My portfolio, 2022 reviews, factor performance and Dylan Grice - the best investing blogs and podcasts from the past week
Hello and happy new year!
This week we’re still in the midst of post-2022 portfolio reviews, and it’s a pretty bleak picture.
I saw one or two reports out on FinTwit of those that finished in the green, but most of the rest tallied with my own experiences: underwhelming.
With so many unusual macro and geopolitical events bearing down, it was a hard year to be directing your own investing. I wrote a few articles in the run up to the year-end which looked back 12 months at some of the predictions for 2022. Really, nobody, professionals included, had much of an inkling of the rough ride we were in for. And neither could they.
If you’d like to catch up with some of the brave reviews that have been around over the past week or so, I’ve listed some of them below.
For what it’s worth, a portfolio of shares that I started at the beginning of 2022 finished the year down 15.8%. Round trip trading fees (I’ve now sold 13 of 17 holdings) more than absorbed dividends received through the year, so the total loss is slightly more than that.
Given that I write about share screening and strategies, I’ve found it easier from a professional point of view to keep my own active share investing fairly low level over the years. These days I’m obliged to report trades on a regular basis, and while that’s not a problem (it’s not like I write about my own portfolio), I prefer to know that I’m well within the rules at all times.
So for the time being, I let funds do a lot of the work for me. But I do think it’s only reasonable that if I’m going to explore strategies for stock selection in my writing, I eat some of that cooking too.
Last year I tried that with a hands-off systematic approach. Strange as it sounds, I generally hated the portfolio from the start. In fact, I hated it before I bought it. And that was the point.
If you’ve got a strategy built on concepts (in my case it was exposure to premiums like cheap momentum and high quality momentum across market caps and sectors) you must go with what it gives you. This kind of approach is almost certainly going to make you feel uncomfortable - Joel Greenblatt literally told me that once.
At the time I constructed it on a spreadsheet (with a colleague) I was instantly looking for ways to bend the rules. In particular I wanted to strip out some of the slow-growth large-cap defensive stuff that I saw no real appeal in. After all, small-cap growth had been smashing it in 2021, and I wanted more of the same.
But you can’t bend the rules. And while it was a bit imprecise in places, the construction stuck to the spirit of the strategy.
Three months in, the shares I’d recoiled at - like BP, Centrica, Diageo, British American Tobacco and Indivior - were all doing the heavy lifting. Without them, the portfolio would have quickly been a train wreck. So sticking to the rules had paid off.
As for the small-caps, they started badly and got worse. Shares in companies like System 1, Secure Trust, Focusrite, Robert Walters, Tullow Oil and Somero all ended up more than 30% down. In some cases it was a lot more than that. It was miserable.
All my initial behavioural instincts had been shown to be wrong - so the exercise was a success from that perspective.
Even more annoyingly, the share that performed the best (with a near 60% gain) - and if you know these shares, you’ll probably guess which - was the one I hated the most. For such a small group of companies, an unfortunate number of them came with ethical question marks. But this one in particular was almost embarrassingly bad.
Would I be feeling so much loathing about them if they’d actually delivered a decent performance? Almost certainly not. I hold my hands up.
I’ve seen these kinds of strategies work well over the past 10 years. And when they do, you don’t ask questions. But in a bad year - even when everything is falling - I’ve found myself finding it all too easy to see the flaws in the individual shares and feel repelled.
It has been a very interesting lesson for me about this approach.
I know a lot of people (and I would count myself on a rational day) would say there’s a horrible clash of rules-based systematic investing and dumb human behaviour going on here. It’s true. The same strategy could well go great guns in 2023, and perhaps all would be forgiven and forgotten.
All said, I’ve concluded it wasn’t for me. I was delighted to see the back of three quarters of that portfolio this week. I’m trying something different this year: but still rules-based and still very much in the spirit of sensible, strategy-based portfolio construction.
Charlie Munger once said that “the first rule of compounding is to never interrupt it unnecessarily”. Those words are ringing in my ears loud and clear. I’m going to try and give myself a better chance at it in 2023 and take a longer view. It’s a portfolio I don’t necessarily feel I need to love, but it’s definitely not one I hate.
Have a great weekend,
Ben
Reviews of 2022
Richard Beddard - How to survive a bad year
Monevator - The Slow and Steady passive portfolio update: Q4 2022
Maynard Paton - My Portfolio: Year In Review 2022 & Q4 2022: Down 23.3% For 2022
Share Knowledge - The Pivot
IT Investor - My Q4 2022 Review
diy investor (uk) - Portfolio Review - End 2022
Roger W. Lawson's Blog - Year End Portfolio Review of 2022
Quality Share Surfer - Winter trades
Fund research from Trustnet - The best- and worst-performing investment trusts of 2022
The Investor Way - [Podcast] E116 - Fantasy Portfolio Update - Year 3
Investor John - The Year that was 2022
VSIHV- Review 2022: Invasion, Inflation, Interest, Indecision
@nicktudor100 - HERE
@smarkus - HERE
@miserlyinvestor - HERE
@rhomboid1MF - HERE
@1James1n1 - HERE
Highlights this week
The Long View Podcast - Best of The Long View: Investing
This is pretty good. The Long View Podcast from Morningstar interviews some interesting people, and this is a round up of highlights from the past year. It starts with views from Jeremy Grantham of GMO on the early days of indexing (he’s philosophically in-tune with the idea). He’s followed by Mary Childs, who wrote about the story of Bill Gross in The Bond King, who talks about the evolution of bonds as an asset class. Among the others is Cliff Asness on investment strategies in bear markets for retirees, Andrew Lo on Harry Markowitz and the evolution of portfolio construction, and Eric Balchunas on Jack Bogle. If you skip through it, don’t miss Wes Gray on value investing and a series of interview clips with Morgan Housel towards the end.
Top Traders Unplugged - Episode 13 Allocator Series: Building Resilient Portfolios with Alternatives ft. Dylan Grice
Here’s something a bit different if you have a passing interest in slightly alternative investing strategies. Dylan Grice is a hedge fund manager who co-runs Calderwood Capital. He was an economist, trader, and then strategist at SocGen (hired by Albert Edwards and worked with James Montier) and specialised in the psychology of risk taking. He then moved into more hands-on asset management and now runs his own fund-of-funds. This is all about Grice’s day job and how he has moved away from “equity in disguise” strategies into more alternative niches (catastrophe risk, credit risk and so on). He’s got some interesting views on market moves and correlations through 2022 and the lack of volatility spikes, as well as some of the upside opportunities in the years ahead. It’s in depth in places but there are some interesting ideas in here about managing risk and behaviour.
MSCI - Markets in Focus: Capturing Big Market Shifts with Precision
This is more of a technical summary of last year from the investment research and services company, MSCI. I include it, really, because it confirms a lot of the anecdotal observations from last year: that high yield equities were a decent place to be, that value did work well and so did low volatility. By contrast, small-caps, high quality and high ESG exposure struggled last year (quality struggled because of its negative exposure to oil and gas (which did well) and relatively high exposure to technology (which did badly)). Their modelling (which adapts to recent conditions) currently has a preference for small-cap value and momentum.
Thinking & Strategy
Excess Returns
[Podcast] The Biggest Lessons From Our Five Most Popular Podcasts of 2022
Compounding Quality
What you need to know about Return On Invested Capital
Of Dollars And Data
It’s Time to Work
CFA Institute Enterprising Investor
Top 10 Posts from 2022: Fama and French, Damodaran, the Equity Risk Premium
A Wealth of Common Sense
2022 Was One of the Worst Years Ever For Markets
The Irrelevant Investor
10 Predictions For 2023
Behavioural Investment
How Will Investors Behave in 2023?
Neckar's Minds and Markets
Sitting With Uncomfortable Questions: A Different Kind of Year-End Review
Institutional Research
Franklin Templeton
2023: Sizing the slowdown
Artemis
Where next for inflation and interest rates?
Bank of America Securities
What to expect from global markets
Securities & Markets
Money Makers
Weekly Investment Trust Podcast with Jonathan Davis (31 Dec 2022)
Quality Small Caps
Small Caps Podcast with Paul Scott – episode 27
Capital Employed FM
Acquiring Profitable Online Businesses (w./ Dom Wells)