My stocks portfolio (as at 30 Sep 2009) - Result of living out a focused value investment philosophy.

After I had divested out of Jaya Holdings (see earlier post) around August this year, I bought into shares of SembCorp with the small profit on divestment. I also increased my other holdings with the small profits on divestment. My reasons for divesting Jaya Holdings are mentioned in my earlier post. I bought into shares of SembCorp as I find that it is a large cap blue chip stocks dealing with multi-industry businesses. It owns the subsidary company SembMarine which is the world's second largest oil rig builder. I decided that investing in an already established large conglomerate like SembCorp is afterall better than investing in a smaller business like Jaya Holdings. Given a large cap and a small cap businesses are both comparable in future long term prospects, it is the larger one having far longer consistent track record that may provide more stability in long term investment. Afterall, the larger business has already established itself with a longer proven track record providing more credibility to continue its operations based on good branding and business characteristics.

My stocks portfolio

Learning to live out a focused value investment philosophy

As I have mentioned in my earlier posts, I started entering the stocks market during late June 2008. My two earliest stocks that were bought included CapitaCommercial Trust and Parkway Holdings. As I was still reading up books and researching on stocks investment during that period, I did not firm up an investment philosophy unique to my personality. My earlier buying trades into CapitaCommercial Trust and Parkway Holdings were based on gut feelings with some emotions involved. It was later that I aligned my learning from these practical experiences with my investment reading and research that I firmed up my own investment philosophy, which is that of a focused value investing philosophy. An investment philosophy is necessary for an investor. It is his own guiding principles on making every investing decisions (e.g. what stocks to buy, when to buy and when to sell). An investor without his own living investment philosophy will be confused and clouded by emotions whenever executing his investing decisions. This is because his thinking keeps changing based on emotions affecting his every decisions. He always questions what he is doing and is unsure if a decision is rightly made since there is no inherent investment philosophy to draw upon as a guide.

After I have firmed up my focused value investing philosophy, every decision and thought becomes clear always supported by the investment philosophy. Making a decision is no longer difficult since it is backed by the investment philosophy. Owning only a few stocks in concentrated positions; buying stocks only at a margin of safety below its intrinsic value; selling stocks only when it is grossly overvalued or underlying business fundamentals have deteroriated permanently or there is a better alternative stocks worth investing; always look at buying stocks as part-ownership in a business, so it is vital to constantly analyse and monitor underlying business of a stocks. These are the guiding principles of my investment philosophy and once an investor has lived out his own investment philosophy, making an investment decision is as easy as breathing since he carries out every decisions naturally. It becomes his own natural investment style.

Therefore, my current portfolio is the result of slightly more than one year of practical learning to live out my investment philosophy, that of a focused value investment philosophy. The more I practise my investment philosophy in thinking and making decisions, the more it becomes a natural part of me. I am still learning and will be always learning to live out a focused value investment philosophy.

Weightage of individual stocks in my portfolio

There is a conventional portfolio management style which says an investor must seek to rebalance the weightage of the stocks in his portfolio. As such, he should sell some shares that have appreciated too much in value and buy other shares so as to keep the weightage of individual stocks in his portfolio constant. E.g. an investor's portfolio is made up of 30% stocks A, 30% stocks B and 40% stocks C. If the price of stocks A has run up such that the portfolio is made up of now 50% stocks A, 20% stocks B and 30% stocks C, by conventional portfolio rebalancing management, the investor must sell some shares of stocks A and buy more shares of stocks B and C to rebalance the % of each stocks back to the ratio 30%: 30%: 40%. This is to reduce the risk of any particular stocks dominating the portfolio and rebalances the weightage of individual stocks according to a pre-determined ideal fixed ratio.

However, based on focused value investing philosophy, the investor does not care about % weightage of individual stocks in his portfolio. He assigns more funds constantly into the stocks he thinks is more promising than others and/or is more attractively priced to acquire more of its shares. As such, there is no fixed % weightage for individual stocks in his portfolio and it keeps changing according to the prospects of individual stocks. As such, I do not believe in rebalancing as an approach to portfolio management. Ride the winners and weed out the losers constantly.

Transaction costs drag down investment returns

The total transaction costs of $1425.29 incurred for all my trades translates to a decrease in 1.52% from my total returns resulting in net 40.5% returns since I started out in late June 2008. I was amazed by such a hefty sum in transaction costs incurred considering that I do not practise active trading of stocks. I really wonder how an active trader trading frequently in many small positions can achieve good returns after deducting the hefty transaction costs even through low cost online brokerage trading?

As such, I am now more conscious of transaction costs. Afterall, a focused value investor waits for the perfect pitch to buy and sell shares only when the best opportunity strikes. Inactivity really matters to prevent having a high turnover in portfolio magnifying transaction costs. Execute trades only when necessary. Otherwise it is better to do nothing.

Further discussions will be provided on my portfolio in subsequent posts.

Discussion points:- It is vital to have a unique investment philosophy aligned to one's personality. When one lives out his investment philosophy, he is no longer basing his every investment decisions on changing emotions. Every investor is unique and may not share similar investment philosophy.

Rebalancing is not an effective way to manage portfolio. Instead, have the courage to invest heavily in the most promising stocks in one's portfolio. Ride the winners and weed out the losers constantly in one's portfolio.

Avoid a high turnover in trading one's portfolio. Transaction costs is a real drag to investment returns.