My Investment Journey

[craft]

Hi Ves,

When I bought it at $4.30, it had the following financial characteristics:
PE: 7.5
P/B: 2.5
P/Sales: 0.68
EV/EBIT: 4.8

Certainly not too expensive. But, with an industry that was almost certainly going to go into a period of decline, I do not think this had enough of a margin of safety. Put another way, I was bracing myself to have half the profit for the next few years, which would place it on a PE of 15. And that's too much.

My other purchases in the sector, such as NWH and BYL I am much more comfortable with. I think their pricing allows for a lot more bad news.

I have observed a few things catch people out with the mining services companies.

Firstly there was Roger Montgomery followers with his idiotic static models, the passing of peak earnings had them way overvaluing the stocks and earnings reports are sufficiently slow to see the price decimated before they had information to update their models. Add in a bit of psychology difficulties around taking big losses and lots will probably hold until they just can’t bare it anymore and will eventually lock in a huge losses.

Next, Because the good times had rolled on for 10 years the historical extrapolators got themselves in trouble – they looked back but just didn’t see the depth of a real cycle trough. Not knowing your process real well and looking at the P/B multiple you payed, I suspect this might include you.

I like to try and look forward (even though knowing the future is impossible) and what I say to myself is that operating margins are slim and that contract estimating is difficult. The contract values are large in relation to the equity. Large, difficult and slim margins are not a good combination in the best of times but add in a down cycle where the capacity is larger than the demand in the industry and things get real problematic. If you can’t make your cost of capital you have to shed capacity – Businesses don’t by choice want to shed capacity, so straight away you can see contracts getting bid down to cost of capital margins. So new skinnier margins and you still have the inherent difficulties of large and complicated projects to stuff things up. The lowest bidding companies will sustain their workforces but at increased risk and at best make cost of capital. Other companies won’t find enough work and will have to reduce capacity – if they can’t shed their fixed costs (debt servicing etc ) they are in trouble, even if they can redundancy payments and carrying underutilised equipment etc is going to make the numbers look pretty ordinary.

So I see a scenario where making cost of capital whilst you try and survive the creative destruction of an over capacity part of the cycle as the best outcome – If you can only make cost of capital, then you are only worth the replacement cost of your assets. That’s the upper limit and many will be worth less.

What competitive advantage does LYL have that means it can make more then it’s cost of capital through an entire cycle – If it doesn’t have a true competitive advantage it will still be able to make higher rates during the under capacity part of the cycle but it will make less during the overcapacity part. It will average out above cost of capital only if it has a competitive advantage over its competition.

If you work through how operational leverage works on a business – the least robust companies actually get the biggest boost from a beneficial industry tail breeze and then go bust when faced with a head wind. So just looking at the best performers in the upswing is dangerous (FGE)

So far I’ve had a crack at UGL (not entirely engineering services thesis) and bailed – so still on the sidelines for me with this sector. The Infrastructure focus of the government might aid some companies.

Sorry just rambling – I’ll stop now.

 

[Huskar]

Sorry just rambling – I’ll stop now.

Rambling is far better than rant..

 

[KnowThePast]

I have observed a few things catch people out with the mining services companies.

Firstly there was Roger Montgomery followers with his idiotic static models, the passing of peak earnings had them way overvaluing the stocks and earnings reports are sufficiently slow to see the price decimated before they had information to update their models. Add in a bit of psychology difficulties around taking big losses and lots will probably hold until they just can’t bare it anymore and will eventually lock in a huge losses.

Next, Because the good times had rolled on for 10 years the historical extrapolators got themselves in trouble – they looked back but just didn’t see the depth of a real cycle trough. Not knowing your process real well and looking at the P/B multiple you payed, I suspect this might include you.

I like to try and look forward (even though knowing the future is impossible) and what I say to myself is that operating margins are slim and that contract estimating is difficult. The contract values are large in relation to the equity. Large, difficult and slim margins are not a good combination in the best of times but add in a down cycle where the capacity is larger than the demand in the industry and things get real problematic. If you can’t make your cost of capital you have to shed capacity – Businesses don’t by choice want to shed capacity, so straight away you can see contracts getting bid down to cost of capital margins. So new skinnier margins and you still have the inherent difficulties of large and complicated projects to stuff things up. The lowest bidding companies will sustain their workforces but at increased risk and at best make cost of capital. Other companies won’t find enough work and will have to reduce capacity – if they can’t shed their fixed costs (debt servicing etc ) they are in trouble, even if they can redundancy payments and carrying underutilised equipment etc is going to make the numbers look pretty ordinary.

So I see a scenario where making cost of capital whilst you try and survive the creative destruction of an over capacity part of the cycle as the best outcome – If you can only make cost of capital, then you are only worth the replacement cost of your assets. That’s the upper limit and many will be worth less.

What competitive advantage does LYL have that means it can make more then it’s cost of capital through an entire cycle – If it doesn’t have a true competitive advantage it will still be able to make higher rates during the under capacity part of the cycle but it will make less during the overcapacity part. It will average out above cost of capital only if it has a competitive advantage over its competition.

If you work through how operational leverage works on a business – the least robust companies actually get the biggest boost from a beneficial industry tail breeze and then go bust when faced with a head wind. So just looking at the best performers in the upswing is dangerous (FGE)

So far I’ve had a crack at UGL (not entirely engineering services thesis) and bailed – so still on the sidelines for me with this sector. The Infrastructure focus of the government might aid some companies.

Sorry just rambling – I’ll stop now.

Hi craft,

Thank you very much for this, your rambling is very, very useful.

As I wrote in the post yesterday, my valuation of LYL 10 months ago was incorect, pretty much for the reasons you've summarised so well in your post.

As for competitive advantage of LYL, I think it has some, mainly its people. But it certainly not enough to offset the industry conditions.

So I see a scenario where making cost of capital whilst you try and survive the creative destruction of an over capacity part of the cycle as the best outcome – If you can only make cost of capital, then you are only worth the replacement cost of your assets. That’s the upper limit and many will be worth less.

That's essentially where my thinking got me to, when reflecting back on LYL purchase. Any MS companies in my portfolio would need to trade at a significant discount to replacement cost of assets. I should have listended more to you last year.

Next, Because the good times had rolled on for 10 years the historical extrapolators got themselves in trouble – they looked back but just didn’t see the depth of a real cycle trough. Not knowing your process real well and looking at the P/B multiple you payed, I suspect this might include you.

Spot on. Guilty as charged. I looked too much at the numbers produced, rather than the numbers that can realistically be expected to be produced.

Here's the current numbers for what I am now holding.


Plenty of food for thought, but my entry prices for these have been much more reasonable in comparison to LYL. LYL is still not super cheap, but I do also consider it more likely to make an above average return (some competitive advantage).

There's always something to worry about. And I am worried.


On a somewhat related topic, something I find to be more and more true is that there's hardly ever a rush to buy something that's declining. Occasionally you'll miss out (such as MMS), but more often than not, decline will take awhile, and recovery will take awhile. There's no rush. The next time I buy MS stock in 2013, I will wait a little longer. Although, 1 year on, with only a little over half of capital commited, I am not exactly pushing people out of the way to get in either.

My last 8 puchases have been in other sectors, so I am no longer over-exposed to it. But whether to buy more, and when, is something I often ask myself, with my filters mainly consisting of MS companies.


It's very nice to see you back, craft.

 

[odds-on]

I had just jumped in, and was ready to double (but only a few k) so a nice 10% loss: I can live with that even if yesterday was my bad luck day....
but indeed the "strategy alternatives" ready rang alarm bells and i sold on the spot

I read the announcement and sold straight away. A small loss for the portfolio.

 

[KnowThePast]

If you can only make cost of capital, then you are only worth the replacement cost of your assets. That’s the upper limit and many will be worth less.

How much of it do you think applies to people businesses such as LYL?

They hold almost no PPP, or intangibles. The bulk of their assets is working capital. They are similar, in this way to DTL. DTL's P/B is 2.8, but it's hard to argue that they are expensive...

Certainly replacement cost of capital is not the same as net assets, but for businesses such as these, it would normally be substantially higher, not lower. The marketing, the contacts, hiring & training costs, etc. do not appear on the balance sheet, but would be very real costs if one was to "replace" those assets.

I have to admit that I did not even try to calculate the replacement value for LYL, I wouldn't know where to start with a business like that. But you've highlighted the P/B ratio in my post, so I thought I'd use that as an excuse to kick off this topic...

 

[craft]

How much of it do you think applies to people businesses such as LYL?

They hold almost no PPP, or intangibles. The bulk of their assets is working capital. They are similar, in this way to DTL. DTL's P/B is 2.8, but it's hard to argue that they are expensive...

Certainly replacement cost of capital is not the same as net assets, but for businesses such as these, it would normally be substantially higher, not lower. The marketing, the contacts, hiring & training costs, etc. do not appear on the balance sheet, but would be very real costs if one was to "replace" those assets.

I have to admit that I did not even try to calculate the replacement value for LYL, I wouldn't know where to start with a business like that. But you've highlighted the P/B ratio in my post, so I thought I'd use that as an excuse to kick off this topic...

Hi KTP

Your guess is as good as mine – actually yours would be better than mine because I don’t know LYL very well.

As you say replacement value is not net assets or net tangible assets or anything actually that is discernible directly from the balance sheet. You have to estimate it, and it is the value at which a competent competitor would rather reproduce the business assets and position rather than buy the business.

If the top half dozen principle employee’s struck out on their own it probably wouldn’t cost them much more then working capital to recreate LYL. Without those people it could be significantly more costly, so there is no real easy or accurate answer to replacement cost.

Despite the difficulty in estimating replacement cost – I find the concept has lots of merit for focusing valuation thinking. The world is not capital constrained, any margin that is not protected by a competitive advantage will be attacked until any excess return has been competed away. In cyclical industries the competition arriving in the bad times is guaranteed because too much capacity is added during the good times.


Cheers

 

[KnowThePast]

A monthly update.

Technically, my 1 year anniversary will come up in a few days, but I'll do a yearly update next months. This will make it synch with financial year and will make things easier going forward. Since I had only minimal activity in the first months, the impact on results will be minimal.

 

[KnowThePast]

Bought DTL, 1841 @ $0.69.

It's been on my radar for a long time. It's a tiny bit out of my preferred value range, but I have absolutely no issues with paying a slightly higher price for a higher quality business.

The DTL thread on this forum is very good, so I won't be able to add much to what's been said there. In summary, I like that they provide a mundane, unwanted, but necessary service and they do it at a lower cost than most.

This industry is more prone to cycles than most, but with IT being an essential evil, it cannot stay down forever. So, I am comfortable in buying a business like this in bad times and waiting until things get better.

 

[odds-on]

I read the announcement and sold straight away. A small loss for the portfolio.

And guess what....There is a market update from NBL today, advising that the company has received interest in a potential acquisition of a controlling stake in, or all of the share capital. NBL is now trading >50c.

 

[Ves]

And guess what....There is a market update from NBL today, advising that the company has received interest in a potential acquisition of a controlling stake in, or all of the share capital. NBL is now trading >50c.

In my opinion, selling for the right reasons (ie. the investment thesis has been broken) is much better than holding in hope that the price will turn around. You may occasionally miss an out-of-the-box event such as takeover speculation / bids (in this case), but unless that is your absolute focus, it is just something that you cannot control.

Put it this way, you will incur less losses in the long-run by selling companies that no longer meet your investment thesis, than you will make profits from continuing to hold them and a takeover bid appearing.

 

[KnowThePast]

And guess what....There is a market update from NBL today, advising that the company has received interest in a potential acquisition of a controlling stake in, or all of the share capital. NBL is now trading >50c.

Hi oddson,

This, very conveniently, touches on the topic that we've discussed so recently.

A strategy of buying cheapest stocks, by whatever measure, is likely to be made up of portfolio where any stock in isolation looks ugly. I've also made a point that a profit is often made after many years, and not gradually, but within a matter of days. NBL is a perfect example of a "success" story for this strategy, if you can call it that. Premature, yes, especially for those who bought it cheap a year or two ago, but let's not let facts interfere with this discussion.

Focussing on the process, there's a couple of takes on this.

You bought an ugly share, but sold it when it became even less good looking, and cheaper. If the strategy was to buy a basket of cheap, ugly stocks, this doesn't quite sound right to me.

Alternatively, you could well conclude that while the outcome was good in hindsight, the risk/reward ratio was not there last week. The small chance of an event like takeover and its likely effect on price, was not enough to counter the other likely possibilities such as liquidation. In this case, it would be about assessing the value and risk of individual stocks, rather than the whole basket.

Yet another take on it could be what I call a manual override. One may follow a strategy of buying a basket of cheap stocks, but a manual override is needed at times for various reasons. Whether the last announcement warranted such as intervention is the question. These manual overrides, and their potential abuse is a very significant factor in long term performance of such strategies, IMHO.

Now, which one was it, in your opinion?

 

[odds-on]

Now, which one was it, in your opinion?

My initial purchase was based on the discount to NTA, low debt and the Kindl family owning a major stake. I placed a small bet as I thought there was limited downside and I had an expectation that there would be a turnaround in sales/change in strategy that would see a re-pricing of the business in the next year or so, the decision took about 15 minutes after comparing to other candidates/current holdings. The market update on the 28/05/2014 forced me to re-assess the risk/reward ratio and I decide to drop NBL for a small loss as my interpretation of the market update was that the turnaround in sales did not seem likely in the foreseeable future and I was spooked by the statement about the strategic alternatives to the capital structure – the ugly share got uglier!

I am both grinning and banging my head about the announcement on the 04/06/2014 because I would have made an approx. 20-30% profit (I would have sold and moved on) if I had just waited a week or so, such is life sometimes!

Your thread is really making me focus on my investment process, thank you. Also, I think we hunt in the same part of the forest, please do not shoot me by accident.

Cheers

 

[KnowThePast]

My initial purchase was based on the discount to NTA, low debt and the Kindl family owning a major stake. I placed a small bet as I thought there was limited downside and I had an expectation that there would be a turnaround in sales/change in strategy that would see a re-pricing of the business in the next year or so, the decision took about 15 minutes after comparing to other candidates/current holdings. The market update on the 28/05/2014 forced me to re-assess the risk/reward ratio and I decide to drop NBL for a small loss as my interpretation of the market update was that the turnaround in sales did not seem likely in the foreseeable future and I was spooked by the statement about the strategic alternatives to the capital structure – the ugly share got uglier!

I am both grinning and banging my head about the announcement on the 04/06/2014 because I would have made an approx. 20-30% profit (I would have sold and moved on) if I had just waited a week or so, such is life sometimes!

Your thread is really making me focus on my investment process, thank you. Also, I think we hunt in the same part of the forest, please do not shoot me by accident.

Cheers

I've noticed a while ago that our strategies seem to be the most similar out of the posters on ASF. Thanks for your contributions to my thread!

 

[KnowThePast]

My first yearly update.

Over the last year, my return has been a loss of 4.5%, compared to a gain of 16.5% for All Ordinaries Accumulation Index. A very significant underperformance.

I have talked a lot before about concentrating on investment process rather than investment outcome. Given the poor performance to date, I feel I must nevertheless analyse the reasons, where possible, of the outcome.

In order of significance:
1. Investing my money slowly over a 2 year period, rather than whenever the opportunity came up. This safety mechanism had an incredibly high cost in the last year. Had I not done this, using the same investment process my return would have been over 40%.
2. From Feb onwards, most value strategies have performed poorly. With half of my funds invested during that period, and all of them into “value” stocks, I did as well as those strategies allowed during that time.
3. I have significant exposure to mining services stocks, which have been in consistent decline since I invested in them.

The question to answer is whether the investment process is sound, and whether I should continue on its course, ignoring the results Things to consider about semi-automated strategies that I am pursuing:
- Value strategies, on average, take 3+ years to outperform, often underperforming in the first 2 years. O’Shaughnessy’s funds are a classic example of this.
- These strategies do not perform consistently, 1 out 3 years, on average, tend to underperform.
- Outperformance tends to occur due to rare, but significant re-ratings of 50%-60% of stocks. None of my stocks have so far had any changes which would warrant a significant price movement up or down.
- My backtesting shows me that such period of underperformance are common.

Given all of the above, I still think I should continue with my investment process, despite the current results.

At the same time, I see more and more value in picking quality companies at low prices, although low prices for these would be way above my current criteria. I am becoming more interested in consistency and predictability of performance, rather than highest positive expectancy.

And so, some changes will be made to my portfolio management:
- I will normally hold a large amount of cash, unless there are outstanding opportunities (~25%).
- First preference will be stock meeting my quality criteria. There’s awfully few of these, so I don’t expect many additions to it. Current stock meeting (mostly) that criteria: CAB, SDI, LYL, CKF, CDA, DTL, ICS.
- Surplus cash will be invested in the cheap stocks, the kind that make up the major part of my portfolio now.

I don’t plan to make any changes to accommodate these, I am quite happy with the makeup of my current portfolio. But with a slight change of focus, I expect my portfolio to evolve naturally towards this over the next few years.

As part of this review, I was going to go over each of my holdings. But, to date there’s been very little news to discuss on any of them. I may do this review after all the annual reports come out.

Now, what have my mistakes been last year? Here’s some of them, in order of stupidity:
1. Buying, then selling PMP. I’ve bought this as I was still deliberating whether to switch to an automated value strategy. After buying it, I back out of it. I then reconsidered my investment approach that would allow it back in, but it was too late. I should have acted decisively, and I would have been $500 better off.
2. KKT has been on top of my value list from the beginning, but I didn’t buy it until much, much later. I would have tripled my money had I let my automatic strategy be automatic. Manual overrides for things such as over-exposure to on industry are fine, but there was no reason why I should have avoided KKT. This single mistake alone would have just about pushed my performance in line with the index. Yet another example of following the investment process and being decisive.
3. Paying too much for LYL and SDI. These were not bought as part of my automated strategy, so I’ve paid a premium that I thought these deserved. Looking back at it, I paid too much of a premium. LYL halved, and while SDI has rewarded me with some good results in the last few days, I certainly didn’t expect a result this good in my valuation. It is certainly worth that price now, but that was an unexpected development.
4. MMS – one of the rare cases where there was a single factor, election, with known probability, that controlled the outcome, with the price clearly not being in sync with it. And for reasons I still cannot explain, I did not act on it.
5. RFG – should have bought it when it dropped below $4. The redeeming factor is that I had a lot of it already in my super, where I bought it for $3.30.

There’s certainly more, but I’ve had enough kicking myself.

Thank you everyone who participated for your help and patience.

I look forward to a second, hopefully profitable, year and wish the same to all of you.

 

[DeepState]

Looks like the major relative loss was in market timing. This was apparently done for risk management purposes. The XAOAI fully invested is not really a fair comparison if a risk management decision was made without an attempt at aggregate market level prediction over the two-year time frame. It does not suggest a break down in process or ability if executed according to your plan within this type of circumstance. It could have gone either way. You can backtest your average in strategy over different periods and markets to soothe yourself unless you believe that you actually made a bad prediction. In that case, I would seriously examine the process of prediction for veracity.

You suggest regret at not stepping to increase market exposure in when opportunities presented themselves. How did you know they were opportunities at the time? What in your process or abilities allows you to expect strong predictive power in relation to such matters? As you would know, market timing tends to be a losing game for most. Do you have evidence that your methodology allows you to consistently pick entry points in a market aggregate? You also know that market timing to this level dominates the overall portfolio performance. If I may, what you write about your decisions is loaded with hindsight bias. The right decision always looks so easy and clear in retrospect. What a difference a second makes. "Experience is what we get after we needed it most." I love that one...sort of.

Your portfolio seems to be exposed to other factors as well which were a negative impact. The strongest style factors on a multi-variate basis over the last year as determined by Axioma were positive SIZE and negative VOLATILITY. It seems you were caught in the cross-hairs on that front, at a guess. In a generic sense, VALUE was pretty flat on the year. It picked up to Feb 2014 and then declined. It may be negative on a univariate sense, because it loads on neg(SIZE) and VOLATILITY. One learning from this is to ensure that if your bet is value...that you actually get it. You mentioned overrides for industry concentration. This is similar.

Thanks for taking me/us along your journey.

 

[peter2]

Congrats on your first year.
Most people that start a blog stop posting after a very short time which shows their lack of commitment. You have shown us all that you are committed to making this work. Well done and I think you'll get many helpful suggestions. Generally when the results don't match the anticipated outcome it will be either a faulty process or a poor application of the process. I'm unable to tell which it is in your case as my approach is mostly chart based. I'll bet you have an idea which it is.

I hope your analytical process for identifying "value" stocks is written down and you know the difference between which info is essential and what's desirable as you'll rarely find a stock that is perfect. The main benefit of a written process is consistency. I've noticed that many of your stock selections seem to be discretionary and perhaps reactive rather than proactive. Buying after bad news is reactive unless you've been waiting for a lower price and have assessed the bad news as only temporary and you take the opportunity to add.

An observation: stocks going down in price when the market is going up or sideways shows that there is something seriously wrong within the company as the longer term investors are slowly bailing out (LYL). Only a very small % of these unwanted companies will be "valuable". Can your analysis identify these gems or are you better off buying those companies that are above your "value" price but are going up.

I hope that you identify what needs to improve and have the courage and motivation to change either the process or your application of the process. All the best for the new FY and remember that one year may not be long enough for your edge to appear.

ps: I'm pleased to see you refer to the XAOAI rather than the XAO.

 

[qldfrog]

And if it helps
I am not sure the comparison you make with the XAOI is very fair on you;
basically the XAO(AI or not) is "The banks", TLS and RIO/BHP
Ok not 100% but not that far;
if you compare your results, compare them to the pool of company you work with;And you will see that small cap or the market in Oz without these few big names was actually running at a loss last year.
Correct me if I am wrong as I did not check the final figures for EOFY;
There is currently a huge gap in perf between these monster stocks and the overall market;
If you add the fact that mining is the key player in term of numbers/capitalisation for the smaller fry, well you probably did not underperformed by much;
And if you learn something about it, might be your best investment ever: an educational fee..
PS: I lost a lot as well: all my T/A and value choices returned a fair value but I invested big for a crash in april (options) which did not occur;
the options lapsed, i lost 50k on those; And gains elsewhere did not make up so at a loss EOFY.
I got my lesson, not on the "educated bet" but on the tool to use.An expensive course.
If it helps to cheer you up...

 

[Huskar]

. . . Now, what have my mistakes been last year? Here’s some of them, in order of stupidity:
1. Buying, then selling PMP. I’ve bought this as I was still deliberating whether to switch to an automated value strategy. After buying it, I back out of it. I then reconsidered my investment approach that would allow it back in, but it was too late. I should have acted decisively, and I would have been $500 better off.
2. KKT has been on top of my value list from the beginning, but I didn’t buy it until much, much later. I would have tripled my money had I let my automatic strategy be automatic. Manual overrides for things such as over-exposure to on industry are fine, but there was no reason why I should have avoided KKT. This single mistake alone would have just about pushed my performance in line with the index. Yet another example of following the investment process and being decisive.
3. Paying too much for LYL and SDI. These were not bought as part of my automated strategy, so I’ve paid a premium that I thought these deserved. Looking back at it, I paid too much of a premium. LYL halved, and while SDI has rewarded me with some good results in the last few days, I certainly didn’t expect a result this good in my valuation. It is certainly worth that price now, but that was an unexpected development.
4. MMS – one of the rare cases where there was a single factor, election, with known probability, that controlled the outcome, with the price clearly not being in sync with it. And for reasons I still cannot explain, I did not act on it.
5. RFG – should have bought it when it dropped below $4. The redeeming factor is that I had a lot of it already in my super, where I bought it for $3.30.

There’s certainly more, but I’ve had enough kicking myself.

Self-analysis is key DeepState - if only I could all be as frank with myself.

Just don't make the same mistakes twice - keep a temple to them even, and don't forget the mistakes of omission (as well as commission)!

 

[DeepState]

I got my lesson, not on the "educated bet" but on the tool to use.

Hi QF. Just curious. I figure the above relates to a loss on (I guess) Puts in April. Does it? What did you learn? Apart from taking a (I guess again) material loss, how did you come to that conclusion? Again, just curious...not seeking a justification.

If this is too far off thread, please feel free to ignore the above. With apologies to thread participants and OP if so.

 

[KnowThePast]

Looks like the major relative loss was in market timing. This was apparently done for risk management purposes. The XAOAI fully invested is not really a fair comparison if a risk management decision was made without an attempt at aggregate market level prediction over the two-year time frame. It does not suggest a break down in process or ability if executed according to your plan within this type of circumstance. It could have gone either way. You can backtest your average in strategy over different periods and markets to soothe yourself unless you believe that you actually made a bad prediction. In that case, I would seriously examine the process of prediction for veracity.

You suggest regret at not stepping to increase market exposure in when opportunities presented themselves. How did you know they were opportunities at the time? What in your process or abilities allows you to expect strong predictive power in relation to such matters? As you would know, market timing tends to be a losing game for most. Do you have evidence that your methodology allows you to consistently pick entry points in a market aggregate? You also know that market timing to this level dominates the overall portfolio performance. If I may, what you write about your decisions is loaded with hindsight bias. The right decision always looks so easy and clear in retrospect. What a difference a second makes. "Experience is what we get after we needed it most." I love that one...sort of.

Your portfolio seems to be exposed to other factors as well which were a negative impact. The strongest style factors on a multi-variate basis over the last year as determined by Axioma were positive SIZE and negative VOLATILITY. It seems you were caught in the cross-hairs on that front, at a guess. In a generic sense, VALUE was pretty flat on the year. It picked up to Feb 2014 and then declined. It may be negative on a univariate sense, because it loads on neg(SIZE) and VOLATILITY. One learning from this is to ensure that if your bet is value...that you actually get it. You mentioned overrides for industry concentration. This is similar.

Thanks for taking me/us along your journey.

Thanks RY, it's always great to get your feedback.

You are right about hindsight bias, but it is very difficult to evaluate past performance and eliminate it completely. It is even more difficult not to subconsciously develop heuristics based on some random, past outcomes. Still, I feel attempting to do so is very important, so I tried as much as possible to find mistakes in the process, regardless of what the outcome has been.

Size and volatility - yep, I was on the wrong end of that one this year. But this is one I do not plan to do much about at the moment. Long term, I do not see as great opportunity there, so I will stick to small and volatile and ride out the bad years.

On market timing - I did not attempt to time it, I spread out my capital input over two years, so that I could sleep well, knowing that there hardly any chance of me losing significant part of my money. That has been achieved, and I do not regret it. The cost of that risk measure turned out to be huge, but it could have just as easily gone the other way, as you pointed out.

The longer I do this for, the more I realise that I am hundreds of steps behind guys like you, as well as some others on this forum (and elsewhere). Playing it safe, while I am catching up, seems to me to be the right thing to be doing.

Thanks again.