Diary of a Private Investor

Locked and Loaded

From an investment perspective, I am glad that 2016 is now done and dusted. My overall performance of +29.46% masks a very uncomfortable year in which I learnt many important lessons. In short, I got out of jail with a couple of big winners but I need to add more certainty and predictability. 2017 is a critical year for me. If I have a really good year (e.g. 60%), then it will be my last year in the corporate world. More realistically, I need three decent years (e.g. average 20% pa) to reach my “retirement number”.

Macro View
I will keep this brief because I have absolutely no idea how the political and macro environments will unfold during the year ahead. However, with Article 50 due to be triggered by the end of March and US interest rates already on the rise, the pound will probably remain weak against the dollar and that is my overriding investment thesis for the year ahead. There was a theme developing in the second half of 2016 that UK companies were vulnerable to takeover bids and I think that trend might continue into 2017.

Beyond that, the big unknown for the world is the Trump presidency. His rhetoric has toned down since he won the election and one can only hope that remains the case. Whether he borrows heavily to get the US economy moving again remains to be seen. The relationship between the US and China looks to be fraught with difficulties, although the relationship between the US and Russia might improve. International terrorism will no doubt continue to haunt us all. What will happen to the price of oil, copper, gold etc.? Nobody really knows but for sure, this will define some of the portfolio winners and losers for the year ahead.

Diversified Portfolio
For many years I have heard people talk about the importance of diversification and yet, 2016 was when the penny finally dropped for me. I spent much of the year with a pile of cash (circa 40% between June and November) which limited my upside when the markets rallied. Most significantly, it limited the income generated from my portfolio for reinvestment. Including cash, I go into 2017 with 42 holdings overall – more than I have ever held before (I was a 10 at a time man for most the last decade). There’s no way I can give these holdings the level of attention or in-depth research that I could with a smaller number of holdings but perhaps that is not so important. WHAT?!!?

24 of my holdings form the income part of my portfolio (30% overall weight) and I believe that will form a quasi tracker for capital appreciation while providing a sustainable yield of over 5%. The main driver as to whether to buy/add, hold or sell will be based around the dividend performance and outlook. This is relatively new territory for me, so we’ll see how it pans out. Of the remaining 17 shares in the growth and special situations sections of my portfolio, I am intimate with a dozen of these holdings and learning more about the ones I have taken an initial position in. Most of my higher weighted holdings are in this section and therefore, will make or break portfolio performance in the year ahead. On the surface, most of the growth shares are already highly rated (Quality and Momentum are the key features) and therefore, success is dependent on the continuation of strong business performance and profit growth. Together with my two larger special situation holdings, it is these overweight positions that I need to watch like a hawk and act swiftly if they begin to go wrong.

Readers wishing to take a closer a look at my holdings can view the overall weightings and/or the breakdown by portfolio. I’ll be publishing performance and weightings updates quarterly.

Weightings and Activity
One of the worst aspects of my 2016 performance was the amount of transactions. This is an area I want to put right in 2017. The first aspect is deciding when to sell. For the income shares it is dividend outlook and I’m going to try and keep it that simple. In relation to the growth and special situations, there are three reasons to sell:

  • Stop-Loss-Decide
  • Profit warning (or weakened outlook)
  • Reducing an overweight position

The second aspect is what and when to buy. I do intend to increase my weighting in income shares over the year. Firstly, I’ll do this by income reinvestment, approximately quarterly. Secondly, I’ll be looking to significantly reduce my exposure to special situations as the current holdings unfold. When I do finally reach my retirement number, I’ll be looking to have a balance of 60% income, 30% growth and 10% special situations. Clearly, I am quite a way from that at present but I’ll be looking to move in that direction as the year unfolds.

Optimism
I am by nature quite an optimistic person which can be both a blessing and a curse. My growth holdings in particular enjoyed a healthy Santa rally which will hopefully give rise to a strong start to the year. The first visible indicators I will be looking for though are the spate of trading updates that signal 2016 business performance and set the scene for results season in March-May. I will be trying to exercise both patience and vigilance in the year ahead and hopefully, making more good decisions than I do bad ones.

I am locked and loaded Mr Market, so bring it on!

I wish all my readers a happy, healthy and profitable 2017.
Simon (@BrilliantLeader)

 

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