At the risk of being presumptuous, this post is being made in response to enquiries I've had over the past few weeks/months.
Specifically, I find myself being asked:
1.) how I was "seeing the investment world" currently in valuation terms, and
2.) how I was "positioned" for some of the things happening in the world.
I'll respond to the second part first, as it’s the easiest bit: my portfolio "positioning" is largely agnostic to whatever is, or is not, happening in the broader macroeconomic backdrop.
That is to say, when I own shares in good quality, well-managed businesses, I care not about:
- what Governor Bernanke and is colleagues are saying at any given time,
- what the US Congress is doing in terms of raising the US government debt ceiling or not,
- what interest rates are doing, globally or domestically
- which political party is in power,
- whether stocks are being included or excluded from any benchmark indices,
- what high frequency algorithms are doing,
- the existence or otherwise of “the manipulators” or the “big boys”,
- what the buy and sell “depth” looks like at any given time of the day,
- whether China is slowing or in a bubble,
- what broking analysts are recommending (I especially ignore Target Prices),
Which means that the portfolio of companies I own tend to remain relatively unchanged from one year to the next.
The only time this changes is when I come to a change in view concerning the business model of a company in which I own shares.
When a company turns out to be something different to what I thought I was buying (for example, the board starts making poor strategic decisions, the competitive or regulatory landscape changes adversely, or the company’s business model deteriorates for structural reasons), then I divest.
But in the absence of such occasions, I find that over time my portfolio tends not to change very much.
As case in point, of my five biggest holdings, I made my first purchase of REH over two decades ago (May 1993), ANZ I first bought in 1996, ARP in 20012, RMD in 2003 and BRG in 2010.
Needless to say, there have been opportunities (the Asian financial crisis of 1997, the global economic recession of 2002/3, the GFC, and most recently, the European default jitters in 2011) since then to add to these holdings.
I am proud to say that I have never sold a single share in any of these fine businesses.
For those who might be interested, my portfolio - broken down into 5 separate clusters, to represent the size of the holding - currently looks as follows (date of first purchase shown in brackets)
TIER ONE (each company representing >5% portfolio position):
- ANZ ('96)
- ARP ('01)
- BRG ('10)
- REH ('93)
- RMD ('03)
TIER TWO (3% to 5% portfolio position):
- AUB ('05)
- AZJ ('12)
- CBA ('95)
- CGF ('12)
- CRZ ('11)
- FLT ('12)
- IFL ('05)
- WES ('08)
TIER THREE (2% to 3% portfolio position):
- DLX ('10)
- GWA ('02)
- IAG ('03)
- RHC ('10)
- SDI ('12)
- SGN ('10)
- SKE ('10)
- VRT ('13)
- WDC ('92)
- WOW ('00)
TIER FOUR (1% to 2% portfolio position):
- ALQ ('04)
- COF ('10)
- CTX ('12)
- DTL ('03)
- ONT ('08)
- PRT ('12)
- TCL ('11)
- TPI ('11)
TIER FIVE (Less than 1% portfolio position):
- CRH ('03)
- KOV ('03)
- MQG ('96)
- PMP ('13)
- SAI ('08)
- SFH ('08)
All of these companies have been around for a long time, and the overwhelming majority of them have created significant value for their owners.
Some have clearly not, historically, but I believe that certain significant irreversible changes have occurred, which will see them create shareholder wealth going forward.
Now to attempt to answer Question 1 (namely, how do valuations look?):
Well, as I have opined often before, I am not a timer of markets (and I don’t believe anyone can ever be on a systematically successful basis...most who try, invariably mistake Randomness for Skill, in my observation). I therefore try to remain fully invested at all times.
Trouble is, right now it is proving difficult to deploy investment capital.
The tone of the market currently “feels” to me like 1995/6 or 2006/7....valuations are not compellingly cheap (other than compared to the yield on cash...which is what is clearly driving stock markets at the moment, and which could continue to do so for some time, but I’m not sure...like I said, picking the direction of markets is not my competitive advantage. I feel far more comfortable dealing in things I know best, like discerning the value of equity).
What I don’t like about the market psychology right now is how it views equities as an each-way bet:
- If economies struggle, well then central bankers will continue to throw free money around, which will support equity valuations
- And if global economies start growing again, well then that’s good for corporate profitability, and hence equity valuations
So: no matter what happens, it is good for equities?!
I don’t know much...but what I do know is that when something sounds too good to be true, it almost certainly is.
(Someone very smart once said that one should never manage one’s financial affairs in a way that is dependent on the kindness of strangers. And right now it feels to me like equity markets are acutely dependent on the kindness of, and indeed on every word uttered by, a certain bearded stranger with an erudite American accent.)
Accordingly, I have found not much to buy during the past 6 months. The only shares I’ve bought recently are VRT (which is a high-quality business) after its IPO, and CTX, CRH, COF and PMP (which are not good-quality businesses, but are fundamentally undervalued, I believe, and are undergoing turnarounds.)
So it’s more a case of cigar-butt investing right now...I don’t see much scope to put much fresh capital to work.
Instead, I have taken the opportunity of the strong market conditions over the past 6 months to “feed the ducks while they are quacking”, as it were, by offloading some of the businesses where my investment thesis had, in fact, turned out to be wrong, and where I had, frankly, got it wrong – notably companies like CCL, FXJ, MMS, ORI, and SLM. (CCL, MMS and ORI, were particularly difficult decisions, as I had held them for many years, and they had proven to be very good investments over long periods of time.)
As a result, I find myself now sitting on more cash as a percentage of my investable capital than I can ever remember....20 cents in every investable dollar of mine is now sitting in cash.
I don’t really like it that way, it feels like I am “timing the market”, but I am simply struggling to find much that is undervalued enough at the moment that warrants having a good solid lash at.
To quote a bit of hackneyed investing pop-psychology: successful investing involves 10% preparation and 90% patience.
Interestingly, when I look back at my personal investing history, it is not lost on me that the best investments I made were not during times like these; they were made when it felt like the economic sky was falling, for example during times following the global economic recessions of 1992/3, and 2002/3, the GFC (2008-10) and the European sovereign debt jitters of 2011/2.
YEAR OF FIRST PURCHASE:
1992: WDC
1993: REH
1994:
1995: CBA
1996: ANZ, MQG
1997:
1998:
1999:
2000: WOW
2001: ARP
2002: GWA
2003: CRH, DTL, KOV, IAG, RMD,
2004: ALQ
2005: IFL
2006: AUB
2007:
2008: ONT, SAI, SFH, WES
2009:
2010: BRG, COF, DLX, SGN, SKE, RHC
2011: CRZ, TCL, TPI
2012: AZJ, CGF, CTX, FLT, PRT, SDI
2013: PMP, VRT
As I said, in 2013 I have actually done very little buying of new shares; the only exceptions are VRT (which I think is an exceptional business, which was undervalued on IPO-ing, but which is now – like most quality businesses – not cheap enough to buy more of, in my view) and PMP (which is objectively extremely cheap, but is not a good business).
One stock I am looking at adding to is CTX (which might sound like heresy to some given the volatile earnings track record of the company, but I don’t think the market really appreciates the definitional changes underway in the company as it moves from a business model of the refining of oil to the distribution of fuel products. I certainly know that analysts who follow the stock have incorrectly modelled the capital requirements of the business going forward, and hence it’s surplus capital generating potential, once it shuts down its unprofitable, and capital-consuming refining activities)
But CTX is really a 2015 story and like most things investing, there is no rush; I have established a position in the stock, and will add to it opportunistically over the coming 12 months.
But back to general investment thinking...during times like this I find myself being somewhat bored with stocks and tend to spend little time following the market.
Which is possibly why I am not finding anything undervalued enough to buy – I’m probably not trying hard enough.
But then again, I’ve always believed that I don’t want to be a slave to feeling compelled to following stocks incessantly, like many individual investors who feel they have to be active every single day...there’s a phenomenon called “tick watching”, i.e., sitting in front of screens watching share prices for hours each day, and most people do it...with stressful side effects.
it is very important to me that investing be stress free.
Which is why, when stocks tend to run too hard, I tend to lose a bit of interest.
And now, even though I think stocks will continue to go up –I believe – is one of those times.
Cam
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