Diary of a small cap growth investor - Feb 2020 update

The below article is for informational purposes only and does not constitute a product recommendation, or taxation or financial advice and should not be relied upon as such. Please consult with your financial adviser or accountant to obtain the correct advice for your situation.

Plenty has changed in the year or so since I last shared a diary entry with you, but one thing that hasn’t changed is the importance of Sharesight in allowing me to be honest with myself by regularly reviewing my performance. It’s an essential habit for improving as an investor, but my online brokerage can’t help with it. That’s because when I sell a stock from my portfolio, it simply disappears, and I forget about how much I made -- or lost -- on the investment.

As I write this, we’re in the middle of reporting season, and a couple of my larger holdings have suffered share price drops on results. For example EML Payments (ASX: EML) dropped 15%, leaving me considering whether I should sell some of my EML Payments shares due to its optimistic valuation (and kicking myself for not having done so before the results).

So it was very grounding for me to see that, in actual fact, the last three months have been pretty kind to me. My portfolio has gained 8.8%, which is slightly better than the popular ASX 200 ETF that I use as a benchmark, as you can see below. In this case, getting the facts straight has helped me clear my mind.

Which holdings let me down?

Of course, that leaves me curious about how I’ve kept my head above water, and what has been dragging me down. For the last three months, you can see my worst four performing companies by absolute contribution (on the left) and by percentage fall (on the right):

Previous star performer Pro Medicus (ASX: PME) has been the biggest drag on my portfolio, as it has descended from heady heights achieved at the end of last year. Although I sold the majority of my holding at above current prices, it’s still a big holding, and a big drag when the share price falls. Straker Translations (ASX: STG) was the second biggest drag in absolute terms, in part because I added more as the share price has fallen. The market seems fairly unimpressed with the stock but you don’t beat the market by agreeing with it.

In percentage terms, Gentrack (ASX: GTK) was the worst loss, as it produced yet another disappointing update. I’ve finally sold out of that one completely, as you can see. Gentrack has been a bit of an embarrassment as it was one of my biggest losers when I wrote the last diary entry here, more than a year ago!

Which holdings performed best?

Interestingly, while some mid-market growth stocks like Pro Medicus, Ecofibre (ASX: EOF), Gentrack and Volpara (ASX: VHT) have dragged me down lately, the micro-caps in my portfolio have held me up.

I have a large position in Kip McGrath Education Centres (ASX: KME), so it doesn’t have to do a lot to make a difference. Meanwhile Chant West (ASX: CWL) popped 40% in a day when it agreed to sell one of its businesses for more than its previous market capitalisation! At the time of writing I am trying to sell shares in Chant West to take profits, and have an order in market, but have not yet succeeded.

Looking back over the longer term

Finally, it’s always worth zooming out to get a little bit more perspective. Last time I took a 2-year view, but I like to look at my returns over a range of time periods. Today, let’s take a look at my 5-year returns:

The 64% total return is a quasi annualised figure calculated using a money weighted methodology. This essentially credits me for the fact that I take money in and out of the market, and ignores the returns (or lack thereof) I make with cash. Because the amount of money I have in the market is constantly changing it’s not a true annualised figure in the sense a fund manager would report it, but it is a close proxy (assuming a minimal cash holding).

In some ways the absolute dollar figures are a more useful way to think about it. I have removed them from the graphic above for privacy, but the chart gives you a visual indication of how my returns have been over 5 years. While 2016 was a tough year for me, with no progress made, 2019 was an absolute cracker. It’ll come as no surprise that the short term loser Pro Medicus has been the big winner over both 1 year, and 5 year periods.

Take the time for an honest look back

I imagine many sharesight users also had a great year in 2019 -- so congratulations. But whether it was a good year or not, I’d encourage you to take some time once in a while to take an honest look at the long term winners and losers in your portfolio. Only you will know why you bought and held a winner, or why you bought a big loser, but by keeping yourself honest you can learn from each investment over time. And after all, there’s no better investment than your own abilities.

The Author of this piece, Claude Walker, as at 9am on February 20, 2019 (the time or writing), he owns shares in Pro Medicus, EML Payments, Chant West, Kip McGrath Education Centres, Straker Translations and Volpara. None of the above is investment advice, or a recommendation on the securities mentioned. Claude writes the Ethical Investing column for arichlife.com.au

FURTHER READING

• Do demergers and spin-offs create value for shareholders?
• Benchmarking your portfolio against ETFs
• What to look for when buying ETFs