% of market value, but the ratio has been higher in the past, and on each occasion it’s come back to break-even relatively quickly. I’m hoping for a similar result this time.

I believe that all my holdings represent good long-term value at their current prices, so I’m not too worried. I have a hefty tax bill coming up shortly, though, and will need to sell some of my shares. I’m also conscious that the Brexit negotiations are entering a crucial stage (again!) and there is a risk of things turning nasty if the talks go off the rails. I hate selling when prices are down, but it must be done and it’s probably best to take the hit sooner rather than wait and hope that they’ll have recovered by the time I need the money. I plan to keep sales to the minimum, however, and to hunker down until the storm blows over.
 

Fella

Frequent Poster
Messages
397
@Colm Fagan i admire you for posting up your share picks , I worry about the amount of behavioural bias you are showing. Anyway good luck i suppose at least a private investor can read the article and see what not to do in investing .
 

opexlong

Registered User
Messages
30
Interesting article.

This report says that Renishaw was trading at a trailing P/E of 29.5x. Too much helium.
My short position in Tesla
In the end, Apple and Tesla and your other picks could suffer severe price declines on the same day. If that happens your Tesla short position could act as an inadvertent hedge against portfolio losses.
 

Sarenco

Frequent Poster
Messages
5,736
I have devised a smoothing approach that helps me to cope with fluctuations in the value of the portfolio. My long-term spending plans are based on smoothed values rather than market values.
Hi Colm

I wonder could you give us a little more detail on your value smoothing approach? It sounds like an interesting idea, at least from a psychological perspective.
 

Colm Fagan

Frequent Poster
Messages
376
Hi Sarenco. The smoothing formula I use for my own portfolio is quite similar to the formula in Appendix 2 of the attached (draft) submission to the DEASP on auto-enrollment. I plan just a few relatively minor changes for the final submission. While my "personal" smoothing formula only has a psychological value (as you state), I'm proposing that, for the national auto-enrollment scheme, the smoothed values will be the values at which contributors will interact with the scheme. It means that contributors will be protected from the volatility of the stock market. As I write in the submission (paragraph 17), the proposed approach will remove the joy of sharp upward movements in stock markets and the pain of sharp downward movements while retaining the equity risk premium. The best of all worlds?
 

Sarenco

Frequent Poster
Messages
5,736
Sorry, I can't seem to attach the document.
That's a shame.

Is it similar to the formula you gave in your presentation to the Society of Actuaries back in February 2017 (i.e. a weighting of 1.5% to the current month’s market value and a 98.5% weighting to last month’s smoothed value, increased by one month’s interest)?
 
Top