2018 – My Best Year Ever
2018 has turned out to be my best year ever.
As famed billionaire investor and philanthropist Charlie Munger once said “Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”
I struggle to find the time with a young family and my own small business to be a voracious reader but I do try and one thing I constantly acknowledge is the need for self-improvement.
Since January 1st 2018, the FTSE AIM All Share is down circa 19%, the FTSE Small Cap Index is similarly down circa 17% and financial markets are in a general state of distress given Brexit uncertainties, possible trade wars and the US economy looking decidedly shaky.
I will quickly come clean and confess that 2018 has not been good for me in investment return terms, with my portfolio (ISA/SIPP combined) down from circa +30% at its peak in early September to around -4.5% now year-to-date (including dividends), BUT three key events in 2018 have had a material impact on my investing journey and my ultimate longer term destiny of quiet freedom; the latter perhaps more of a lifestyle goal as anyone with young children will appreciate:
- A significant cash injection during April / May 2018 from 3 deferred pension schemes. Whilst this alone hasn’t made any difference to my investment process, it has brought all my pension schemes under one very manageable umbrella (my AJ Bell SIPP) giving me more control over my own financial destiny.
- Although I have previously navigated my way around a set of company accounts without too much pain and anguish, I’ve always been conscious that my investment process leaned more heavily on the qualitative side than on the quantitative and hence I made a decision early in 2018 to spend more time sharpening up my financial analysis skills culminating in me attending Graham Neary’s ‘Financial Statements’ course in September 2018 which, without sounding like a naff plug for my own Editor (!), was excellent and comes highly recommended. I have now put in place a more rigid set of quantitative criteria for my investments, the results of which have positively contributed to the quality of the constituents of my portfolio going into 2019. More of that later…
- The downturn in the markets since October 2018 along with other macro factors has emphasised the need for me to try (as best I can) to protect my investments from macro factors; specific examples of ‘protection’ being companies that derive earnings from the US or those that sell products/services that are largely non-discretionary.
So having held up to c. 30 holdings in my portfolio during parts of 2017 and 2018, this is now trimmed down to 12 core holdings with 6 further speculative ‘outlier’ holdings.
Stocks that have been sold completely include 21st Century Technology (C21), Arden Partners (ARDN), Begbies Traynor (BEG), Fireangel (FA.), Fishing Republic (FISH), Inland Homes (INL), Touchstar Technologies (TST) and United Carpets (UCG). These sales have been for various reasons including a major profit warning (FISH), concerns about the sector (ARDN), lack of confidence in the management (FA.), poor financials (TST / C21) or simply because I felt I would rather consolidate smaller holdings into my larger and higher conviction holdings.
Additions to my portfolio during the year have been:
- National Milk Records (NMRP) – readers will be familiar with my investment rationale as detailed here, here and here.
- RA International (RAI) – again, readers will have seen my ‘Mello London’ write up here although frustratingly the company has released an Operational Update this week noting some contract delays into H1 2019 and protracted bidding time for larger contracts. House broker Cenkos duly issued an updated note stating they had trimmed forecasts for FY2018 results by 10% but I retain my positive outlook for this business.
- PCF Bank (PCF) – I generally steer clear of the financial services sector simply because its one I have little expertise in, but having discussed the business with some other investors, seen the company present at Mello Derby in April and November 2018 and in parallel execute on their growth strategy, I believe PCF to be a worthy additional to my portfolio especially as the recent acquisition of Azule Finance looks to be a very sharp move in its quest to achieve a £750m loan book and 15% ROE over the medium term.
- Games Workshop (GAW) – I was rather late to the party here. However, as well as the financials of GAW being compelling, I perceive this business as unique with a fanatical customer base and it’s unlikely to see any major headwinds unless consumer confidence (and importantly spending power) falls off a cliff. It has such a strong brand with a cult like following and a growing geographical footprint that I expect it to continue to perform well over the long term.
- Airea (AIEA) – This is a classic example of a hidden backstory, namely their loss-making Rylux carpets business being sold leaving just their nicely profitable ‘Burmatex’ (commercial flooring) business in play. AIEA also has freehold property assets which I always like and is paying a chunky dividend.
- Goodwin (GDWN) – Another ‘turnaround’ of sorts and a fascinating British business. Richard Beddard wrote an excellent article on it here which nicely covers many factors of this exceptionally well managed and long-standing family run business that has spent the last 3 year or so heavily investing in new capabilities after a turndown in the Oil & Gas market from which it previously derived a substantial chunk of its revenues. 2018/19 onwards should see the fortunes of this business transformed. Half year results this week showed great progress with sales, profits, margins and cash all up as it starts to reap the benefits of 2-3 years of fairly heavy CAPEX in repositioning the business for new markets and refining its existing and extensive high quality product range.
- Christie Group (CTG) – Currently at the bottom end of my core holdings as it has net debt and the margins leave room for improvement but this business is modestly valued, has new management in place and a strong brand / reputation. Its Stock and Inventory Systems & Services (SISS) division has been historically loss making but if the new management can turn this around investors should see a nice re-rating.
- Bonhill (BONH) – This used to be Vitesse Media (VIS) up until earlier this year and is a very small speculative holding further to the Group acquiring Investment News which I perceive to be a potentially clever turnaround under a solid leadership team who have invested a decent chunk of their own money in the new business.
- EservGlobal (ESG) – Speculative play on the premise that MasterCard will potentially acquire the circa 35% of HomeSend owned by ESG. Unfortunately I let my impulsiveness get in front of my rationality when making this investment and the stock is down circa 50% since I purchased; fortunately it’s just 0.5% of my portfolio.
Although I am firmly in the long term investor camp, I have been known to make the odd short-term trade here and there if the opportunity should arise and often such trades are on companies also in my long term portfolio. An example is Modern Water (MWG) which saw its share price spike on at least 3 separate occasions during 2018 (January, April/May and July). Stock that I bought in March / April 2018 for prices as low as 6.5p was later sold into the big spike on 10th May 2018 at prices up to 33.9p – a nice 5 bagger. Despite MWG being a disaster for long term investors since IPO’ing at circa 120p back in 2007 (now 8p), I still like the prospects for this small Surrey based business now it has secured 3 decent JV partners in India, Africa and China for its innovative water membrane technology. Although still loss making, MWG has cash resources to cover operations until early 2020 by which time its Gibraltar Sewage Treatment Plant project should be complete (bringing in further cash) and sales of its membrane technology will hopefully have moved it sustainably into the black at last.
Although Modern Water is in the speculative part of my portfolio, anyone who watched The Big Short on TV last weekend may have noticed at the end of the film the narrative stating “Michael Burry is focusing all of his trading on one commodity: Water.” Whilst this is only a film, it is based on a true story and Michael Burry has gone on record to clarify that he “started looking at investments in water about 15 years ago. Fresh, clean water cannot be taken for granted“. With my own professional career being founded back in 1990 around the water industry, I fully agree with this and expect to see continual innovation in this sector, including further clever technologies (graphene….?) to clean and re-use water. A sector to watch.
Going into next year my biggest holding is AIM listed D4t4 Solutions which is an excellent business that I have been invested in since 2011 when it was called IS Solutions. Its IP protected ‘Celebrus‘ Customer Data Platform (CDP) continues to win some excellent Tier 1 customers in partnership with big-hitting partners such as Teradata, Pega Systems, Microsoft and SAS. I am very excited about the long term prospects for this business.
In summary, whilst 2018 has been a poor year for investment returns, I am very pleased to have firmly beaten the market indices that most reflect my own portfolio and overall its been a fantastic year of more learning, networking, sharing, writing, researching and generally investing in myself – you can’t put a percentage return on that.
Bring on 2019.
At the time of publication, the author holds a long position in some or all of the shares mentioned in this article.