This is the editorial of our monthly Shareholder Yield Letter published on 8 October 2024.
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More information about the newsletter can be found here: The best large cap investment strategy ever
This month you can read about six must have traits that will help you become a successful investor.
But first the portfolio changes.
Portfolio Changes
Buy Four – Hold Three – Sell One
Four new recommendations this month as the MSCI World index is above its 200-day simple moving average.
The first is a big, nearly debt free HKD 124.4 billion (USD 16.0 billion) Hong Kong-based property developer with a shareholder yield of 7.8%. Over the past 12-months, it has bought back 1.8% of its shares and paid a dividend of 6.0%.
The second is a large DKK 164.5 billion (USD 24.2 billion) Danish bank with a shareholder yield of 8.8%. It is made up with share buybacks of 1.0% and a dividend of 7.9%.
The third is a £3.1 billion (USD 4.1 billion) UK media company with a shareholder yield of 7.9%. Over the past 12-months, it has bought back 1.5% of its shares and paid a dividend of 6.4%.
The fourth and last recommendation is a well-known £31.5 billion (USD 41.4 billion) UK consumer goods company with a shareholder yield of 6.7%. This is made up with share buybacks of 2.4% and a dividend payment of 4.3%.
Hold Three
Continue to hold:
- Inpex Corporation +16.9%,
- MetLife, Inc. +40.5%
- Swire Pacific Limited +36.2%
(all recommended in October 2023) as they still meet the newsletter’s selection criteria.
Sell One
Sell First Pacific Company Limited at a profit of +47.3% as the company no longer meet the portfolio’s selection criteria.
The 6 Indispensable Traits for Investment Success
As you know, being a successful investor is not hard, but it is more difficult than it looks. What makes it hard is not acquiring the mental the skills you need, accounting and basic mathematics can be learned by anyone.
What makes it difficult is the emotional or behavioural skills you need. The problem is with mastering these skills is that the wrong approach is hard wired into our brains.
This makes it hard to make the right decisions. Here are my 6 indispensable traits that will make you a successful investor:
1. The Ability to Seek and Buy Undervalued Securities
At first glance this seems easy, but it is not. Ignoring companies with upwards rocketing share prices while looking companies those share prices are just moving up from recent lows is not easy.
A current example would have been ignoring companies like Amazon and Tesla and looking at the companies recommended in the newsletter, solid undervalued companies that may have been left behind in the rally.
This trait will result in you not being able to talk about your portfolio at parties because after mentioning your investments you will either get a blank stare (no name recognition) or asked if you are mad and do not read the newspaper?
I am immediately excluded from hot stock conversations at parties. The same as you, it does not bother me because I invest to make money not to have something to talk about at parties.
2. The Ability to Stick to Your Investment Process
Even the most time-tested investment processes underperform in some years. In fact, studies have shown that they can under-perform for a few years.
It is the reason why Joel Greenblatt says that, despite the spectacular success of his Magic Formula investment strategy, too many people will not start using it. If they do it will reduce its effectiveness.
If you follow a time-tested investment process and it is under-performing, look at the reasons why it is under-performing, but be very careful before changing it. You may be changing at exactly the wrong time.
Think of the value investors that started investing in internet stocks just before the internet bubble burst – they all lost their shirts.
3. The Willingness to Learn from Past Mistakes
This is also easier than it sounds.
As you have found, losing money is painful.
However, working through your past mistakes gives you the chance to see where you went wrong and improve your investment process.
My best example is in 2007 my largest investment, Lambert Howarth, went into administration. It was not so much the complete loss that hurt my performance it was the fact that I allowed the position to become a too big a part of my portfolio. Especially for such a small company.
4. Have The Courage of Your Conviction
Once you have gone through your company valuation process and completed your analysis it is time to put your money on the table and invest.
If the share price is moving against the market hitting new lows it is of course a reason to be careful, and a reason to make sure you have not overlooked something, but if not, it is time to invest.
Irrespective of what friends, colleagues or other investors may be thinking or doing.
Because of my fear that it will get even worse, I missed the March 2009 lows after the financial crisis and did not invest. That was despite me watching companies I have already analysed fall to ridiculously low valuations. I am talking of price to earnings ratios of less than four.
I watched the companies drop to price earnings ratios of four and even two and still did not buy. But I learned from that experience, made changes to my investment process and I think I will be able to buy when it happens next time.
Believe me it will.
5. Have A System for Managing Risk
Risk management is not rocket science. But you must think of what your tolerance for risk is, write it down, and implement it as part of your portfolio management.
Things you must think about:
- That is the maximum percentage of your portfolio you want to invest in one company. Mine is 4% as I want a minimum diversification if 25 names in my portfolio.
- Will you follow a strict stop loss system? For example, sell at a 15% to 20% loss irrespective of what has happened. After a lot of thought and looking at research, the same as with the newsletter, I have implemented a strict trailing stop loss system. You can read about the whole process in this article: Truths about stop-losses that nobody wants to believe.
- What percentage of your portfolio will you invest in one industry? I have a rule of about 20% but it is not something I apply rigorously.
- If you use multiple investment strategies, do you have a limit as to that percentage of your portfolio you want to invest in each. For example, if you follow a deep value strategy what is the maximum percentage you will invest in it to have room for other strategies such value momentum companies? I do not have any limit with regards to any strategy.
6. Have The Courage to Sell
This point may seem obvious, but it is not.
I am sure you have also fallen in love with a good performing company only to see the share price decline after reaching a new high.
Ever since I have implemented the trailing stop loss system, I just follow that. This meant as soon as a company has declined 20% from its all-time high since I invested it is sold.
This system allows undervalued companies to run up as high as possible as investors move the share price up from undervalued to substantially overvalued.
If you do not like following a stop loss system you can re-evaluate the companies in your portfolio soon after the release of interim or annual results to see if there are any fully or overvalued positions that must be sold.
You can also review a position after an increase of 50% and 100%.
In Summary
I learned the above traits over the 37+ years I have been active in investing. Some were learned with losses, something I hope I can help you avoid.
Investing is not rocket science. It has more to do with common sense than most people realise.
If you have answered the important questions and have a system in place to take care of the ups and downs, you can be certain of very acceptable investment returns over time.
Your analyst wishing you profitable investing!
