Million Pound Portfolio: 2021 half-year results

In this half-year review I outline my portfolio’s performance, take a brief look under the covers and run through each major buy or sell trade of the last few months.

Table of Contents

A new name and a new all-time high

I’ll get the gritty details out of the way first.

After ten years I’ve decided to change the portfolio’s name from “Model Portfolio” to “Million Pound Portfolio” because (a) it’s more catchy (and yes, more cheesy) and (b) because it sums up the portfolio’s long-term goal.

As a quick reminder, my plan is to grow this virtual portfolio from its 2011 starting value of £50,000 to a million pounds within 30 years (2041). That requires an annualised total return of 10% over those 30 years, and Ideally I’d like about 5% of that to come from dividend yield and 5% from dividend growth (which drives capital gains).

As for performance so far in 2021 (including dividends):

  • The Million Pound Portfolio is up 12.7%
  • The FTSE All-Share is up 8.9%

Of course I don’t expect to get anywhere near a 13% return every six months, so this is an abnormally good result. Most of that is down to the UK stock market’s ongoing recovery from the lows of last year, which shows up in the All-Share’s abnormally good 9% half-year return.

The strength of the UK stock market’s recovery has driven the portfolio to its first new high in just over a year. Its total value now sits at £112,200 compared to a high of £110,000 in January 2020.

Longer-term returns are ahead of the market but behind my target

Value investing performance chart
Past performance is not a guide to future performance

Here’s a quick summary of the portfolio’s longer-term results:

  • Ten-year annualised total returns are 8.4% for the portfolio, 6.3% for the All-Share
  • Five-year annualised total returns are 6.5% for the portfolio, 7.4% for the All-Share

So the portfolio is ahead of the FTSE All-Share over ten years and that’s really my minimum standard. If I can’t beat the All-Share over the longer-term then I should close up shop and find something else to do.

However, it’s behind the 10% annualised return needed to hit my million pound goal. To be on target the portfolio needs to be at £139,000, so it’s 24% behind that. I have no idea whether I can close that gap, but in the last few months I’ve introduced a few changes to my investment strategy which I think should help.

But before I start talking about those changes, here’s a quick review of the portfolio’s dividend track record:

Steadily growing dividends until the pandemic, but how quickly will they recover?

My goal for dividends is that the yield should be better than the FTSE All-Share’s at the very least, and preferably around 5% or more so this is definitely an income and growth portfolio.

As the chart above shows, dividends from the portfolio and the All-Share took a hammering last year, recording declines of 36% and 32% respectively.

Given these lower dividends last year, the yields on the portfolio and the All-Share are 2.9% and 2.6% respectively, which is unusually low.

Although this wasn’t a disastrous performance it was disappointing to suffer a larger dividend decline than the All-Share, so dividend safety is another area I’ve focused on in recent months.

The biggest winners and losers of the year so far

The share prices of individual companies will always be volatile

Even though the Million Pound Portfolio follows my Defensive Value Investing strategy, the individual holdings are still going to be volatile. It’s an inescapable part of investing in individual stocks and it’s why you shouldn’t focus on short-term share price movements.

So far this year Senior is up 68%, making it the best performing holding of the year so far with almost all those gains arriving in one day. Senior’s shares were happily sitting at just over £1.02 when out of the blue, investors were told that a private equity firm had offered £1.76 per share to buy the whole company.

Management refused the bid, but the share price still rose to almost £1.60. This pushed Senior’s position in the portfolio up to around 6%, while at the time making the shares less attractively valued (just like a loaf of bread at £2 is less attractively valued than the same loaf at £1).

So following my new rule of active position sizing, I sold down Senior and reduced it to 2% of the portfolio. The proceeds were used to top up an undersized but more attractive holding.

At the other end of the spectrum, Telecom Plus is down 15% so far this year. I still like the company so I used this price decline as an opportunity to buy more shares at a lower price, increasing its position size to 4%.

In summary then, performance so far this year has been better than I’d expected. That is mostly down to luck but some of it may be down to a few improvements I’ve made to my investment process in recent months.

What I’ve changed to improve performance

During its first six or seven years the portfolio was happily ticking along with annualised returns of around 10%.

Then it started to run into problems in early 2018, partly because of Brexit and partly because there was a global economic slowdown. More importantly, too many of the portfolio’s holdings were having fairly serious problems and it became clear that my investment process needed improvement.

Here’s a summary of the most important and most recent changes.

Change 1: Focus on higher quality companies

In 2019 I started to focus on companies with high quality earnings, capital employed growth, wide profit margins and perhaps most importantly, high returns on lease-adjusted capital. I also started to focus much more on avoiding turnarounds, recovery stocks and transformations and I wrote an article for Master Investor Magazine about some of these issues to help me clarify my thinking.

I think these changes have really helped in terms of identifying quality companies. More recently I’ve made a few changes that should improve the valuation and portfolio management side of things.

Change 2: Value companies with discounted dividend models

The biggest change of the last six months, by far, is that I now value companies using a discounted dividend model.

This is a big shift because previous I valued companies using backwards looking ratios such as PE10 and PD10 (price to ten-year earnings and dividends respectively). I now think those ratios are a useful starting point, but the real value of a company lies in its future cash returns to shareholders, so that’s what I focus on now.

I find the process of building dividend models extremely useful. It forces you to think seriously about how the company might perform over the next ten or twenty years, and that’s important because that’s a realistic holding period for a long-term investor.

Change 3: Calculate target Buy and Sell Prices

Once I’ve built a realistic and conservative dividend model I use it to generate two target prices: a Buy Price and a Sell Price.

  • Buy Price: At this price the stock’s expected rate of return is 10% per year. That’s my target rate of return.
  • Sell Price: At this price the stock’s expected rate of return is 7%. That’s the long-term average return of the UK market.

In short, if I don’t think a stock is likely to beat the All-Share over the long-term then I don’t want to own it.

In most cases the Sell Price is around twice the Buy Price, so this gives me a fairly wide price range where I’m happy to hold.

For example, at the moment Senior‘s Buy Price (according to my dividend model) is £0.84 whereas its Sell Price is £1.74. The private equity firm bid £1.76 per share to buy the whole company, so I assume their model is more optimistic than mine, or that owning the whole company will allow them to add value to the company directly.

I like to think of the relationship between the current share price, the Buy Price and the Sell Price in terms of a company’s Margin of Safety.

Change 4: Calculate the Margin of Safety

Ben Graham said that margin of safety is the central concept in investment, and I think that’s exactly right. It doesn’t matter if you’re a value investor, growth investor or momentum trader, if you don’t have a margin of safety at some point you’ll get badly burned.

I calculate a Margin of Safety score to tell me where a company’s share price is relative to both its Buy Price and Sell Price. It works on a sliding scale, but here are the major landmarks:

  • If the share price equals the Sell Price then Margin of Safety is zero
  • If the share price is halfway between the Buy and Sell Price then Margin of Safety is 50%
  • If the share price equals the Buy Price then Margin of Safety is 100%

Margin of Safety tells me how attractively valued a company is and I now use it to drive position size decisions.

Change 5: Actively manage position sizes

Before 2021 I had a hands-off approach to position sizing. The Million Pound Portfolio held around 30 companies, they were added with a default position size of 3-4% and that was that. If the share price went up a lot then the position grew and if the price went down a lot the position became smaller.

This is how indexes like the FTSE 100 work. It’s called passive position sizing and it makes sense for index trackers and inexperienced investors because (a) it reduces transaction fees, (b) it reduces the amount of time and effort required to run the portfolio and (c) it can make sense if the investor doesn’t really know what they’re doing.

But once you’ve been investing with a reasonable degree of success for a few years, I think most investors would be better off by deliberately investing more into their best holdings.

We usually have fairly large portions (5% to 10% of our total assets) in each of five or six generals [generally undervalued stocks], with smaller positions in another ten or fifteen

Warren Buffett, Buffett Partnership Letters

Here’s how I now actively manage position sizes:

I have a separate default position size for defensive companies (4%) and cyclical companies (3%). To arrive at a target position size I adjust those defaults using each holding’s Margin of Safety.

The basic idea is that as Margin of Safety gets larger so does the target position size, and vice versa. I use a simple formula to make the adjustments, for example:

Margin of SafetyTarget Position Size
150%200% of default
100%150% of default
0%50% of default

If you want to try this out I’ve added this formula to my investment spreadsheet.

I’ve only been actively managing position sizes for a few months, but so far I like it. The portfolio is now much more weighted towards the best companies at the most attractive valuations.

The most noticeable difference is that the top four or five holdings (about 25% of the portfolio) are all Quality Defensive companies and they have an average dividend yield of around 6%. These large dividends have started to flow into the portfolio and that makes me happy.

What I’ve sold so far this year

This review has gone on long enough, so finish off by taking a look at all the major trades I’ve made this year.

Somewhat unusually, I haven’t added any new holdings to the portfolio this year. All I’ve done is remove quite a few holdings as part of my plan to build a more concentrated portfolio (and they had very small target position sizes too).

Most (but not all) of these investments worked out badly, so hopefully what comes next will provide you with some useful lessons on what to avoid.

January: Sold Hyve because it’s too acquisitive for my liking

I bought Hyve Group in 2015 when it was called ITE (International Trade Exhibitions). It was a Russia-focused trade exhibitions business and its operations and share price had been hit by the Russo-Ukraine War, so it was trading on attractive-looking valuation ratios.

Buying ITE was a mistake (and a learning experience) and it produced a total return of about minus 50%.

Hyve struggled because in the past it had repeatedly followed a strategy of growth using debt to acquire other companies.

In 2015 my company review were far shallower than they are now, and although I did spot Hyve’s acquisitive history it didn’t put me off investing.

Today I know better, having seen debt-fuelled acquisition sprees blow up on more than one occasion.

For the complete lowdown on why I bought and sold Hyve, here are the full reviews taken from my monthly newsletter:

February: Sold N Brown because it doesn’t meet my Quality criteria

When N Brown joined the portfolio in late 2014 it was a successful mail order catalogue business doing what, at first glance, seemed to be a decent job of transitioning to the online world.

In reality it was a long way behind where it needed to be, and had seriously underinvested in the hard and soft infrastructure needed to compete in a mobile-first world.

Today N Brown’s transition to a pure-play online retailer is almost complete, but it has lost the major competitive advantage it held as a dominant mail order catalogue business (the advantage has been lost because almost nobody uses mail order catalogues anymore).

As a pure-play online retailer N Brown doesn’t have the sort of proven track record of success that I’m looking for, so I decided to sell (although I do like its market-leading Simply Be brand and think that may have a good long-term future, but it’s only a small part of the overall business).

This was another mistake (or learning experience), with a total return of around minus 60%.

That sounds bad, but with a position size of 4% or so a 60% loss only translates into a 2.4% loss at the portfolio level. That isn’t the end of the world, which is why small position sizes make sense when you’re less experienced (as I was in 2014).

March: Sold Mitie because it operates in a super-competitive high risk industry

Mitie was one of the first “defensive value” investments I made, way back in 2011.

Before that I’d spent several years investing in micro-cap deep value stocks, but that didn’t suit my personality. What I really like is a decent dividend yield and reliable dividend growth, and as the UK’s leading facilities management company that’s what Mitie seemed to offer.

In 2011 Mitie had a long history of impressive growth, growing by 18% per year in the decade to 2011 and raising revenues, earnings and dividends almost every year.

However, rather than being a steady and dependable dividend growth stock, Mitie was in fact more like a race car being driven too fast on worn out tyres. To the more experienced eye (which I didn’t have at the time) a serious crash was virtually inevitable.

The main problem was Mitie’s history as a company built from over one hundred small acquisitions, a strategy which often produces large companies with no coherent structure.

In the computer programming world this is known as a big ball of mud, or a hairball/spaghetti system. There are lots of different components, many of which don’t play nicely with each other, and the end result is a system which can grow very quickly until it collapses under its own inefficiencies and complexities.

That’s bad enough, but Mitie also operates in the super-competitive outsourcing industry, where suicide bidding on very large contracts is an occupational hazard. Problems at Capita, Carillion and Interserve provide good examples of just how hard it is to run a conservative and sustainable business in this sector.

This investment was another mistake with a total return of about minus 30%, but at least Mitie taught me a lot about the importance of detailed research and how consistent and profitable growth, in and of itself, means nothing.

April: Sold Standard Life Aberdeen because I don’t think it has any durable competitive advantages

Standard Life Aberdeen originally joined the portfolio in 2016 as Aberdeen Asset Management, which was then the second largest active fund manager in the UK. The investment in Aberdeen worked out well, with the 2017 merger of Aberdeen and Standard Life leading to annualised return of 17% at the merger date.

Unfortunately I decided to hold on to the merged company’s shares.

My opinion at the time was that Standard Life was a leading asset manager and the combined group promised additional economies of scale and a more diverse and robust business.

Four years later and as a more experienced investor, I now think both companies lacked durable competitive advantages and I think that’s true of the combined business too. This matters because I only want to invest in a company if I think I can see and understand its competitive advantages, because without those I cannot have any faith in its long-term future.

Standard Life Aberdeen (or Abrdn plc as it has now inexplicably been renamed) doesn’t have obvious competitive advantages that give it an ability to earn consistently high returns, so it isn’t a suitable holding for the Million Pound Portfolio.

I would call this a mild mistake and another good learning opportunity, and in the end the total return was about 20% over five years, or 4% annualised.

May: Sold Petrofac because it operates at the crossroads of two extremely cyclical sectors

Petrofac is an oil and gas construction and engineering business, and when joined the portfolio in early 2014 it had a track record most companies can only dream of.

It had grown by 35% per year over the previous ten years, increased revenues, earnings and dividends almost every year and its average return on capital (ROCE) was a very impressive 30%.

What I didn’t appreciate at the time was the extent to which those results had been driven by a huge boom in oil and gas prices and oil and gas construction projects from the early 2000’s until 2014/2015.

Oil prices fell off a cliff in 2015, taking capital spending with them (Source:

When supply finally caught up with demand, prices fell and the oil and gas projects that Petrofac depends on dried up. Petrofac has struggled ever since and several major self-inflicted wounds have made its recovery much more difficult.

Looking longer-term, Petrofac’s core market is likely to be in decline as the world transitions away from fossil fuels.

So this was another mistake and another opportunity to learn about the difficulties that come with investing in highly cyclical industries. The total return was about minus 75%.

June: Sold XP Power because the price is close to my target Sell Price

After months of seemingly doing nothing except selling badly performing investments, it was nice to finally close out a position which has produced very solid returns over the last few years.

XP Power has been one of the portfolio’s best investments to date, returning 130% over four years. The annualised return was even better, at almost 50% per year. That was mostly because I sold about half the original investment after a near 100% gain in the first nine months.

When XP Power joined the portfolio in early 2017 it was one of the world’s leading designers, manufacturers and distributors of AC-DC, DC-DC and other power converters. It started out as a distributor and over many years expanded into design and manufacturing as part of a long-running and highly consistent strategy.

Today XP is a global leader with the largest technical salesforce and the broadest and most up to date range of converters in the industry. The only problem is that its share price has almost tripled and is now close to my target Sell Price (which is effectively my estimate of fair value).

In practice that means its dividend yield was a healthy 3.7% at the time of purchase and today its below 2% (although of course there’s much more to valuing a company than simply looking at its dividend yield).

I still think XP is a high quality business, but I’m in the process of reducing the number of holdings in the portfolio from 35 at the end of last year to 25 by the end of 2021. Something has to give and this time it was a quality company at a not obviously attractive price.

Just for the record, here’s are XP’s various prices:

  • Price today: £52.00
  • Target Buy Price: £22.39
  • Target Sell Price: £51.07

Summary: A good start to the year, let’s hope it continues

Overall, 2021 has been a good year so far for the UK stock market and that has helped my portfolio.

Crystallising multiple losses is never easy, but having sold off all the dross I am much more happy with the remaining holdings and their relative position sizes. I’m looking forward to the rest of the year and hopefully the pandemic won’t throw any more spanners into the works.

Feel free to share your own portfolio’s ups and downs in the comments below.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

29 thoughts on “Million Pound Portfolio: 2021 half-year results”

  1. I’d like to see how active position sizing works out for you. It seems sensible, but does it work in practice? I’m sceptical that it adds value. I don’t think the market really cares over the short run which of our stocks we think are the best values! And there is always uncertainty in our estimation of those values in the first place.

    Is it better to adjust position sizing as we go, or should we just hold our positions passively and sell when they reach full value? I don’t know the answer. It would be interesting to track two versions of the portfolio: one with active position sizing and the other with passive. I’ve never seen anyone run that experiment.

    1. Hi Rod

      That was exactly my position for the last ten years. I felt that any preference for this or that company, other than the fact that they meet my overall criteria, was misplaced, so I invested equally in each holding and left position sizes to be driven purely by price changes.

      The only thing I did was cut positions in half when they went above 6% or so, to reduce company-specific risk.

      I think that approach is fine, but it’s time for me to try something else, and I think if you have enough experience then active position sizing probably makes sense.

      But as you say, we’ll have to wait and see if it adds value, which I can measure retrospectively by looking at the returns from my larger holdings verses the smaller holdings. It will probably take a few years before any obvious difference starts to show itself.


  2. Thanks for the thought provoking review.

    In own portfolio ………
    SNR sold out completely on bid approach,
    might re-enter if price slumps back
    SLA this bothers much along the lines of your thoughts
    Could well be one for the skip if better beckons

    Thanks again.

    1. Hi Bob

      I did think about exiting Senior completely but decided to hold on for now as I’d like to see how the post-pandemic recovery takes shape in aerospace. But of course holding on is still dependent on (a) the quality of the company and (b) its valuation. And of course I might not get much choice if the private equity firm ups their bid.

  3. I would say that a discounted cash flow model is probably better than a dividend discount model. Having said that the assumptions in both are so error prone that they are almost useless in my experience once you go more than a couple of years out.
    There was some academic work done in this a few years ago (behind a pay wall published in the Toronto Globe and Mail) where future returns were regressed against various predictors.
    They didn’t do a nonlinear multivariate regression and correct for multicolinearity which was my criticism, but used a linear stepwise approach. Nevertheless they found that the best predictors of price appreciation is price to free cash flow for consumer discretionary and staples. For financials it was price to earnings not price to book. Some time when I get some financial data I would like to extend this research and combine the analysis with ROCE, but it’s not easy to get the historical ratio data.

    1. Hi Andrew

      This is how I think of it: In theory the present value of a company is the net cash flow from and to investors over its remaining lifetime, discounted at an appropriate rate (whatever that may be).

      In my models I assume I’m going to buy the whole company and that it won’t require additional equity funding from me, so the future cash flows are all outbound in my direction and are made up entirely of dividends (because buybacks make no sense if I own the whole company).

      So that’s why I focus on discounted dividend models. However, exactly how you come up with those estimates of future dividends is up for debate. if you want to focus on free cash flows then that’s sensible. If you want to focus on how retained earnings could drive capital, earnings and dividend growth, which is what I do, then I think that’s okay too.

      So there are lots of ways to estimate future dividends, but if you’re valuing businesses from a “private owner” perspective then I think dividends make the most sense (plus the realisable value of net assets if you’re investing in companies that might get broken up or sold for scrap).

      And yes, obviously these models will always be wrong, but hopefully if I’m realistic and conservative they’ll be wrong by underestimating future dividends, in which case my returns will be even higher than expected.

      In terms of the correlation between various ratios and future returns, I don’t really think like that anymore. I just focus on estimating future dividends and buying at a solid discount to their present value, and if a company’s too complex or uncertain to build a sensible model then I’ll just move on to a different company.


  4. Good honest view of the mistakes John – we all make them, or we wouldn’t be making any decisions at all?
    Still some are more painfully educational than others, as Ted Baker taught me, and your good self.
    One other of mine is glaringly amateur in nature :-

    I bought Lloyds at 60p — still got it — Terry Smith did tell me never to invest in banks and I didn’t listen — It won’t be in the portfolio long.

    Still, the pandemic was a wonderful investment opportunity and to give you an idea of the areas I poked into, here is a short list:

    Hargreaves Lansdown at the 13XX level has become a sizeable holding which I hope never to sell. One you have covered a lot John.

    AG Barr, Nichols, Fevertree and Coca Cola HBC make up my drinks package – in fact they are doing so well at the moment I’m thinking of designing and building a drinks cabinet to keep them in.
    I will keep the first three long term and sell CCH when the price ticks up a tad more.

    Melrose when it hit 90p – Couldn’t resist despite the dire state of aerospace and automotive at the time. The recent announcement of the sale of the US division isn’t still factored into the current price of 163 — I’m guessing (because one never really knows) it’ll comfortably climb above 250p

    Morrisons at 16X — they aren’t the flashiest of outfits but perhaps a better pick above the bunch and relatively stable during lockdown or not. The dividend is serviceable and after the recent pay back of the pandemic benefits it should see a steady growth into 2022.

    BAE Systems at 495 – has its critics, but as a huge order book, the envy of any company plus it has a supportable high dividend, and personally I consider it to be a 6XX stock — 533 as I type.

    Aviva 282 — seems Amanda has got the audience with the sale of 8 non core businesses, shedding a lot of cost and in a position to pay down debt and return capital. The recent active investor entered this year at much higher price to become 2nd largest shareholder after Blackrock, and their view is it’s an 8XX stock with 2 years and a doubling of the dividend. I’d be happy with somewhere between 6XX and 7 and then I’d say sayonara.

    PZC Cussons 17X – Always liked the company for it’s British manufacturing, apart from Nigeria of course which is in scale back mode. Jonathan Myers seems like a good choice for running the focussed brand portfolio it has decided on. I’m a bit surprised Imperial Leather isn’t one of them but Carex, St Tropex and a few of the others seem like winners.

    BATS — entered at 29XX Current price is a steal if you are not squeamish about the concept of smoking and the regulator — It’s still a cash machine and has captured a big % or the western world’s vape market.

    Rathbone Brothers 15XX– rather a strange choice with the emergence of the user friendly platforms like AJ Bell and Hargreaves, but it serves a different hands off wealth market for professionals and those with no time, and is well financed and always profitable.

    Warpaint London 91p – An oddball with W7L brands and very Vegan make up but it has a low cost base, reasonable handle on social media marketing and is expanding well in the US as well as UK/Europe. It is an AIM flutter, but so far at 139 it’s turned the corner with the latest results. I’d like this to be a 5 to 10 bagger, risks considered of course.

    That’s it in the UK — the US stuff is interesting but off topic for this forum I guess.


    1. Hi LR, thanks for the summary, I’m sure lots of readers have a few of those companies in their accounts; I spotted three of mine.

      HL is an interesting one. It’s outgrown the stocks and shares market because it’s so dominant, so is now entering cash ISAs which in the UK is a much larger market. Will be interesting to see how it does there and if it’s able to leverage cash ISAs as a mechanism for drawing more of the UK’s infamously conservative savers into its more profitable stock & shares accounts.

      1. John, Looks like Morrisons value has finally been unlocked. What a shame it took a foreign entity bidder to appreciate this fact?

        Still, it’s a good return for both of us of course. I’m assuming this was one of the three you mentioned.


      2. Hi LR, no I sold Morrisons in 2017. As I gained more experience as an investor I realised there were two main points I didn’t like:

        (1) Weak returns on capital employed
        (2) Massive growth of capital employed primarily through huge capital investments over many years. Capex consistently exceeded earnings and was consistently more than twice depreciation, which means that free cash flow was consistently less than half of its earnings.

        This was during the supermarket “space wars” where every UK supermarket seemed to be opening up more and more stores. Eventually the supply of retail space exceeded demand and they’ve all been suffering ever since to varying degrees (other than the discounters who lucked into a perfect windfall of recessions and wider social acceptance of shopping in their stores).

        So no, it wasn’t one of the three!

      3. Aahh I see — still the price it dropped to during the pandemic clearly undervalued the entity on its property portfolio alone and that has now been recognised. I’ve owned MRW a couple of times as they seemingly drift from feast to famine alongside the general sentiment for supermarkets which as you point out are precariously low margin businesses.
        Coincidentally I sold it last time in 2017 for just under 248p on 10 Jan2017 for a modest gain of around 6% per annum over 3 years including dividends — so rather unexciting.

        This time around the gain is going to be so much greater of course, having bought in at 17X. Particularly so if Amazon get involved in the bidding.

        Regards LR

  5. This post was republished on Seeking Alpha and one of the readers there asked me why the portfolio’s dividend fell 30+%. Here’s what I wrote:

    “Good question; I wish I’d put that in the article but it was long enough already!

    I just analysed the dividends from the 21 companies currently in the portfolio that were there at the start of 2020. Here’s what I found:

    7 companies suspended dividends with 5 not yet reinstated. These were all cyclical companies in sectors such as aerospace and retail.

    4 companies missed one dividend during the initial panic and then returned to full dividends or a slightly reduced dividend. These were all cyclical companies.

    2 companies cut their dividend to fund faster growth, which probably would have happened even without the pandemic. These were both relatively defensive companies.

    1 company just made a simple cut. This was an auto loan business.

    7 companies maintained or grew their dividend. 6 of these were defensive companies.

    So clearly the most robust dividends were paid by defensive companies, which is what I’d expect. The obvious lesson is that if you want a more robust dividend then focus more on defensive companies.

    In my case, I have adjusted my active position sizing strategy to overweight defensive companies compared to cyclicals, so hopefully that will make the portfolio’s dividends more robust during the next major downturn.”

  6. I’ve taken the idea of putting more money into my best ideas to the logical conclusion of ONLY investing in my best ideas. Once I’ve done that I don’t need to size positions by the quality of the idea–I size by risk. Downside (for some) you have to abandon traditional notions of adequate diversification. I only own 3 to 5 stocks at once because of this high-grading. Nobody is going to have 20 great ideas at one time, or even 10. I can only invest in safer bets under this strategy. But fortunately, most truly great ideas are safer.

    1. Hi Rod, that can definitely work if you have the knowledge and stomach for it.

      It reminds me of Buffett’s approach during his earlier years. He basically said he wanted high returns with virtually no risk, and since there was virtually no risk in each individual position is meant that larger positions could be taken in the best ideas.

      He started out with a rule something like no more than 20% in a single idea, and ended up expanding that to 40% for American Express.

      So it can definitely work, but I don’t think I’ll be ready for that level of concentration anytime soon. Currently I expect to have perhaps 20-25 holdings going forwards, although I admit that probably less than 10 of those are going to be really exceptional ideas. The problem is that you don’t always know which ones are going to turn out to be the exceptional ideas.

      1. Absolutely right. It took me 20 years before I felt ready. I would have blown up in my first decade 😉

        I find the main obstacle investors have to doing this is they don’t believe they can afford to wait long enough to get a “great” idea. And it’s usually a very long wait. I’ve invested in only 3 new stocks since 2015, and it would have been 2 if not for the pandemic sell off. One idea every 3 or 4 years seems unworkable to most. How do you create a portfolio at such a glacial pace??

        What people don’t grasp is that a 1 great idea replaces 10 good ones because you can take larger positions sizes safely and have longer high-return holding periods. You may get 10 good ideas for every great one, but the great one does the same work for you so you CAN wait for them.

        I think nobody does this because you can’t learn this way. You need more activity at first. And there are almost no examples of investors doing this to learn from–Buffett and Munger are the only prominent ones I know of.

        I think it’s a better way, but, like you say, it’s not for everyone.

      2. “I think nobody does this because you can’t learn this way. ” – Exactly.

        So a reasonable approach is to start off broadly diversified (possibly in an index tracker which is how I got started almost 30 years ago) and gradually increase the degree of concentration on your best ideas.

        I also think decades is the right timescale to use. My first decade I was an index tracker and I now think of the last ten years as my apprenticeship in active stock picking, hence my goal of reducing my holdings from 30-35 towards 20-25. Perhaps 10 years from now my portfolio will hold fewer than 20 companies…

    2. Trouble is that future share price movements are seldom just determined by fundamentals, but also driven by investor sentiment which at times as we know can be irrational.

      By cautiously spreading the net wide while using fundamental value analysis, more of those irrational movements can profitably be captured in shorter time spans. Little and often.

      Tillinghast I think runs with circa 800 positions and supposedly does OK.

      This is not intended as a specific criticism against concentration, would not be so bold; just thoughts on the various approaches..

      However left wondering which are the select magic three ?

      1. There’s nothing magic about the 3 stocks I own, they just jumped out at me as being absolutely compelling opportunities. But I’ve been doing this for 25 years so I’ve learned enough to recognize them at least once in a very, very long while.

        I think extreme concentration can be dangerous with less experience. I wouldn’t have recommended it to myself in my first 15 years.

  7. Re: The Rod discussion

    Hi John,

    I completely agree with the following statement and I follow it myself:

    ‘I only own 3 to 5 stocks at once because of this high-grading.’

    From historical data the opportunity of buying a stake in a quality company substantially below its intrinsic value which is a company you understand 100% occurs infrequently within a decade.

    Therefore when such opportunity presents itself concentrating is the sensible approach. I also think people get confused with diversification. Diversification refers to allocation of capital in different assets i.e. equities, bonds and cash not investing in 40+ stocks.

    One thing I might add is that using such approach takes extreme patience a few examples come to mind in the 00s:

    WD-40 the stock virtually went nowhere in 00s but the stock kept on paying dividends, management kept on buying back stocks and eventually the market recognised what a wonderful gem of a company WD-40 was. However imagine being a shareholder in a company which reported fantastic earnings which the market completely ignored in the 00s?
    Estee Lauder was another company which went largely ignored in the 00s by the market despite being fantastically ran only from 2015 onwards things turned a corner in capital appreciation.

    The only kind of shareholder which would have persevered in such situation is one who had an owner mentality i.e. focus on financial reports, dividends, capital balance and maintenance of moat. The market plays a different game.

    A thorough understanding of the business like a owner is key to long term performance. For example if you recall my criticism of Reckitt Benckiser:

    This was a business I understood and given the recent disposal of the unit China it shows that RB foray into the infant formula business was not a success. However I lack the insight to make such call in the tech/clouding business to determine when management has made a good call and when things are just plain dumb.

    Being able to evaluate management choice in capital allocation is key to long term success in investing.

    1. Hi Reg, I agree that this level of concentration can work but I’m wary of saying this or that approach is the “best”. What matters is that investors use strategies they can apply with reasonable success over many years, and that could mean holding 3-5 companies or 30-50, or investing in the best companies or playing the momentum game.

      I tend to have a healthy level of self-doubt so I can’t see myself ever holding just a handful of companies!

      1. Hi John,

        I think to make any investment strategy work a healthy dose of self doubt is essential. As the late Andrew Grove famously stated:

        “only the paranoid survive”

  8. Re Concentration v Diversification.
    It may sometimes be the case that the former exhibits a lack of humility on the part of the investor ??

    1. The greatest danger is not to beginners who usually understand they don’t know enough to concentrate heavily, but intermediate investors who have gotten better, but still don’t realize how much they have left to learn.

      Nobody can ever tell whether you are being wise or foolish when you make an unusually large bet on something. It’s always going to be up the investor to figure that out.

  9. Hi John

    Glad to hear your portfolio is bouncing back strongly after a turbulent 2020. Personally, I’m pleased with my strategy to sit tight, not sell anything and, in fact, use the opportunity to buy some great businesses at good prices for my income portfolio (Diageo, ABF, L&G). As I think we all know, the secret was not to be in a position where I HAD to sell and instead being able to choose IF AND WHEN to sell. My income portfolio is up 14% so far this year so very happy with that, plus increasing dividends to come later in the year.

    My value portfolio has done better with 20% gains. Amazingly, Lookers has come back from the dead (+228% this year) after being suspended and although I don’t like the business any more, I may even get to sell it at break-even or close to it. IMI, Greggs, Rank and Vistry have all generated 40% plus gains and more dividend income to come later in the year. Telecom Plus hasn’t had a great year so far which is disappointing but with the finals due on Friday, hopefully Mr Market is in for a (pleasant) surprise!

    Anyway, now most of the damage to my portfolios have been fixed, lets hope the UK value rotation continues and we get a few good years to make up for the last five poor ones.



    1. Hi Steve, impressive gains from your value portfolio and I’m not really surprised. There were some serious bargains available last year although of course many were only obvious in hindsight. On L&G, possibly my biggest mistake last year was not loading up on that one when its yield reached 10%!

      As you say, the rotation into value was noticeable and provided a nice tailwind, and I’m happy for it to continue as long as there are still some bargains to invest in.

      Here’s to valuation mean reversion; long may it continue…

  10. Hi John

    Fascinating reading your investment style and I am learning a lot. I am new to serious investing and am taking a portion of my capital to invest myself with the challenge to beat my wealth managers taking similar risks.

    Something that I cannot see covered in your articles is what structure you use to invest. Are you doing this personally, through a FIC or other structure? And what impact do you feel this has on your strategy and ultimately your performance – do you think that the fewer constraints of investing personally give you the higher returns than more tax efficient holding structures (assuming you are investing personally)

    Really interested to get your insights on this


    1. Hi Toby, you’re right, I don’t really talk about tax-efficient structures or vehicles as it doesn’t really interest me. Personally, I just use a mixture of ISAs and SIPPs, which I think is probably true of most of my readers. They’re simple to understand and use, widely available and, for most people, they’re good enough.

      As for how they affect my strategy or performance, I don’t think they do. They’re just tax-efficient wrappers through which I own some shares and I certainly don’t think about the investment vehicle when I’m selecting companies or adjusting position sizes.

      Good luck with your investments,


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