Top & bottom 10

With over 147 distinct investments, Persimmon leads with a compound return of 891% . At the bottom, BetOnSport with a total loss.

Introduction

The top/bottom 10 can often reveal insights into a group’s best and worst collective investment decisions. Some of the key  headlines include:

• The top 10 average holding period is significantly longer than the Mobius all time average equivalent (44 months versus 16 months)

• Almost all the top 10 investments are recent undertakings

• Large/mid caps of the top 10 tend have a longer holding period than their smaller caps counterparts or fledgling companies

• The current portfolio has 4 of its holdings in the top 10

• The top  performer is Persimmon, held for over 10 years (accumulated 4 times) and a compound return of 891% (AER ~ 25%).

• The worst offender is BetOnSport with total loss (100%). 

Main sections:

• Top 10 Holdings
• Bottom 10 Holdings
• Current portfolio comparison
• Return rates

Top 10 holdings

Below is the table of  the10 best completed investments in the club (excluding current holdings in the portfolio, as of March 2021, these are discussed further down). The table columns also show the holding period and % compound return rate over the entire holding period.

 Top 10 completed investments (by % compound)

One of the first points to note is the dominance of Persimmon. The second point is the longer holding periods. The top 10 includes either large caps or companies that are rather familiar (known) to “private investors”; the likes of Persimmon, Ashtead and Hill & Smith have strong followers in “private investors” community “safe play”. Of course, many other forums are equally full of high risk equity followers or penny shares too. In the top 10 above, some of the other entries  are smaller entities with high growth, higher risk  potentials such as Synergy healthcare, Blue Prism  and Retail Decisions. We sold at first sign of weakness for all three. It seems like the club was less prepared to accept some jitter in their share price movement and exited with a much tighter margin for error. That explains the  shorter holding periods.

The average holding period for these top 10 is 44 months (3yrs, 8 mths), compared to the club’s long term average holding period of 16 months. These top holdings show the club’s principle of long term investments, prepared to further increase its positions in shares it believes have further to go. For example, Mobius increased its position 4 times in Persimmon and 3 times in Ashtead over their respective holding periods.

The chart above shows that most of the top 10 investments took place recently (using  the club’s full lifespan as a timeframe). Apart from the two small companies (Synergy healthcare & Retail Decisions), all the other top 10 investments completed very recently. This further shows how the club’s strategy has matured over time.

 In terms of measurements, we choose the compound growth rate (%Compound) as it is the most representative performance measure capturing the cash flow and  time series of an investment (given a few holdings are made up of a number of accumulate or partial-sale transactions, multiple dividends or special income distributions). Take for example Persimmon during its period in the portfolio, its cash flow series listed  21 entries; 1 buy,  1 sell, 4 accumulates, 1 partial-sale and 14 dividends and special distributions payments. The compound rate also bears the important notion of compound return over time.  For completeness,  we also show  a table further down  with AERs and (simple) cumulative returns. 

To qualify for selection the stocks needed to have a minimum holding period of 3 months: We had a long standing rule of giving 3 months grace to any new investment (exceptions allowed in special circumstances). 

Bottom 10 holdings

 BetonSPorts suffered a total collapse after a promising start (we should have known better with an online gambling company setup in Bermuda targeting the US market). A few members in the club were uncomfortable with the sector itself but the numbers at the time looked promising (and well, the voting system did the rest). For the subsequent two (Stanley Gibbons and Cupid) , both stocks were performing according to the investment case for a while but plummeted with a series of profit warnings. 

The average holding period for these bottom 10 is  20 months (1yr, 8 mths); heavily skewed by Stanley Gibbons. These averages are less than half of those in the top 10. By and large the club takes a quick exit route when the sign starts to materialise in that direction; but sometimes it falls victim to expecting or hoping for an unexpected (perhaps miraculous) recovery. In other cases, the share price just falls of the cliff (e.g. BetonSports, Stanley Gibbons among others).

Current portfolio comparison

An interesting comparison would be to look where the current portfolio (holdings) would feature in the league of best/worst performing investments. At the time of writing (March 2021), it looks rather positive, the top 4 current portfolio holdings  would make it to the top 10 best overall performers.  

To put this in context, the portfolio (for March 2021) has a 34 month average holding period, compared to the 44 month period for the top 10 and 16 months for the club’s long term average holding period.

The chart above shows the top 10 of all investments to date. It combines the current portfolio with all completed transactions. Here we can see the 4 of the current portfolio in the top 10 (Diploma, Ideagen, Tracsis and Judges Scientific).

Top 10 of all investments to date (holding period timeframes)

Return rates

In comparing performance, compound growth rate best represents like for like comparison whenever there is more than one transaction (say additional top-ups or dividends) and we want to capture the essence of time (period). Cumulative returns are simplistic and often used as a blunt indicative instrument: “(total return - total cost)/ total cost”. They do not capture the period over which the investment is made, nor do they capture if other transactions (cash flows) have been during the period. Nevertheless, these are sometimes quoted. The AER quoted below is the annualised version of compound rate (also known as CAGR compounded annualised growth rate).

 Current portfolio with the three key dividend ratios 

The table above expands the previous table (current portfolio, shares with holding period > 1 year) with two additional columns (%cumulative and AER). Note that for Marlowe and TI Fluid Systems, the cumulative and compound rates are very similar because  for these two stocks, there are no transactions between first purchase and a valuation date (no dividends nor accumulate transaction). However note the difference for Diploma (294% versus 708%);  Diploma featured 4 accumulates and 18 dividend payments over its holding period. These show that the cash flow and its time series are important when comparing like for like investments.

All three metrics (%cumulative, %compound and AERs) have their purpose, merits, context and limits. One of the issues with %compound is that two investments with the same compound rate but two significantly different holding periods can seem to perform alike, when in reality these are better compared by adding the AER component.

Investors will have their own preference on which metric to use. What really matters is that  they are clear what it means and it is fit for purpose for what they are measuring or comparing. Some metrics are good enough for a quick approximation (and hence simple to use), whilst others are more precise but are probably more complex to obtain or reason with.