Share Sleuth's forensic portfolio yields 90 per cent gain

Avoiding failure is key to long-term success

For the last few months I've been eagerly anticipating yesterday, and dreading it. The ninth of September 2014 was the fifth anniversary of the Share Sleuth portfolio. It means, for the first time since I swore off performance watching, I'm going to discuss how it's doing.

As yesterday approached, and the curiosity of friends and colleagues mounted, it seemed as though Share Sleuth might double in its first five years, a round number that might have been something to brag about.

But over the summer, Share Sleuth went down and the benchmark, the same notional investment in an index tracking fund, went up. The final score is Share Sleuth +90 per cent, FTSE All-Share index tracking fund +64 per cent.

The infographic below charts the portfolio's first five years in visual form. Click to enlarge the image and the click again to zoom in and explore.

Above Average returns

Temporarily, the self-imposition of an arbitrary date at which time I would be judged has distracted me from the worthy work of finding good companies at low valuations. It's turned me into a bag of nerves, actually.

I search for good companies at low valuations in the expectation of achieving above average returns in the long term. Five years feels like a minimal definition of long term.

The good news is you've been saved from the crowing, and Share Sleuth has turned in an above-average performance. Rounding the numbers flatters it a little, but Share Sleuth has grown at a compound annual growth rate of nearly 14 per cent compared to just over 10 per cent for the tracker fund.

It may sound like a modest difference, but by way of example, a £30,000 portfolio growing at 10 per cent would return over £500,000 after 30 years. If it grew at 7 per cent a year, it would return less than half as much.

Share Sleuth started life as a column in the pages of Money Observer magazine and quickly spawned an experimental portfolio, then called the Thrifty 30, and a blog on our sister website Interactive Investor.

A fuller account of the last five years will be published in the October edition of the magazine, but in short, the portfolio only started the move that pushed it ahead of the market a year and a half ago.

Improved fortune

Many things have changed in the last two years, which may have contributed to the improvement, principally:

  • A portfolio review in the winter of 2012/2013 revealed I'd chased companies on very low valuations, sometimes at the expense of buying shares in genuinely troubled businesses. I rejected the riskiest, like Holders Technology, French Connection, Northamber and Victoria, and replaced them with shares in stronger businesses. The review came too late to save the portfolio from Metalrax, which went bust.
  • I divided the portfolio into stalwarts, companies that should prosper through thick and thin, and susceptibles, companies susceptible to competition, mismanagement, or dependent on positive economic conditions to prosper. The former would form the backbone of the portfolio, the latter occasional opportunities.
  • I developed what is now a 13-point checklist, analysing the drivers of long-term prosperity through a framework of trust, stability and value.
  • Share Sleuth is predominantly invested in smaller companies, and smaller companies have surged recently including good businesses I'd kept faith in for years, companies, like Dart, Trifast, Vp, Ricardo and Colefax, and newer additions like Sprue Aegis.

Continuously reducing risk

You can never rule out the role of luck, or patience, in the timing of returns but the criteria of trust, stability and value ferret out proven businesses, managed for the long term, at good valuations.

The overriding concern is to continually reduce risk rather than to chase returns because avoiding broken business models, craven managers, and overpriced shares is easier than trying to work out which of all the companies in the stockmarket are most undervalued relative to how much they will earn in the future.

The future is a mystery to me, but the risks business face are apparent in their histories (and if they don't have long histories, that in itself is a risk). Companies are supposed to 'fess up to risks in their annual reports.

Reduce the risks, and the returns should come, after all, these ably managed companies with sound businesses are there to make money.

Since this is my last chance to talk about returns until September 2019, here's my dirty laundry: The total return (realised, and if the share hasn't been sold, unrealised) for the 10 most-profitable shares, and the 10 least profitable.

Share Sleuth portfolio's top 10 winners
NameTotal return (%)Date addedTook profitDate ejected
Dart328Sept 2009Sept 2013
          -
Vp194Jan 2012Feb 2014
          -
Ricardo182Jan 2010Feb 2014
          -
Trifast168Oct 2010Feb 2014
          -
Games Workshop165Sept 2009       -          -
Tristel151Nov 2012       -          -
Sprue Aegis148Jun 2013Apr 2014
          -
Solid State146Sept 2009       -Sept 2011
Northgate141Sept 2010       -          -
FW Thorpe109Nov 2010       -          -

 

Share Sleuth portfolio's top 10 losers
NameTotal return (%)Date addedTook profitDate ejected
Grafenia-8Sept 2009       -Jul 2014
Northamber-18Nov 2010       -Oct 2013
Victoria-23Oct 2011       -Feb 2013
T Clarke-24Oct 2009       -May 2011
French Connection-26Apr 2010       -Feb 2013
AutoLogic Holdings-30Jun 2010       -Aug 2012
OPD-32Sept 2009       -May 2010
International Greetings-37Aug 2010       -Jul 2013
Armour-70Feb 2010       -Dec 2011
Metalrax-100May 2011       -Apr 2013

Below is a chart (click to enlarge) of the portfolio after £1,119 in trading costs, plotted against the accumulation units of an index tracking fund.

Perhaps the most important lesson is that had I been watching performance instead of refining my techniques, I might have given up before I got to year five.

It's very difficult to be independent of the market, and therefore beat it, if you're constantly looking over your shoulder for its approval, so even though Share Sleuth's performance, and that of every constituent, is updated continuously on the Share Sleuth home page, rest assured, I won't be looking at it again for a long time.

My focus is returning to another section of the same page, the 'Top 50'. This is a list of the shares in the portfolio, and the leading candidates that might replace them as I continuously reduce risk.

Its two sections, one for stalwarts, and one for susceptibles, are ranked subjectively according to the principles of trust, stability and value. The shares that are currently most attractive are near the top. Shares that are less so, near the bottom.

Share prices are quite high in relation to profits and most of the good companies I've looked at recently, Goodwin, James Latham, and also a beguiling susceptible, Xaar, are, in my judgement, on the cusp of good value. The shares are testing my resolve, but I have yet to add them, which is why the portfolio's biggest holding (14 per cent) is cash.

Ranking the top 50 will help me see more easily when a candidate is ready to join the portfolio and, infrequently I hope, when a holding, is ready to leave.

Those decisions will drive returns for the next five years and beyond.

 

Share Sleuth: Objective | Top 50 | Who is Share Sleuth? | Performance

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