Let's go twos

My latest purchase(s) took place last night. 

It took the usual shortlisting approach, followed by the application of the new analysis model (which i've rejigged to double-weight the dividend cover and dividend yield values).

Interestingly, the top stocks were two I have had question marks over for some time - but which fitted my recent thinking well.  I have been fascinated by the gold price vs. gold miner stocks valuation deviation for some time now - and off my shortlist analysis I ended up with African Barrick Gold miles ahead of the rest of the pack.  Why?  Well, quite a few reasons actually:

1. It has a dividend cover average between last reporting year and next of 6.9 - that's right, 6.9 i.e. it could afford to pay out seven times its dividend out of profit
2. It has insane dividend growth over the last, current, and (anticipated) next reporting periods - 131% per period
3. The normalised EPS growth is the same as the dividend growth story - 375% over the last three reporting periods
4. Free cash flow as a percentage of the turnover is 30% - nearly as high as my other purchase

It currently yields 2.6%, which is lower than the target, but with so much room for future growth based on the cover.

I bought this as a way of staying in gold but diversifying away from my Swiss Physical Gold ETF - let's see how it does.

The second stock I bought into was another of my existing holdings - IG Group - one of my most sucky purchases since this project started.  As of two days ago, it was my poorest performing share - down around 12% on the purchase price.  So why get involved in this sob story of a share?  Well, it's fundamentals look good.  It has suffered this year as trading volumes are down - pretty standard for a trading platform provider during settled markets - if there are no significant share price fluctuations, what's the point in speculating as to the direction of share prices?  You'd have to put up huge sums for small returns.  Is this going to last?  History is against it!

So why are the fundamentals so great?

1. The dividend yield is 5.27%, well ahead of my target of 3% - it's cover is ok at 1.69, so there's room for it to drop
2. It's a £1.5bn company, which has sales of £400m and £228m in the bank and debt of £40k - that's right, it has seven months worth of sales as cash, and owes next to nothing to anyone.  The retail world would have to cease trading in financial products to screw this company as things currently stand
3. It's in 89 countries - great global exposure, so any government mucking around with retail trading laws should, on their own, have a fairly limited impact on this company

So there you go - good money thrown at my worst performing share, and an African gold miner - i must be contrarian (or insane).  Only time will tell!  In eighteen days i'll be able to give you an idea of where my contrariness (or insanity) has taken my future!

Lots of old people

I made my latest investment 10 days ago, into a company called Smith & Nephew.

What do they do?  They are, according to Google Finance: 

'a global medical devices business operating in the markets for orthopaedic reconstruction and trauma, endoscopy (which includes arthroscopic procedures referred to as sports medicine) and advanced wound management'

 Bread and butter if ever such a thing existed - there's no way any of those problems are going to disappear in a hurry, and with an aging population there will be more people needing hip replacement - combine that with increasing wealth in the developing world and this must be a long term winner.

Is it a contrarian play?  Not particularly.  Over the last decade the share price has moved upward, although it has been up and down.  The shares are trading roughly in line with where the price was in 2007/8 where the company was no doubt seen as a defensive play.

It throws a lower than average dividend (1.98%), but the average dividend growth from last, this, and next year's predicted is 24% - with a big jump next year.  That's pretty punchy stuff.  Can the company afford it?  Dividend cover averaged between this and next financial year is 3.77; unless things go badly wrong (and this company is a leader at what it does), there should be no problems at all.

I noted earlier - lots of people are getting old, and lots of increasinly wealthy countries will be demanding access to the kind of product Smith & Nephew are pushing.  The company does not do too badly - it's got offices in 36 countries worldwide, so thats about 20% of countries covered off globally.  Laura's pretty happy with it as well.

Now, this month I have tried to become a bit more systematic about how I approach assessing the companies I like the look of.  I am not going too detailed, as I am worried that is restrictive, and I am just using metrics as a guide rather than the decider (technical analysis is a good idea I think, but the world does not operate through a spreadsheet!).  Things I am considering are:

• Dividend growth rate
• Normal Earnings Per Share (EPS) Growth
• Levered free cash flow as a proportion of turnover (as measured by Yahoo Finance)

Dividend growth rate is important to me as my investing philosophy emphases the importance of dividends as the primary source of returns from the market.

EPS growth is important as to pay dividends, a company needs to be creating more wealth on an ongoing basis for its shareholders.  Finally, free cash flow is important because the one thing that will kill a company is a lack of cash in the bank.  Cash gives, as they say, 'options' i.e. you can react when things change.  Companies with lots of invoices but no cash (Worldcom springs to mind), are metaphorical toast.

I put a shortlist of companies through a weighted model to see who I should be considering this time round - others, for interest, which did well were Microsoft - which has amazing global exposure, and pays a surprisingly high (for the US) dividend - and Mondi, which has had some awesome dividend growth and pays a 3.29% dividend at the time of writing.

Now, I am going to place a limit on myself to only buy a share every three transactions at most - so each year i will be able to invest 30% maximum in each company I buy into.  Some would say that bold - but if the fundamentals are good, then why should I not?

Until next time!

XPPPPPP Power

Tuesday was the most recent share purchase I made.  As the title might indicate, it was the company XP Power.  If you flick back through previous posts you'll notice i've been a fan of this company for a few months.

When L and I went through the shortlist, we noticed that i've stuck quite a few generic electronic component manufacturers onto the list.  This narrowed things down, then XP Power seemed an easy choice. 

What are the key points on this one?  Firstly, analysts seem quite split - either massive fans or totally cool on this one.  One thing I really like about this one is the level of equity holding by the directors - two of the directors own 18.5% of the business, so they will be pretty aligned with my interests.

Dividends, which we all know makes up a significant amount of stock market growth, looks ok - somewhere between 3.5 and 5% for the next few years, with a cover of more than 1.97. 

Is this a contrarian??  Well, I can't really imagine how many people would be getting involved in electronics as China slows down. 

The future?  I don't know - I am thinking that I might look at PPHE which is the Park Plaza hotel chain.  Who'd invest in hotels and property at the moment?  Me probably.

Ups and downs!

I am yet to see any sign of consistent performance in my fund - but in part that's because of my constant fiddling with the way I calculate the figures I report.  This isn't in the same way my former-fixed income fund manager described that his marketing did when he was in the banks - identifying which period of time demonstrated the best period of performance then reporting it.  No, I am trying to give as accurate account as possible; in part, it affects whether I continue this whole enterprise given that I have a lot of "skin in the game" i.e. my retirement income!

So, what is interesting this quarter?  Well, my performance is again lagging the market (even though the market has really bellyflopped in the last few weeks). Disappointing really, given that I felt I had sped ahead when the markets realised that the world was still screwed - and that lots of people trying to outprint each other's currencies didn't actually produce a material growth effect.

I have dropped in my comparison against the Trustnet managers - and am now sitting in the 76th percentile (I also worked out you can actually see the performance for the year to date) - including an uplift of 1.2% for my lack of fund manager management charges (it helps a lot!).

A continuation of the good news from last quarter is that, now I am into positive growth, I can expect to net a pension equivalent to about 74% of my current income - although based on 3% inflation for the next 34 years that actually equates to a real income thats about 35.5% of my current salary.  At least I won't be a higher rate taxpayer, I suppose!

Last quarter I told you the best and worst performing stocks for growth (Carnival and Aviva respectively) - well this has now changed.  Carnival remains my growth genie (although CareTech was pegged back by a second purchase of shares), and my all-time dog is thee ater company Dee Valley Group.

Thinking ahead, I am always trying to think "fundamentals".  In some cases I have bought stocks for stupid reasons - but on the whole it is because I believe theyy hae a long term benefit.  This means if things are dropping in price it presents a buying opportunity - and my real suckers at the moment are Dee Valley Group, IG Group and Tesco.  I'll buy more shares on Tuesday - I wonder if L will go for any of those or if she'll be more keen for something new.

To summarise - at least growth is now positive.  There's still bad stuff on the horizon, so how the storm is weathered will dictate my future.

Sell out!

Sugar rushes all round today as the European Central Bank promised to bring bond yields into line.  So that means that the ECB will buy bonds of government that noone else wants to lend to in order to make their borrowing costs lower.  So rewarding their naughty behavior when they borrowed more than they can afford when times were good.  Real moral hazard stuff. 

Anyway, the stock markets liked it because it makes everything feel warm and safe - so stock prices went up.  Don't count on them staying that way forever.

I made one further change to my portfolio yesterday - I mentioned earlier this year that I owned shares in a Scottish Widows tracker.  Having looked at the breakdown, and unsurprisingly given its an index tracker, its stuffed full of those stocks L doesn't think are ethical - British American Tobacco, BAE etc etc.  She wants it sold, so that's what i've started to do.  Yesterday I sold a third of my holding - my intention is to sell the other two thirds over the coming two to four weeks.  That'll leave me with substantially more cash to invest over the coming months.

Otherwise, little to report. 

What happens when it all goes wrong?

Over the last few days I've been running the scenario of "when it all goes wrong" round in my head.  I've suggested several times before that I am holding onto around a third of my pension fund as cash in order to take advantage of the stock market collapsing - but I haven't actually decided what i will do when that happens.

And this seems to me to be quite important - if and when the markets crash - later this year or early next year when the Greeks get the boot and China's poor economic situation becomes apparent - I'll need to act really quickly.

Looking back at the 2008, 2002 and 1998 "tits up" moments in the markets, there's some interesting things to observe:

• In 1998 it took 2.5 months for the FTSE 100 to drop 1400 points
• In 2002/3 it took 10 months for the FTSE 100 to drop 1600 points
• In 2008/9 it took 6 months for the FTSE to drop 2000 points

So that shows that the total drop is getting longer, and they happen over a period of months rather than days.

This Guardian article lists the top 10 largest falls in the FTSE 100 ever.  The range is 5.58% to 12.22%.  All but one were in the 2008 or 1987 market crashes (it was in 2001). 

So, what does that information tell me about trading strategy?  Well, firstly a drop over 5%+ should indicate that it's time to buy.  Secondly, there's no reason to panic - these collapses last months rather than weeks.  So, with that in mind, a 5%+ drop should indicate that its time to double the rate of market investment to start eating into that reserve fund - so investing around once every 16 days or so.

With regards individual shares, market panics usually lead to wholesale sell offs before the wheat is sorted from the chaff - so buying into the big reliable companies first is probably prudent, as they are likely to rebound faster.  Smaller stocks are more likely to spend time in the doldrums whilst analysts try and work out what to start recommending again. 

Obviously the FTSE 100 is UK listed stocks, although not necessary UK-focussed stocks (think about all those miners from post-Soviet states).  International diversification will be key - who'd want to rely on one potentially knackered market when they could have the safety of exposure to many?

My first go at a list (to be bought in this order) would be something along these lines:

• Unilever - big, international, selling something everything needs
• Microsoft Corporation - totally market dominant
• eBay- Paypal will give this company amazing growth, and the auction site is market dominant internationally
• LinkedIn Corporation - great growth story, with a high alpha (market correlation)
• ARM Holdings - this and Imagination between them dominant the chip market for mobile devices
• Imagination Technologies Group - as per ARM Holdings
• XP Power - great growth stock exposed to the far eastern market
• Golar LNG - 100% utilisation at the moment, a play on the global gas growth trend
• Fenner plc - if you want conveyor belts for mining, this is the company you go to.  Late in the list because commodities arent going to be bouncing anywhere at the end of their supercycle

I'll update this every couple of months whilst we wait for the day stocks get cheap.  Remember Baron Rothschild: "Buy when there's blood in the streets, even if the blood is your own."

Too much uncertainty!

Back from honeymoon as of Saturday morning, I was straight back on it with regards looking at where to invest next.

Having thought a lot about conviction over my holiday, I have been considering the merits of continuing to buy shares in companies I already hold - rather than always seeking "new" companies to buy into.  After all, I bought the companies I did with good reason - and unless there has been a fundamental change I should stick with them.

On this logic, the next thing to do is consider which "end of the scale" to consider.  Should I go for shares where the price has dropped since my first purchase - so they are "even better value" assuming they are a fundamentally good investment - or should I go for those performing exceptionally well, indicating that there is good momentum behind the share price?

Using this filter, I was looking at IG Group - the financial spread betting company - and Dee Valley Water, the UK's smallest listed water company - or Games Workshop Group, providers of wargaming hobby toys to young men in the UK and Europe - or CareTech Holdings, the specialist care home provider in the UK.

Thinking about the big picture, the FTSE All Share Index is up nearly 8% in the last three months.  I, however, am still hugely pessimistic.  China is slowing down, Australia exports are dropping off hugely, nothing good is happening in the Eurozone - how on earth can companies be worth 8% more over three months?!  So, with this in mind, I wanted my next investment to be in an unloved sector (sectors, rather than stocks, is how you should invest - look for unloved sectors, like iron ore mining in about six months!!). 

There's something called "beta" which is about the correlation between share price changes and index changes.  A beta of 1 means the share price moves in line with the index, -1 means it does totally the opposite, and 0 means it has nothing to do with the index movements at all.  If you think that the market is going to pile in, buy shares with a beta between 0 and -1.

Looking over the options about, Games Workshop and CareTech both fitted the bill.  Initially I was going for Games Workshop, with the intention of making a "standard" investment (the market has been pretty flat over the last couple of weeks) - and even queued up the order overnight.

Having slept on it though, I started getting worried about a value trap - Games Workshop is paying out lots of dividends recently (its on a 6.57% yield), and its dividend cover isn't great at just over 1.  That means that if profits drop, then the dividend is definitely going (which is not what I want as a long term investor focussed on dividends!).  So I got scared and switched to CareTech.

So this has positives and negatives.  I was kicking myself when I saw the share price changes this last week gone for Games Workshop (its up 6.5% in a week!!).  But then, looking at the CareTech dividend cover, I feel better - its massive.  That means on top of a good yield, there's lots of profit going into the savings account or into new business - which for me in the long term is great news!  And talk about unloved - CareTech's share price crashed a few months after Southern Cross when wrong - it's definitely not tarred with the same brush, but certainly unloved!

Having written it all down, I feel better already about changing my mind.  My next investment will be near the end of September unless the market tanks by a good 5-10% before hand, and then it'll be time for another portfolio review to see how this project's actually working out.

Bad day at the office

It certainly was for Aviva shareholders yesterday, when the share price dropped by 7.54% - which I took as a buying opportunity.

As per my last, I am off on honeymoon for a month at the end of the week so I wanted to get some more shares into my portfolio beforehand.  I considered quite a few weird and wonderfuls, but something I am trying to increasingly consider is those companies that already exist in my portfolio - new is not always better once a certain level of exposure to different areas has been achieved, and I did buy those shares for a reason.

So, why more Aviva?  Well, the share price dropped significantly, and the company binned its CEO and is now talking about "hoping" to maintain its dividend (just shy of 10%) whilst intending to dispose of underperforming businesses and get focussed.  Sounds like a good long term plan, and with a 40% discount to assets held I am pretty happy to hold more.

What else was under consideration?  Well, Caretech is up 25% since I bought it in late May.  I also thought very seriously about an electronics company called XP Power which is being widely tipped and has a 4.6% historic yield based on today's price.  They seem to be very good at what they do, but I am going to wait until the share price drops to sub 950p before I pick any of those up (i just feel that's about the right amount to pay).

Anyway, I am gone now until the end of August.  I wonder what the market will do whilst I am away....

Let's print some money....

No, not a reference to the Bank of England's latest smack-addict announcement to dump more money into the economy to the cost of all those who have spent time accumulating into savings and pensions (thanks guys!)

Actually, it's a reference to my latest stock selection - De La Rue - which prints money in over 150 currencies (there are 182 in total).  That's a pretty strong start - it looks like market dominance to me.  And in this era of money-printing, it has to be a classic "picks and shovels" stock selection.  How could a selection like this go wrong?  Well, we could all move back to barter or base metal currencies, but I am afraid that I don't see that happening.

Is it a good company?  Well, the Wikipedia entry says that "the company was recognized by Hermann Simon as a role model for other small to medium sized business in his book Hidden Champions".  Good for him.  More importantly, other than market dominance, let's look at that driver of long-term market returns: dividends.  It looks pretty good - okay, back in the mid to late 00s there were a lot of special dividends making it very attractive, but now it still yields around 4.28%. 

Laura's a big fan - this months run-through of stock options was pretty pointless, as it was the only one she wanted me to buy. 

What am I thinking about next?  Well, i'd like to get some more Aviva stock because I think the announcements to sell off all the crappy business bits and focus on the profitable bits, makes sense.  Sounds a bit like Jack Welch's approach to GE in the 1980s.  I just had a look at their preference shares as well, although these only seem to yield 8.5%ish - and I don't think the company is going to the wall just yet.

Oh - final bit of good news.  I said that I had opted out of the state second pension (last tax year was the last opportunity) - well this last week I got a decent rebate which has done a good job of bolstering my cash war chest.  I am probably going to pull my next investment date forward by a few days - and probably drop back into a monthly cycle again.  I am off on honeymoon at the end of this month, so I'll probably get back into the market a couple of days before that.

Portfolio .... break it down

Before next week, when I make my next selection, it seems to make sense to take a "strategic view" of the fund as it stands - in order to improve decision making going forwards.

Hargreaves Lansdown is good in this respect, as it has a fairly rudimentary portfolio analysis tool.  So what does it say?

The portfolio breaks down as follows between equities, funds and cash:

Funds           32.5%
UK Shares   33.4%
Cash             31.4%

So I realise I haven't spoken much about my cash holding on here to date.  I do have a substantial amount which I am holding back, on the basis that I still believe Europe is going to experience a shock event in the coming months.  Cash provides "optionality" - that is, it gives me the opportunity to do things.  I don't include it in my calculations at the moment, other than the interest it throws off, but this isn't a big concern for me right now - over time it will dimish as a portfolio constituent.  If that's not an approach you agree with, divide my dividend by two-thirds and my TER by two-thirds - frankly, the optionality is more important over the long term than the short term impact of the cash.

Industry Breakdown

A nice graphic here showing I am very much skewed towards consumers.  The financial services are my Aviva and IG Group holdings - not the banks (another bad week for those guys!)

	Consumer Services							28.3%
	Financials							16.3%
	Consumer Goods							15.0%
	Telecommunications							12.7%
	Health Care							8.6%
	Oil & Gas							6.0%
	Utilities							6.0%
	Basic Materials							3.9%
	Industrials							2.9%
	Technology							0.5%
	Non-Classified							0.2%

Market Capitalisation

Interesting breakdown here - for some reason I either hold very big companies or relatively small companies.  It would probably be worth reviewing how this sits alongside the FTSE at some point, although that's not a task for this evening.

	>£50bn	27.4%
	>£20bn and <£50bn	16.8%
	>£10bn and <£20bn	8.9%
	>£5bn and <£10bn	12.5%
	>£1bn and <£5bn	10.4%
	>£250m and <£1bn	6.9%
	<£250m	16.3%
	Unknown	0.8%

So what?

So what does this all mean?  I am heavily exposed to consumers, which might not be the best with a long period of sluggish growth coming up - although that said, a) I aim for companies that have exposure to as many markets as possible and b) we do live in a consumer society.  Buying shares in companies that sell things people need (soap) rather than want (foreign holidays) seems quite defensible to me. 

What does concern me is how low my exposure is to "technology", although if I dig into this what does it actually mean?  I am not too sure as the whole holding is via my SWIP All Share Tracker fund.   Really, this is an area I know and so should be able to make good decisions about.

A positive?  "Big" companies tend to be defensives because they sell things loads of people need - so having 44% of my shareholdings in companies in the top two categories seems like a positive to me.

Decision making

Being hard on myself, I really need to make sure that shares I buy as the work goes soggy sell things everyone needs, in as many places as possible.  What does this bring to mind?  The basics - soap, telecommunications (especially if they are selling TV which people will sit at home and watch), utilities, nice and cheap generic medicines - all that kind of thing. 

However, given I have a buy-and-hold-for-the-next-30-years strategy, I have the opportunity to be contrarian - maybe I should buy into something I know has long term value which other fund managers will be avoiding on the basis they know it is likely to ruin their next few quarter's performance figures.  Say.....oil rig manufacturers, shipping companies, PIIGS shares etc

Lots of options for the long term investor at the moment - I'll go through my short list and update you once the next purchase has happened.

Take care.

Q2, how did you do?

So I was quite excited to sit down and review my fund after the second quarter of performance.  This quarter the investment rate has slowed down, and all the transaction costs I incurred (usually around £15 per share purchase) are slowly getting averaged out over time.  There's an article here about how much a high turnover rate in shares costs your pension fund, and the wikipedia article here that explains the "buy and hold forever" approach (which is my preference - and I am one of the extreme cases!)

So how did my fund do?  Well, performance is massively up since last quarter - both in straight fund terms and in comparison to the market.  My fund is only down 2.55% ex dividends, whereas the FTSE All Share is up 1.17% - a difference of 3.72%, versus a 9.53% difference last quarter (still an underperformance but definitely not as bad as before!).

Next comes comparison with the Trustnet superstar managers.  Unfortunately Trustnet has taken out its "year to date" performances, so I was only able to compare to the full last year of their performance.  Now the FTSE All Share is down 6.63% in the last 12 months, so this means my performance is likely to look a lot better in the rankings than it should be.  On a straight comparison (including a +0.8% uplift for annual charges that Trustnet does not include) I am at 1065, I sit in the 40 percentile - which a massive improvement on where I was last quarter. 

As a fairly academic comparison: if I apply the market shift between 1st July 2011 and 31 December 2011 of the FTSE All Share index (down 7.85%) to my portfolio (taking my performance down to -9.22%) I would be ranked......2121 (the 79th percentile).  Again, this represents another improvement over the previous quarter.

All in all, I feel pretty good about this.  Things are moving in the right direction vis a vis the fund.  I was interest to have a look at what would happen if I comtinued my performance to date until I was to retire at 65 - and using this calculator worked out I'd be at a fund with a total value that would enable me to have a pension that is a 13% of my current salary.  Not really my aim, so let's hope that things improve substantially - both in the annuity market and my fund performance!

And just so you know, I am keeping in touch with how much this is costing me - my total expense ratio (TER) stands at 0.37% - versus a UK market average of 1.6%.  And as an illustration: £100,000 invested for 30 years, with 5% growth would end up as £388,764 with my management fee....and £272,656 with the UK average (so I am 42.6% better off if I perform in line with the City's fund managers).  This is scary stuff when you consider your pension.

Anything else to bore you with?  Well, firstly I thought you might be interested in my best and worst performing stocks (by pure change in value since purchase).  The best? Carnival Cruises is up 11.95%.  The worst? Aviva is down 14.14%.

Secondly, a tradeable subordinate preference bond from the Cooperative Bank - ticker CBPA.  In short, this is an agreement to borrow money, made by the Coop with investors, at a stated interest rate - in this case 5.5555%.  The bond is sold for £100, but the value can then change on the secondary market (much like a share's does).  It always pays £5.55 per £100 of face value on the bond though, so if the price of the bond drops to £70 then the actual interest rate is 7.94% (5.555/0.7).  Furthermore, the Coop MAY chose to buy the bond back at a specified date in 2015 at the face value (say £100).  If you buy the bond at £70, you make £30 as well.  However, if the Coop decides not to buy the bond you continue to get the Bank of England base rate plus 2.065% - so 2.565% at the current rate.  However, say the Bank of England decides to raise interest rates to rein in inflation then this could increase.  Prior to April 2008 the base rate hadn't been below 4%, with one exception, since the 1950s - which means that the bond would be paying at least 6.065%, which I don't consider too bad (although there is no growth there).  I think this is one Laura could really go for, but let's wait and see - she's also really into De La Rue because they literally print money!

Until my next entry in a few days - my next purchase should be around the 4th July, so I'll give you an update once that has happened.  Over and out.

Thanks LOVEFiLM!

The two of us are subscribers to Lovefilm (which was acquired by Amazon early in 2011).  I've been a bit suspicious about the service quality over the last few months, mainly because neither of us can remember ordering a lot of the DVDs that arrive.

This month was no exception.  Neither of us ordered Insider Job, which confirmed what we suspected - Lovefilm is sending out films that were not ordered, probably based on previous selections and probably due to a need not to hold too much stock.

Anyway, it was an interesting film which exposes the links between the US government and the major investment banks.  In particular, it looks at what happened during the 2007-8 crisis - and the preferential treatment doled out by the US government.  Primarily, in my opinion, at the expense of private investors and workers all over the globe.

Famously, Al Capone said of wild market speculation in the late 1920s: "its a racket".  This has come to mind a lot recently as I've watched the collapse in Facebook's share price (down 30% as of today), and as I watched the narrator of Inside Job describe how, whilst selling pension funds "triple A" subprime-based loans, were betting they would fail (and bringing down major insurers like AIG at the same time).  These people have no scruples, and watching them get a hard time from US elected representatives was reasonably entertaining.

Why's this all relevant?  Well, it made me think: the markets are always going to be manipulated by bankers (at least until governments either heavily regulate them or nationalise the retail bits), which makes investing for retirement a very long and stressful game.  I am not sure it is a lesson, but it is certainly a thought: make sure that stocks that are bought are in companies that make things that people actually need.  Structured, complex products are difficult to understand (even for those who are paid full time to do so), so avoid them.

Interesting stock to think about?  De La Rue prints money for 150 countries worldwide (that's more than 90% of them!), and no matter what you think of money and the way it is managed, a common language that governments can print to steal from investors and their populations are going to stick around for a long time - and with a 4.2% dividend, I should probably get involved.  They are almost certainly printing drachma already!

I CareTech.......

Just placed an order after a good session with L looking at the next investment.  We reviewed a whole load of companies off the watchlist - United Utilities, National Express Group, AstraZeneca, EnCana Corporation, Zipcar, and CareTech.

Regular blog readers, if such people exist, will know I have been keen on CareTech for well.....ages.  They are a specialist care home provider for adults and children with mental and physical disabilities.  I went to their office once and they certainly don't splash the cash on unnecessaries like flashy offices - but they do make sure they pay consistent, increasing dividends (4.65% as I write, according to Google Finance) twice per year.

Like the whole care sector, the wonderful Southern Cross has smashed their share price to pieces (down 66.49% over five years) - pretty much totally unfairly based on the business I am looking at today.  Very few analysts review them - but those that do are big fans according to Yahoo Finance.  So, with Southern Cross in mind it is a massive contrarian purchase - but equally should be resilient based on the contracts it has with local government.

I've tee'd up a big buy tomorrow - I looked at the market situation which is definitely a "down" at the moment - so boosted my investment by 10% (as detailed earlier).  Should be a good long term bet - I suspect that once they are back in favour they will form a good nucleus for a private equity buy and build strategy.

Good news this evening too about pastys.  Greggs should bounce tomorrow morning.

Wednesday 4th July (Independence Day theme anyone?) should be my next investment date.

More arithmetic

I have been thinking recently about how fast I am buying into shares.

Why?  Because I am buying into shares faster than I am placing cash into my SIPP and this is unsustainable.  Initially this was fine because I needed to get cash "working", but now I am in a situation whereby I have 1/3 cash and 2/3 stocks and shares - so I need to slow down.

So, to calculate my new interval between investments I am working on the basis of investment value divided by rate of cash accumulation (assuming 30.42 days per month).  At the current rate of cash going into my SIPP, this means I should be making an investment every 39 days. 

My last investment took place on the April 18th, making the next investment day 26th May.  Am very excited about the next one because the markets are in tatters at the moment.

(Furiously shorting Facebook, in my head)

Coming clean on opting out

Ok, so I haven't been entirely open in this blog since its inception, but something has changed which means I need to.

I think I wrote earlier about opting out from the state second pension.  Why?  In my (little) capito-anarchist world letting government do anything is a bad idea, so if you can get money out and manage yourself you should.  The ability to opt out (contract out) stopped this year, but has impacted my pension. 

Basically the way it worked is this: rather than the second pension pot being managed by the Government, it went into a separate account linked to your main pension.  However, Hargreaves Lansdown emailed me the other day to say the accounts no longer have to be separate - so the money has been transferred to my main account.

Wondering what I did with it?  I played the passive tracker game.  A passive tracker does as it sounds - it copies an index in as exact a way as possible, and because it is passive i.e. there is little human decision making, it is cheap cheap cheap from an annual management charge perspective.  It is a bit crappy insofar as when a stock gets more expensive the fund buys more of it (so you have the tendency to buy on the up and sell on the down), but the cheapness plus dividends should far outweigh this.

I put all the money in my state second pension account into the cheapest FTSE All Share tracker offered by Hargreaves Lansdown, which is the SWIP FTSE All Share Index Accumulation tracker.  What are its statistics, you ask?  The total expense ratio is 0.11% - compared to 1.6% on active funds.  To illustrate what that means, if you assume growth of 5% per annum gross, after 10 years, on £1000 the SWIP fund will equal £1612 - whereas the active fund will equal £1397 - so you are already 13.6% worse off.   Extrapolate that over a 40 year working life and it's even worse - £6751 vs £3809.  


Any downsides?  Well, yes there is (through Hargreaves Lansdown at least) - a £2 per month "platform" fee to cover the loss of the kickback that are usually paid to brokers on active funds that aren't received on passive funds.  I can honestly say I don't begrudge them that at all.  


How's it performing?  Well I bought into it on the 14 December last year and it's up by 8.9% since then - although that does include dividend income being reinvested.   Not bad, and in line with the rest of my investment strategy - once I am in I am in - so I am sticking with it.

Onwards, little men!

My mum always used to refer to my Games Workshop tryranids as "little men".  My brother was into them too for a good while.  Very entertaining when I was little - a bit of a school subculture, often at the "unacceptable" end of the scale.

When I played them they were primarily based in the UK, with a couple of outposts in Florida and California if I remember properly.  But how times change - I have their website open in another window and the dropdown lists a bit more of a global footprint than before with 19 countries in total listed.  Now I am sure that there's probably no more than one outlet in Japan, but hey - it shows global intent.  Perhaps a bit worrying is that 14 of the countries listed are European, and we know that's all going t*ts in the next few months.  But, interestingly I am not that worried. 

Why, you ask?  Well I thought Games Workshop was horrendously overpriced when I was 14 and they've increased the prices significantly since then.  The target market age profile has got younger and younger since the early days of hardcore my-little-man-has-30-attributes-and-i-need-to-make-calculations-using-eight-of-them-to-fire-a-gun days - and as countries (and parents) become more affluent, every household has a potential Games Workshop salesman or woman in it.

So how does the stock look through my narrow lens?  It has lots of countries that it operates in, which is good, as i have already detailed.  Its is retail, which you'd have to be insane to get involved in (contrarian box anyone?), and it had dropped about 1.5% the month before I bought in.  That said, it is up 26% in the previous 12 months. Let's look why now.

The dividend yield is ridiculous - with good reason.  As I write it is at 11.82% because of a special present for investors from the company's board.  In the 12 months prior to buying in (on the 18 April 2012) there have been three dividends paid, totalling 67p per share.  The company is chucking off cash, and although the yield is not sustainable based on current cashflows the board has reason to believe it's acceptable to pay out.  And look here - they are pretty confident to chuck their own money at the stock.  No director has sold out of Games Workshop since September 2010, and since then there have been nine exercising of options or purchases of shares.  THF Kirby spent just shy of a million quid on shares in the company on the 22 March 2012.  Punchy.

Laura wasn't entirely convinced until I told her there is practically no competition on the high street anywhere in the world.  What will happen to them?  Probably get bought by someone like Mattel or some large toy conglomerate before I retire, but that i do not mind too much.

So where next?  Well, according to my Moneyweek magazine this week Aviva's net asset value (sum of all the assets - in their case primarily investments) is around 457p as of February 2012.  So according to Google Finance the FTSE all share is down about 1.43% since early February.  Assuming that the value of Aviva's investments has dropped twice as far they should be worth about 443.93p at the moment.  And where are they?  They were 316.70p on Friday 27 April - so they are trading at a discount of 28.7% to the net asset value.  Oriel Security reckons they should be doubling in price to 640p - unlikely if the market tanks - but Yahoo Finance shows strong analyst support for them.  Google Finance has a 8.21% yield.  All looking like it might be my next investment - but not for a few weeks.

Further financial fiddling

I read an interesting article about Keynes over the weekend - famous economist and relatively successful investor (as Fellow of Kings College, Cambridge). He believed that trying to time the market was impossible - and as a true value investor, said that you should focus on identifying out of favour companies at whatever point you find yourself in the economic cycle.

I am not sure - as you will read in earlier posts, I think that the market is going to tank this year, so why pile money in if stocks will be double figures percentages lower in six months time? Thinking about it brought me to common ground in between - i am going to keep buying stocks, but I will speed up and slow down depending on what the overall FTSE performance tells me.

So, when the market's in a down phase (let's say net down by more than 3% in the ten days prior to the point I invest) I will invest 10% more than the nominal amount detailed in the previous post. And when I say market, I mean the FTSE All Share Index.

Conversely - if it's in an up phase (i.e. up by more than 3% in the ten day prior to the point I invest), i'll invest 15% less than the nominal amount.

And if it's within the +3% to -3% range - i'll just put the nominal amount into the market

Let's see how this pans out - as ever, i'll keep you updated!

Changing my investment value

So something else I have decided is important is to maintain the value of my "units" at a steady rate, based on the Consumer Price Index. That means I want my buying power to remain constant.

This is fairly easy to calculate - on the 20th of each month the ONS reports the previous month's inflation figure.

If I start myself at a nominal value of "1", each quarter I add the impact of the previous three months inflation to my value of "1". I'll be doing this around the 20th April for the first time, so i'll tell you where "1" has got to. Assuming no big changes in inflation, it'll probably be around 1.0086

Ok, got to run!

A horrendous start!

So there's no dressing up my start to this project - it's been horrendous. I've just totalled the figures up until today, and they make grim reading!

The FTSE All Share Index is up 4.17%, whereas my portfolio (taking into account management fees, interest on cash held, and dividends) is down 5.36%.

So I've underperformed the market 9.53%. Pretty terrible, because I could have put it all in a cheap tracker, but I think there's an advantage to actively managing your pension - so I've just headed over to Trustnet to see how I have performed compared to all the clever managers out there.

Top operator this quarter has been MFM Junior Oils Trust, based out of Bolton in Lancashire (no kidding!), which is up 31.6%. Well done to them! On a TER of 1.88%, you really cannot complain.

Where do I fit? 2754 out of 2793 Open Ended Investment Companies (OEICs). So in the bottom 1.4% - awful - but without factoring in a quarter of the annual TER for the funds. Based on an average UK TER of 1.6%, i'll factor in an extra 0.4% I haven't had to pay. Any better (at -4.96%)? Nope - I'm at 2744!

So can I rationalise this project to myself at all? Well, yes actually. Have I done anything I wouldn't have done again? Probably - Tesco was another lesson in "the past is no guide to the future", and my hugely illiquid Dee Valley Water drops by whole 1.5%s at a time (and all it has done is drop!). Gold has been pretty poor too. But I still think I'd be on a par with current performance - I've got my portfolio started, and all the trading costs I have incurred over the last few months will get smoothed into the value of the stocks over time. I've also held back from diving into anything new and dropped my trades to around one per month - I am anticipating a crappy market over the next two quarters, when there will be loads more good value dividend stocks out there. Plus I am in this for the long game (30 years!)

What have I got my eye on at the moment, that I need to convince the fiance about? Well, Games Workshop is yielding 9.65% (i used to play it when I was younger and it's a great business - no serious competition at all!), and I like CareTech as I have said before (yielding 4.32%). I'll probably dive into both during the next month, should they drop by a couple of percentage points.

Until next time!

Gold? More gold?

So, things have been pretty quiet since I bought that second lot of Vodafone shares on the 24th. To be honest, this is pretty much in line with me "i think something bad's going to happen over the next few months to the stock market so i better be prepared" strategy. The UK stock market had a stinking time at the start of March, dropping just short of 3% in three days - makes me think there is worse to come!

So what's been happening recently? Well, i've decided a watch list is in order. Given I think that equities are going to get a lot cheaper in the next few months when everyone works out what a big deluded mess the current market performance has been - being entirely the product of mindless stealing from the population by government (or Quantitative Easing, for short!) - I want to try and remember who I thought was interesting over the previous few months.

So far it's got National Grid on (good sustained dividend), Fenner Plc (worlds number 1 conveyor belt manufacturer, started in Hull!), Care-Tech (care home group that's had a hard time because of the Southern Cross mess, but one at which I know an employee who says it's fine), Premier Farnell Plc (electronics distributor, one of two vendors of the Raspberry Pi - their site is getting 500,000 hits per day at the moment because the device has caused such a stir), United Utilities (good dividend, lower P/E than Dee Valley Water), Drax (massive coal power station energy producer - not sure about the environmental side though), Jersey Electricity (its got a monopoly, and just sells on very cheap French power - with a good yield), National Express Group (decent yield, and exposed to UK, Spain and North American transport markets), Asian Citrus Holdings (owns a load of fruit farms in China, where people are consuming more fruit as they "westernise" whatever that means!), and finally Games Workshop (i used to play it, apparently people still do, and it chucks off so much cash it's dividend is over 10%!).

So I was thinking my gold proportion of my portfolio was getting a bit behind versus other stocks - I was on a mix of 50% cash (I am serious about this market problem!), 37% equities and 13% gold. So I rebalanced the mix to 23% gold, 37% equities and 40% cash. Laura said she likes gold, and as ever it's a store of value so it should go up.

But I have learned a bit of a less on on this one - i bought the gold first (through the usual Swiss gold fund LON:SGBS) thing in the morning on the 13th (not a Monday). As of today (with a little bounce during today) it's down 2.74%. Not much in the grand scheme of things, but still its the kind of difference that in a sideways market will take a dividend yield >3% (which is a target of mine) to cover as a loss. How annoying. So, new rule: only buy stocks after a fall of over a period of say, one week, of 3%. I did this with Carnival and it's doing very well now thanks!

Not long now until the end of Q1 2012, when I can tell you how this gambling my own pension thing is going. Feeling confident in myself at the moment, although I think I may have underperformed because most of my stocks are not the kind that react well in a "risk on" market!

Until next time!

Apologies ... been busy

A busy few weeks so I haven't had a chance to update you on the additions to the portfolio. I've added two lots of stocks, having made the decision that I think the market's going to have a tough time this year so holding a lot of cash is probably a good idea.

First up is IG Group, which provides technology for spread-betting. Anyone who reads any vaguely financial newspaper will have seen adverts that relate to these guys. It works in 10 traditional "western" markets (Australia, New Zealand, South Africa, France, Germany, Italy, Luxembourg, the Netherlands, Portugal, Spain and Sweden), and has a dividend yield of around 4.2%. Given I think the markets are going sideways, with lots of volatility, I think lots of people will try their hand at betting. The fiance said no to this one because she doesnt approve of gambling......but I went in for it anyway.

The second is Dee Valley Water. A funny one this one - I like the water industry because it's heavily regulated in the UK, so the income should be fairly predictable. I spent around 15 months working with a company selling to water companies, and it's an interesting market. There are two types of business - water and water / wastewater. And there are some weird companies that operate in the water-only market. My favorite is / was Tendring Hundred - it only supplied about 136 square miles, but for historical reason was stand alone (it did get bought by Veolia though). In the long term, I expect there will be consolidation in the market so I went for Dee Valley as the smallest listed player. It yields over 4%, and the only thing that's really going to prevent that being maintained is government policy forcing investment or mass unemployment meaning people cant pay their bills. L approves of water companies, so it's a goody.

I'm looking at my portfolio tonight thinking it still needs more diversification, but I also need to increase the stakes I have in some companies. I am thinking more water (although possibly UU given it's great yield), more Greggs (great company - did i mention?), more Vodafone (people are SELLING - are they crazy, it yields 5%+ with a global footprint), and possibly more gold.

In fact, I think more Vodafone now in fact......

Taking the plunge

So at the start of this week (Wednesday to be specific) I decided to pile into Carnival Plc. I'd been looking at the price drop on the London market over the weekend (a 19% drop), and trying to work out why the same hadnt happened on the NYSE - until i realised there hadn't been any trading on Monday in the States.

I read some advice from Credit Suisse that said if the price dropped to below $30 in the US, they'd consider it to be a buy - on the basis that it has averaged 16.2x forward price to earnings, but at less than $30 it would be trading at 11.1x - so leaving the possibility of a significant correction.

Anyway, that's the view of the analysts. I'm more interested in the fundamentals of the business, which on Friday afternoon had a market capitalisation of £16 billion - but had previously been worth £20 billion, as I pointed out in a previous post.

Looking at this website, which is good for seeing past dividend payouts, Carnival has been a bit up and down over the years. Even if it all goes tits, I think Carnival will be able to deliver decent yields in the long term - Laura said cruises are a popular cheap holiday, and the figures I have read on the internet show a market that grows and grows over the decades. Given that Carnival owns about 50% of the market, it should be pretty well positioned. Its also exposed to North America, Europe, the UK and sends boats out to the Far East. I can see the Asian market really getting into cruises, and i'd expect Carnival will have a big chunk of that.

Anyway, as with everything I'll keep you updated quarterly. Carnival's up 3.86% since I bought it though :) :) :)

What else have I bought?

To fit with all the criteria i.e. high dividend, exposure to lots of markets, acceptable to my fiance (although this one only just), I bought into Tesco at 394p per share. Tesco is an absolute staple - one of those shares that fund manages charge you 1.5% per year of your investment to buy into (where's the value add?!). It's the third biggest supermarket in the world after Walmart and Carrefour, it operates in the UK, California, Thailand, Poland, China and plenty of other countries. It was also expected to pay out 3.8% as a dividend when I boughtthe shares. More later on that.

There's nothing like food in bad economic times - as long as there isnt a significant decline in population, you know people are going to want food and the supermarket is the obvious place to go. Working on this logic, I decided to buy into Sainsbury's too at 295p per share. Sainsbury's doesn't operate outside the UK, so in some ways it failed the diversification criteria. However, it was very acceptable to the fiance because it has a reputation for good business practice (compared to the other supermarkets, at least!), and the dividend yield is expected to be 4.8% - and as I know, diversification is very important (and how glad was I of that mantra come Tesco's January performance!)

Sticking to the so called "defensive" stocks, the next place to go was a company actually producing everyday goods that people had to buy. I went with Unilever, the producer of food, drink, cleaning and "personal care" goods. Its a old company that strikes me as being fairly smooth sailing, if such a thing exists. It owns 52% of a company called Hindustan Unilever which sells the same kind of thing as Unilever to the Indian subcontinent. Tick on the diversification box, and tick with the fiance (great Corporate Social Responsibility i'm led to believe). 2134p a share gives an anticipated dividend of about 3.8%.

The next purchase was Vodafone. This company is so underrated it is unbelievable - it's absolutely massive (the world's largest when measured by revenue), but it's treated like just another mobile phone company. At 174p per share, it should provide a dividend yield of about 3.5% - and given that people keep wanting to talk to each other, I cannot really see how this can change much. But then that's my opinion. The fiance was happy with them too, because she hasnt heard anything too negative in the news (neither have I for that matter).

So food, food, gold, phones - where next? Well, walking round Lancaster around Christmas gave me the answer. I consider Lancaster a fairly stereotypical town, so when you see a lot of people in a stereotypical town wanting to do something, in a low competition environment, it's probably a good sign. Pies. That's right, pies - or in fact Greggs Plc, to be specific. Lancaster has three of them in the pedestrian area, all with big queues, and no really serious chain-like competition. And believe it or not, it is a dividend darling with 26 years of rising dividends. So that may change, but its a good indicator. And the dividend yield at the 507p I bought the shares for is 3.3% - another good one, and no complaints from the fiance (can you believe that Greggs have 1200 shops!?!)

So more food. Quite a lot of food there, so perhaps time for something different? Well, I read about the insurance company Aviva and how it was trading at a discount of around 30% to the assets it held. For those that don't know about insurance companies, the way they work is very simple - you pay them a premium, they invest it in shares, bonds, and other investments, and then try and profit before you take your cash out again in the form of claims. So, if Aviva is trading at a 30% discount to assets, it means you can get a load of shares for a discount of 30%. Obviously this is only useful if you believe that the discount will reduce in the future - which you do if you believe in market efficiency - so there's a lot of growth there. Although, remember, I should be investing for dividends and diversification. Well, at the 311p I bought the shares the dividend was about 9% - that's massive I know, and reflects the fears around the exposure that Aviva has to Europe which is paddling up the metaphorical creek at the moment as fast as its politicians can get upstream. However, Aviva operates in 28 countries of which 6 are in Europe. So it might own a lot of European shares, but I am sure the company knows that and is doing something sensible about it before it all goes Pete Tong. On the basis of all this evidence, the fiance was fairly satisfied.

My most recent share purchase? Well, a certain company announced some terrible earnings in the last few days - and that fitted nicely with my contrarianism. Are you seriously telling me you think that Tesco is suddenly worth 18% less because it didnt sell as much stuff as it thought it would over Christmas? Let me put that in context - you are telling me Tesco is suddenly worth £5.5 BILLION less because it didnt sell as much stuff as it expected in one of its 13 countries? Ok, the UK represents 51% of its stores, but it's hardly going out of business. "Oh, but they made the announcement to prepare you for a reduction in the dividend". They'll have to have really screwed up if they are going to reduce the dividend by 20% and set it back to 2008. Maybe they have, but i don't doubt it'll come bouncing back.

Long post this once, but now everything's up to speed. And how does everyone feel about Carnival, the world's biggest cruise ship company? It sinks £95 million worth of boat and suddenly is worth $3 billion less. They must have had all the company's money on the boat, in non-waterproof boxes. It's the world's largest cruise ship operator, for goodness sakes - their balance sheet (what the company nominally owns) shows $37 billion in assets, and the market only values the company at half that now. I might pile in - need to speak to the fiance first.

Signing off......

So I cashed in......

That's right, I sold out of all the funds in my pension when the British government decided to start more money printing in late 2011. Enough was enough - share prices would go up for a bit, i'd get my money out, then i'd invest it as I saw fit (without paying someone 1.5% a year).

Having done a bit of research, I opened a Hargreaves Lansdown SIPP - it seemed to be the cheapest provider going for what i wanted, which is the ability to buy into very cheap tracker funds (i.e. those that mimic a certain index) and shares. The fees are pretty simple - a "platform fee" for certain types of tracker funds (between £12 and £24 per year i.e. what you'd be charged by a fund manager for between £800 and £1600 under management, although that doesn't include the tracker fee) - and a 0.5% fee per year on shares, which is capped at £200 per annum (i.e. it starts to decline as a percentage when the total value of shares held gets to over £40,000).

So what then? Time to start buying into some shares. My plan, so you know, is to publish the quarterly performance of my portfolio, and compare that to the FTSE index and how it would rank if I was a fund manager (which I am now, albeit a very small scale one!!!)

All fund managers have some kind of strategy when creating their portfolio. Mine is pretty simple - a focus on contrarian investing (i.e. buy when others are selling), dividend income (so shares anticipated to return more than 3% of their value per annum as dividends), exposure to as many markets as possible, and FINALLY - shares which my fiance agrees make sense to buy.

As at 16th January 2012 I have been buying into shares and funds for seven weeks. The first investment I made was a significant chunk of my total funds (11%ish) into a share that was backed with physical gold. That means that the shares represent gold held somewhere. Being a bit of a sentimentalist, I opted for gold held in vaults in Zurich, Switzerland - I can't think of anywhere better. So the share I went for is called ETF Securities Physical Swiss Gold . What does it do? As the site says:

"ETFS Physical Swiss Gold (SGBS) is designed to offer investors a simple, cost-efficient and secure way to access the precious metals market. SGBS is intended to provide investors with a return equivalent to movements in the gold spot price less fees."

Sounds good to me. And as you know, I am very into fees - for this one, 0.39% per annum (plus that 0.5% that HL charge me per year because it's a share). I am very worried about money printing, and gold is (as all the gold fans will tell you) unprintable by government. Plus it has been going up in value since Gordon Brown sold off most of the UK reserves in the late 90s from around $300 per ounce to $1800 today (i.e. a fivefold increase).