@kevinrica,
At the risk of being presumptuous, I assume you've directed your post to me, given you reference "looking at your portfolio"and I don't see any other portfolios disclosed on this thread.
So I'll respond:
1. You have a bottom-up approach and looking at your portfolio these are not traditional "blue chips". Has this approach beaten the market returns regularly? Have you done any analysis on that?There is really no upside in answering that question
:
If I said didn't beat the market, then for me to be managing my own money reflects on me as being rather dumb; on the other hand to say that I do beat the market, then it sounds like boasting.
No matter.
I never used to actively monitor how my portfolio was performing; I've always merely bumbled along blindly on a bit of a gut "feel" that I was adding value, but to what extent I was unsure.
Funnily enough, only earlier this year while preparing tax returns, my accountant asked if she could do some work to try and quantify how my portfolios have performed over time (the accounting practice was developing some kind of in-house asset management tools as a value-add service for its family office clients, so I was happy to form part of the beta-testing... on a
pro bono basis, of course!).
At any rate, I'm happy to say that she tells that I go just fine overall.
Not every year, obviously, but certainly most years and - most importantly - when the portfolio lags the overall market it does so meaningfully less than the degree to which it outperforms.
My observation based on history is that my portfolio tends to beat the market during two distinct market conditions:
1.
During sharp, sudden share market falls:
- 1997 (the Asian financial crisis)
- 1999-2000 (the bursting of the dot.com bubble)
- 2002 (the start of the global economic recession)
- 2007 (the GFC)
- 2011 (the Greek debt crisis)
- 2015 (the bond market "taper tantrum")
- 2020 (onset of Covid)
- YTD, 2022 (The current market downturn is going to deliver a different outcome compared to others: I entered 2022 loaded to the gills with energy, which is a jolly good thing because I also own a lot of technology stocks and very small, illiquid technology stocks, at that. So I very much doubt if I'm ahead of the market so far this year.)
2.
During the years emerging out of major crises:
- 2003-2005 (when we came out of the synchronised global economic slowdown, r
- 2008-2011 (recovering from the GFC),
- 2012-2013 (rebound after the Greek debt crisis)
- 2016-2017 (after the bond market rout)
- 2020-2021 (ex Covid... 2020 was particularly good relative performance. Plenty of truly fine businesses got very badly beaten up in April and May of 2020)
The times I wouldn't back myself to outperform the market is when weight-of-money momentum takes valuations way out of kilter. On that score, I lagged market returns in:
- 2006-2007 (I was almost 10% underwater relative to the market in 2006)
- 2018-2019 (I lagged the market by a couple of hundred basis points in 2019, but I believe that flattered things, because had it not been for a handful of takeovers it, would have been worse.)
- Late 2021 (2021 was an outperformance year, overall, for me; however, as I say, I don't see attribution on a six-monthly basis, but if 2021 was broken down into half-years, I am certain it would have been a year of two distinctly different halves, with the lights being shot out in the first 6 months, followed by a rather lousy December half!)
I have to say, I have always poo-poohed the idea of accurately measuring investment performance ("Close enough is good enough for a small family office", was always my mantra).
But now that I've seen the exercise done, I'm glad it happened, because I learnt quite a few things from it, things about my own investing "DNA" in the context of differing equity market stages/cycles.
So I'd encourage everyone to go through the same analysis, as well as ongoing monitoring (not on daily, weekly, or even monthly basis, but maybe every six-monthly)
As an aside, your reference to my portfolio not containing what are conventionally called "blue chips" is an interesting one for a number of reasons:
For starters, I think that "blue chip" is a bit of a nonsense term. I suspect it is yet another one of those investment constructs created by the investment fraternity (funds management/stockbroking) designed to confer some sort of mystical pre-eminence to such stocks when, really, stocks described as "blue chip" are not much more than very large companies with long operating histories and which are unlikely to go out of business. But, importantly, they aren't necessarily good investments. There are long periods during which so-called blue-chip stocks underperform chronically.
The other reason your "no traditional blue chips" observation is interesting is because it makes me think of the "style drift" which I have undergone over my near 30 years of investing... style drift not so much in terms of investment process (I've always been a free-cash flow multiple style of value investor), but drift in terms of
wherein the market I've been applying that value-centered valuation process:
In the 1990s and early 2000s, I invested mostly in large caps - those so-called blue chips: the major banks, retailers, construction material companies, property trusts, property developers, large industrial companies. In fact the very first shares I even bought were Macquarie Bank, Westfield Holdings, and CSL, which I continued to hold almost ever since (Westfield's various incarnations were sold a few years back; CSL I sold a little over two years ago, and Macquirie Bank I sold a few months ago).
In the early 2000s I discovered the world of small- to mid-caps; these were a few isolated companies that had started to demonstrate the ability to grow their earnings organically at well-above system rates for long periods of time (companies such as ARB, AUB, BRG, CAR, DMP, REA, REH), which was very different to the nature of the ASX at the time, which then was overwhelmingly dominated by large, mature, cyclical businesses (banks, insurers, resources, domestic retailers, building materials, property trusts, agriculture and the like).
Then about 5 or 6 years ago, there was this whole new world of micro-caps that started to open up (as discussed in this earlier post
https://hotcopper.com.au/posts/61551901/single).
I am convinced that is in this part of the equity market that the outsized investment returns will be found over the foreseeable future. If I ran a hedge fund today, I would simply short the ASX20 and invest the proceeds into a basket of 25 or 30 of those "new-generation", technology-driven, long-duration growth stocks mentioned in that post (or, involving far less effort, use the proceeds to buy something like SMLL.AX, which is a small cap ETF offered by Betashares).
Which is a good segue into answering your question, "
If you have to name three equities that you think would do well, greatly undervalued at PRESENT, do you mind telling me what they are?".
Three is far too few given the concentration risks, so what I will do instead - and this way it circumvents the risks of me purporting to offer investment advice - is provide a list of the micro-cap stocks I've been either buying over the past, say, month, or would have bought if I did not already have sufficient holdings:
AFL
CCR
CE1/HZN (proxies for one another)
ENN
FDV
KOV
LPE
MSB
MSL
NTD
PPL
PTG
SEQ
STG
VUK (admittedly not micro-cap, but a worthy exception to include in the list, I feel)
(Hint: To prevent us all taking ourselves too seriously, for fun I've included an odd-man-out in that list.)
.
.
