It is about three months since I last reviewed my performance so I thought it was about time to do so.  I aim to continue to do this quarterly in the future. My strategy has been shifting a little bit recently so it’s also a good opportunity to clarify how it has settled.

Performance

The performance of my portfolio (QSS) is shown against its benchmarks in the table below (all the figures below exclude dividends).

The last three months have been very good and the gap between my portfolio performance and the performance of the FTSE100 and Stockranks top decile of stocks has continued to widen.

I have now also started tracking the performance of dummy portfolios to use as benchmarks. These include a ‘buy and hold’ portfolio of all the shares on my watchlist and portfolio equally weighted, a mechanical portfolio which selects the best 25 shares from this list using my watchlist spreadsheet, and a more concentrated version of this portfolio that selects only 10 shares. It’s a bit early to draw anything from these, though I do note that the more concentrated portfolio has got off to a strong start (perhaps unsurprisingly).

I’m now also more consistently tracking my trading stats, in particular:

• The winning %: percentage of trades which are profitable (‘win:loss %’ in the table below)
• The size of an average win divided by the size of and average loss (‘win loss ratio’ in the table below)

These are shown in the table below.

As you can see from the table, the source of my outperformance is from the relative size of my wins rather than my hit rate. While fewer than half my trades are profitable, the profitable trades are about four times as profitable as the losing trades are costly. This is no accident – broadly my strategy is to not worry so much about the percentage of winners, but rather focus on making sure the sizes of my gains are as big as possible relative to the losses. I achieve this by holding and adding to winners while cutting losers as soon as possible. In a way I think this is a contrarian strategy as it runs counter to the natural bias to focus on the percentage of winners (as being right is intrinsically psychologically rewarding).

The statistics in the table above only account for completed trades rather than open trades. This means these statistics track my actual performance with a bit of a time lag in practice. My open trades are currently doing very well, with all holdings in profit and 11 out of 18 already with higher gains than my average gain over the last 50 trades. From this, like a business with a bulging order book, I can be pretty confident that my trading statistics are going to continue to improve in the future.

Individual Stocks

I haven’t had any more profit warnings since the last review. The performance across the whole portfolio over last three months has been strong with most issuing positive results or trading statements so there aren’t really standout performers to highlight.

That said, there are a couple of specific shares I will highlight. One is Bioventix, which has started earning from its provision of antibodies for Siemens new Troponin test a couple of months early. For me this was the one area of uncertainty for an otherwise really excellent and defensive business. Now I think it’s prospects are very exciting and it is substantially undervalued. It’s my largest holding (10% of portfolio) and definitely my favourite share at the moment. Part of me wonders whether I should have even more of my portfolio in it, but I’m going to hold off doing anything more for now until we start to see how much revenue is coming in from Troponin test. The other two shares I will highlight here are On the Beach and Liontrust. Both of these are performing well and still have very attractive valuations.

Given the rise in price of the shares in my portfolio, it’s also worth considering whether any are starting to look overvalued. Three appear to be somewhat overvalued according to my DCF approximations: Fevertree, Boohoo and Craneware. However, all three are trading very well and I’m happy that my valuations of them are probably overly cautious. I’m not definitely not minded to sell but may hold off adding to them for now.

Trading strategy

My strategy has been developing recently, most notably with a bid to further concentrate my portfolio. I’ve gone from 25 holdings down to 18 now and I intend to continue concentrating further.

I have to be careful about overtrading. I think my strategy of monitoring a watchlist of high quality shares has left me susceptible to the fear of missing out on owning them. I think the best way to deal with this is to maintain a high bar on when to sell i.e. only on profit warnings and significant loss of momentum rather than when I see a better opportunity.

Macro view

At the macro level there is so much uncertainty I don’t set great store by my view, but it might still be useful to think about the overall market risks.

Something I’ve seen quite a bit of discussion about recently is whether the stock market is overvalued, having continuously hit all time highs for a little while now. Broadly, the valuation of the UK market seems to be about its long term average, as noted in this article for example, or somewhat higher than average if you look at Shiller’s CAPE. This doesn’t appear to me to be cause for concern.

The US stock market appears more overvalued and may warrant greater concern, particularly as hopes of Trump’s fiscal stimulus may be waning, though interestingly even Shiller himself is just now saying it could go higher. There is a lot of correlation between US and UK and many of the shares in my portfolio trade in the US so this is of interest. Another related concern is that volatility levels have been very low of late.

My take on this is that it all seems like healthy scepticism. The global macroeconomic picture seems fairly rosy right now with lots of businesses growing strongly and valuations are not really stretched enough to suggest we are anywhere near the top of a bubble. I’d hazard that the next market correction is still a few years away yet. I think overvaluation, of growth and tech stocks in particular, is probably one of the main things to worry about in the medium term but I don’t think we’re there yet. The dotcom bubble is a useful template for how high prices can go (and how hard they can fall afterwards). If we are at the start of a bubble in tech and growth stocks, then there are probably some very decent gains to be made in the next few years. Given my strategy is momentum based, which should get me out near the top of a bubble, I should maybe worry more about a volatile ‘whipsaw’ market, which would throw me out on the lows and induce me to buy back on the highs, though I’d hope my stock selection would mitigate this.

For the UK economy, there are some risks very clearly on the horizon in the form of Brexit. A more negative outcome to the trade negotiations with the EU (which seems fairly likely) would hurt businesses that trade with the EU and if the impact is significant enough could hurt the UK economy as a whole. It’s hard for most to raise the subject of Brexit and remain dispassionate and I think debate and understanding of the possible effects has suffered as a result. The failed prediction of Armageddon on announcement of the referendum result has led to predictions of more long term negative impact being discredited. On the other hand, the UK economy is currently in rude health and it seems quite possible that it will emerge fairly unscathed at the end of it. I would say there is a significant risk that volatility for UK stocks is likely to increase as negotiations progress and clearer risks emerge from the uncertainty (unknown unknowns become known unknowns). In my view this would particularly affect businesses that trade with the EU and potentially UK cyclicals so I’m limiting my exposure to them (well I try to avoid cyclicals anyway).

The other macro factor that has some significance for me is the £/$ exchange rate. The Brexit vote led to a big fall in the exchange rate and a temporary opportunity to buy dollar denominated assets which took longer to adjust cheaply.  I took advantage of this so am now faced with the question of whether to reallocate back before the exchange goes back up, as it has started to give signs of doing. I am not inclined to do so as it’s quite unclear what will happen to the exchange rate from here and I there are some risks for UK based stocks on the horizon.