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Welcome to Quality Share Surfer.

This is a UK focused investing blog, where I regularly set out my thoughts on investing strategy, economics and behavioural finance and chronicle the decisions I make for my own portfolio. My goal is to bring clarity to complex ideas and provide original insight you won’t find elsewhere.

My investing style is ‘behavioural’ in that it aims to take advantage of systematic errors made by other investors. Part of the idea is that these errors lead shares with certain attributes, e.g. value, quality and momentum, to tend to outperform the market. My strategy is focused primarily on exploiting two such attributes in combination: a) the tendency for high quality businesses to outperform over time and b) the tendency of shares with momentum to continue to do well. You can find out more about my strategy following the menu above.

Here are examples of some of my most popular posts.

I hope you find the blog useful. Please leave comments if you find this interesting or would like to ask questions or discuss related topics.

Quality Share Surfer

Portfolio review: April 2020

I, like many investors, am glad to be seeing the back of that quarter. The Coronavirus has caused a rapid crash over the last month in most stock markets across the world. This has left the FTSE 100 down 27.9% and the S&P 500 down 22.9% over the last three months. My portfolio hasn’t fared a great deal better at 18.4% down. It doesn’t look like we are quite out of the woods yet.

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As I said in my last post, the direct consequences of the containment measures on economic activity and unemployment are of unprecedented magnitude. Hopes of a swift v-shaped recovery seem overly optimistic. It seems more likely that there will be quite severe knock-on effects as consumer confidence is reduced, investment decisions are delayed and bad debt spreads throughout the global economy. Judging from previous recessions it seems more likely than not that the market would have further to fall as the economic news gets progressively worse over the next few months.

Against this backdrop, the stock market’s bounce over the last couple of weeks has had a rather eerie quality to it. I don’t think it means much. Large rallies are a fairly common feature of bear markets. I think there are several technical and psychological reasons for a significant rallies to follow rapid falls eg short covering, portfolio rebalancing towards equities and the fear of missing out on a rapid recovery.

I’ve been taking advantage of the bounce to sell  more holdings and free up more cash. This week I sold Boohoo, Arcontech, Euronext, Adobe, ServiceNow, Alpha FX, Ansys, Esker and DotDigital. I’m now more than 50% in cash, even without counting the possible injection of funds from my house deposit.

While I think the most likely direction from here is downwards, it could be that the low has already been reached. There is a good chance that lockdowns are alleviated sooner than expected and the long term economic consequences may not turn out to be as bad as I fear. There is simply a huge degree of uncertainty at the moment. It’s very hard to predict what will happen in the actual economy let along how the stock market may react. Given all the uncertainty, I think it’s important to ensure my strategy is prepared for any eventuality and that I don’t get caught out forever holding cash waiting for an apocalyptic crash that never materialises. More on this below.

Performance

The performance of my portfolio (QSS) is shown against its benchmarks in the table below. My main benchmarks have been the FTSE 100 and a portfolio of the top decile of UK shares according to their Stockranks. Given the continued out-performance of US stock markets, I’ve also decided to also include the S&P 500 as a tougher benchmark (though note I’ve only started to invest in US equities over the past couple of years). As for the last two yearly reviews, I’ve also continued to benchmark my portfolio against a handful of professional fund managers.

April 2020

On an absolute basis my performance has been terrible over the past three months. I missed a major opportunity by failing to react more quickly to the Coronavirus. Oh well. On a relative basis my portfolio has held up fairly well against its benchmarks. The only one that has done better over the last quarter has been Fundsmith, with its admirable outperformance backing up Terry Smith’s conviction that his strategy would hold up better through a downturn. That said, I anticipate that the time when Fundsmith will underperform is likely to be not far off now ie during the recovery from the bear market when value typically does better.

One quarter is too short a period to read much into. This review marks a milestone where I have now been following my current quality momentum based strategy for over five years. Over five years I’m very happy to report a 19% CAGR despite the current crash, and that I’m comfortably beating all my benchmarks by some margin.

Strategy review

The main part of my strategy has been to systematically rotate across the quality shares on my watchlist every couple of weeks to take advantage of opportunities as they come up, exploiting changes in momentum, newsflow and valuations. I am pretty confident that this strategy allows me to outperform the stock market on a fairly consistent basis. 

However, I’ve long recognised that this strategy provides little protection for overall market crashes. My plan has been to always be fully invested and just ride things out, unless there are exceptional circumstances, where the chances of a future buying opportunity are clearly high enough to warrant raising some cash. For the first time since I started investing, I think we have indeed reached these exceptional circumstances. Even though the market has already fallen significantly, I think at this point the risk of further falls are large enough to warrant holding some cash. 

Looking backwards, I should have responded to the risks from Coronavirus sooner, though to be honest I think this may be more of an error in judgment over the severity of the events being played out, rather than an error in the underlying strategy. I’m still minded not to use stop losses in general, but next time the whole market is tanking I might be a bit more cautious in deciding whether raising some cash is warranted.

Looking forwards, I am now in bear market mode. My cash levels are as high as I’m going to let them go and I’m trying to come up with the best plan for reinvesting it. There are two aspects to this: ‘what to buy’ and ‘when to buy it’.

Several aspects of investing get turned on their head in a bear market. While most of the time the market’s main error seems to be to undervalue quality stocks, in a bear market bigger mispricings can arise from overreactions to the risks faced by lower quality businesses. The very best returns can come from investing in businesses which look like they might go belly up but eventually recover. So rather than following momentum, I’m now looking for investments where share prices have fallen harder and valuations look cheaper to take advantage of the eventual rebound. I’m reluctant to stray too much away from my watchlist of shares I have already vetted for quality. There are a few more cyclical businesses within it that have been hit harder that look like they may turn into good opportunities. However, to properly take advantage of a market crash I recognise that I may need to go a little ‘off piste’ and invest in more bombed-out lower quality businesses than I am normally comfortable with. One of my early successes came from investing in bombed out house builders in the wake of the financial crisis. So I am keeping an eye out for this sort of opportunity, especially if the market falls much further from here.

Deciding exactly when to reinvest is also hard. At a high level I have little confidence in my timing beyond a vague notion that there is a good chance the market will fall further before it recovers. Even then I think there is a reasonable chance that I’m wrong and the bottom is already in. Because of this uncertainty I think the best approach is to reinvest steadily and gradually over time rather than trying to pick a bottom and going back in all in one go. So my starting plan is to reinvest at a constant rate every week or so over the next 3-4 months, taking advantage of opportunities as they appear and slowly topping up my existing holdings over time. I might adjust this time period a little depending on what happens (eg I may speed up a little if the market plummets quickly or slow down if the current buoyancy persists) but I think it’s good to start with a rough plan.

A swift recovery?

I have now fully recovered from Covid-19, assuming that is what I have had over the past week. The main symptoms were severe fatigue and shortness of breath. This was debilitating enough to excuse me from doing any work or household chores but almost imperceptible if I remained completely immobile, say reading Twitter or watching Netflix in bed. My lungs felt like they took a pounding but have recovered quickly. So all in all not the worst virus I’ve had the pleasure of hosting by any means. I’m thankful to be getting off relatively lightly.

Given the extraordinary times, I’ve updated again below with my latest thoughts on the economic outlook and what this means for my game plan. I’ve also updated on my purchases from last week.
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Too late to panic?

Stock markets have taken another steep tumble since my post last week. People say that the bottom of a market crash happens when everyone gives up, at the point of maximum pessimism. My emotions have taken a bit of a pounding too and I’ve started to feel the urge to capitulate. Maybe that means we are near the bottom? I fear not. I’m trying my best to remain level-headed in deciding the best course of action from here. This probably isn’t helped by the fact that my wife and I are locked down in self-isolation in our London flat with mild symptoms of the virus…

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Portfolio health check

Last week was one to remember! After a big fall on Monday led to comparisons with the October 1987 crash, we had another massive fall on Thursday after markets were unimpressed by Trump’s response of restricting flights from Europe. The result is that we’ve now had the fastest ever market crash by some margin – just 20 days to fall 20% from the highs. Exciting stuff, but a little harrowing if you are fully invested as I am. Continue reading

Turbulent times

Well the market has certainly woken up to possible risks from the Coronavirus contagion since my last post! We now seem to be in the midst of a full-blown market panic, with the market yoyoing up and down (well mostly down) several percent every day, as investors overreact to news about the virus, its effect on businesses and the government’s response. To top that we now also have to contend with news of a collapse in oil prices, which have fallen almost 30% over the weekend following the break down of OPEC agreements.

All my gains from what had previously been shaping up to be a good year have been eroded and my portfolio is now squarely in the red. Continue reading

F* you viruses

I’m sick of viruses. I’ve had more than my fair share over the past few weeks. The beginning of my honeymoon was blighted by Rhinovirus – just a humble cold, though a nasty sore throat coupled with incessant air conditioning resulted in sensation of a shard of glass lodged in the back of my throat for several days. For the end of the honeymoon, I was graced by the altogether more unpleasant presence of Norovirus in some dodgy seafood and am still recovering from the after effects. Unsatisfied with ravaging my physical health, the viruses have decided to go for my portfolio as well, with the outbreak of the Coronavirus epidemic in China halfway through my trip. (Other than that we had a magical time, thanks!) Continue reading

Avoiding perfectionism: investing without conviction

The classic, though now dated, ‘right answer’ to the job interview question, “what is your biggest weakness?” is to say that you are a perfectionist. The thinly-veiled subtext is that perfectionism is actually a strength, though perhaps one that has been taken a bit too far: “I’m just so focused on making sure I get everything right all the time that sometimes I work too hard (sigh).”

Of course, attempting to achieve the unachievable can lead to harmful outcomes for you and those around you. But there is more to it than that. The underlying drivers of perfectionism affect pretty much everyone and can interfere with your ability to make rational decisions. In investing, where so much is about maintaining Spock-like rationality, this is probably one of the most common and important psychological issues investors face.

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