Based upon fear of what he might discover, Slack Investor keeps most personal introspection to a minimum. However, for a number of reasons, I am particularly fond of reviewing investment performance. … and always looking to tie in a quote from a great scientist and Time Magazine’s 1999 Person of the century – Albert Einstein.
Anyone who has never made a mistake has never tried anything new– Albert Einstein (1879-1955)
Slack Investor has made plenty of mistakes and regularly racks up the failures. The 2017 Financial Year, (1 July 2016 – 30 June 2017) annual review of his portfolio has revealed a few “shockers” in the Slack Investor Self Managed Super Fund (SMSF ) portfolio – which I not so proudly list (with their percentage losses) as my financial year investment “fails”
Sirtex (SRX) -34%
TPG Telecom (TPM) -23%
McMillan Shakespeare (MMS) -16%
G8 Education (GEM) -15%
APN Outdoor (APO) -14%
Amaysim (AYS) -11%
These companies have usually dropped in price during reporting season where a bit of bad news, or a failure to reach projected profit forecasts, triggered dramatic price falls. In all cases, these stocks were eventually sold because they breached the end of month stop losses that I had set.
Slack Investor just accepts these setbacks as part of the investment process. The type of companies that I invest in are usually
Growth companies
Have an above average “return on equity” ROE
Have an above average “price to earnings” P/E ratio – Where P/E =Current price/Historical earnings.
The reason that Slack Investor is interested in these stocks is that they usually have higher projected earnings in the years ahead and should perform better than the general market. When I am looking at a stock, the forecast P/E ratios are given much more importance than the actual P/E ratios. However, it is the nature of these stocksto be particularly sensitive to any change in the forecast earnings. If profit forecasts are not met during a reporting season (sometimes referred to as the “confession season”), then there is a mad rush for the exits and the price plummets. Slack Investor is not a day trader and prefers not to watch his stocks continuously. As a result, he is never able to pick the precise right time to bail out.
I am sure there is a cost to this monthly decision making technique – but it is a price a pay gladly. The “peace of mind” in knowing that I only have to make stock decisions once a month – and that I can ignore the daily fluctuations of share prices is priceless to me.
The upside of dealing with these type of companies is that they have excellent growth potential. Thankfully, there was some good news in the portfolio this last financial year due to some heavy lifting from the following stocks.
So far, the Slack Investor approach has been very fruitful. I usually own about 20 different stocks and this diversity allows my portfolio to have some individual failures and still do well.
The point of this post is that you can fail in the stock market … but also succeed. I certainly do not dwell on these failures – they are just part of investing.
For the 2017 financial year my SMSF portfolio achieved an overall return (IRR) of 19.5%.
Hi Grogounet … good question … At the moment, I don’t regard the researching and owning individual stocks as a great burden. In fact, I like doing it. Most of my investments are in individual shares, but I own a few index funds and have a lot of my work superannuation in index funds (no choice!). Ultimately, I feel that some effort put into stock selection and a disciplined approach to stop losses should yield better results than the index (which must include all companies – both good and bad). My 1-yr SMSF return of 19.5% was superior to the ASX200 accum. of 14.1% and av. balanced fund return of 10.7%. At this stage, over a 5-yr period I am still showing skill against the benchmarks so will continue with individual shares. As I gradually lose interest or skill (or facilities) … I will have a larger portion in ETF’s or Vanguard Index funds.
What about after taxes and transaction costs? I consistently “beat” the market by several points for several years running but stopped because I realized that, after realizing short term gain taxes, I was barely beating the index. Throw in the opportunity cost of time spent analyzing stocks vs another money making endeavor and the returns were definitely negative compared to the index. I still do some individual stock selection because being honest with myself I just enjoy it too much to entirely give it up but I now do it with a small portion of my portfolio and see it more as my gambling fund. Anyways, curious to hear your take on how you factor in taxes and time to your decision making!
Hi Spend … Yes costs are important and are worth documenting, Like you, I really enjoy the process of trading shares – the time spent analysing shares is not a negative to me as it is something that I like doing. Transaction costs are a real factor when you are starting out – I can only offer the glib advice of trying not to “overtrade”. I do not trade that much and am lucky that for my usual trade parcels, the brokerage costs are a very low percentage. I do most of my trading in Australia and it is a favourable tax environment for share investment (Franked dividends, Capital gains discounts). I am not sure how punitive the tax regime is where you live. Cheers SI
As a reader, it’s great to see someone posting losses. That’s the reality of investing in the share market, and yet I rarely see anyone detail shares that have dropped. Thanks for the transparency, and a good example of what asset allocation can do for you.
hey there just interested on the reason you would not use index fund and remove the burden of buying individual stocks?
Hi Grogounet … good question … At the moment, I don’t regard the researching and owning individual stocks as a great burden. In fact, I like doing it. Most of my investments are in individual shares, but I own a few index funds and have a lot of my work superannuation in index funds (no choice!). Ultimately, I feel that some effort put into stock selection and a disciplined approach to stop losses should yield better results than the index (which must include all companies – both good and bad). My 1-yr SMSF return of 19.5% was superior to the ASX200 accum. of 14.1% and av. balanced fund return of 10.7%. At this stage, over a 5-yr period I am still showing skill against the benchmarks so will continue with individual shares. As I gradually lose interest or skill (or facilities) … I will have a larger portion in ETF’s or Vanguard Index funds.
i like the approach. next obvious question: what analysis did you do to pick them up
This requires a more expansive answer … I will set out my approach to stock selection in a future post.
What about after taxes and transaction costs? I consistently “beat” the market by several points for several years running but stopped because I realized that, after realizing short term gain taxes, I was barely beating the index. Throw in the opportunity cost of time spent analyzing stocks vs another money making endeavor and the returns were definitely negative compared to the index. I still do some individual stock selection because being honest with myself I just enjoy it too much to entirely give it up but I now do it with a small portion of my portfolio and see it more as my gambling fund. Anyways, curious to hear your take on how you factor in taxes and time to your decision making!
Hi Spend … Yes costs are important and are worth documenting, Like you, I really enjoy the process of trading shares – the time spent analysing shares is not a negative to me as it is something that I like doing. Transaction costs are a real factor when you are starting out – I can only offer the glib advice of trying not to “overtrade”. I do not trade that much and am lucky that for my usual trade parcels, the brokerage costs are a very low percentage. I do most of my trading in Australia and it is a favourable tax environment for share investment (Franked dividends, Capital gains discounts). I am not sure how punitive the tax regime is where you live. Cheers SI
As a reader, it’s great to see someone posting losses. That’s the reality of investing in the share market, and yet I rarely see anyone detail shares that have dropped. Thanks for the transparency, and a good example of what asset allocation can do for you.