Diary of a small cap growth investor

For years now I’ve cultivated a habit of regularly appraising my own performance. In part, that’s because I’m an investor by trade; but I genuinely believe that it is a process we can all benefit from. Unfortunately, with the market in sell off mode, I fear my results won’t look as good as last time I did this. Here is my performance in the last three months:

To my surprise, I’m actually outperforming the market. My opinion of myself as an investor is that I underperform in the down periods, and outperform in the up periods, in keeping with my decision to focus on highly volatile smaller companies. So I’m happily surprised, and interested to zoom in to see what has driven my short-term performance.

For the last three months, you can see my worst four performing companies by absolute contribution (on the left) and by percentage fall (on the right):

MNF Group (ASX:MNF) is down about 20% in that time, and even though that’s not as bad as Windlab (ASX:WND), I have a much bigger investment, so it was had the biggest impact. My other losers (by percentage) were companies that I sold recently; since they no longer seem to be as attractive as I thought. Gentrack (ASX:GTK), on the other hand retains my confidence, and I actually bought a few more shares a a price of $5. I’ll hold off buying any more to see if it gets lower, since it disappointed the market with its recent results.

At this point I could look to my winners, but I’d rather focus on just one. Laserbond (ASX:LBL) was my best performer. It’s a very small company so its share price more reflects company-specific events, rather than the overall market. It was up about 60%. My turnaround play in Energy Action (ASX:EAX) was also a positive contributor (although I did sell some of those shares, at about $1.) The common theme is that my portfolio is very different from the big companies that dominate the overall market!

In my view, when your portfolio is down, the most important thing is to zoom out. The last two years looks very different from the last three months, as you can see below.

As you can see, my portfolio varies, both on an absolute level and relative to the market. From December 2016 to October 2017, I was actually underperforming the market. It was a tough time, and it didn’t feel good, but I kept at it and my strategy paid off.

For those who are interested, you can see my 5 year portfolio returns here. I think it makes sense to look at longer periods. In some ways, the longer, the better! However, I’m glad I looked at my 2 year returns because whereas my 5 year returns are dominated by my largest holding, Pro Medicus, my 2 year returns are dominated by a company I sold, Livetiles (ASX:LVT). You can see my best four performing companies by absolute contribution (on the left) and by percentage fall (on the right):

However, even with two years you can seen how the life of an investor has its ups and downs. When fear reigns -- or mistakes come home to roost -- our wealth shrinks and the process feels painful. But as long as we continue to pursue our strategy (mine is to buy undervalued small cap stocks), then the compounding machine that is capitalism should work in our favour. As Benjamin Graham famously said, "In the short run the market is a voting machine but in the long run it is a weighing machine."

One key takeaway from the book Superforecasting: The Art And Science Of Prediction is that our forecasting abilities improve with practice. And equally, it’s hard to improve a process if you cannot measure it. So for this reason I think you should measure yourself, preferably over a multi-year horizon. By keeping yourself honest (to yourself) you create a base to improve on, and position yourself to make the right decisions for you and your family. And that, after all, is what investing is about.

The Author of this piece, Claude Walker, owns shares in Pro Medicus, Energy Action, Laserbond, Gentrack, MNF Group and Windlab. He will not trade these stocks within two days of publication of this article. He blogs at Ethical Equities

Important Disclaimer. We do not provide tax or investment advice. The buying of shares can be complex and varies per individual. You should seek tax and investment advice specific to your situation before acting on any of the information in this article.

FURTHER READING

• Do demergers and spin-offs create value for shareholders?
• Benchmarking your portfolio against ETFs
• What to look for when buying ETFs