In today’s post I take a look at how as an individual investor you can improve your results going forward by learning from the good and bad investment decisions I’ve made in my own stock portfolio in 2017.
The best single investment I’ve made this year purely on a percentage return basis is IG Group.
It is often said that a value investor only needs one or two good ideas a year and that is certainly true.
But what stands this investment out from others that were made this year is the degree to which I ‘took courage to be a pig.’
The phrase ‘it takes courage to be a pig’ is attributed to an interview by Stanley Druckenmiller in which he was asked what he learned from his boss George Soros:
Perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong… Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig … As far as Soros is concerned, when you’re right on something, you can’t own enough.
Certainly IG Group is my largest position by a wide margin so my only failure in regard to this piece of advice was that I did not buy enough of IG Group on an extremely high convection investment case at the time.
I simply did not appreciate just how high convection an investment in IG Group at the beginning of 2016 was.
This lack of appreciation in the investment case seems silly in hindsight because the fundamentals and investment case was exceptionally strong indeed:
- a 40% price decline in a week in December 2016
- a strong balance sheet
- a high dividend yield
- a competent, experienced, shareholder aligned management team
- a market leader in it’s field
- a 40 year operating history
- high returns on capital employed
- an obvious overreaction by the market to bad news
- a history of financial responsibility to it’s customers
This last point was important because IG Group is in the financial services sector that allows it’s customers to use leverage to make trades and invest on financial markets.
They have simply excelled at looking after their clients over the years by offering a course on the merits and dangers of leveraged trading and limiting the downside risk that new or inexperienced customers have on their accounts.
I should know I have been a customer of IG group for many years.
Why the hindsight analysis? What’s Done Is Done Right?
Not in investing because in order to improve your skills as an investor you have review what has gone right and wrong in order to avoid what went wrong and leverage what went right.
When I first started investing I stuck rigidly to capital preservation management principles that literally held me back by not allowing me the room to have ‘courage like a pig’ when a high conviction investment presented itself.
The investors I respect and admire have the majority of their capital in their highest convection ideas.
Sometimes they have 80% of their capital spread across their top 10 or top five holdings.
But however high convection investments are organised by an individual investor the fact is that they sensibly leverage their best ideas.
This is one of the ways a value investor can use leverage to generate greater returns but it takes experience to do it without negative results.
The way I mitigate downside risk when leveraging in this way to to ensure that I buy mid to large cap (often dividend paying) stocks that are trading far below their intrinsic value using equity – or stock – as the way to do it.
I do not use CFD’s or spread betting for placing large high conviction trades although I do use spread betting for smaller individual trades when it is obvious from the price that a quick return is likely.
Using spread betting or CFD’s for large high conviction investments is financial suicide as if the price should go lower you’ll end up financing a leveraged losing position.
Are There More Investment Lessons To Be Learned From 2017?
There are many investment lessons to be learnt from 2017 but the most important is that in a market where valuations are high it’s good to have a large amount of the value of your portfolio in cash.
Despite the best efforts of the globalist financial gangsters to destroy the value of money and turn currencies digital cash is king when it comes to protecting a portfolio from downside risk.
How much money to have in cash depends.
They way I do it is to make high conviction investments as above then spread the downside risk across other mid to large cap stocks that are trading at a discount to their intrinsic value but which I have less conviction on.
This is a simple diversification strategy.
These ‘lower conviction’ investments simply have less money allocated towards them than ‘higher conviction’ investments and by quite a wide margin.
They also pay dividends which is the reward I get for holding them in the first place.
The higher the PE Ratio of the FTSE 350 and S&P 500 go the higher the cash balance in my brokerage account.
Since I and the British government place cash into my SIPP every single month this build up of a cash war chest is simple to achieve by not buying any investments and letting the cash pile up.
I’ve also spread my risk and cash across alternative investments outside the SIPP including peer to peer lenders, gold and high yield savings accounts.
Key Takeaways from 2017
All in all the stock portfolio and the alternative investments have all made gains over 2017 and investing in a SIPP continues to be a cost effective way of preparing for retirement.
As I see it the most important takeaways for the portfolio from today’s review are:
- Whenever a high convection investment comes onto the radar buy a lot of of it using equity – have courage to be a pig
- Always remember that a high convection investment may only present itself once or twice a year – especially in a market with valuations higher than the historical norm
- Continue to watch the valuation of the markets and horde cash proportionately – some as savings, some as gold some as cash
- Stick to the low cost value investing for retirement formula for the SIPP
I hope this review has been as beneficial to you as it has to me.
As I enter 2018 with a broad range of high quality investments and a healthy cash balance it remains for me to keep on the look out for stocks that are too cheap to mention.
Many pundits have predicted a stock market crash and recession in 2018 so if it happens I’m more prepared now that in 2008 when I missed the boat completely (due to lack of cash) – make sure you are also prepared by properly diversifying and keeping an eye on your stock market PE to cash balance ratio.