Are you concentrating hard enough?

I sure am!

The top two shares account for 78 percent of our concentrated share fund. The top three 92 percent.

So yes, we’re concentrated!

Two great investing principles

The five shares in the portfolio reflect two simple investing principles.

Two rules from two great investors, Peter Lynch and Warren Buffett.

Water your flowers and pull out the weeds, and only own a handful of companies.

I learnt both rules from Peter Lynch. Though it was Warren Buffett who popularised the concentrated approach with his catchy 20 ticket punch card analogy and his ‘You don’t have to swing at everything — you can wait for your pitch’ phrase.

Lynch was more mater-of-fact.

‘The smallest investor can follow the Rule of Five and limit the portfolio to five issues. If just one of those is a 10-bagger and the other four combined go nowhere, you’ve still tripled your money.’

I illustrated that point in this post highlighting how the view of ‘the greater the loss the ever greater the gain required to make you whole again’, was wrong. For example instead of requiring a 400 percent gain to make up for an 80 percent loss as contended, due to the parallel nature of investing an 80 percent loss is balanced by an 80 percent gain.

The two largest positions are a result of watering of the flowers. Adding on the way up and then simply holding on. Though the second largest has now been trimmed three times. A potential fourth haircut inspired this post.

There are only five companies in the portfolio as the weeds have been pulled.

The third largest portfolio position deserves some water. It’s management are frugal and appear focused on safely growing and rewarding shareholders.

The smallest two positions are speculative long shots. They’ll only receive water if their odds of success shorten.

Please keep in mind there are many right paths. We hold close to 20 companies in our super fund. Plus our concentrated fund has and likely will hold more companies.

Fusion Fund October Performance

With November almost finished and Christmas around the corner here’s Fusion Funds belated October performance charts.

The peak is in

The 1 to 5 year performance chart has peaked.

Fund management marketing wizards would give a right arm for these 25 percent returns across multiple time-frames.

fusion-fund-performance-vs-all-ords-accum-2014-10 fusion-fund-performanc-2014-10

October was a poor month for Fusion Fund, not that you can easily see that from either of those charts. With Acrux (ASX:ACR) and TFS Corporation (ASX:TFC) leading the way down.

Disclosure: Long ACR and TFC

Are you any good at investing?

I’m a modest guy. In general I don’t take compliments well, I either ignore them or make light of them. My partner is training me to simply say thank you, but after 26 together she hasn’t had much success.

She also says I should sell myself more, you know talk myself up.

I struggle with that, as I’ve always found that in general there are people who “can” and people who say they can. Those who can have little need to say it, while those who can’t often shout they can.

Are you following me?

Clearly I’m on a completely different page from the Commonwealth Bank marketing team!

The more I know, the more I realise I don’t know. Maybe I’m simply a slow learner.

The two questions I’m most often asked are, what do I do all day, and am I any good at investing.

A normal day sees me reading, thinking, gardening, clothes washing , kid wrangling and cooking dinner. As spring blossoms daily exercise will come back into that mix.

As to whether I’m any good at investing, that’s complicated. My returns and consistent outperformance of the market are excellent, but I’m probably just lucky.

Fusion Fund Performance to September 2014

I’ve been lucky for a long time.


And my luck continues to this day.


To ensure my luck continues, I sell companies I own when they become expensive and buy when I’m offered attractive opportunities.

Right now I’m close to 50 percent in cash. For the first time ever I’ve invested a portion of our cash in a couple term deposits, six month and three month.


Fusion Fund has a spring in its step

Fusion Fund outperformed the ASX200 Accumulation Index by 1.2 percent in August,  1.8% to 0.6%. Year to date the fund is up 11.6 percent versus a not to shabby 8.2 percent for the accumulation index.

fusion fund performance 2014-08

Last week I read someone deriding funds for reporting 5 year returns instead of 6 year returns. The insinuation, or maybe it was explicitly stated, was that the funds were portraying returns in the best light possible.

I disagree, there was nothing manipulative or misleading in the funds’ reporting. Five year returns are a standard measuring stick. But as I now have just over six year’s of returns  and as those returns are even better than my five year returns I thought I’d share them.

Over the last six years I’ve averaged 18.1 percent per year compared to the 6.2 percent for the ASX200 Total return index.

fusion fund performance vs all ords accumulation index 2014-08

Is past performance indicative of future performance

The short answer is yes. Past performance is indicative of future performance. However, the tricky thing is that good historical performance can point to either a likely continuation of that outperformance or an imminent fall from grace.

Tony Hansen at Eternal Growth Partners wrote a thought provoking article this week about outperformance and skill versus luck.

Hold the press. I just downloaded the fund performance data Tony provided. The spreadsheet lists 278 Australian managed funds. The number one performing fund over 1 year returned 38.2 percent.

Is that the best you guys can do! Little old me returned 44.8 percent and I know people who did even better. Unfortunately 1 year performance data is close to meaningless, but hey it still puts a smile on my dial.

Over 3 years the Australian fund manager industry did slightly better. Seven of the 278 funds did better than me. Well done, you seven deserve your outrageously high salaries. To be fair, 79 funds (28 percent) outperformed the ASX200 accumulation index.

Looking at 5 year performance tables only six fund managers outperformed me. Of those six I see only one that I believe has a chance of outperforming me over the next 5 years. Past performance is meaningful contrary to what the industry is forced to say. Smallco Investments is more likely than the other managers to be near the top of the pack in five years time.

A good example of when past performance is not indicative of future performance is the other five funds. All five are either property, international or geared funds, or even more dangerously a combination of those attributes. Those funds are highly likely to get hammered in the near future. Their past performance is a strong indicator to future poor performance. The cyclical nature of investment returns ensures their imminent stumble.

Sorry I got distracted. What was I going to say? Oh yeah, luck versus skill.

I’m not going to claim my outperformance as skill. I’m a lucky guy. Always have been and I plan to work hard to ensure my luck continues.

Performance, Pigs, and Investment Process

Pigs at the trough

What’s the difference between an independent director and a shopping trolley?

You can load a trolley with grog but can’t push it anywhere you want.

Hat tip to Michael West @MichaelWestBiz for that amusing summary of Peter Swan’s damning report on the performance of independent directors. As Swan’s report was published in October last year, I’m guessing that you need to present your findings at a junket for the media to take note.

Anyway, it’s great to see the pigs at the trough have finally been exposed. The bigger question is why does the ASX governance council require all listed companies to adopt a majority of independent board members? Do they have any empirical or even strong anecdotal evidence to suggest people without skin in the game who often lack industry knowledge are capable stewards of shareholder wealth? Of course they don’t.

It’s time to slaughter the pigs! Have skin in the game or fork off.

6 Signs of a Good Investment Process

I enjoyed this post on the investment process by Todd Wenning at Clear Eyed Investing. Todd’s 6 signs of a good investment process are:

  • Stoic: It can endure both good and bad short-term outcomes without getting emotionally swayed in either direction.
  • Consistent: It doesn’t adjust to current market sentiment and sticks to core competencies.
  • Self-critical: The process is periodically reviewed, includes both pre-mortem and post-mortem analysis on decisions, and is refined as needed.
  • Business-focused: Rather than rely on heuristics like “only buy stocks with P/Es below 15,” a good investment process focuses on understanding things like the underlying business’s competitive advantages (if any) and determining whether or not management has integrity and if they are good capital allocators.
  • Repeatable: A process gets more valuable with each application — insights are gained, deficiencies are noticed, etc.
  • Simple: The less complex, the better. If you can hand off your process to another investor without creating significant confusion, you’re on the right track.

It’s a great list, though I disagree with some of his finer points. Anyway, Todd is well worth following.


With no disrespect to Todd, I always wonder when reading articles like his if the writer is struggling with poor performance. I hope not, but when my performance lags I often find myself reaffirming that it’s process not outcomes that count. Here’s how Michael Mauboussin put it in ‘More Than You Know’, as quoted by Todd.

Results – the bottom line – are what what ultimately matter. And results are typically easier to assess and more objective than evaluating process.

But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field…all emphasize process over outcome

While I think my process is good, I know my outcomes are great. Give me another ten years and I might also know my process is great.

What a cracking month. The All Ords Total Return Index blasted ahead 4.4 percent. I did slightly better with a 7.2 percent return.

Daily, monthly and even yearly performancefusion fund short term performance vs all ords accum 2014-07 mean little to a long term focused process such as mine, but they are the repeatable steps that facilitate review. And hey, if we can’t celebrate our small victories we’ll get mighty thirsty!

As Mauboussin says results are what ultimately matter and naturally in the investment game it’s long term results that really matter.

As the next chart show I continue to do exceeding well over the long term.

fusion fund performance vs all ords accum 2014-07What I find even more stunning is my results over the last year include an average cash holding of 45 percent. That’s like beating Mike Tyson in a fight with one arm tied behind your back.

Or is it?

fusion-fund-asset-allocation-2014-07I think a better analogy may be beating Mike Tyson when he has both arms tied behind his back. As this asset allocation chart shows when the market is winding up for a punch my cash position increases. The high cash position stops the market from delivering a knockout blow and allows me to continue taking big swings.

I’m not trying to time the market. Our cash balance is more a reflection on both the lack of opportunities and elevated risks in the market. Just because others are prepared to take more risk for less reward doesn’t mean I will.

Here’s some pearls of wisdom on holding cash from Seth Klarman and Warren Buffett as used by Steve Johnson in his article ‘The real reason you should hold cash‘.

One doesn’t need the entire market to become inexpensive to put significant money to work, just a limited number of securities. Klarman

Holding cash gives us optionality. Alice Schroeder, author of the definitive Buffett biography, The Snowball, says this is one of the most important things she learned: “the optionality of cash”.

“[Buffett] thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

As the above asset allocation shows I found an inexpensive security this month, but more on that another day.

One final chart that tells me my process is on the right track and encourages me to keep perfecting it.



The World Is Not Enough

Life has been hectic lately, wonderfully so. Therefore, this financial year wrap will be short and sweet… or maybe sour.

The Fusion Fund trounced the market in the 2014 financial year, doubling the market’s return of 17 percent with a stonking 34 percent return. I should feel marvelous about the result, but as the title of this post suggests I’m disappointed. I should have tripled and could have quadrupled the market return, but I let both my emotions and greed get the better of me.

Fortunately investing is a life long pursuit. That means even slow learners like me who make the same mistake more than once may yet triumph. Yes doubling the market this year is wonderful. As is quadrupling the compounded market return of 35.8 percent with a 154.7 percent return over the last 6 years. But what I really want is to make the right decisions.

It sounds so simple doesn’t it? All I want to do is make the right decisions. I don’t mean that I want the outcomes to be good, thought that is always nice. I simply wish to go to sleep at night knowing that I made good sound decisions. For now I’ll settle for market trouncing performance despite making some poor decisions, but I sure won’t be smiling about it!

Fusion Fund Performance vs all ords accum


fusion fund performance 2014-06

A rational investor picks himself up

As an investor it’s important to remain rational and unemotional in the markets. But I’d be lying if I said I was always a rational investor.

I get emotional. When I’m getting a market arse-whopping I may even yell at my kids — more than usual. My rational side knows the losses don’t matter, that any loss is merely a temporary aberration. But when my rational side also knows that I screwed up and it’s not simply a market gyration my emotional side kicks in to overdrive.

Conquering your emotions

Over the years I’ve developed strategies to put my emotional side back in the box. My three main strategies for remaining rational are using mistakes as a learning opportunity, gardening and music.

My primary strategy is using mistakes as a learning opportunity. And believe me I still get a lot of opportunities. By thinking long and hard about my mistakes and how to correct for them in the future I gain a sense of accomplishment, a satisfaction that I’ve paid for and learnt a valuable lesson. An investment diary is an invaluable tool in this regard, as it helps to avoid deluding oneself.

Gardening is my regular go-to-strategy. If you don’t like gardening you can use any mindless repetitive task that gives you a sense of satisfaction, maybe walk, run, cycle, swim or knit. The key is it has to be a repetitive task that puts your mind on autopilot, thus letting your mind wander, allowing you to see more clearly. Almost all my investment ideas crystallise while I’m gardening. Perhaps I’d have more investment ideas while cycling if I didn’t listen to TED or similar podcasts which captivate my mind. This ability to let your mind run free seems to disappearing, as people are constantly tuned in.

Finally there is music. Music not only improves our moods by encouraging the release of dopamine, it has been shown to improve performance and results. I find music to be both the opposite of and complimentary to gardening. After gardening has let my mind run free to make connections, music helps me focus and improve on the realisations.

All three strategies help reign in my emotional side and assist me to remain rational.

Those who’ve read this blog for years will know there is one other strategy that I’m a strong advocate for, juggling.

Juggling is one of the few activities that simultaneously engages both brain hemispheres and strengthens the corpus callosum — the link between the hemispheres. As investing is best described as a combination of art of science, having your creative and analytic ‘brains’ working together is highly desirable. Besides that juggling is heaps of fun. I find it impossible to frown or feel down when juggling.

Enough psycho babel, show me the money

This month our winning ways returned. Despite a cash balance of close to 50 percent, Fusion Fund more than doubled the total market return — which includes dividends. Our fund gained 1.55 percent compared to the ASX200 Accumulation Index return of 0.68 percent. Yay – no yelling at the kids tonight, heck I may even let them have ice cream!

Our 3 and 5 years performance continues to be around double the market and well ahead of my arbitrary 15 percent  return. But before I pop the champagne it’s worth noting these returns have come on the back of a rising market. Equity markets are now expensive and returns are very likely to be lower over the next 5 years than they have been for the past five.

Over-optimistic institutional and individual investors have failed to adjust for a world of declining returns that will leave them short of money in retirement, says Cliff Asness, one of the world’s most prominent authorities on financial markets.

Asness, the outspoken 47-year-old founder of $105 billion investment firm AQR and a protégé of Nobel Prize-winning economist Eugene Fama, says bonds and stocks have only ever been more expensive 15 per cent of the time in the past century.

We’re not in a “bubble” – a term he hates – but we are at a stage where we should revise just how much wealth our financial assets will deliver.

Everything is expensive but nothing is in a clear bubble, which means you don’t want to short or time things, but you do want to expect less,” Asness told The Australian Financial Review from his office at AQR headquarters in Greenwich Connecticut. via AFR

fusion fund performance vs ASX200 accumulation index 2014-05

Next month will mark the six year anniversary of our fund — or at least the tracking of our fund. It sure has been a bumpy but profitable ride.


And finally, I started a position in Acrux (ASX: ACR) last week. I took a half position as Acrux is a falling knife, but one which could have a quick rebound. I bought because it is fundamentally cheap and has an excellent risk reward profile. I’m likely to buy more based on technical signals.

Disclosure: Long Acrux. This babble blog is for my amusement only. I am not authorised nor wish to provide investment advice.

Fusion Fund lands hard

Last month I said Fusion Fund finally stumbled after an unparalleled winning streak of seven consecutive up months. As I warned that stumble, a fall of 0.4 percent, was a somber presage for this months hard fall. After one of the hardest months I’ve endured in the market the final damage toll is a fall of 10.7 percent. Ouch!

Fusion Fund performance 2014-04

So far this year we’ve barely managed to keep our head above water, with an 0.9 percent gain. That lags the ASX200 accumulation index by 3 percent.

Of course monthly and even year to date returns are virtually meaningless, but hey it still hurts. Fortunately I can smile at our 1 through 5 year returns. All of which are handily trouncing the market.

Fusion Fund Performance-vs-all-ords-accum-2014-04

While an 11 percent monthly fall is abysmal, it is not particularly unusual for our fund. As the following chart shows, I endure a monthly fall of this size or worse about 9 percent of the time. Scary? I’m sure it is for most people, but it business as usual for me.

Fusion Fund monthly returns frequency 2014-04

If you think that’s scary, then you best stop reading as the really scary part lies ahead.

Swing for the fences

The really scary part is that I could stop these massive draw downs, but to do so I’d also have to sacrifice some of the even larger upside months.

I choose to keep swinging for the fences. It may not be economically rational to do so, our returns could even improve if I swung at fewer speculative pitches, but it is the psychologically sensible path for me. You see, a little bit of me would die if I was to forsake my wild swings. I’d prefer to have bad results than to run with the crowd and be an index hugger. Of course there are other paths, but they are not for me.

If this wonderful game of investing was only about the money, I would have tired of it years ago. Investing is my passion, it’s my sport, my job, my hobby. Having the occasional wild swing and a concentrated portfolio sure does increase the volatility, but in my books it sure as hell beats mirroring an index.

Howard Marks

In his wonderful must read client memo, Dare to Be Great II, Howard Marks said this…

Only if your behavior is unconventional is your performance likely to be unconventional… and only if your judgments are superior is your performance likely to be above average.

My behaviour in life and investing are certainly unconventional, but I have to keep my fingers crossed that my judgments really are superior. There is a chance I might just be a lucky monkey.

Another Marks comment that strongly resonated with me was about asymmetry.

The goal in investing is asymmetry: to expose yourself to return in a way that doesn’t expose you commensurately to risk, and to participate in gains when the market rises to a greater extent than you participate in loses when it falls.

I hope I can report better returns next month, but of course I truly have no idea where the market will blow me in any given month. All I can do is stick to my process of looking for tailwinds where no-one else is looking or too fearful to venture. Occasionally my mainsail will be ripped to sheds and I may even hit some rocks, but in the long run I hope to enjoy an exhilarating ride that take me much further than the crowd.

Fusion Fund finally stumbles

As I said last month Fusion Fund had been enjoying an unparalleled winning streak of seven consecutive up months. Well all goods things come to an end. Our fund dropped 0.4 percent in March, under-performing the ASX200 total return index by 0.7 percent. Compared to the abysmal returns April will deliver, that feels like a win to me!

Due to Prana’s disastrous PII trial results for PBT2 April will probably set a new all time performance low for us. But hey that’s getting ahead of myself, so let’s dive back into March results.

March was a wild ride and the 0.4 percent drop does not reflect the intra-month volatility. Year to date the fund is up 12.9 percent compared to the ASX200 TR index of 2.1 percent.

fusion fund performance March 2014

This month’s comparative returns graph, see below, highlights just how ludicrous snapshot performance returns are.

March 2013 was a poor month for the fund. Consequently our one year return has leapt to a staggering and unreflective 71 percent. If I was a running a public fund and only cared about assets under management I’d be taking out full page adds featuring these ‘amazing’ returns. But hopefully you can see and realise that these snapshot returns are close to meaningless. Further, a multitude of studies have shown that investing in funds with recent good performance results in significant under-performance. And as mentioned above, we’ll certainly prove that correct in April!

Tip 47: Don’t chase hot returns!


There was virtually no change in our cash position this month. But that is a poor reflection on the activity within the fund. While this results looks like all calm on the water, I was furiously paddling below the waterline. Fully valued telecommunication companies were trimmed and one new position added.


Finally. I was extremely disappointed and surprised by the terrible PBT2 results.

While it’s only money to me, the outcome robs millions of AD sufferers and their carers of what was the best potential disease modifying compound around. Those gloating over the failure are a sick depraved bunch who only care about money. There is something so wrong in wanting to be right for the sake of it, without any thought  to those suffering from a disease. I hope one day they discover empathy and realise that there are many thing more important than either money or being right.

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