Portfolio Update

A quick portfolio update.

I started this blog during the summer of 2011, in an attempt to keep track of my equity investments and research, to hold myself accountable to the discipline of publishing my thoughts publicly and to hopefully illicit response and engage in debate.

Prior to the summer of 2011, I held very little of my savings in equities, largely as I felt that there was very little that was of value.

I purchased my first equity for this portfolio on 12 November 2010, which was my holding in FBD. My all in cost was €5.88.

Since then I have added further equities which have been detailed in my various blog posts.

The portfolio now looks like

Stock Purchase Price % P/L Weight
FBD 5.879 51.5% 12.8%
CRH* 11.774 40.3% 16.6%
Total SA 32.515 32.0% 12.3%
Bank of Ireland 0.117 15.2% 4.3%
Total Produce 0.401 12.3% 16.1%
Heijmans 7.896 0.7% 4.3%
Grafton 2.611 32.1% 5.4%
Dart Group 0.652 23.2% 8.7%
Mothercare 1.482 52.6% 5.7%
Lloyds Banking* 0.32938 15.3% 13.7%
      100.0%
Equity Total Return   26.9% 32.00%
Other Investment   14% 68%
Total Return   18.1%  

* Lloyds Banking Group and CRH plc were sold from the portfolio on 20 February at 36pence and €16.42 respectively.

My direct equity weighting (prior to that sale) was low at 32%, and this was significantly lower this time last year. The remainder of my investments are a mix of cash and investment funds that I have switched between over time. It is not particularly important to me what I have achieved in such a short time relative to various indices. I am pleased that I have achieved a generous total return.

The genesis of this total return is down to some factors:

(1) Luck. I managed to pick up some of my investments as the markets was bottoming,

(2) Patience: I really only invest when I feel that long run valuation is in my favour. In this respect using stock screens as a strategy tool has always been fascinating and educational for me. I continually re-run the same few screens over and over and over again. The number and quality of companies in appearing as results in my screens tells me a lot about overall market valuation and sentiment.

(3) Discipline: I know what I am looking for in an equity investment. I only invest when I see it. I am uninterested in stories. The job of a an equity share of a public company is that of a transmission mechanism. Companies exist to turn sales into profits into returns. The market eventually rewards those that are successful. But the market is also short termist in the short-term. This can lead to pricing anomalies. It doesn’t really matter what a company does. If it can turn sales into profits into returns, and these returns are being undervalued by the market, then whether it produces i-Pads or shifts mud, there is an investment return to be made.

When I began this blog, I did so as a ‘tired bear that was looking forward to hibernation.’ By that, I meant that I was hoping that valuations would come continue to de-rate and allow me to pick up some strong companies at very attractive prices.

In the very short time period since I began this blog, that is in fact what has transpired. I am now watching a portfolio that has risen in value. Furthermore, some of my small cap holdings are beginning to look technically very attractive. On the other hand, some of my large cap holdings are beginning to look a little jaded (which has helped to persuade me to sell down Lloyds and CRH). Given that sale I know hold 8 equities, which is too low. I would like to build up to between 20 & 30 over time. But I also see no reason to rush headlong into the present ‘melt up’ in markets.

Given the rally in equities, valuations have lifted, but remain at or below long run averages.

Price/Book ratio for the broader European market is now once again approaching 1.5 times. This is an average valuation excluding the bubble era of TMT.

The Schiller PE for MSCI Europe has also recovered and is over 13x 10 year average earnings, having been as low as 11 during the autumn sell off

The point of all of this is that the markets are not as absolutely cheap as they were a few months back. That said, they are hardly downright expensive either. Bob Janjuah, the strategist at Nomura known affectionately as Bob the Bear has recently decried current market conditions as being so rigged that he has no meaningful insight to offer. I find it difficult to disagree.

In my own quest for equity investments I try very hard to focus on picking companies that have a decent history of returns, where present profitability is far from peak, and that this is supported by a good balance sheet and highly appealing valuation. The stocks that I have sold, I simply wanted to take money off the table. I don’t see myself as a trader, but as an asset allocator. I may regret selling those equities, because I was confident that I invested at a highly attractive price.

Technically markets are bumping against resistance. I have no idea as to what the future direction of markets will be in the next year. I am confident that investing in strong companies on low valuations does lead to strong compounding over time. Given the gains that I have seen in the markets and my own portfolio, it wold not surprise me to see a pause for breath or a pull back. If that comes, I hope to be alert enough to take advantage of it.

I remain of the view that the secular bear market in equities beginning in 2000, has more to run. Enjoy the cyclical bull market.

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John McElligott

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