Sticking with value investing principles pays off

The market has been having a hard time of it recently. In 2022 the FTSE250 index of medium-sized companies fell 19%, followed by no return in the first quarter of 2023.  Fortunately, I guessed there might be tough times, and in February 2022 moved to 40% of my portfolio to cash, ready to deploy when Mr Market’s fear became really manifest.

Having a significant amount of cash helped the portfolio maintain value, but what gave it a real boost was that the few shares I held onto generally moved up, some by a significant margin.

Smiths News’ shares rose by 30% in the fifteen months to the end of March – a nice rise. And that is before accounting for its significant dividend: 2.75p paid 9^th Feb 2023, following 1.15p Feb 2022 and 1.4p in July. Total dividends in the last fifteen months amount to 14% of the January 2022 share price of 37.6p.

bp rose from 400p on 26^th January (buying date) to 532p at the end March 2023, a 33% return before accounting for a very welcome dividend of 6%.

Coping with two major economic crisis, first Covid then inflation/recession

Back in early 2020 I followed a strict caution-first value investing approach at the beginning of the Covid-19 crisis and, similarly to Feb 2022, went to 40% cash. This pile of money was very useful later in 2020 and 2021.  The shares bought in those years have generally risen nicely – see first table.

A list of all the shares I bought in the Covid-19 crisis and subsequently (up to end 2022)

Company	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Smiths News (Connect Group)	18.3.20		£0.151		5.8p		£0.488		262%
Character	5.6.20		£2.52		37p		£3.80		65%
McCarthy & Stone	1.10.20		£0.718		0		Sold 7 Dec 2020 £1.185		65%
Capital & Counties Properties	6.11.20		£1.032		0		Sold 19 Aug 2021 £1.743		69%
Dewhurst “A”	11.11.20		£5.94		38p		£6.40		14%
MS International	16.12.20		£1.292		10p		Sold 20.9.21 – 7.6.22. £2.488		100%
Wynnstay	29.12.20		£3.405		15p		Sold 24.3.21 – 3.2.22 £5.58		68%
Lloyds Bank	12.3.21		£0.4169		3.37p		£0.4902		26%
J Smart	18.3.21 & 24.3.21		£1.253		3.22p		Sold 7 Feb 2022 £1.575		28%
Fletcher King	Feb 20 – May 21		£0.3265		0.5p		Sold Sept 21 – Feb 22 £0.40		24%
Orchard Funding	7.6.21		£0.568		6p		£0.415		-16%
Caffyns	22.6.21		£4.65		30p		£5.25		19%
Highcroft	22.7.21		£8.75		78p		£9.10		13%
Town Centre Sec	10.8.21		£1.426		1.75p		Sold 2 Feb 2022 £1.581		12%
bp	26.1.22		£4.006		24.1744p		£5.32		39%
Orchard Funding	7.12.22		£0.48		2p		£0.415		-9%
Tandem	2.12.22		£2.8221		0		£2.55		-10%
AVERAGE									45%

All the investments I made through my personal accounts over the nine years or so of writing on ADVFN (after I quit my university chair to concentrate on investing), are shown in the tables below. On ADVFN you can still read the rationales I advanced at the time of buying.

More recently, I have transferred shares and cash to my account within the Managed Portfolio Service at Henry Spain Investments. With that, I decide which shares are held. My clients each have their own MPS accounts at Henry Spain and I select the same shares for them.

My intention is to move the bulk of my investment money to my MPS so that I eat my own cooking alongside my clients. This might take a few months, as I’m waiting to sell some and then transfer the cash – but need to hold fire until they are ripe for selling (some will be transferred in specie, but I can’t transfer them all as it would unbalance the MPS accounts, e.g. too much Smiths News).

I’m sorry, but I cannot divulge the shares I’ve selected for the MPS, because to do so would be unfair on my clients and might influence the prices at which I can buy in the future.

Longer run performance

When, in the summer of 2013, I quit being a professor, teaching at Schroders and book writing so that I could concentrate on investment the FTSE 100 was around 6,600. It is now 7,742 – a slow rise. In addition, there  have been dividends of around 3% per year. The FTSE 250 index has moved from around 15,000 to 18,797.

The numbers in the tables below show that I have significantly outperformed, which is quite a relief given the salary and security sacrifice I made all those years ago.

The tables display the results (so far) of all the purchases I’ve been writing about in my newsletters. Because the comments I made at the time explaining the rationale for each investment are available for you to read in older newsletters there is nowhere for me to hide from my appraisals I made three, four or seven years ago – all the errors of omission and commission are there in broad daylight.

I present the returns after taking the hit on broker costs, stamp duty and bid/offer spread.

(Criteria for my portfolios after briefly described after the performance tables.)

The 2013 Net Current Asset Value, NCAV, portfolio

Company	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
French Con.	25.7.13		£0.3047		zero		Sold July 2015 £0.4378		44%
Caledonian T	25.7.13		£0.70		zero		Sold April 2020 £1.391		99%
Fletcher King	6.8.13		£0.30		14.25p		Sold June 2016 46p		101%
Northamber	22.8.13		£0.287		1.6p		Sold Oct 2016 £0.303		11%
Titon	5.9.13		£0.379		6.5p		Sold May 2016 £1.06		197%
Mallett	12.11.13		£0.7682		12.7p		Sold Nov 2014 £0.60		-5%
AVERAGE									75%

 

The 2014 NCAV portfolio

Company	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Holders Tech	10.10.14 & 3.11.14		£0.47		1p		Sold March 2017 £0.33		-28%
Airea	4.11.14		£0.1195		0.9p		Sold Sept 2016 £0.309		166%
Northamber	17.11.14		£0.4265		0.7p		Sold Oct 2016 £0.303		-27%
Caledonian T	30.12.14		£1.39		zero		Sold April 2020 £1.391		0
AVERAGE									28%

The 2015 NCAV portfolio

Company	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
PV Crystalox	15.1.15		£0.122		zero		Sold Dec 2016 £0.237		94%
Arden Partners	1.9.15		£0.422		1p		Sold May 2018 £0.364		-11%
Northamber	4.9.15		£0.443		0.4p		Sold Dec 2016 £0.303		-31%
AVERAGE									17%

The Buffett-style portfolio

This type of share is rarer than the others, and so I combine all years.

Company	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Dewhurst	9.4.14		£3.18		70.5p		Sold Feb 2020 £7.217		149%
MS International	9.10.19		£1.723		13.50p		Sold 20.9.21 – 7.6.22. £2.488		52%
Character	20.1.20 & 5.6.20		£2.811		45p		£3.80		51%
Dewhurst	11.11.20		£5.94		38p		£6.40		14%
MS International	16.12.20		£1.292		10p		Sold 20.9.21 – 7.9.22. £2.488		100%
AVERAGE									73%

(I bought some more of Dewhurst in June 2014 at £3.11, December 2014 at £3.75, November 2017 at £5.46, February 2019 at £5.54 and April 2019 at £5.64. These were sold Feb 2020).

Modified price earnings ratio portfolio 2015/16

Company	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Haynes	11.2.15		£1.159		33.5p		Sold 2.10.19 £2.9175		181%
AGA	11.3.15		£1.002		zero		Taken over June 2015 £1.456		45%
Hogg Robinson	10.4.15		£0.4709		2.37p		Sold June 2016 £0.656		44%
MS International	3.7.15		£1.86		46p		Sold 20.9.21 – 7.6.22. £2.488		58%
BHP Billiton	24.9.15		£10.43		127p		Sold May 2018 £16.90		74%
TClarke	5.11.15		£0.7916		13.61p		Sold Feb 2020 £1.1215		59%
Premier Farnell	8.4.16		£1.222		3.6p		Taken over 20.6.16  £1.632		36%
AVERAGE									71%

The AGA holding was doubled 30 April 2015 at a price of £0.9466.

Modified price earnings ratio portfolio 2017

Company	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Braemar	28.6.17		£2.848		20p		Sold June 2018 £2.639		0%
Caffyns	10.8.17		£5.012		52.5p		Sold July 2020 £2.389		-42%
Connect/Smiths News	27.9.17		£1.046		16.1p		£0.488		-38%
MS International	14.11.17		£1.84		30p		Sold 20.9.21 – 7.6. 22 £2.488		52%
AVERAGE									-7%

The 2017/18/19 NCAV portfolio

	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Caledonian Trust	7.11.17		£1.23		zero		Sold April 2020  £1.391		13%
J Smart	30.1.19		£1.13		4.14p		Sold Mar/Apr 2020 £1.101		1%
Northamber	6.12.19		£0.504		0.3p		Sold Mar 2020 £0.5717		14%
AVERAGE									9%

More Caledonian Trust shares bought in February 2019 at £2.29.

More J Smart bought 30.4.19 at £1.16

The 2018/2019 modified price-earnings ratio portfolio

	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Connect/Smiths News	14.6.18		£0.285		9.40p		£0.488		104%
N Brown	17.8.18		£1.42		9.93p		Sold Sept 2021 £0.557		-54%
Spaceandpeople	31.10.18		£0.224		0.5p		Sold Dec 2020 £0.128		-43%
Tandem	2.4.19		£1.59		9.49p		Sold Aug 2020 £3.707		139%
MS International	6.6.19		£2.22		20p		Sold 20.9.21 – 7.6.22. £2.488		21%
Character	25.10.19		£3.506		50p		£3.80		23%
AVERAGE									32%

More Connect Group shares bought in February 2019 at 40.86p, March 2019 at 38.29p and May 2019 at 39p.

More N Brown bought May 2019 at £1.30.

The 2020/21/22 modified price-earnings ratio portfolio

	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Wynnstay	7.1.20  & 29.12.20		£3.33		29p		Sold 24.3.21 – 3.2.22 £5.58		76%
Daejan	5.2.20		£52.90		zero		Sold 21 Feb 2020 £79.41		50%
Connect/Smiths News	18.3.20		£0.151		5.8p		£0.488		262%
Lloyds Bank	12.3.21		£0.4169		3.37p		£0.4902		26%
bp	26.1.22		£4.006		24.1744p		£5.32		39%
Tandem	2.12.22		£2.8221		0		£2.55		-10%
AVERAGE									74%

The 2020/21 NCAV portfolio

	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
McCarthy & Stone	1.10.20		£0.718		0		Sold Dec 2020 118.5p		65%
Capital & Counties Properties	6.11.20		£1.032		0		Sold 19 Aug 2021 £1.743		69%
J Smart	18.3.21 & 24.3.21		£1.253		3.22p		Sold 7 Feb 2022 £1.575		28%
Fletcher King	Feb20 – May21		£0.3265		0.5p		Sold Sept21 – Feb22 £0.40		24%
Orchard Funding	7.6.21		£0.568		6p		£0.415		-16%
Caffyns	22.6.21		£4.65		30p		£5.25		19%
Highcroft	22.7.21		£8.75		78p		£9.10		13%
Town Centre Securities	10.8.21		£1.426		1.75p		Sold Feb22 £1.581		12%
AVERAGE									27%

Bought more Orchard Funding 7.12.22 at 48p

The return reversal portfolio

	Purchase date		Purchase price		Divs to 31 Mar 2023		Price 31 Mar 2023		Return to 31 Mar 2023
Havelock Europa	20.5.15		£0.14609		zero		Sold Dec 2016 £0.0915		-37%
AVERAGE									-37%

Brief description of criteria for the portfolios

Shares are allocated to portfolios designed around ideas flowing from research conducted when my PhD students and I asked the question “what works in investment?”

These investigations were often inspired by the ideas of great investors such as Benjamin Graham.

More detail on these ideas is presented in earlier posts (if you put key words into the search box those Newsletters will appear).

Net current asset value, NCAV, criteria

1. Current asset values are taken from the balance sheet (e.g. inventory, receivables and cash).  From this total are deducted all the liabilities. Long term asset values are usually ignored (counted as zero).  Usually, further deductions are made to reduce inventory and receivable values to give a conservative bias.
2. Companies passing the quantitative test are also assessed qualitatively for business prospects, managerial ability/integrity and business stability.

Modified price earnings ratio criteria

1. A cyclically-adjusted price to earnings ratio (CAPE) significantly below average.  That is, a current share price divided by the earnings per share calculated as an average of eps over the last seven to ten years.
2. A high Piotroski score.  These nine factors indicate whether a company is strengthening its financial position and income flow.
3. Finally, and crucially, the same qualitative criteria as for NCAV investing.

Buffett-style criteria

1. A strong economic franchise,
2. Managers of integrity and talent,
3. Excellent accounting numbers, and
4. A reasonable price.

(There is much more on this in my books The Financial Times Guide to Value Investing, The Great Investors, The Deals of Warren Buffett or Warren Buffett’s letters)

Return reversal

1. Rank all shares based on their returns over the past five years. Select only the worst 20% of performers – “the losers”.
2. Examine each loser share using Piotroski criteria. Select only those with a high score.
3. Ensure that the company has a market capitalisation below its net tangible asset value
4. Use the same qualitative screening criteria as for NCAV investing.

 

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