Rearranging deck chairs

Since my last post, the markets have continued to be volatile. I am very glad to have raised cash at the beginning of last week so I’ve been on the front foot looking for opportunities, rather than being dragged passively on a stomach churning ride. There were big falls on Thursday and Friday last week in the US, followed by a big reversal on Friday that has followed through into Monday and Tuesday this week. This reversal seems pretty bullish to me, at least in the short term, though I don’t think we’re out of the woods yet. The UK markets have been vaguely following the US but in a slightly less volatile manner.

I have been reallocating my portfolio to better position into shares where I have the conviction to weather the volatility. I’m particularly looking for shares whose prices are holding up relatively well and where I have higher conviction in both the long term business quality and the current trading.

As I think further turbulence is fairly likely, why am I not just holding onto cash for longer? Reallocating my portfolio might just be rearranging the deck chairs on the Titanic. Well, it might but I prefer to err on the side of being fully invested too early rather than too late. I’m still bullish on stocks in general, as I think the macroeconomic backdrop is rosy and valuations are reasonable. Fears about inflation and rising interest rates seem overblown to me at the moment. I think it reasonably likely that the worst is already behind us (well, for now at least) and I want to take advantage of the current dips in some of my favourite shares. That said, I’m going to keep some cash to take advantage of any further falls and ensure I stay psychologically on the front foot. I’m about 15% in cash at the moment and looking to keep that level until we get further market falls (more likely) or a decisive sustained move upwards (less likely), signalling a resumption of the bull market.

Since my last post I sold Impax Asset Management (for a 12% loss) and CBOE (for a 23% loss). Despite trading very well at the moment, the share price for Impax was not holding up very well through the volatility and I have less conviction in it than many of the other shares in my watchlist. It is a thinly traded small-cap so I was concerned it was prone to further large falls were the market correction to continue.

CBOE is a business that I have a lot more conviction in long term, but one I unfortunately traded  badly. It’s a mistake to learn from, so worth reflecting on.

CBOE (which stands for Chicago Board Options Exchange) operates various market exchanges and owns the largest options exchange in the world. It famously owns the VIX volatility index. It fell more than 10% last Monday on news that exchange traded funds based on delivering the inverse return of the VIX had collapsed in value due to the sudden spike in volatility and were being withdrawn. Rather than selling out, I decided to add to my holding. My thinking at the time was that the increase in volatility would be likely to significantly benefit CBOE more widely and that the inverse VIX products would be likely to be replaced fairly swiftly. As CBOE was due to report on Friday, I anticipated that it was likely to outperform expectations and that the dip in share price would be temporary. Long term CBOE is hugely profitable with a massive competitive advantage and strong secular growth prospects. Unfortunately, while it did not expect material impact from the blow up of the inverse VIX products, it marginally missed earnings expectations on Friday and fell a further 10%. Resisting the temptation to add to my holding further (and I was sorely tempted) I decided to call it a day and sold out for a significant loss, though the position was still fairly small (around 5% of portfolio).

The lesson I’m taking from this is to not let my conviction override a falling share price. This might work for some, but it just doesn’t fit with my strategy. I should have sold out quickly and waited for the opportunity to buy back again when things looked more positive (as I would normally do). As it stands, I probably ended up selling at the worst possible time…

I took the opportunity of the falls last Thursday and Friday to buy a few new holdings in shares where I have high conviction in both current trading and long term quality:, Keywords Studios and NMC Health. I’ve written about all these before so won’t do so again here.

I’m now closely monitoring a handful of high-conviction shares from the watchlist to invest my remaining 15% cash balance into. The shares I’ve got my eye on currently are:

  • Paycom
  • Trigano
  • Microgen
  • Nvidia
  • RWS
  • Just Eat
  • Adobe Systems
  • Amadeus IT
  • IG Group
  • DotDigital
  • Activision Blizzard
  • Craneware

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