Share Sleuth: time to reflect on comfortable positioning

The portfolio's biggest holdings are good firms at reasonable prices, but what about the others?

This month I have no trade to report, because I am happy with the portfolio’s shape, and, as you will notice if you read the Share Watch column (see page 76), my quest to find new investments that might be better than those I have already picked has drawn a blank.

 When I talk about Share Sleuth’s shape, I mean it is reasonably diversified and generally the biggest holdings are the shares I have most confidence in. The portfolio has 26 members, in the middle of my 20-30 share target. The biggest holding is £7,837 invested in XP Power, followed by Dewhurst and FW Thorpe.

The top three account for 7, 6 and 6 per cent respectively of the portfolio’s total value, above the arbitrary 5 per cent level at which I question whether a holding might pose too much of a risk and below the 10 per cent level at which I will almost certainly take action to reduce it. I’m not going to reduce the big three holdings unless they get even bigger, because I believe they are among the least likely shares of the 26 to be overvalued. They are good companies at reasonable prices.

At the other end of the scale are Trifast (less than 2 per cent of the portfolio’s total value), System1 (1 per cent) and Alumasc (1 per cent). These are among the investments I have least confidence in and are more likely to be overvalued, taking into account their share prices and longterm prospects. I am not so sure these are good companies at reasonable prices.

Cyclical past

Trifast, for example, has been a great investment. It supplies fasteners such as nuts, bolts and screws to leading manufacturers. Somewhat dependent on electronics manufacturers in the past, its profitability and share price were highly susceptible to the fortunes of its customers. Since the financial crisis of 2008, Trifast has acquired fi rms supplying motor vehicle and white goods manufacturers, reducing its dependence on the electronics industry, but these are cyclical markets likely to suffer in a recession.

It is not a bad business, and it claims to be more indispensable to its customers than it once was, but I’m not convinced Trifast has entirely shed its cyclical past. Traders appear to disagree. Its current share price values the enterprise at 19 times adjusted profit on a debt-adjusted basis, which is the kind of valuation I’d pay for a business more obviously in command of its own future.

You might well ask why I bother with Trifast, or System1, or Alumasc, why I don’t just get rid of my low-conviction shares and put the proceeds into the top three. The answer is that I might be wrong. If you put a gun to my head and demanded to know which share I believe will be the best investment over the next decade, I might say XP Power or FW Thorpe, but it could be Trifast or Alumasc.

Twenty to 30 shares is an arbitrary number to own. I chose this number when I was a much less experienced investor because it seemed plausible that I could follow that many shares closely at one time, but also because I thought that the more expert I became as an investor, the more confident I would be in my judgement and the fewer shares I would need to hold.

In at least two respects, I’ve been a consistent investor. The first is in my remorseless search for good companies at reasonable prices. The second is in the sense that I have never held fewer than 20 or more than 30 shares in the Share Sleuth portfolio. I think my failure to behave more like my preconceived notion of an expert is the result of a realisation encapsulated in a saying repeated so often its source may be lost in time. I’ve seen it attributed to Aristotle and Einstein, and Donald Trump has tweeted it, yet it is my experience too: the more you know, the more you realise how much you don’t know.

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