And the winner is
Gav asked a few questions.
I am wondering what sort of stocks you hold as your core long-term dividend holdings? Your outperformance last FY was huge! Was this attributed largely to movements in biotech holdings, I am wondering how you did so good!
I invest in companies. I aim for the highest total return for the risk I’m prepared to take. Sector and category or ‘story’ – which I’ll discuss later – are the two buckets I put our investments in.
Hence a phrase such as ‘core long-term dividend’ holding is not something I think about. Maybe I will in 20 years, but probably not.
Let’s break that phrase down.
‘Core’ implies something central, essential or fundamental to my portfolio. As everything I own is for sale at the right price, nothing is core.
I am a ‘long-term’ investor, but the types of companies I invest in for the long-term are what others would probably call speculative. The types of ‘core long-term dividend’ companies most people like to hold forever are the types of companies I prefer to trade.
There is nothing new in my style. I could most easily be classified as a little Lynch, as in Peter Lynch of Magellan fame. Lynch’s 20 Golden Rules form the basis of my investing philosophy.
Perhaps a few examples will illustrate my point. But first let’s cover category, or more correctly Peter Lynch’s “story” type.
This excellent Peter Lynch overview provides a quick summary of Lynch’s categorisation.
Slow Growers: Large and aging companies expected to grow only slightly faster than the U.S. economy as a whole, but often paying large regular dividends. These are not among his favorites.
Stalwarts: Large companies that are still able to grow, with annual earnings growth rates of around 10% to 12%; examples include Coca-Cola, Procter & Gamble, and Bristol-Myers. If purchased at a good price, Lynch says he expects good but not enormous returns–certainly no more than 50% in two years and possibly less. Lynch suggests rotating among the companies, selling when moderate gains are reached, and repeating the process with others that haven’t yet appreciated. These firms also offer downside protection during recessions.
Fast-Growers: Small, aggressive new firms with annual earnings growth of 20% to 25% a year. These do not have to be in fast-growing industries, and in fact Lynch prefers those that are not. Fast-growers are among Lynch’s favorites, and he says that an investor’s biggest gains will come from this type of stock. However, they also carry considerable risk.
Cyclicals: Companies in which sales and profits tend to rise and fall in somewhat predictable patterns based on the economic cycle; examples include companies in the auto industry, airlines and steel. Lynch warns that these firms can be mistaken for stalwarts by inexperienced investors, but share prices of cyclicals can drop dramatically during hard times. Thus, timing is crucial when investing in these firms, and Lynch says that investors must learn to detect the early signs that business is starting to turn down.
Turnarounds: Companies that have been battered down or depressed–Lynch calls these “no-growers”; his examples include Chrysler, Penn Central and General Public Utilities (owner of Three Mile Island). The stocks of successful turnarounds can move back up quickly, and Lynch points out that of all the categories, these upturns are least related to the general market.
Asset opportunities: Companies that have assets that Wall Street analysts and others have overlooked. Lynch points to several general areas where asset plays can often be found–metals and oil, newspapers and TV stations, and patented drugs. However, finding these hidden assets requires a real working knowledge of the company that owns the assets, and Lynch points out that within this category, the “local” edge–your own knowledge and experience–can be used to greatest advantage
Most investors consider stalwarts to be good long-term core holdings. My view is that’s the shortest path to mediocre market returns.
While advising at Motley Fool I picked QBE for Share Advisor to illustrate Lynch’s concept of stalwart. Unfortunately I left prior to advising subscribers to sell for a quick gain, but have mentioned it should be sold a couple times on this site. Now is another good time to consider a short term position in QBE.
Telstra is another great example. Buy around $3, sell around $5. Enjoy the great dividends along the way.
“Story” is incredibly important as it frames each investment. Without it you may be left with one useless bucket called buy and hold.
One downside of buy and hold is it can result in using an incorrect framework for decision making. An example of this is selling a fast-grower based on valuation concerns. That is the worst type of market timing. It normally results in selling your winners too soon.
Framing your decisions based on each stock’s story will help eliminate many investing errors.
Here’s my recently published performance chart.
The returns I disclose on this site are from our SMSF. While the published returns are not audited, the fund is audited. So some companies we own, such as Somnomed (ASX: SOM) won’t appear in the following list of winners.
The winners list is headed up by a biotech, Prana Biotechnology (ASX: PBT), but it is the only biotech that contributed to the winners in our fund.
The sector that provided the most winners and the largest overall gain was telecommunications. Vocus Communications (ASX: VOC), iiNet (ASX: IIN) and MyNetFone (ASX: MNF) all made strong contributions, both realised and unrealised.
Then there are two odd ball companies. Traffic Technologies (ASX: TTI) and TFS Corporation (ASX: TFC). TTI is covered is so many warts it’s hard to see if it is beautiful underneath. I’ve sold the majority of our position for good gains.
TFS Corp is a huge winner and while I don’t expect recent stellar gains to be repeated any time soon, I do think it has a high probability of excellent returns over a multi-year time frame.
Jonathon , a dear friend, once said to me that stock pickers annoy him as they incessantly bang on about previous winners. While it’s true that we reminisce a fair amount I think another cognitive error is at play.
Both on this site and while working at Motley Fool I’ve highlighted many fantastic companies that have delivered strong returns. The problem is I can’t guarantee the winners in advance. That’s because I simply do not know.
Investing is about probabilities. Every investment has multiple possible outcomes. A huge mistake some investors make is believing they ‘know’ the expected outcome. All they are doing is anchoring on one possible outcome and rolling up confirmation bias and optimism bias in to one ugly snot ball.
I think Jonathon’s error is common; people tend to focus on and remember the ‘winning’ stories rather than the initial analysis. Of course few stock pickers every talk much about their losers, which is a shame as a lot could be learnt from those stories.
Am I rambling…I think so.
Anyway, looking forward here are the companies I own that I judge to have the highest likelihood of delivering the biggest returns this year. Please note that doesn’t mean the highest expected return, which is risk adjusted – see the following table for an illustration.
|Company||Return/Prob. 1||Return/Prob. 2||Return/Prob. 3||Expected Return|
|Stalwart||-20% / 20%||20% / 40%||50% / 20%||14%|
|Fast Grower||-60% / 40%||30%/ 40%||100% / 20%||8%|
While Fast Grower has the highest likelihood of delivering the biggest returns, Stalwart has the higher expected return.
And the winners are…
First on the list has to be Acrux (ASX: ACR), as it’s already up 66% this financial year. Hummm I guess that’s cheating, but I expect the gains to hold and improve. I did try to sell Acrux recently at above $1.90, but just missed out.
I’m not guilty of hindsight bias here, as when asked at an analyst and fund manager get together I named Acrux has one of my top picks – that was prior to its excellent royalties and ensuing price jump.
Somnomed and TFS Corp were the two other companies I named with the proviso that better entry points should occur. Checking the charts I’m going to upgrade my status to freaking legendary! All three calls were amazingly precognitive – yeah OK lucky. But hey you make your own luck!
TFS Corp is breaking to new highs since I started writing this, but I find it difficult to justify much more upside in the near term.
Maverick Drilling and Exploration (ASX: MAD) was one of my biggest losers last year. However I recently more than doubled our holding as the price fell so low there appeared to be very little risk. Disturbingly it turned out I was buying from the founder! Time will tell, I like the new story and it sure has the potential to be a very big winner over the next year or two.
Mobile Embrace (ASX: MBE) also has the potential for large gains. But I am yet to take a full position as the second half lack of growth troubles me, as does the crowd I’m long with.
Reverse Corp (ASX: REF) also has the ingredients to be a winner.
Now tell me what big winners do you see in the year or years ahead. And hey, if you know any great core long-term dividend stocks, Gav would like to know.
Disclosure: Not advice yada yada. This is for entertainment purposes only. I am not authorised to provide advice. I would say seek professional advice, but isn’t that advice…and quite possibly bad advice.