Lessons from the past two-and-a-bit years
Senior analyst James Greenhalgh reviews some lessons from his recent stock purchases. It's a practical look at applying Intelligent Investor recommendations to a retirement-focused portfolio.
This year marks my 26th year as an investor – and the 19th since I began managing money for family. Much of it is retirement money for older relatives, so I'm keenly aware of two things: careful risk management, and the need to provide for living expenses.
There have been jubilant highs and crushing lows. The brutal periods have changed me; these days I'm much more risk averse and considerably more patient. Counter-intuitively, perhaps, I believe both have improved my returns.
A decent proportion of the past 26 years has been spent as an analyst with Intelligent Investor. I rejoined the company in June 2015 – and it's time for a review of the stocks I've bought in the meantime.
Most stock purchases were made while they were ‘Buys', so they're a real-life example of how you can apply our recommendations. Unlike me, though, you're in the fortunate position of being unconstrained by Intelligent Investor's staff trading policy.
|Date||Purchase price ($)||Dividends
|Sale price ($)||Price now ($)||Comment|
|IOOF Holdings||26/06/2015||9.23||1.3550||10.72||Add to existing|
|Computershare||14/08/2015||9.87||0.8500||15.19||Add to existing|
|Trade Me||24/08/2015||3.15||0.4003||4.01||New holding|
|Commonwealth Bank||23/09/2015||71.50||8.4900||81.52||Rights issue|
|Veda Group||16/10/2015||2.66||0.0000||2.825||N/a||Takeover arbitrage|
|Crown Resorts||20/06/2016||12.99||1.8250||12.17||New holding|
|Crown Resorts||27/06/2016||12.05||1.8250||12.17||Add to existing|
|Crown Resorts||18/10/2016||11.35||1.4300||12.17||Add to existing|
You can see my portfolio purchases in Table 1, excluding stocks not covered by Intelligent Investor. Just so you don't think I'm hiding mistakes, I've only bought three non-Intelligent Investor stocks since June 2015, and each has been profitable thus far.
So are there any lessons to take away? Well, what follows are personal opinions – so feel free to disagree in the comments section. Whatever the case, I hope some are useful.
Lesson 1: Generally, stick to big, high-quality businesses
I've said before that Good things happen to great businesses. While I was once a small stock aficionado, most companies I buy now tend to be companies with billion-dollar market capitalisations. And my experience is that buying big stocks can be just as profitable as buying small stocks.
Small companies run into trouble far more easily – and when they do, you're more likely to suffer a permanent loss of capital. I still buy small stocks, but I'm now very selective. (You can outsource the purchase of smaller, riskier stocks to the InvestSMART Small Companies Managed Fund if you like).
Lesson 2: Buy on bad news
I've trained myself over the years to buy when there's bad news or significant uncertainty (see Harness uncertainty to make your portfolio fly). IOOF (ASX: IFL), Computershare (ASX: CPU), Trade Me (ASX: TME), Seek (ASX: SEK), Ansell (ASX: ANN), Crown Resorts (ASX: CWN), Navitas (ASX: NVT) and Isentia (ASX: ISD) were all purchased after bad news.
Bad news or significant uncertainty usually means the share price has fallen. If you're doing the opposite – or worse, buying ‘market darlings' – my view is you're more likely to run into trouble.
Lesson 3: Dividends matter
It's so easy to forget about dividends. They disappear into your account and, in the case of the retirement funds I manage, are spent on living expenses. But consider the ‘Dividends' column in Table 1.
IOOF's share price may not have increased much since 2015, but the company has produced a very respectable stream of dividends. And while Crown Resorts' share price remains lower than my first two purchases, with dividends included it's still a decent return over the past 18 months.
Never ignore dividends. They're likely to generate a significant chunk of your total return. If you can reinvest them in your portfolio so much the better because compounding boosts returns over time.
Lesson 4: Think independently
We all have different stock preferences. Think about the types of businesses that will fit your risk profile – and therefore your portfolio. Err on the side of risk aversion. I suspect the biggest mistake Intelligent Investor members make is buying stocks that are too risky for them. Only investors with high risk-tolerance should buy small stocks like GBST (ASX: GBT) or OFX (ASX: OFX).
I'm generally a ‘quality' stock guy these days. I don't buy resource stocks (and was content to miss out on South32 (ASX: S32) for example), or capital-intensive businesses in general. And as mentioned earlier, I tend to steer clear of most smaller stocks. There's a place for some exposure of course – but big, cash-generative companies make up at least 80% of my portfolios these days.
You don't need to follow all our buy recommendations – in fact that's almost certainly a mistake. In other cases you might think Intelligent Investor's hold recommendations are too conservative, as I did for CYBG (ASX: CYB). Just make sure you only buy stocks that fit your risk profile.
Lesson 5: Make fewer but better decisions
I'm actively trying to become less active (is that a thing?). The longer I invest the more I think trading activity is a blight on my portfolio. Looking back, the fact I have sold quality stocks has ‘cost' me a lot of money over time. In so many cases it would have been better had I done nothing.
It's why I now keep a ‘never sell' list. It's designed to make me pause before selling quality stocks, and over time it should help me focus on the most outstanding buying opportunities too. Over the past two-and-a-bit years I've bought about a dozen stocks, which is probably still too many.
Calendar 2017 has been an exercise in patience. I've bought only one stock since March this year, which tallies with a shortening of our Buy list. There seem to be fewer decent opportunities available.
That's OK, because opportunities turn up when you least expect them. Even a couple of great buying opportunities a year should be enough.
Lesson 6: Don't worry about the ‘missed it by that much-es'
You might wonder why I haven't bought other stocks I've upgraded, like Woolworths (ASX: WOW), Reece (ASX: REH) or Flight Centre (ASX: FLT). These too are big, quality companies that would have been candidates for my portfolios.
Well, Reece was only a Buy for a short time. With Woolworths and Flight Centre, I was either waiting for a slightly cheaper price or too busy with other activities at the time.
Don't beat yourself up over missed opportunities. There will always be another candidate along eventually. Just remember to be patient – six months between Buys is not uncommon. You don't need to buy every opportunity and it pays to be selective (see Lesson 5).
It's been an instructive exercise reviewing my portfolio purchases since rejoining Intelligent Investor. It can be too easy to coast along without considering the big picture, particularly when the market's been buoyant.
I hope these lessons have been useful for you too. Please feel free to make comments or ask questions about how I run my portfolios in the comments section below. Happy investing!
Disclosure: The author owns IOOF, Computershare, Trade Me, Seek, Commonwealth Bank, CYBG, Ansell, Crown Resorts and Navitas.
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