DOGS OF THE PORTFOLIO AND A REVIEW OF FY 2017, RECOMMENDED RESEARCH SOURCES.

dog

No harsh comments about the dog in the picture as he is a close friend of mine.

June 30 is often a time of reflection for investors and I thought I would sit down and do a quick self-review of the financial year gone by. As promised I went through and just noted the stocks that I have mentioned on the blog previously where I still hold, and picked out the ones that have looked shaky of late as at June 30.

I made this distinction by searching for any that showed losses of greater than 10% since I mentioned them on the blog. There are a few that are about almost 10% down but only one that I could find showing results worse than this, being Reverse Corp (REF). Apart from this one I think there are about 22 other stocks I have mentioned before where I am still holding. Of these 22 there look to be 6 that are showing relatively minor losses (i.e. under 10%), with the rest showing gains. Whilst they may be minor losses, with markets being strong since I started blogging I would have hoped to have less that are slightly underwater like this.

I will further discuss REF, later will also discuss SSM, but my views shouldn’t be taken as any advice so please do your own research if making decisions on these stocks!

Where did I go wrong with Reverse Corp and where to from here?

To provide some context I should revisit my original investment thesis, which I discussed on the blog. After all, that is probably the main reason I began blogging, to get in the habit of writing down reasons I am in the stock in the first place. Here is the link.

https://stevegreeny.com/2016/07/22/reverse-corp/

All the risks that I was aware of seem to be coming to the surface! I always knew the 1800 Reverse revenues would decline sharply, but this has been a fair bit more than I would have imagined. Factors at play to steepen the decline probably include that data plans have given users better bang for their buck, and perhaps improvement in the prevalence of Wi-Fi in public places. Both reduce the chances of someone needing to use 1800 reverse. This may reflect some laziness on my behalf. I was aware of such themes but probably too dismissive and didn’t consider them enough. I also feel I went into this trade a little too quickly. What I have discovered over the years is it is better for me to wait at least a few weeks at a minimum from when I discover and look a bit more depth into a potential buy idea, before I commence buying the stock. Often you become a little too excited and after a few weeks you slowly discover more of the potential pitfalls. In the case of REF, it wouldn’t have meant I avoided it, but I probably would have got my fill 15% lower or so. That would mean currently more like a 15% loss rather than 30% which sounds not quite as bad.

The other factor that has hurt the stock is the lack of progress on the integration of Ozcontacts and their bolt on acquisition Net Optical. This seems to have been costlier than expected, and even ran into significant delays. I am less critical of my research regarding this. I am still surprised over the difficulty of combining the two and getting marketing up to see some progression here, maybe I am naïve to the complexity in IT platforms.

What to do now? In my initial premise, I was comforted because in the event these two downside risks evolved, there was quite a bit of buffer with the large cash balance and franking credits on hand. I still believe that is the case. The next 6 months is critical and we need to see revenues pick up with the contact lens business. The market cap has been less than the net cash of $7.4 million stated in the profit guidance release on Jun 21. Importantly, we shouldn’t lose sight of the fact that recent guidance was for EBITDA of close to $1 mill for the latest financial year. Cash shouldn’t deteriorate too much even if Ozcontacts and 1800 continue to disappoint. The franking account balance implies potentially 6.5 cents available to distribute as fully franked dividends. I think given this buffer it is prudent to wait and see the next half develop. Finally, it appears the integration of the contact lens business has been completed prior to this half. They stated they can commence full marketing and it appears this is already evident. I made a few internet searches for their contact lenses, now whatever website I go to I am constantly confronted to buy some contact lenses from Ozcontacts. It now feels like someone is following me and rubbing salt in the wounds by reminding me every day of this wrong investment call! It is possible even the Amazon factor is also weighing on the REF share price. If so I am happy to have some part of my portfolio betting that the hype may be slightly overcooked here. In my experience when an investment theme gets repeated as much as in this case, and so widely known, I would be worried on going with the theme and believe you are more likely to do better betting against it in some way. I don’t doubt Amazon will have a massive impact, just think that from an investor’s point of view you need to be over the theme before it is at the front of the newspapers nearly every day.

There is some risk that REF spends the cash on anther bolt on acquisition that the market doesn’t like. Give that they have been so slow to move here I am thinking if there is an acquisition , then the level of patience shown to date should mean that it will stack up ok.

I keep holding REF, it is possible that if Ozcontacts doesn’t turn around then we get back more from here than the current market cap via some corporate activity. A larger player may get value from a complete buyout, or we could see the lazy capital on the balance sheet returned to shareholders in an efficient way. If that was the case maybe I will look back on REF as not such a bad call, i.e. things went wrong in most ways and I didn’t lose hardly anything at all. At this time of writing though it has been a dog!

 

SOME REFLECTION UPON THE FINANCIAL YEAR GONE BY

As the financial year end has come to close I usually do a little bit of reflection on how my investing has gone, and hope to find ways I can improve. Position sizing and when to sell are the two main issues I have grappled with a lot over the last couple of years, and they are often related. My performance numbers for the 16/17 year will be about 11-12%. Some may look at the ASX200 Accumulation index and see it has posted about 14% and be dissatisfied. You could even be more critical and point to the S&P 500 posting returns around 17%.  Interestingly though when the index was almost flat the year prior, I performed significantly better. Maybe I am being too kind to myself but I probably look at the year as at worst a minor fail, but possibly still a pass. I am quite absolute return focused and try to minimise my drawdowns, so am not too concerned with some underperformance of popular benchmarks in a very mature bull market. On average, I have probably held 15% of real cash and on top of that 10-15% in what I refer to as “cash equivalents”. I also have a bias to focus on the smaller stocks, and there have been plenty of horror stories at that end of the market. I believe I have done better than the small ordinaries or ASX emerging company index. I wouldn’t say I am that pleased with things though, and there is always plenty to learn hence reviewing things.

When I began blogging I kept a table of how the stocks I mentioned on the blog fared, which I still have kept monitoring as it wasn’t all that hard to continue because in 2017 I decided to share far less of my trades. This record was a simple assumption that each stock gets given an equal weight. What has become evident that the record here looks to be doing comfortably better than my own numbers, pointing to some weaknesses I have in position sizing.

I went back through history, not just the last couple of years but back many years prior. Some patterns I tended to notice were the following:

– Good results that may have seen returns of say 20-40% returns in the space of 1-3 years, often had further room to move to the upside and I sold too early.

– I don’t often hold stocks greater than 3 years, and my style doesn’t lead me to find too many that double, triple or do better.

– When I have been fortunate enough to find winners that have close to have doubled or better, I didn’t find that many did much better than that after I had sold.

– My big losses were usually in stocks that didn’t begin very well after purchasing. i.e. if I had stocks where I lost 30-40%, usually in the first months or year they began being weaker by 10-15% early on.

What should I pay more attention to?

I read about many great investors will often run some large concentrated positions, and much has been written about Warren Buffett’s “20 slot rule”. Historically however, the stocks that I initially seem most confident on are often not in my top 10 ideas, they may come about just as likely with my ideas ranked 15-25!

These are some of the things I plan on paying more attention to going forward, they will by no means be hard and fast rules to follow. Rather just some notes that I will regularly look to and give plenty of consideration when trading.

– Spend more of my time looking at the stocks in my portfolio that have drifted 15-20% for signs of weaknesses in the business I may have missed or be underappreciating.

–  When seeing a stock showing gains of perhaps around 30-40%, don’t be too hasty in clicking the sell button for that warm and fuzzy feeling of making a profit. It may be my analysis was spot on and has further upside potential if I originally bought in with a high margin of safety.

– In the above scenario, or perhaps when the stock has gained a bit less but still started off very well, this may be the times to bet big. The advantage here is you may be already owned the stock 6-12 months and naturally read more about how it is going and about the industry it is in. Extra time devoted on even more in-depth research could provide the confidence for larger bets. Where possible, this could even involve going further than the annual reports to gain a closer perspective to the industry/customers etc where this is possible, depending on the nature of the business. One exception though is when I delve into lower quality businesses, of the “cigar butt” variety.

– If a stock has delivered me gains of 80-100% don’t fall too in love with it. My investment style often turns up not the highest quality businesses, rather many asset plays or names that other investors feel are quite dull. That tends to limit my potential for 5 or 10 baggers. A compromise here is to consider at least half selling a position.

I feel investing is a lot about understanding your own style, strengths and limitations over trial and error. Starting at an age as early as possible gives you an edge in this regard. The patterns I have wrote about above may be totally irrelevant for many different investors depending on their style. What I believe is the same though is that over time any investor should occasionally look back to try and detect where they are going wrong, and what they are doing right for that matter.

I’d be curious if any other readers have experienced similar patterns to what I have notice with my investing above, or maybe something totally different?

SSM

I recently decided to sell the remainder of my SSM shares. I commented in May that when it got close to $1.40 I was still comfortable to hold the remainder as it didn’t stand out as overly expensive. Now that we are in the new financial year this means it is possible that at some point I am more likely to be able offset the capital gains with some losses. That was just a minor tilt to weighing up what to do from here. I have also noted that Forager had taken profits even south of $1 initially, and recently Thorney have taken a small amount of profits near the recent highs. Both fund managers originally provided a catalyst to consider this stock more when it was below 30 cents, so feel I should at least give some weight to how they perceive the valuation now, and they are still major shareholders in the company. Logistically with their very large positions they don’t have the luxury to sell out completely near $1.40 and put the money to more compelling value situations. I am a much smaller fish and do not have that problem. Reading between the lines though I wouldn’t say they believe the stock is expensive at $1.40, but they don’t think it is cheap. I have milked a lot out of this position and now felt it was time to move on completely and get out at $1.33. They are forming a habit of easily beating profit guidance and I have a slight concern the market has become too used to this, and may be vulnerable to just a very slight reduction in management’s enthusiasm. In May last year they guided the market higher, only to easily beat the higher guidance when reporting in August. These events caused large spikes in the share price. In May 2017 again they revised guidance higher, the share price reaction has been relatively modest this time and making me wonder whether investors are expecting a lot for this company.

 

TIME-OUT & OTHER BLOG LINKS & RECOMMENDED READS

I may be relatively inactive on the blog for a couple of months. I experimented last year switching off the likes of my watch list screen, twitter financial news feeds, and other markets feeds through the day so will probably try and do the same again for a while. Another thing I have noticed that may help my investing is freeing up time for more reading of annual reports and some books on investing or books generally.

By the way, I recently edited the recommended reading link on my blog to write some quick notes on some of the books I have read in the last year. I also updated the useful web links category. This shows various fund manager pages, other Australian share market blogs and miscellaneous pages I find useful. Amongst them more recently I have included some investment podcasts I find interesting to listen to. If you are interested simply look at the right-hand side of the blog for the heading CATEGORIES. Then click on “recommended reading” or “useful web links”, and feel free to comment and suggest other reads and sources of investment research you like to use yourself.

When I get back into this blogging again in a couple of months we will be into reporting season and which usually brings about more discussion points. Hopefully some of the heat can come out of the US market, and make it easier to come across some bargains by then.

 

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