SMSF: FY18, Q1 Performance

Thanks largely to Kogan, my first full quarter running my SMSF was an absolute cracker.  The portfolio finished up 21.6%* against the benchmark (The Vanguard ASX300 index) of 0.77%.  Without Kogan, performance still would have been a respectable 4.52%.

 

I don’t have any big plans to add anything new, but will add to my portfolio if stocks I already hold become cheaper, or if something well-priced appears on my radar.

 

Here is my current portfolio breakdown:

KGN 28.6%

JIN 3.7%

AVJ 18.9%

REH 15.5%

DTL 1.8%

DDR 4.1%

FMG 4.1%

ST1 6.6%

Cash 16.7%

 

I’m aware that almost 2/3 of my total portfolio is concentrated on 3 stocks.  Here is Warren Buffett’s take on diversification.

His business partner Charlie Munger says that the surest way to succeed is to avoid doing dumb things, rather than attempt brilliance.

 

Some of my dumbest moves this quarter:

Buying FMG because it was so cheap on a P/E basis, without modelling forward P/E based on current IOP (Would not have affected my decision which is why I still hold).

Buying DMP the day before it dropped 20% on earnings release, then tripling the size of my position, before coming to my senses and exiting at a small loss 2 days later, because I realised I should never have bought them in the first place, because they are overpriced based on earnings growth and are borrowing $300m to buy back shares at these prices.

Overloading my JIN position blithely ignorant of the fact that they lacked any significant moat.  I still hold, but it’s now a smaller percentage of my portfolio.

 

I have high hopes that the mistakes I make over the next 3 months will be better than the previous 3.
*Originally reported as 17.7% in error.  17.7% is the percentage of current portfolio value at quarter end which was profit.  The percentage return on start of quarter portfolio value was 21.6%

Some thoughts from this week

One of the key things we need to do if we are to make good quality decisions, is to be aware of our own internal biases and not let them cloud our judgement.  This last 2 months, I’ve really gotten into Charlie Munger’s wisdom (a starting point here).  For the uninitiated, Charlie Munger is Warren Buffett’s friend and business partner.  I’ve collected a number of his quotes, some examples below:

The worst thing to anchor to is your previous conclusion. Do the best you can to destroy your current ideas.

You don’t need to be the smartest or the most diligent to succeed. You need to be a learning machine, and go to bed smarter than you were the night before.

Not many people integrate multiple disciplines. If you do that you’re in a territory with not a lot of competition.

If you want to disagree with somebody, you should be able to state their case better than they can. Otherwise you should keep quiet.

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, “It’s the strong swimmers who drown.”

Any single one of the above quotes is enough to make you measurably more successful, and they all refer to certain biases and assumptions we all make as human beings.

I was reminded of that this week when Jumbo Interactive started dropping in share price, presumably off the back of the market becoming more aware of competitive lottery apps.  Jumbo are by no means the lowest cost player, they charge a large premium over The Lott (in the case of Ozlotto, $1.45 per game vs $1.30) and Lottoland charges $1.45 also but offers a $1m bonus on any winning jackpot.

The problem being, while Jumbo is a cash machine, they don’t have a significant moat (They do have an existing customer base and are part-owned by Tatts Group).  Looking at the current market price, I started my decision process in context of my buy price, which should not have been relevant to my decision.  What I should be asking myself is this: Is the company now a buy based on new information? (or in my case, information I always had at hand, but was too blinkered to pay attention to).

I concluded that while I wanted to continue holding JIN, I had too many shares (~10% of my total portfolio), so sold down about 60% of my holding at what was basically breakeven.  It feels good to have gone through a more logical thought process and to have had the self-awareness to make a better decision than I would have normally.  I am learning!

 

 

Bulletproof Networks (BPF) – How I reacted to new information

One of the decisions I am most proud of this year is my call to sell off my BPF shares in February after some disappointing HY numbers.  Previous articles on BPF have extolled the virtues of their annuity business and their high revenue growth rate.  I’d been cheering BPF for the previous year after seeing the stock price hit the mid 50s.

 

Then the HY17 results hit. What a shocker!  Revenue growth was only 13% YoY, and the company had moved from profit to loss.  Rather than procrastinating, I took action.  Despite being a fan of BPF, I was a fan of the BPF that was growing at 50% and had just gone profitable.  This was a different company.  I sold the next day for 21c

 

Since then, the share price has slid to around 8c, vindicating my decision to dump the losing stock.  My loss was small in comparison, having bought in at 25c.

 

Looking at FY17 numbers, there are some encouraging signs.  The company has returned to a positive EBITDA, and is nearly back to breakeven.  Unfortunately, they have had significant management changes and severely damaged their reputation.  We’ll see what HY18 numbers bring, but I have plenty of good opportunities to deploy capital elsewhere.