A bird's eye view of some of the key components of our investment strategy; asset allocation, portfolio size, monitoring, risk tolerance and watchlist ...
These elements have been refined over time, improving through lessons learnt, as well as picking up best practices from other clubs and successful investors.
Over the years, Mobius has built a large toolset of investment schemes. It chooses to add, remove or provisionally put on hold some of these depending on circumstances: The strategy and associated policies are reviewed annually at AGM time. Some of these are outlined below:
Mobius manages a single investment portfolio. For at least the past ten years, it decided to limit the number of entries to its portfolio to 12. This provides a focus and a balanced mix of concentrated assets allowing enough room for diversification. If the portfolio's size is at its limit and there are share proposals for consideration, the club needs to identify a “weaker” entry in the existing portfolio for substitution (if appropriate).
In the early years, the Mobius portfolio listed over 16 shares with only six members at the time (and a rather poor investment return). It was a combination of issues; (1) members just started to learn about investing, (2) not being disciplined enough about stop losses (S/L), (3) no upper bound on portfolio size and (4) most importantly some shares were neglected given the number of shares to follow per member. Some of these had their share price suffering a free fall without being picked up. So the portfolio maximum size was set by the club’s membership size (12).
One of the major assets and strengths of the club is and has been the rich diversity of members’ investment profiles at hand (and how to tap it during investment discussions and selections). These members have come from different professions, a really diverse mix, so this has brought much additional background knowledge and intelligence. The idea is to allow for these opinions & trends to be expressed and not necessarily to have a uniform homogeneous stream (forced by any party). Share proposals are scrutinised from different angles and perspectives. It sometimes leads to challenging meetings as the dynamics, chemistry and passion take over. The spectrum of profiles include any combination of technical analysis (charts), fundamental analysis, cautious, contrarians, adventurists, value investors or scholars of prestigious investors (think Warren Buffet and alike).
The overall club’s approach to selecting the types & constituents of its portfolio is bottom up: Share proposals are presented, discussed and voted to join the portfolio. During share selection, not much attention is paid to the impact on the portfolio from the share specific sector, market cap, risk or otherwise. Each share is selected on its merit.
Top down and bottom up: These are basically the two approaches at the end of s spectrum with a myriad of variants in between. Top down usually means identifying an overarching framework to construct the portfolio. An example would include a systematic approach to shortlisting sectors or geographical regions or other attributes (and in what proportions). Then a share and stock selection process takes place using the structured framework. The bottom-up approach is much simpler & driven by selecting stocks and shares that are deemed good value.
From time to time, we do check and review the portfolio’s sectors, geographical spread, market capitalisations or risk parameters. We also discuss the possibility of having a structured top down portfolio. However, this has not received wide support by members, and they much prefer the selection of best shares coming through submissions.
The club operates a number of checks that are reviewed annually (AGM). These tend to look at thresholds and limits of key attributes:
Any portfolio’s holding with a valuation greater than 25% of the overall portfolio NAV receives an additional level of scrutiny in the monthly meetings (a specific recurring agenda item for these portfolio entries).
No investment can be greater than the club’s NAV divided by the maximum portfolio size. This limit is revised annually at the AGM. For example if the portfolio NAV stands around £120K and the maximum portfolio size is 12 entries, then the limit on investment per holding (including any further accumulate) is £10K (£120k/12)
Portfolio size limit (maximum 12 slots).
We invest in stocks and shares, mainly on the London Stock Exchange (LSE). Recently we started to invest in other markets, notably North America (NASDAQ, NYSE and TSE). In the past, we also invested in mutual funds such as unit trusts, OEICs and ETFs, particularly for corporate bonds, commodities (e.g. oil, mining), country- specific (e.g. India) and in Gold assets (by weight in secured storage). Thus far, the club has not used any advanced financial instruments such as options, futures, warrants or other derivatives.
The club maintains a watchlist of shares. This latter is the main feeder to the portfolio. Each member of the club should have one share submitted to this watchlist. Shares enter the watchlist by submitting an investment case followed by a presentation and a discussion at a monthly meeting. Entries in the watchlist are discussed on a regular basis; and members can put forward a share in the watchlist for a vote to buy.
Each share in the portfolio is closely followed by a member (called champion of the share). Championing involves monitoring the progress of the share over time, providing updates/news prior to every meeting (and in some special situations, notify the club immediately if it requires urgent attention). Regular (monthly) updates sent prior to meetings usually include
By default, a member proposing a share would be its champion. On occasions where a member has proposed more than one share in the portfolio, one of the shares is assigned to another member with no share to champion.
The club takes a medium to long term view to stock holding. Investment proposals capture this view in their submission. Club meetings are monthly, so it follows that buy/sell decisions (if any) are monthly. The long term average time length of a stock in the Mobius portfolio is 19 months. The current portfolio holdings have an average of 34 months. The longest share held in the portfolio is Persimmon (10 years & 3 months with a 25% AER investment return). The club normally gives a minimum of three-month grace for new shares to avoid quick buy and sell (there are exceptions). The club supports one of the most enduring mottoes on Wall Street "Cut your losses short and let your winners run”. By the same token, some heated debates and momentum meetings have indeed led to “a profit is a profit” and sold shares for no other reason than that they appreciated in value.
The club tries to have a balanced risk profile (allowing and accommodating for cautious and adventurous members). This is reflected by the type assets (shares, bonds, mutual funds) and asset allocation too (portfolio mix). There is of course the all important premise that a level of experimentation is what a club is about: “trying things out, learning & testing new approaches, taking some level of risks on the way”. Sometimes, the club’s conversations take the shape of “little point in investing in large caps dividend-paying safe blue chips. Members can do that in their own individual portfolios''. Nevertheless, the club has often had a risk-adjusted balanced portfolio with large caps (safe houses) like FTSE-100 companies as well new start-ups, small-caps AIM companies. Usually, the portfolio weighs towards smaller caps.
In the first decade, the objective of the club was heavily geared towards learning and experimenting. So it follows that mistakes were going to be made and therefore investment risks were high. Indeed, it was clearly explained to any potential member that one should be prepared to lose any fund invested in the club. Proshare was strongly carrying this message “only invest what you are prepared to lose”, suggesting an indicative £50/month investment per member. The follow-on message felt like “ think of it as a monthly fee one pays to learn to invest”.
Fast forward ten to twenty years later and members’ individual funds in the club got quite sizable, sometimes in ten of thousands of pounds. So the risk position has also evolved over time to preserve or protect the funds acquired; It is no longer a position of ““only invest what you are prepared to lose”. Hence, club meetings sometimes get into conflicting positions on what constitutes a good mix (and in what proportions) of risk-adjusted assets.
To add an interesting spice to the mix, when new members join in (with small funds), they will want to experiment and learn. This can sometimes bring frictions with long-standing members when it comes to the level of risk taken. Normally a good debate and the voting system settles this (and this has been an accepted practice). There have been attempts to bring changes to the “one member one vote” to a system weighted to some degree on the members units owned, but so far it remains “one member one vote”.
The club does not operate a S/L system for its shares. Champions of a share would alert the club of any unusual movement and propose a resulting course of action. Historically Mobius has had a S/L policy for the best part of 15 years with various degrees of success. It has often proven difficult to react in a timely fashion. Therefore, conditions were devised to equip the trading team to automatically sell, or conditionally sell after consulting members (by email): Variants included a time-out option to act (if members did not respond in time). One of the most difficult discussion points was agreeing what constituted an automatic sell (what conditions). Often the worry was either that the share price would bounce back or it has fallen so low that another course of action might be better (such as buy more if the market has overreacted to a situation). Perhaps, the level of maturity and an acceptance as to the quality of shares selected meant less need for a S/L policy.
Note that some UK stockbrokers provided an automatic sale option (upon reaching certain conditions or triggers). The club had opted to never use this facility: After much reading at the time, the main concern was that the algorithm might react to a quick jitter in the share price and sell. So the club preferred to undertake manual trading. The meaning of “automatic sell” above meant that in the club’s context, the trading team upon certain conditions would sell without having to consult the club.
These are central to Mobius' success. The club has strived really hard to take this part very seriously. The club has developed various processes and formats/templates over the years. The current process includes a free-format document that is submitted at least a few days prior to a meeting for discussion & assessment.
In the early years, the club mandated share submissions be made via the “Proshare toolkit form”. This template had very much a fundamental analysis flavour (with a touch on “Charting”). The toolkit had 8 sections and a minimum of 4 pages. One would expect a minimum of 3-4 hours to undertake the research and complete one. Proshare wanted to encourage long-term investing by carefully selecting strong quality companies either undervalued and/or with growth opportunities. The toolkit however proved too heavy for quite a few members of the club. So it started to either be (really) partially complete and eventually the submissions simply dried out. For a period, the club reverted back to bringing proposals on the meeting day for a quick introduction and presentation.
For nearly a decade, Mobius has been running a three-point 5-3-1 score system for stock selection. At decision time, each member (present at the meeting) rates the proposed share by assigning 5, 3 or 1 point(s); with 5 points being “strong support”. The decision is a buy if the sum of points from all members present is greater than 60% of the maximum number of points. For example, if we have 4 members; the maximum a share can get is 20 points (4 members x 5 points); so if members vote with a total of 13 points or more (>60% of 20); then the vote is carried; else it is not.
The previous voting scheme was the widely used binary (yes, no) system with a simple majority. Over time, it was felt that it was not allowing members to better express their rating of a proposal. A three point score system allows more granularity in the decision making scale. So the idea is that after the share/company has been discussed, each member uses the three-point scheme - hence exhibiting the strength of his/her decision in purchasing or otherwise.