Ann: Trading Update, page-52

@madamswer

(Would that you had expressed your misgivings about SDI before the downgrade, instead of afterwards, it might have saved some people from some losses.)

1. As I have said earlier to @MarsC, the main point of my initial post was not about SDI and its downgrade, instead it was to remind others to conduct their own analysis when making investment decision. I did this because I felt that there are some here who end up becoming SDI shareholder because they follow the steps of others without really doing their own homework.

2. The second main point was my preference for running a concentrated portfolio. This was in response to some posters who said that they only have small positions in SDI.

3. My "misgivings" about SDI, if you want to put it that way, was just about the fact that now, after this downgrade, it's almost impossible to be come up with a reliable estimate for the second half. If the trend in the first half continues in the second half, then in my opinion, SDI still has further room to fall.

4. The other "misgivings" was about the credibility of management. My observation of other companies told me that the first downgrade is seldom to be the last one. That's all.

5. And the last "misgivings" was about the volatility of the earnings. Other companies who also rely on a lot of R&D, such as ARB & BRG didn't experience such a magnitude of volatility during tough periods. So maybe, the quality of SDI's moat is not that good.

6. There are plenty of stocks that I look into that do not meet my criteria and I never post about them. I only post when I'm in the mood... Also, it's also not my responsibility to "save" people from losses especially when sometimes I can't even save myself from making losses!




But, possibly unlike you, I look at the capital appreciation in the value of those companies in recent years and I think that we have just been lucky in relation to a very large element of the capital profits we've enjoyed... lucky because we have been beneficiaries of a very significant, decade-long phenomenon of unprecedented global monetary policy which has caused capital to become very, very cheap, and which has translated into company valuation multiples rising to several standard deviations above long-run averages.

I will be the first one to agree that luck is a very important element in any type of success.

However, this same macro environment was faced by other companies in the same industry and yet they didn't seem to enjoy the same level of benefit, in fact, some even managed to struggle during this "boom" period.

Think of these companies:
- Tradelink vs REH
- CMI (past owner of TJM) vs ARB
- GUD (past owner of Sunbeam) vs BRG
- etc.

All I know is there are some companies out there who are more likely to make their own luck than their competitors, both in good time and bad time.

CAGR Growth in EPS (2011 to 2017):
ARB = 3%pa
BRG: 7%pa
ONT: 4%pa
REH: 10%pa (but that was undoubtedly due to the ~20%pa growth boosted by the housing boom in 2016 and 2017)
NCK: 21%pa (but that was during an aggressive store roll-out program and we know what the sort of operating leverage results from store maturation plays)

At first glance, the figures don't look that flash, but we need to consider the following:
ARB: 3%pa in a period which includes the end of the mining boom
BRG: 7%pa in a period which includes the loss of a major contract (Keurig)
ONT: 4%pa in a period which includes the end of CDDS
REH: 10%pa in a period which includes a major expansion of the distribution network, which in other companies, are usually associated with cost overruns, project delay and business disruption.
NCK: 21%pa in a period when there are numerous discretionary retailers who hit the wall.



I could not countenance too many a good night's rest if I had 30% of my wealth committed to just one company, irrespective of how much conviction I had in its financial prospects.

I agree that the concentrated portfolio approach is not for everyone. If you look at successful business owners, most of their wealth is usually tied to their business. And I imagine that these business owners who don't have other medical condition, are still able to sleep quite well at night.

Most successful business owners usually have more than 90% of their wealth tied to their business. In fact, this is the very reason why they become rich. If they keep adjusting their portfolio just so that the business doesn't represent too big of a proportion, then their stake will be diluted regularly and as a result they won't be as wealthy.

An example of this is the Browns of ARB. Had they just kept their original shares and not sell a little bit during the special dividend, they would have been much wealthier now.


When building a portfolio, I also consider the possibility of myself suddenly being summoned by the Big Guy upstairs. I need to leave behind a portfolio to my estate that doesn't require a lot of adjusting, that can just be left alone as it is and still has a good chance of performing relatively quite well over the long term and provide for them for a long time to come.

At the moment, nobody in my family has the sufficient knowledge to be able to continue my work.

This is why I believe a concentrated portfolio of excellent companies suits my needs. I can just tell them to leave it as it is, no need to decide which of the 20 companies to keep and which ones to sell.

I hope you can now understand how and why my approach to portfolio construction is different from yours.




But, as long as there exist distortions induced by tax implications, upwards creep in the number of stocks in a portfolio is a natural consequence.

I have experienced it first-hand over the course of my investing career and I'm not sure how it is to be avoided.

I am fully aware of this phenomenon. In my personal experience, I try to be prioritise topping up of existing positions over opening a new position. But, even this is not enough to fully avoid it.

Assuming that our existing holdings are doing well, I find that the biggest obstacle to be able to do this is the difficulty of purchasing more parcels of the same shares at higher prices than the original purchase.

It took me some time to be able to completely ignore the lower prices that I paid earlier when considering to top up.

I am happy to report that now I'm quite numb and is able to purchase the same company at much higher prices than what I paid years ago.

What I will not do now is to compromise quality and go down the ladder and dabble in the less desirable.