Ron Bewley explains why discipline and a systematic approach to what you do is so important when constructing a portfolio of equities for the long term.
For my sins, I am often asked which stocks people should have in their super funds. I probably seem evasive when I say, “it depends”. So in this and the next few issues I will try and add some colour to the problem of populating a stock portfolio.
I will start at the end of the process with a “mature” portfolio, run by someone with a lot of experience – say, me.
My portfolio is in its fifth year – and it has handsomely beaten the market, and consistently so, even through the GFC. I will deal with where to start in subsequent issues.
I started out in 2007 with a traditional sort of stock portfolio, but it rapidly transformed into one that was just right for me. I found that, for me, it is not just about choosing the good stocks and avoiding the bad – it is about feeling a part of my companies. I own bits of companies – not just share certificates.
These companies must support me until I die.
‘So every day I work hard, but rarely buy or sell. But I am ready for almost anything’
I started the year 2010/11 with 17 stocks and finished with 17. The number comes from the rules I expounded in an earlier issue of PP. I did sell one stock though – Harvey Norman (HVN) – and replaced it with Emeco Holdings (EHL).
It took only one trade to rid myself of HVN, but six trades during April and May to buy EHL. In my opinion, it was time to get out of consumer discretionary stocks because, I believe, there may be long-run changes in the margins retailers can enjoy.
I do not care if I am right or wrong – I just do not want any of my money invested in places where I am questioning my future. As someone else said: “Hope is not an investment strategy.”
My modelling had suggested that I needed another mining services stock to accompany Boart Longyear (BLY) and Bradken (BKN). I had a handful of companies on my radar, but EHL had the best consensus recommendation of my watch list when I decided to buy. I buy in smaller parcels because I like to learn how the stock price moves.
Fortunately for me, I finished up averaging down in price, and the stock price finished the year just above my average purchase price.
As a high conviction manager, I like to keep a small set of stocks in focus; but, over time, I want to change their relative weights.
Like many people, I am adding to my fund each year in sufficient quantities to be able to rebalance without selling stocks that I still like. I usually just add to my positions that need bigger allocations. But if I must sell to rebalance (and not because I think I should – like HVN), I wait for that sector to be over-priced by my measure of exuberance.
I strongly believe in exclusion rules – for stocks and sectors. I don’t need to justify them, because I am the only beneficiary of my fund. But for completeness, I will have no investment in REITS (property trusts), insurance compa-nies, consumer staples, airlines, telcos and IT.
For the moment I am not in consumer discretionary but will go back into that sector if/ when the timing is right.
I think some sectors – guess which – have more chance of a big and swift downside in the event of a disaster, natural or otherwise. Some sectors are plodders with low volatility – but I have time to wait for cycles to work through – so why plod? At 62 I must plan for the eventuality I will still need money in 30 years or more. I use healthcare and utilities as my defensive sectors. I am about four times index weight in health as I reallocate to health what I might have put in some other defensive sectors.
This strategy worked beautifully in the GFC but, for the moment, currency headwinds are holding back strong growth.
Nevertheless, I keep three stocks – CSL, Cochlear (COH) and Sonic Healthcare (SHL) as I think these are strong companies with a good degree of diversification within that sector.
Currently, the consensus recommendation for COH is worse than that at which I would buy or top up. I need a massive reason to buy a stock with worse that a 2.5 (on a scale of 1 for buy to 5 for sell) but I don’t sell a stock unless my own rating, which is strongly influenced by consensus, suggests I should. I found this frustrating when COH dipped below $70 and I had some spare cash, but COH had a 3.06 rating. Rules are rules.
For banks, I only hold two of the big four and nothing else from that sector. CBA and Westpac (WBC) were my choices, being the stocks (at the time when I first bought them) with the best recommendations. They should be bring-ing me in a dividend of about 10 per cent, including franking credits.
My modelling does not paint a great future for capital gains in the banks, so my holding of banks is limited by determining the dollar value of the dividends I need for pension payments and no more.
