UK Value Investor

After reading a post on The Div-Net, I started to think about how I differ from dividend investors and why.  The first point to make is that I'm not a dividend investor, in fact I consider myself a trader rather than an investor.  An investor to me is someone who buys something with no explicit intention to sell it.  This typically means they are either buying it for the income (dividend investors, landlords, Warren Buffett etc) or perhaps they are buying it to let the capital appreciate for decades or to let the kids inherit. 

So why would I trade rather than invest?  Well, there is some evidence that the returns are better if it's done properly (which I'll try to cover at some point), and more importantly it's a better fit with my personality.

Since I'm buying with the intention to sell, how long do I expect to hold my stock? 

On January 12th Waterman Group paid out a dividend of £125.92.  As with Northamber, this will probably just sit in cash for now as it's not worth investing just a few hundred pounds in one go.  Or I may change my mind and move it onto my Bonds ETF as I want to get the bond allocation up towards 20-odd percent as part of my stock/bond split described here.

On January 12th Northamber paid out a dividend of £177.45.  This will likely just sit in cash until I have enough to make a purchase worthwhile (due to commission costs etc).

I recently read "Painting by Numbers - An Ode to Quan" by James Montier and Dresner Klienwort via a link from Richard Beddard to Greenbackd.  This paper, and the papers it refers to, have helped strengthen some of my existing opinions about stock picking and investing in general. 

My opinions are also those of Ben Graham towards the end of his life, that "I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost" (www.bylo.org/bgraham76.html).

I first bought Waterman on October 22nd 2009.  I had recently sold Harvard International for a profit of £4,102.82 and needed somewhere to put the proceeds and some additional cash.  Waterman marked a slight change in my rules.  Whereas before I would only invest when a company was trading below 2/3 of tangible book, I decided to allow intangibles into my valuations. 

I've long been fiddling around with various mechanical methods of adjusting an almost passive index investing stragety to improve the risk/reward ratio.  This is sometimes known as Tactical Asset Allocation (TAA).  I thought I'd put up some charts of my efforts.

The lines in the charts are for four portfolios:  Cash, with the returns calculated using the average instant access interest rates borrowed from the rather excellent Swanlopark;  The FTSE 100 with dividends reinvested;  A 60/40 FTSE 100/cash split rebalanced each year; Another FTSE 100/cash split which is rebalanced annually using my asset allocation function which is fed with the FTSE 100 real earnings over the period in question.

I'm going to record an analysis of each of the trades that I make so that I can learn from each trade.  I'm sure that sometimes there may be nothing to learn, but that's not always going to be the case and it certainly wasn't with my first value stock back in 2008.

I had come to value investing from a more typical mindset where I was trying to predict the future in order to see where it was going to be most profitable to invest.  I had been heavily invested in energy stocks through unit trusts back in 2005-2008 and they'd done incredibly well, almost doubling my money.  But I had no idea how to value these unit trusts nor the stocks within them.  When oil went to $146 I thought I was pretty smart.  But we all know what happened next.  I lost about 50% and that's a really big drawdown, one that made me almost physicall sick.

I'm a big fan of CAPE (cyclically adjusted price earnings) and Tobin's Q as tools for understanding expected future risk and returns from a stock market.  After reading Wall Street Revalued: Imperfect Markets and Inept Central Bankers, I'm an even bigger fan. 

The logic is simple.  Market valuations must be tied in some way to earnings (the discounted cash flow that I hear so much about from earnings based investors).  Earnings for an entire market, over the long term, are somewhat predictable using past earnings.  These earnings are generated by assets and so market values are tied in some way to assets.  CAPE seeks to value markets using earnings and Tobin's Q does it with asssets (or net assets to be more precise).