Monthly Archives: October 2016

October performance report

As I start each trading month on the 20th (old habit from derivative settlement dates), today is my end of month. October has been a good month, with a closing balance of £175,113.42. The flash crash in sterling meant that my IG hedge account has taken a bit of a beating, but the same dynamic, the fall of sterling vs USD, means that my underlying portfolio (many of which have significant non GBP earnings) have felt the benefit.

My holdings in the ISA at close of business today are:

Bank of Ireland 13.375% Perpetual sub notes
BT 5.75% Senior 07/12/2028
BTG PLC
Lloyds Banking Group
OMG
Next
Restaurant Group
Sports Direct International
Glencore PLC
Fitbug Holdings
Inspired Energy
JP Morgan AM UK Ltd Emerging europe
Beazley PLC

ISA market value 152,377.20
Cash 21,620.00
Spread Bet 1,117.00
   
Total 175,114.20

Start of my financial year at 20th March – balance was £141,500 giving a year to date profit of £33,613 and an annualised return of 35.63%. 
That’s a good return, but the trick is doing it consistently. In fact, the trick is doing half of that consistently, so it is very early days. To put the task in context, I would need to match that percentage performance for 5.75 more years from this point to hit my £1 million target. AND I’D STILL BE LATE!!
What you will notice is that most of the above portfolio is exactly the same as it was when I started the project. I brought in Next when they dipped a few months back and I have revisited Lloyds – an old foe of mine – on the basis that they are a UK focused bank with a huge market share. I am ashamed to have not ditched Fitbug earlier and they are now worth a fraction of my entry price – to the extent that they now represent a more or less free option so I may as well keep them as they can no longer hurt me having dropped to a value of just £361.61 from a £6,500 investment – OOPS!
Beazley is solid and a high dividend payer and that is a long term hold, as is Glencore now that it has reduced it’s debt mountain. Sports Direct I am a big fan of as discussed elsewhere on this blog. 
Restaurant Group has underperformed my expectations and that will form the basis of my analysis over the coming days. 
It would be great to hear any feedback, views on the stocks or strategies mentioned in the blog

Trading, cognitive ease and heuristics

I’m reading what is probably one of the best books I’ve ever read, and I read a lot! Thinking Fast and Slow by Daniel Kahneman is not the easiest read in the sense that it makes you think deeply about difficult psychological concepts, but given this complex subject matter it is incredibly clearly explained.

If I can simplify one aspect of what Professor Kahneman says without changing its meaning it would be that the brain likes conclusions that are easy. Having grabbed an easy conclusion, we are then predisposed to follow that conclusion and to ignore, or at least not seek out further evidence which may challenge that conclusion.

My current take on U.S politics for example is that Trump is an idiot and Clinton is preferable. I have that opinion even though I confess I have very little grip on either candidates’ policies on a whole raft of issues which any sensible investigation into who you would want running the worlds largest economy should take account of. So I know I don’t have enough information to form a proper opinion, but I have one anyway. That feeling of cognitive ease you get from a very clear cut opinion, ignoring the nuances shows similar brain activity to pleasure. We like things simple. Working out the detail is hard and gets in the way of making decisions, even if the decision is the wrong one.

This is also why we tend to make group decisions with a bias toward the first few opinions we hear. Who hasn’t been irritated by the person who waits until 30 minutes into a discussion to bring up an alternative viewpoint. Does it matter that their view might be the best option? It doesn’t matter at that point, everyone is ready to move on. Cognitive ease has kicked in.

So what has any of this got to do with trading?

Everything.

How many private traders hit the buy or sell button on a hunch or a half-formed chart? How many decisions are driven by cognitive ease? I like their shoes /cars /perfume so I’ll buy their stock even if the numbers say it’s a dog. Everyone else is buying so I will buy because I don’t want to miss out on this rally. Doing something because Johnny did it is a strategy that got us into trouble as five year olds, but it still seems to work for a lot of private traders. Well it “works” in the sense that it feels good at the time because it is easy cognitively. It feels right. Tends not to help with the process of actually making money though so most private investors lose.

How many times have you looked at a portfolio that you own and not been able to give a good, current reason for owning one of those stocks? Or maybe more? Given the wealth of information available today there is no excuse for this, other than the rather powerful one that it is human nature.

So I am not going to give myself a hard time for being guilty of all of the above and more at one time or another. I am going to challenge myself to be more mindful of these human biases in my future stock analysis, and if you notice me making decisions based on what you believe is flimsy evidence please feel free to pull me up on it.

BTG PLC – Sterling work

BTG the UK Pharmaceuticals company settled a legacy claim today against one of its subsidiary companies with the US Government.The shares jumped, as they tend to do in these situations – probably an overreaction to that one particular piece of news, but as I’ve said before, I’m a long time fan of this company. The company also earns significant revenues outside of the UK so their income this year will benefit from the fall in sterling since the Brexit vote (see what I did there with the title).

I can talk about the Quantitative reasons for that, and I’m sure that will be the subject of a post in the future, but today I want to mention just one element that shows this company is quality. Look at their website. On there you will find clear guidelines about their products, people and strategy. The investor section includes the annual reports but also presentations like this one https://www.btgplc.com/media/1785/investor-update.pdf which show in plain language what the overall strategy of the company is. You don’t have to dig around trying to find a message – it’s right there. Therefore, I wasn’t at all surprised that when I picked up the phone to ask a couple of questions there was someone on the other end who was more than happy to discuss the company.

This obviously isn’t a reason on its own to invest in a company, but its absence is certainly a reason to think twice.

What to do about Low & Bonar?

So far the year to date (starting in March) has yielded a 32.12% annualised return. Well into the second half, I need to be looking for a little more volatility in one or two picks to get to my required 40% return whilst having a good idea on preserving the capital I have built so far. This thought process brings me to Low & Bonar (LWB)

A UK Manufacturing company with the vast majority of revenues earned overseas (last 6 months only £9.4mm vs total of 180.6mm), a majority in Europe (117.2mm). Negotiations that will be kicked off by the UK Government when they invoke article 50 and give notice to leave the EU will have a key impact upon the future value of this company. In the meantime, their large proportion of Euro denominated earnings will benefit no doubt at the year end in November from Sterling’s weakness since the vote.

CEO Brett Simpson has taken some positive action, not least in opening up in China and selling off a less profitable artificial grass yarns business for £27mm.

My main question regarding LWB – why such a large increase in working capital in the last 6 month reporting period to July 2016? This has increased by £26mm, a significant figure in the overall context of the company. More worrying, this is on the back of an increase in working capital last year of 5.9mm. So working capital is going up but profits aren’t particularly. That is a sign that more investment is needed to make the same amount of money – that’s not good.

I also note that earnings have dropped by more than 5% in 6 out of the last 10 years – this would have Ben Graham spinning in his grave. Volatility is good, but for specific reasons, not general swings.

I like this company – they are very good at what they do, but are they a long term sustainable winner? They certainly wouldn’t make the cut for Warren Buffett so when the market opens in the morning, my position in them is going. I bought my first tranche of this share in December 2012 at 52.50, adding at the much higher level of 87 a few months later. On blended principal I am 1.5% down but have picked up more than that in dividends over the last nearly 4 years. However, it hasn’t been worth it’s place in the team trying for 40% returns so it has to go.

Binary Options

As you know, I have had mixed success with my spread betting, the main advantage appearing to be that it stops me messing around with my share portfolio too much. The need to “do something” can be quite overpowering at times so having something to trade where I can’t lose too much money is helpful.

However, clearly it would be still better in me achieving my ambitious goal if I either didn’t trade outside of the share portfolio at all or if I found some way to make it profitable.

On this mission, I read a book the other day – Trading for a Living by Alexander Elder. This is a fairly dry tome mainly focused on charting, which isn’t my favourite subject. However, it did make one blindingly obvious but very important point which is that the first target of a trader is to protect and grow their capital. The high failure rate of private investors is largely because a lot of traders skip straight to the aim of making a killing and forget to properly consider their risk according to Elder.

Looking at a number of systems on the market for trading, the live demonstration seems to be an interesting feature that is coming up more and more. My old University even has a trading floor built into their business faculty to give students the authentic feel (although the authentic feel of my first two years on a trading floor could have been created by simply shouting at me and telling me what sandwich you wanted).

One live demonstration that I have seen recently which I was very impressed with was Night Owl Signals
http://3b5e9fzd2ngyandcyatpyt0ju6.hop.clickbank.net/?tid=BOMSCRIPOWL Here you actually get to watch a binary option trader live as they go about their business with commentary on what is going on. There is a subscription service, for which I will get paid a commission if you follow the link above and end up subscribing to the full service, but also on the link there is a free trial available. I would recommend you use the free trial as it is very informative, and gives a good idea of the service at no obligation.