2021 Annual Review

This blog is probably a surprise to any readers who read my site regularly as I haven’t made a post in over six months and have been fairly absent from Twitter. Where to begin?

Well, I should start with the exciting news; I got married! Not only did I get married in October but my wife and I also bought our first home together! AND I got a new job! When I write it all I can scarcely believe it all happened in a single year.

All of the excitement meant that maintaining this blog fell by the wayside. Writing simply became challenging to fit in and with that challenge came first neglect and then abandonment. One of my New Year Resolutions was to turn that around and make the most of the site again. I enjoy writing and now I shall find the time again.

Investing-wise, 2021 turned out to be an absolute corker of a year; I was up 23% including dividends by year-end. Despite not writing publicly, I continued to keep my trading journal up to date, with my worst month being November (down 2.3%) and my best being April (up 6.2%). I also made the highest number of trades in a single year I’ve ever made before, coming in at an eye-watering 52 (evenly split between 26 buys and 26 sells).

My emerging strategy of building three ‘tranches’ has continued throughout the year, with the top ten positions now encompassing 48% of the portfolio, the middle tranche making up 40%, and the bottom ten positions making up 12%.

Of the 26 sales, five were taken to free up cash to rebuild my cash buffer (I was running at close to 0% and am now at a fraction over 11%). Five were taken to remove old holdings that were failing to meet my annualized return profile (I look for companies that return 10% per annum over a five-year period – if they fail to meet this criteria by the end of the second year and also fail to generate at least 4% in dividends then I sell the position).

This leaves a further 16 sales; of these, six companies including GlaxoSmithKline (-19%), Tharisa (14%), Shearwater Group (35%), Microfocus International (-31%), Barclays (3%) and Supermarket REIT (7%) were sold within twelve months of their purchase.

These companies were bought for a two main reasons; Tharisa, a play on the exuberance for Sylvania Platinum (another holding) began to spill over in the wider market but then hit price resistance. It wasn’t a company I wanted to hold long-term and I was happy to take a 14% profit in just three months.

Tharisa, Shearwater, Barclays and Supermarket REIT were bought on a ‘buy the dip’ strategy and were suffering from price declines from all-time highs when I bought them. These companies were only purchased to generate short-term profits as volatility in the market increased and as such, I was comfortable selling them relatively quickly to lock in a profit).

In the case of GlaxoSmithKline and Microfocus International, the trades reveal a lack of discipline on my part in protecting capital when opening positions. Of the 26 purchases made in 2021, eight, including GlaxoSmithKline and Microfocus International were bought too quickly (remember the old saying “people who catch falling knives get cut hands”?) and I’ve been forced to watch as the price declined.

As we head into 2022, I am heavily exposed to property and technology companies. Warehouse REIT and Urban Logistics REIT are my top two positions and have been in my top ten for many years. CentralNIC, Gore Street Energy Storage, S&U, Digital 9 Infrastructure, Chesnara, Tekcapital, and Centamin round off the pantheon (as well as my top position being an 11% cash position).

My big concern in 2022 is inflation. After many, many years of writing about the dangers of Quantitative Easing, inflation finally seems to be soaring with asset prices through the roof (average UK housing prices increased 10% last year and the S&P500 is soaring in value year after year). In the UK, productivity remains moribund and supply chain shortages are rampant. For the first time in my life, I am now regularly seeing empty shelves in random sections of supermarkets on a regular basis.

I expect that the supply chain issues will resolve over the coming years – I doubt they will be resolved in 2022 but then again, I might be being overly pessimistic.

I believe market volatility will continue throughout the year; central banks are finally waking up to rising inflation and interest rates are beginning to rise. This will create growing headwinds for speculative growth stocks – which brings me onto another minor obsession I’ve had this year. Cathie Wood and ARK Invest.

For those readers that aren’t aware, Cathie Wood is the Chief Investment Officer for a US fund house called ARK Invest. Cathie shot to fame in 2020 after generating outstanding returns for her investors and growing her funds from $20bn under management to over $5bn. Cathie and her team are known for making bold predictions about the future, grouped into megatrends such as artificial intelligence, robotics, energy storage, DNA sequencing, and blockchain technology.

Among her many claims, Cathie has been quoted as claiming her funds could return 30% annually over the next five years, that Telsa could reach a price target of $4000, and that index funds are stuffed full of dying, old-world companies that are going to be torn apart by the disruptive innovations being developed by the types of companies she invests in.

Interestingly, the more I listen to her, the more I want to learn about these new technologies. Cathie’s argument that innovation transforms the world is undeniable; think of the telephone, the automobile, electricity or the internet. Over time, these technologies have become widespread and affordable, unleashing demand and revolutionizing the way we live and work.

The hitch comes from the way these technologies are commercialized. Unlike the type of investments I favour (profitable, stable, reliable businesses with assets I can value and plenty of customers), emerging technologies are usually loss-making.

As a result, ARK Invest’s funds are packed to the gills with companies that are not only relatively new, but that have small market share, untested technologies and lose money hand over fist. Over decades some of them may turn out to be profitable – some of them will turn into the next Amazons of the world – but many of them will go nowhere.

The trick for investors, therefore, is to try and establish which will be successful and which will not. In my opinion, Cathie Wood is an outstanding marketer; she’s capitalized on her fame to grow her funds to an astronomical size but her approach isn’t entirely revolutionary. There are dozens, if not hundreds, of growth funds in the market; many specializing in technology and biopharmaceuticals. At its core, this is essentially what ARK Invest is; a fund house selling baskets of investments in technology and biopharmaceutical companies.

I also think investors are at serious risk of ‘buying the story’ – as seen by the madness of Bitcoins, Altcoins, NFTs and ‘meme stocks’ which have caused hundreds if not thousands of investors to end up thinking investing is speculative gambling. These ‘assets’ produce no revenue, they have limited practical value, and they are exceptionally volatile.

I was extremely concerned to find myself having more and more conversations in 2021 about investing in such things. When readers listen to my stance on these assets, they usually have one of two reactions – they think I’m very sensible or they think I’m an old-fashioned bore with no idea about how much money I could be making if I’d only give these things a try.

My investing philosophy is simple; buy high-quality, productive assets for less than they’re worth and let them produce dividends and capital gains to generate a profit. No matter how I try, I cannot find any way to realistically measure the value that digital currencies or NFTs represent. They are, by all accounts, simply a digital version of things that already exist – I don’t invest in fine art and I don’t trade currencies, so why would I be interested in their digital alternative.

I can see some value in blockchain technology but I don’t think that most investors in digital currencies are looking at the practical application of blockchain. They’re buying a thing (a token) and hoping that someone comes along tomorrow who will buy it for more. It will still be the same thing but they just hope that someone will buy it for more.

By comparison, if I buy a company for £10m that produces £1m in profit each year, hold it for five years until it produces £2m profit each year, I could reasonably expect to get more for it than I had paid; it would be worth more.

To me, these two approaches are as different as chalk and cheese.

This year, I’m expecting to take up writing again and may redesign the site. It’s been several years since I re-developed it and during that time the content has grown tremendously (as of the date of this article I have over 200 articles and expect that number to hit 300 by the end of 2025).

I will continue my steady plod forward with investing. My portfolio is now generating 11% a year, still behind my target of 15% including dividends but inching closer each year. I am reasonably confident of achieving this annual target by 2025. My portfolio has also swollen to an enormous 38 positions; I am aiming to reduce this to 30 by the end of the year.

Finally, I hope that this year will continue to see the easing of COVID restrictions after two years with intermittent lockdowns and restrictions around the world. A great many people have struggled through this period and it is by no means behind us yet. Therefore, as a good friend likes to say, be kind, be supportive, and look to help out those in need!

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