You don’t have to be an expert on every company, or even many. You
only have to be able to evaluate companies within your circle of competence.
The size of that circle is not very important; knowing its boundaries, however,
is vital. Warren Buffett
Having spent the last few weeks
wandering through the world of psychology, I thought it would be good to get
back to some basics. I started this blog to help both novice and more
experienced investors alike*. Many people who are just starting out will ask
questions such as, how much money do you need to get started? what platforms do
you use to invest? How do you do your research into what to buy? Where do you
get your ideas?
I have developed my approach over
8 years of investing. It works for me as a busy person with a full time job
(preventing me watching a screen all day!) and other commitments. It may not be
the optimum approach for you.
I started with a sum of money
that I’d built up in an Individual Savings Account (ISA) wrapper over about 11 years. I had met an Independent
Financial Advisor (IFA) when I first
got a mortgage, who recommended that I consider an interest-only mortgage and
build up my capital within an ISA wrapper. This was in the days of interest
rates being ten-fold of what they are now and was on the back of a tremendous
bull-run in shares. I think looking back on it that it wasn’t the greatest
advice as my ISA fund didn’t perform that well (only saved by the performance
of Fidelity’s Special Situations Fund). The blessing was that interest rates
started to come down. Eventually after a few years and a house move I switched
on to a capital repayment mortgage. By this point in time I had built up a
reasonable sum in the ISA (at the cost of my mortgage not having decreased
much!)
When I decided I was going to
start doing my own investment I was lucky to have a pot of money to invest.
ISAs have been a good innovation in the UK. As of 2020, you can invest up to
£20,000 per annum and all gains are free of tax. There are some nice tales of
people who have managed to grow their ISAs to over a million pounds with
prudent use of the annual allowance and investment. As ISA contributions are
already out of taxed income, unlike UK pensions there is no future income tax
to pay on withdrawal (at least as of February 2020…)
I am loath to pay fees unless I perceive that
I am receiving value. I was not concerned by al all singing all dancing
service, so settled on Jarvis’s x-o.co.uk ISA which charged £5.95 per trade in
2012 and still does in 2020. The website is orange and just as basic as it was
in 2012. They charge no custody fee and I take peculiar delight in seeing my
money appreciate in such a Spartan setting!
I read the Naked Trader by Robbie Burns early on in my journey and was
attracted by his focus on “growth at a reasonable price”. Aside from my first
purchase of an oil company which shot to the stars and then crashed down
(fortunately I had put in a stop loss), my early investments performed
sensibly. I did well in industrials like Carlclo and Fenner which were mounting
nice recoveries after poor years. In truth my early investments were a mixed
bag as there was a sense of me casting around in the dark not really knowing
what I was looking for, but the decent ones did outperform the poorer ones that
dragged performance. In hindsight I was lucky with timing. When I began at the
start of 2012, we were coming out of a bad year in 2011 when all the talk was
of double-dip recession.
However, it was the loan from my
local library of Joel Greenblatt’s the
Little Book that Beats the Market that really revolutionised my investing
approach. Greenblatt taught an approach that I still follow to this day. It
focuses on finding companies that deliver the highest internal rates of return
and then buying a basket of them. To this day, I will generally not buy a
company unless I am satisfied that it has a high return on capital and a decent
earnings yield.
Greenblatt’s approach is based
upon a quantative method. In other words, buy a bunch of companies that meet a
certain criteria and hold them. On the basis that there will be some duds and
some gems, the overall effect is that you should often be the Market because
your companies are better quality than what the Market as a whole will offer.
I spent some time looking for a
way that I could screen the Market to find these companies and happened upon Stockopedia, an online subscription
based stock-screener. The concept was devised by the brilliant Ed Croft, who is
a clever and personable individual. He was really into screening and devised
software where the whole Market could be screened and then attractive “at a
glance” reports delivered on each company. I trialled it and then (suitably
impressed) subscribed. I have now been a member for almost 8 years. Stockopedia had built several screens
based on “Guru” strategies, including Greenblatt’s Magic Formula. You could see which strategy had performed best and
then use that as a basis for stock selection.
This approach led me into buying
companies that gave me the outperformance I was after. It also widened my eyes
to what had been written by the investing legends. I started buying second hand
copies of the great books. I became a big fan of Warren Buffett’s methodology
(after reading 2 books on him as well as his many investor letters) and Jim
Slater’s Zulu approach. I looked at David Dreman’s deep value approach and read
Benjamin Graham’s Intelligent Investor-
in many ways the seminal work on value investing. I enjoyed William O’Neill’s
quality and growth approach. All of these helped to mature me as an investor
and helped me focus on really good companies- either established quality or
having the potential to grow into quality companies.
I decided later in 2012 to take
control of my Self Invested Personal Pension (SIPP), having amalgamated my various occupational pension funds
from two employments. I used AJ Bell to set this up and remain very pleased
with the service. Yes, there are custody charges, but they charge a reasonable
£9.95 per trade (discounted to £4.95 if you trade 10 times the previous month),
allow dividend reinvestment and have a nice App to go with the software, so I
can keep track. Since starting that in 2012, the size of the fund has roughly
trebled (allowing for my annual contributions as well as growth). I’m pleased
with the effect of dividend reinvestment as I grow my best holdings.
Stockopedia has been a constant reference companion and source of
new ideas. Although not cheap at £225 per year, it is much better value (for me
at least) than paying an IFA. It helped me spot such gems as Games Workshop
when it was only £8.50- a company I still have a holding in and which rose over
£70 this week. I have had more mixed success with a quantative approach with
Stockopedia. Buying a basket of value shares works well when the Market has
just had a downturn. It works much less well when the Market is about to go
into a downturn. I’ve learnt to use stop losses if I use that approach now.
As my SIPP has got larger, I tend
to hold less in individual stocks and more in low cost index funds with global
exposure and investment trusts, as well as gilt and gold exposure. I’m a fan of
How to Own the World by Andrew Craig.
I always keep a portion of my SIPP in individual shares.
So I operate a blended approach.
I run a longer term lower risk in my SIPP, using the power of compounding
through reinvested dividends with some in individual stocks. My ISA is focused
on a maximum of 12-15 stocks at any one time, with some cash on the side.
Dealing and holding costs are kept low and I manage the portfolio ruthlessly by
running winners, cutting losers and reinvesting dividends and gains.
It’s an approach that works for
me and helps me stay focused whilst suitably spreading risk.
*This blog is published subject to this disclaimer.
*This blog is published subject to this disclaimer.
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