2018 fiscal year review

Given most of the money I manage is via my family account and subject to the Australian tax year (30 June year end) I thought I would use the work I was already doing in preparing the accounts as an opportunity to record a review of the year gone by.


the numbers

2018 proved to be a good year for the family account, which registered a total return of 19.24% despite holding an average cash balance of ~50%. The personal account did quite a bit better at 42.26% – driven entirely by a materially larger weight in the years biggest winner, Redhill Education (ASX:RDH).

As for stocks mentioned on the blog, my records have that they achieved an average return of ~29% with the best performer being FairFX (AIM:FFX) and the worst performer being ITL Health Group (ASX:ITD). See the appendix at the end for a list.


the analysis

One interesting point that came out when analysing the accounts for the year was that >100% of the realised+unrealised profits for the year came from just three holdings (which also happened to be my highest weighted positions at the start of the year). This implies that everything we did throughout the year detracted from performance.

Now it could be argued that seeds planted today lead to flowers in the future, but the important point I’m trying to make is that activity has a negative correlation with returns. Before you email me stating how 1 year worth of data does not constitute statistical significance, there are numerous academic studies that show real portfolios, managed by real fund managers, with lower annual turnover, outperform the others.


the lessons

Do less. This year we tried out a few things in the family account that have differed from how I have historically managed money. Firstly, I did’t swing as hard as I normally do. In the past, when only managing my personal capital, I tended to make 1-2 big bets each year, investing 20-30% of capital at cost. However, this year the largest at cost position in the family account was 8-10%. I think I’m more comfortable taking big bets when it’s only my money, because I completely understand and accept the risks I’m taking on. However, when managing other peoples money, my subconscious logic seems to be “take smaller but more swings, to reduce the risk of blow up.” The irony of this is that I actually think I end up taking on more risk, because I have to invest in my 5th “good” idea of the year, instead of the one or two “no fucking brainers.”

To counteract this “subconscious non-logic” I’ve decided to more formally define the buckets in which an investment falls and the position size it equates to. The buckets I’ve chosen are:

  1. Good business, extremely mispriced
  2. Special situations

The first bucket encompasses all the good stuff that you’ve heard from many of the Buffett disciples over the years – predictable revenues, barriers to entry, aligned management teams and high returns on capital. The one area I differ is in valuation, because I’m not looking for a “fair price” I’m looking for an extreme mispricing – which I define as a three year double at least, with a very low risk of permanently impairing capital. For this bucket of investments, the minimum ticket size is to be 10% of capital and I expect to make 1-2 investments per annum.

These restraints do two things that I believe will improve my process. Firstly, it allows me to say no much quicker. For example, if I am looking at a new business and I don’t feel comfortable that the business is safe enough to invest 10% of my net worth in, I can immediately pass. The second advantage this minimum investment threshold should have, is through reducing the feeling of “needing to swing.” As a private investor I don’t have a CIO breathing down my neck, dictating cash weights, or worrying about relative performance, but one thing I did notice over the course of the year was the burning sensation a large cash balance gave me. By not swinging hard enough at my best ideas, the cash balance was higher than what it otherwise would have been, subconsciously forcing me to invest in a range of smaller “so-so” ideas, just to put some of the capital to work. By investing 10% (as a minimum) in my best 1-2 ideas, this should dramatically reduce this effect.

The second bucket, special situations, basically includes anything else. Typically, these will include various arbitrage opportunities (mergers, tracking stocks, holding companies etc.), liquidations, tender offers etc. I invest in these situations for a few reasons. Firstly, I find them interesting. I really do love to search for and find odd little situations in the corner of the markets where a $20 note is lying on the ground. Secondly, they keep me busy. This is important, because if I wasn’t searching for and investing in these little situations, I might gradually lower my investment bar for the first bucket – leading to a large investment in a less than optimal idea. And finally, they do provide a good source of return above cash, with little correlation to the overall market. For investments in this bucket, I expect to have a range in weight from 1-5%

By bucketizing my investment ideas, I do want to make one thing clear – they are not mutually exclusive. For example, one company I’m currently reviewing is essentially a holding company with another listed security as its main asset, that is trading at 60c on the dollar. As per the above, this would fall into the special situation bucket and constitute a 1-5% position. However, what if the underlying company that it holds shares in, is both a good business and attractively priced? Well, it could make its way into bucket 1 and result in a 10%+ weight.


the outlook

I continue to be wrong in my assessment of the market. Despite rising interest rates, signs of wage pressure and sky high multiples, global stock markets continue to grind higher. While I am still managing to find pockets of mispricing, the quote from Ben Graham “chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions” remains front of mind.

Alarm bells are also starting to ring with the yield curve getting closer and closer to inversion. I wrote about its uncanny predictive ability here and an updated chart is below:


But I’ve been cautious on the market for several years and that has proved to be a mistake.

the appendix

AIM:FFX + 152% (link)

ASX:RDH +131% (link)

LSE:REC -8% (link)

AIM:THAL +25% (link)

ASX:KME +67% (link)

AIM:STM +15% (link)

AIM:AFHP +11% (link)

NASDAQ:SPRT -2% (link)

KLSE:TRIPLC +12% (link) (note changed ticker to KLSE:PEB)

ASX:ITD -58% (link)

OTC:PCOA +7% (link)

ASX:MUA +1% (link)


As always, none of the above should be construed as advice. It represents my opinions and many of them may (will) turn out to be wrong. Please see the disclaimer.

3 thoughts on “2018 fiscal year review

  1. Better to be wrong than doing an Einhorn and actively betting everyone else is wrong. Great post, & congrats on your performance.


  2. Great article. Came across your site through the German ValueDACH community site. I’m also looking for stocks with the potential to double within three years. However, I’m not taking such big bets. At least for the time being 10% is more my upper limit. May I ask you what your turnover is / for low long you keep the stocks in your portfolio? Thanks a lot! Axel


    1. Thanks for the comments mate. My turnover is really dependent on what “bucket” the stock falls in. I basically categorise my holdings in the same way Buffett did in his original partnership: Generals and Work Outs. In my “generals” bucket, which is essentially good businesses at great prices, my holding period has averaged 3+ years. I only sell if my thesis changes or the stock gets way overvalued. In the “work outs” bucket, which is basically special situations, the turnover is much higher. Typically, they are <1-2 year holds


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