DIY Investor’s ‘Diary of a Private Investor’ is written by two trading partners Humbug (because he owns a sweet shop and possibly because of his manner) and Fagin (because he like to pick the market’s pocket).

 

As part of their product development and market testing exercise, for the tax year 2017/18 they decided to challenge each other to see who could produce the best return on a real life one hundred thousand pound portfolio, both using different variants of the momentum trading system they’ve developed; trading vs investing.

For three years Humbug traded predominantly small cap AIM stocks with the ambition of achieving a 20% annual return on his £50,000 portfolio. However, post the vote to exit the EU he found it increasingly difficult to accurately value small stocks and turned to momentum trading; not for the feint hearted, the competition is for real.

‘Unto yourself be true’, is vital for the peace of mind of a trader or investor and Humbug and Fagin are very different animals.

For this challenge Fagin is in Hare mode looking for regular quick profits, typically using around a quarter of his capital on each trade and aiming to make a good return from small percentage movements in prices using a combination of  the weight of money and a high rate of stock turn. A typical timeline for holding any given stock will be anything from a few days to a few weeks. This quick fire action suits his personality exactly and is right for him.

Humbug in contrast is in tortoise mode, working towards balancing risk by building a little mini hedge fund with between thirty and forty different holdings. Like Fagin he’s using their system to seek out momentum, but in his case is using a longer time frame both for selecting and holding, his time line being anything from a few weeks to the whole year. Again this slower pace sits well with his calm very dry demeanour.

Six weeks into the financial year and how are they both doing?

Initially Fagin raced ahead (as you would expect from a Hare) but then he suffered a serious loss from  Petrofac Plc (PFC) or as he put it quoting from Charles Dickens ‘accidents will occur in the best regulated families’.

That ‘accident’ cost him double his risk and meant that he was -£1800 (or 1.8% percent down) at the 15th May 2017.

Given the difference in their two strategies, as you would expect, Humbug hasn’t as yet experienced the same thrills and spills, he has however been down from the very start and as of the same date was -£178 (or .178% percent down).

It’s worth saying that Fagin believes that because of his due diligence events like his problems with PFC will be rare and also that they both feel that current market conditions are not at the moment conducive to their style of momentum trading/investing, this being reflected in their results to date.

You can follow their progress for the rest of the year here in future editions of DIY Investor Magazine, or by reading the Diary of a Private Investor ; it will be very interesting to see who wins – will it be the tortoise or the hare?

 

Here is a recent post:

 

Running total -£408.88 Humbug’s been sailing and decides to dip his toe back in the water

 

I’ve just come back from another week of sailing, reading and thinking hard. Currently my boat is up in Norfolk, now I don’t know how well you know that part of the world, but at this stage of the summer even though there are tourists there, it’s still possible to totally escape into a calm little tranquil world of your own………………………………….which is brilliant for plotting, planning and of course thinking.

One of the books I took to the boat was ‘How to Make a Million Slowly’ by John Lee, this is the guy who is believed to be the first person to make a million pounds in an ISA, a feat he achieved back in 2003.

It’s always said that the first million is the hard one, since 2003, John (who I’ve never met but would like to) has continued to do brilliantly and he’s now reportedly close to being the first person to make five million pounds in an ISA. That really is a clever trick, I’m in awe.

His book is very simple and quite short and like most people who excel at something, he makes making a fortune sound so easy and of course it’s anything but, however that doesn’t invalidate what he says.

One of the key things I brought away from his thinking is that value will usually come out in the end; basically if it’s a trading company, you want to find a quality one with good fundamentals that isn’t trading on a high multiple of its earnings and if it’s a property or investment company, again choose a quality one, but where the current share price is at a decent discount to the tangible net assets.  In both cases the investor isn’t looking for something just because it’s bombed out and dirt cheap but something that’s well worth owning which happens to be cheap at that time. A world of difference.tortoise

This idea sits well with what Fagin and I have developed, where we’re looking to buy into something that is showing momentum but is below a moving average that in a sense shows where the current consensus of short term fair value lies.

As I’ve been saying for a few weeks now, I’m very wary of a market that’s within spitting distance of its all time high at a time when everywhere you look in the country it’s either already gone wrong or looks like it’s about to. I wasn’t planning to take any new positions this week because of all these factors, but changed my mind after taking John Lee’s wisdom about value on board.

I’ve opened two new positions, one is a property asset play the other a geared angle on the price of spot gold.

The property purchase was Daejan Holdings Ltd (DJAN) they are probably the largest residential landlords in London as well as having exposure to both UK and US commercial property.

The company is effectively 80% owned and controlled by the Freshwater family and is an old fashioned ‘family’ firm with all the good and bad that that entails. I really like this kind of deal where a huge part of the family wealth is in the firm and as a result you just know that the directors aren’t going to do something stupid and chuck it all away on an ego trip.

The principle drawback is that there’s a very thin market for the shares with little liquidity, so prices can take a run on very little buying., indeed I got slightly caught out by this when I bought in at 6691p., the price has since eased back. However the underlying value is brilliant, the tangible net asset value per share is 27% above the cash price and provides a huge margin of safety for investors. I’ll drop 73p on the ground and bend down and pick up a pound any day all day long, good game.

The gold situation is Highland Gold Mining (HGM) which looks good value right now; as a side issue Fagin has made a lot of money on this one in the last couple of years, with a bit of luck it’ll now be my turn.

Both Spot Gold and HGM have pivoted round making the buying signal we look for and they both tend to move in the same direction at the same time with HGM being a geared play on the underlying. With all the political and economic problems we face there is a good case to be made for holding Gold and whilst there are obvious dangers to buying a mining company that digs gold out of the ground in Russia, my take is that the rewards outweigh the risks. It’s the old gag you’ve got to risk it for the biscuit, albeit I haven’t risked too much, two thousand pounds worth at 146p.

Looking back, if I’d bought in three years ago at 70p I’d have doubled my money and banked 19.4p in dividends along the way. Will the next three years be as good? Who knows, but the current dividend is 7% so there’s the starter for 10 with no conferring.

 

Lord Lee of Trafford, UK’s first “ISA Millionaire” and author of “How to Make a Million – Slowly”

 

Will it be the Hare or the Tortoise?





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