It’s been a very mixed year for me in several ways with lots – good and bad – going on in my personal life. It’s made me feel rather philosophical and I’ve been doing lot of thinking about what I want my life to be and how my investing might fit into that. I’ll riff on that more on that later in this piece.
Given this is an investing blog, Iet’s start, however, with the 28% total return for the year. This is obviously highly satisfactory, but in a year when lots of indices were up big, and where lots of twitter small cap investors are reporting returns of 40 or 50%, it feels a little mundane. I think part of that feeling is also due to the fact that a large part of that good return is attributed to Leaf Clean Energy, which was up c400% on the back of its court victory and subsequent liquidation. Did I get lucky? Maybe. But you have to put yourself in the right spots to get lucky and I made the investment because it seemed the risk/reward was favourable. Maybe I was also owed some good karma after my total loss on Flybe the previous year.
Some of my other positions really underperformed:
Rolls Royce: Continued issues with their installed engines led to more expenses, with the market fearing that there are fundamental design/quality issues and beginning to lose faith in the idea that there is a ramp up in FCF on the way as engines continue to mature. I will keep faith for now with Warren East, the CEO, but the fact that the board representative from ValueAct has resigned is worrying. There may be a benign explanation but I really don’t know what it might be. I will continue to hold on the hope that the market starts to think about this one differently.
Crystal Amber: I bought this stock because I feel that Richard Bernstein is a value investor who creates long term value, and provides exposure to an asset class – UK mid cap activism – that is idiosyncratic. In addition, unless you’ve really been through the accounts, you won’t know that he maintains index puts to provide protection in the event of an equity market collapse. 2019 was a horrific year for this fund. Pretty much the whole concentrated portfolio of UK stocks (except Leaf Clean) encountered their own difficulties and price pressure which led to a big discount to NAV developing to compound the fall in fund value. I have added as I don’t believe Bernstein has become a bad investor over the course of a six month period, that the stock should indeed ballast if the S&P were to sharply correct, and because I think Bernstein will pursue value creating buybacks as long as the fund trades at a discount.
Tripadvisor: I sold this as they reported continuing deterioration of their hotel booking business and they paid out a special dividend, which seemed a little to me like an act of desperation to bolster the share price. I think this is probably another example of me buying a “story stock” but to be honest, given not much value has been created over more than a decade by the CEO, it was clearly a mistake. Why did I buy pretty much the only travel review/booking platform that doesn’t make money!
Imperial Brands: This fell precipitously on the back of health and regulatory concerns re next generation products and specifically vaping. I am somewhat hopeful on this stock given the high dividend yield, low multiples, and the fact that they have just appointed a new chairperson with M&A expertise to presumably oversee a sale of the company.
The good news about 2020 is that I feel my portfolio is well set. As well as the three above that I continue to hold:
Dignity: While this has come off its lows, the stock continues to trade at a depressed level as the Competition and Markets Authority plods on with their competition enquiry. Given the lack of material being posted on their website, and content of their various industry fact findings, I am becoming increasingly confident that the final report will be benign. This will give Dignity the freedom to continue with their strategy of rationalising their estate, digitalising the company and building some competitive advantages based on their scale. This should lead to a rerating and materially higher earnings if they can execute. The company should also reap the benefit of demographics, as more and more people are forecast to die in the UK, on an annual basis.
Jefferies: The CEOs appear determined to reverse the Leucadia merger and become a pure financial services organisation again. This should be good for shareholders as they continue to sell assets near book value and buy back shares at a large discount to tangible equity. Broker Dealers have had a good quarter, and at the Investor Day last year, leadership were very clear that they believe the Investment Bank is underearning. I will continue to hold as long as the asset sales and buybacks continue.
Bayer: After their terrible 2019 and the shock of the Roundup lawsuits, it seems that the pessimism is fading as the market starts to believe in a settlement scenario that will be painful but not disastrous. Consequently, the stock price is back to near where I bought it but still looks reasonably cheap compared to its peers. Granted, management is useless but there’s a gem of a business in there in what used to be called Monsanto, and we have to assume it won’t be totally ruined. This is a hold until the Roundup scandal has passed.
Further to the stocks above, the stocks I bought in an attempt to increase the quality of the portfolio – Howden, Exor, Facebook, Berkshire – have performed well but still don’t have very challenging valuations. I can imagine owning these for many years. They are hopefully “forever” stocks and I hold them outside my ISA.
Moving onto wider things about the direction of my life, the 28% return resets me and my savings somewhat, and I feel a little like I’ve got out of jail. I can still see a runway to achieving my ambition of early retirement – let’s call it FIRE deluxe – and if I think back to when I was a student, and I envisaged myself as a rich person, it was always because I wanted freedom, not status. Freedom from having to do a job which I found dull and freedom from having to worry about money if a relative got ill or I wanted to travel. I also wanted to pass onto my kids enough money that they could have freedom from the hum drum of the commute and office politics. Now, I still think I’m on track for that to happen when I’m 50ish, although perhaps in a much less grand way than I thought when I was 20. Then, I saw myself retiring on my own terms on the back of a successful city career. Now I think I’ll be escaping from a job I don’t enjoy to do what comes naturally to me – pottering around and thinking about the world. I won’t have the money to create some sort of dynasty, my children will have to work, but I’ll definitely be able to start them off in a much better place than I. So that’s the plan – in ten years I’ll be living outside the UK probably, in Poland, France, Italy or Spain.
To get there, I’ll need to make 10% -12% a year, I think I need to try and do two things. First, I need to not have losses of permanent capital. What does that mean? I know it sounds obvious but it means not betting on story stocks, not trying to shoot the lights out, and fully understanding the business models of companies I invest in. I shall continue to try and use my edge of a genuinely long term, unconstrained, time horizon, and it also means being ultra conservative.
Second, I need to survive through the next downturn and stock market collapse. We all know one will come, and we suspect it might be quite soon. I am going to start building cash in preparation for that day.
I will also acknowledge what is clear to me now, which is that I don’t have the time or discipline to research all the stocks in my portfolio myself and I should outsource some of my portfolio management to others. So for example, I have invested 10% of my money in a portfolio manager based in Switzerland, who has had great results over the last ten years, and who’s style I like – cheap global stocks that often have some sort of catalyst. I have money also with Warren Buffett and John Elkann, quite simply because they are cleverer and harder working than me.
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