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The smashing investment returns of a lucky fool

Citywire's Income Investor columnist has either found a perfect formula to make money on the stock market, or is merely a 'lucky fool'.

 
The smashing investment returns of a lucky fool

As the 2012 total return on my DIY Income Investor portfolio is heading towards 30% (excluding cash), I have to face a serious question: is this great result (well, great for me at least) because:

  • I have found a perfect formula for making money on the stock market, or
  • I am a Lucky Fool

 

And by Lucky Fool, I am referring to Black Swan author Nassim Nicholas Taleb’s definition:

'Lucky fools do not bear the slightest suspicion that they may be lucky fools - by definition, they do not know that they belong to such a category. They will act as if they deserve the money. The lucky fool [is] defined as a person who benefited from a disproportionate share of luck but attributes his success to some other, generally very precise, reason.' (Fooled by Randomness)

So, that’s me told, then. But maybe it is useful to try to unpick what has happened and what choices have led to this (possibly temporary) happy state of returns.

First, how have the benchmarks done? My portfolio is made up of:

  • 50% high-yield UK dividend shares, drawn from the FTSE 250, including a few ‘legacy’ shares (that is a flattering term for ‘poor investments’) left over from the 2008 crash;
  • 50% high-yield fixed-income securities, quoted on the London Stock Exchange and almost exclusively from the UK finance and insurance sector and consisting of corporate bonds, preference shares and PIBs (I sold my UK gilts during the year).

So, the appropriate benchmarks might be those related to:

Some surprises there, to me at least, particularly on corporate bonds, which I had assumed were in a bigger bubble than that! Still, apart from the good showing of the FTSE 250, there is still not a good explanation of the portfolio’s performance.

Taking again the key features of the portfolio and recent asset allocation decisions, there might be some other explanatory factors:

  1. The portfolio is almost exclusively UK-based, and the UK has at least avoided the Euro currency storm and the US election and ‘fiscal cliff’
  2. I made a conscious decision during last year to increase the share of fixed-income to 50% of my portfolio
  3. The portfolio is overweight in the financial and insurance sectors - both of which were heavily hit by the global financial crash
  4. I have bought ‘distressed’ high-yield fixed-income securities significantly below par - and have benefited from a change in market sentiment
  5. My ‘legacy shares’ - notably Lloyds (LLOY.L), Royal Bank of Scotland (RBS.L) and Barclays (BARC.L) have recovered significantly during the year (although remaining far below their purchase prices)

So what does this Lucky Fool take from this review? Well, I am sensible enough to realise that this performance is not sustainable - the continuing difficult economic times in the UK may mean an slide in my portfolio’s value in the coming years. And it is increasingly clear that my portfolio is not really as diversified geographically and sector-wise as it perhaps should be.

Perhaps it is time already to work on my New Year’s Resolutions.

If you've enjoyed this article, why not visit DIY Income Investor's blog? The views in this article are the author's own, and do not constitute advice.

25 comments so far. Why not have your say?

Clive B

Dec 17, 2012 at 13:47

I'd be interested to know the details of which investment(s) gave rise to the 30% annual profit.

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sgjhaghsdg

Dec 17, 2012 at 14:21

> 50% high-yield UK dividend shares, drawn from the FTSE 250

A mid-cap income portfolio is a rarity. Do you mean FTSE 350?

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ERic Hancock

Dec 17, 2012 at 17:12

Well done - a 30% gain is splendid, even if it was a fluke. You can still spend fluke money. You've even beaten my 25% return this year ( £ 5,000 capital gains £ 3,500 income) and everybody knows I'm an absolute expert at investment. Don't they?

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paul kaye

Dec 17, 2012 at 18:34

well I am showing around 100% on Enterprise inns william hill over 100% talk talk 10000% as they cost me zero on the Carphone warehouse split,I wont go on

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Tony Pletts

Dec 17, 2012 at 19:25

I am a lucky fool also, for the same reason (high yield, bonds, Pibs, and yes, two of the bad banks). Question is where does one go from here? Due to the easing of the Euro worry (Boi in particular), the bonds will not continue to rise anything like they did this year, but the yields are still extremely good.

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J Thomas

Dec 17, 2012 at 20:03

Standard Life up 68% over last twelve months, not including dividend payments, has been very good to me.

The question now is, how long will the current run continue. SL were ahead of the game when they stopped paying IFA comissions and fees and introduced their MyFolio SIPPs, together with painful cost cutting.

Still a hold for the dividend payments alone.

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Income Investor

Dec 18, 2012 at 15:38

sgjhaghsdg

Yes - should have been the FTSE350 - but I couldn't immediately find an appropriate ETF. The iShares FTSE100 was up 10%. But the point remains that my asset mix is not reflected fully in any benchmark I can find!

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Income Investor

Dec 18, 2012 at 15:40

Clive B - details of the portfolio are given on the website.

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Hilary hames

Dec 18, 2012 at 15:44

wow!

I dont have any etfs but prefer them in theory to trackers as you can always see exactly what you would get if you sell

Are these etfs ones that are still worth getting into? (Given of course, that we have no crystal ball...)

Very well done.

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Hilary hames

Dec 18, 2012 at 16:10

@income investor, can you post a link to where the portfolio sits on the website?

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Income Investor

Dec 18, 2012 at 18:10

http://www.the-diy-income-investor.com/p/portfolio.html

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Hilary hames

Dec 18, 2012 at 21:52

'Income Investor' thanks so much

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ERic Hancock

Dec 19, 2012 at 09:15

Income Investor - I've looked on your page and you've gone into some consideraable detai - many thanksl. Many of the holdings you have are also in my portfolio.

Some time ago, I made a spreadsheet of all shares producing over 5% p.a. I listed the offer and bid price to calculate the spread (important with some of these high yielders), the NAV (to ascertain the ratio between the NAV and the offer price) the Earnings Per Share, the annual divi (which enables you to see whether it's covered or not) the P/E, the XD date and payment date.

So I sort by XD date and if a share is coming up to its XD date within a few days, it's got a low P/E, its divi is covered by earnings, the spread isn't too much and the Offer Price is (ideally) at a discount to NAV, I may well jump in.

If anybody reading would like the spreadsheet page, just let me know your email address and I'll forward it to you. It's on Excel.

Whilst I'm writing, before I invest I also check two other, incredibly useful, sites.

One is Ichimoku Trader which gives brilliant forecasting graphs and is on

http://www.ichimokutrader.com/

and the other is BannRonn, which provides Buy/Hold/Sell advice and gives you the trends and reasons, plus the price trigger points to look out for, when investing . BannRonn is on

http://uk.bannronn.com/stocks/trend-analysis.php?symbol=NWS.L

I'll gladly provide details of my current holdings, if anyone is interested in that.

Good luck

Eric JH

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Ian Holmes

Dec 22, 2012 at 09:20

Thanks Eric, that's a helpful addition to an interesting blog! Can we have an e-mail address to contact you as invited?

Best regards;

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ERic Hancock

Dec 22, 2012 at 09:25

Yes, Ian - I'm on

jennyanderic@talktalk.net

EricJH

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HETTIE1

Dec 22, 2012 at 11:24

Well i bought pace, at 80p,about 4 months ago, now £1.85, so great return , but do i sell

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derek farman

Dec 22, 2012 at 12:55

Well I did something silly . At first it seemed a great move to buy a bunch of Apple shares which quickly gained over 30%, but hubris set in and I thought they would keep on going. Now my 30% has evaporated.

I never learn . So many times I have held on having made big paper gains only to see them vanish.

2013 resolution.....stop being so greedy.

I will hang on to Apple because their stuff is so superbly designed, trouble free and user friendly, and will surely come good again.

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Deliberating Investor

Dec 22, 2012 at 18:41

Hettie1

Look at price graphs over 8 years - this share is erratic thro commercail performance winning and losing. I should sell. Topps Tiles is another where I would not go back

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HETTIE1

Dec 22, 2012 at 18:53

dont normally go back to a share, and i know you should never fall in love with a share, but pace ls where i grew up saltair, plus i like the new chairman

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Deliberating Investor

Dec 22, 2012 at 19:19

Hettie1

Well you have a reasonable reason to stay in, but I think you have to understand the technical future - if you go to Wikepedia there is a good run down on just what they do. Probably, you know that already, but technology moves fast these days

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sgjhaghsdg

Dec 22, 2012 at 19:43

I've done very well from tech shares but that;'s because I'm prepared to put hundreds of hours of time into reading the patents of likely candidates and those of their key competitors.

No way would I be happy skipping this step and investing blind.

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HETTIE1

Dec 22, 2012 at 22:17

Thanks so much for comments, will think on them , had a scare this week when they suspended , dont take much notice of share tips but did see one broker recommending buy price target at £2.30 will have to sell, did think of b p, any thoughts on them

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Deliberating Investor

Dec 23, 2012 at 17:11

I am nearly 81 and I am not a very great 100 FTSE private investor but I do look for exemplary investments (you cannot be right all the time) but here is one. James Halstead Plc - incorporated in 1915, family run with as far as one can see about 30% shareholding. Makes flooring products sold virtually throughout the world. Was originally on Main market, but possibly went to AIM for qualifying IHT reasons. My experience- invested £14,000 in2005, have shares now valued at £27,600 and have realised in the interim period £15,600. Have received 2x 100% bonus share issues with another due in 2013. Have received special dividend in period. Do you own research and start by going to Google and putting in "Shareholders of James Halstead PLC" and an interesting site comes up and then scroll to the top to see who owns it.

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Jolanta Nowak

Dec 24, 2012 at 14:31

Eric... I would be very interested in receiving your spreadsheet please!

jolantanowak@hotmail.com

Thanks!

Derek Farman... Not sure I agree with you on Apple.. every new product is better by a smaller and smaller margin, and they no longer produce the best tablets or phone. Biggest market cap in the world - I think they will underperform.

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derek farman

Dec 24, 2012 at 15:21

Yes Jolanta, it does appear others may be catching up or overtaking . However, I have only ever had Apple, and judging from the comments/frustrations of friends with PC's, I know I chose correctly. Also if one is into photography as I am, the reproduction of ones efforts is incredible.

I expect them to outperform even though the charismatic and lateral thinking Jobs has sadly passed away, even if they only tinker around the edges of their excellent products.

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