2020 Investment Advisory Services Report Card Part I

A few weeks ago, Woody mentioned that we’d do a report card on our various services. It will be the topic of your last two Insider issues. From Wednesday, we’ll take a break for a few weeks and return on 11 January.

From all of us here, we wish you and your loved ones a very Merry Christmas. Thanks for reading this year. We hope we’ve been successful in both making you money and making you think.

We’ll see you again in 2021!

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Right then, the report card…

I’ve been thinking a lot about the best way to do it.

The best way, really, is to have you tell us what you think. You pay for and consume our various services and at the end of the day, what matters is your opinion, not mine or Woody’s.

But with so much happening this year, and December popping up out of nowhere, I didn’t plan far enough ahead to request and sort through your feedback for publication.

I will do that next year though. While you’re free to get in touch at any time and tell us how we’re going, I think it’s important to do so in a coordinated manner and get an opinion of how you’re finding the service (or services) you’re subscribed to.

But for this year, you’ll have to put up with a bit of a self-assessment. I’ll be as objective as I can.

As Editorial Director, my job is pretty easy. It’s simply to make sure the various services do what they say they’ll do.

You subscribe to a service for a certain philosophy, style of trading, or area of focus (say, small-caps). So, the editor simply needs to stick to their knitting.

Next, they need to make you money. That’s what it’s all about. Sometimes the market makes this part easy, sometimes it makes it hard. This year, we had it both ways. Regardless, I want the editors thinking hard about their area of the market, what the mood of the market is, and whether it’s a time to be taking risk or easing off.

I don’t tell them what to do, or how to do it. I just make sure they’re working hard and delivering on what they say they will.

This year, I think we’ve done a pretty good job on that front. It’s been a crazy year, but that’s the market for you. Our job is to anticipate the future and position you for it. You can’t make excuses based on ‘black swans’ or outliers such as COVID. Sure, not many saw it coming, but it’s how you respond to such events that matters.

One thing I don’t accept is excuses. If your excuse for not doing well is the COVID collapse, and the extraordinary response to it, then this is not for you. We all make mistakes. The market is ruthless in exposing weaknesses. But if you choose to blame your mistakes on something else, instead of taking responsibility for them, the market will slowly bleed you dry.

So, when it came to this year’s extraordinary events, I was happy (given the benefit of hindsight) that none of us panicked during the March collapse. Except for maybe Vern, who’s been panicking about a collapse for years now. But he stuck to his philosophy, which has been well argued and researched for years.

No one wavered. No one made excuses.

I do have one criticism of this period though. While we didn’t panic, we weren’t brave enough either. It was the time to buy. Not because hindsight has proved it so, but because it was so damn hard to do it. As market professionals, we need to be better at recognising extremes in sentiment and responding to that.

If there is one thing that market history has proved, it is that taking the opposite trade to the crowd is nearly always the winning trade.

March saw one of the fastest collapses in market history. The panic was palpable. But as a group, we weren’t aggressive enough in taking advantage of it. We didn’t recognise the discomfort as a positive sign.

Sure, you might have thought we were crazy telling you to buy in March. But we need to remind ourselves we’re not here to get your agreement. We’re here to give you money-making ideas and (hopefully) teach you that being uncomfortable when buying isn’t a bad thing.

And when someone is telling you you’re crazy for buying in ‘this market’ (after it’s fallen 30% in a month) that’s actually a positive sign.

Now, having said that, I recognise that what happened this year is a rare event. Mostly, markets will be boring compared to 2020. After the collapse, stocks came roaring back. It was time to go ‘risk on’, and I think many of our services did a good job of that.

How good?

Well, here’s where things get tricky. In the newsletter business, there is nowhere to hide. Every recommendation is there for you to see; the good, the bad, and the ugly. In funds management land, by contrast, you can make hundreds of investments and just talk about the ones that worked out.

If you’re a subscriber to our services, chances are you’re not going to take every single recommendation. That means your experience may vary widely, depending on either dumb luck or astute stock selection.

But the best way to give you an idea of how each service has performed is to just provide a portfolio overview. I don’t have the time and space to go through each and every stock recommendation and return. I think that would be overkill.

So today, and in Wednesday’s Insider, I’ll give you the overall ‘portfolio’ return for each service over the 12 months to 3 December, along with some comments about how the editor (or me) felt about the performance this year.

For comparison, the benchmark ASX 200 index was basically flat over the period, while the Small Ordinaries Index increased about 5.5%.

I’ll run through a few of our entry level services today, and finish with the rest, as well as our trading services, on Wednesday.

I’ll start with my Crisis & Opportunity service.

Over the past 12 months, the service returned a modest 7.5%. I got some calls right this year, warning of a bear market early in the year, then guessing it might have come and gone just a few months later.

While I was right in thinking the March collapse was as bad as it would get, I expected a correction to at least test those lows and that made me more hesitant to buy than I should have been.

I got the call on the banks right, but my bearish view on iron ore was completely wrong.

While the stock picking side of things was OK overall, one of my speccy picks — Kalium Lakes [ASX:KLL] — blew up, which was disappointing. I’ve realised this year that this end of the market isn’t for me. I am better at analysing bigger stocks with earnings and cash flows. That’s my knitting and I’ll stick to that in 2021.

All up, my comment would be ‘can do better’.

Next up is Australian Small-Cap Investigator. Following Sam Volkering’s decision to focus on the UK, Ryan Clarkson-Ledward took over the service mid-year and has done a stellar job. The portfolio delivered a 20.2% return in the 12 months to 3 December. As Ryan points out below though, it was a wild ride…

Over to you Ryan…

2020 has been a turbulent year for Australian Small-Cap Investigator. Filled with some of the highest highs, and some notable lows.

First and foremost, in terms of results, we’ve had some incredible gains. Closing long-held positions in both Afterpay Ltd [ASX:APT] and Zip Co Ltd [ASX:Z1P].

In the case of the latter, we were fortunate enough to get out close to, but not exactly at the top.

However, our decision to exit Afterpay in February has proved premature in hindsight. And while we will never regret a 10-bagger result — the subsequent explosion in Afterpay’s share price is vexing.

On the flipside though, there is no shying away from the losses too. Including several calls to exit positions that were deep in the red. With Creso Pharma Ltd [ASX:CPH], Northern Minerals Ltd [ASX:NTU], and Food Revolution Group Ltd [ASX:FOD] being the biggest offenders. All of which delivered a 70% loss or more.

On top of that, two of our past recommendations (Animoca Brands and Pyrolyx) have been de-listed from the ASX entirely. And while both entities are working on ways to ensure shareholder interests are preserved, it may prove challenging to recoup any capital.

This is precisely why I decided to implement a new risk strategy for Australian Small-Cap Investigator as the new lead editor. Ensuring that every new recommendation comes with definitive stop-loss positions, as well as a more aggressive profit-taking ethos.

In doing so, I hope to deliver readers not only better returns, but quicker ones. All while mitigating any big losses and taking emotion out of the equation.

So, expect more of that in 2021, as I look to capitalise upon the extremely bullish small-cap market!

I completely agree with that. If there is one criticism of the service, it’s in the extreme volatility. If you missed out on some of the big winners, your experience was probably very different to the overall portfolio return.

That’s part and parcel of a small-cap service. But Ryan and I had a chat about this issue when he took over, and I think the changes he’s implemented are the right ones.

So look for an improvement on this front next year.

The outstanding performer of the year was our other small-cap service, aptly called Exponential Stock Investor. Helmed by Ryan Dinse and Lachlan Tierney, this service returned a huge 78.6% this year. They were aggressive in taking advantage of the rebound and big increase in speculative appetite, and it paid off big time.

Here’s Lachy’s assessment of the year…

We had a largely successful year at Exponential Stock Investor. When the market looked like it was on the brink of collapse in late February, we examined the portfolio closely. A number of our picks were on a knife edge, strapped for cash, and a fair way off making the breakthrough. Subsequently, these kind of “binary outcome” picks smashed it and we took half-profits to de-risk. It could so easily have gone differently though, and although the risk was justified in the end, we can always improve our risk management strategies.

On a couple of occasions, we should have taken half-profits earlier and we want to work on timing these moves better. On a disappointing note, our Chinese middle-class/healthy Australian food thesis didn’t work out as expected. The ongoing diplomatic and trade dispute is hurting these companies. The portfolio theme is under review and we may reposition it in the new year.

Our outlook for 2021 is bullish but we are mindful of pent-up danger in the global financial system created by a swathe of cheap money. Should a crisis threaten to materialise we may look to pre-emptively trim our portfolio of companies that may have trouble raising cash in a more risk off environment. All up though, we are quite happy with our performance and the outcomes we delivered for subscribers.

That’s a fair summary, I think. The focus on risk management is important. When the market is bullish, being aggressive pays off. But when things turn, it’s all about risk management, and it’s good to see the boys are mindful of this.

The last review for today is Shae Russell’s Rock Stock Insider, a gold and commodities-focused service that also taps into Shae’s global network of commodity gurus.

The service returned an impressive 29% this year. Here are Shae’s thoughts on the year that was…

2020 was a big year. Gold hit a new high. The supply of gold to settle futures contracts nearly collapsed. A few months later gold stocks shot up like a rocket…and a couple have landed back down with a thud. To boot, one of our stocks wasn’t able to trade out of a political coup in Africa.

In spite of all of the events that could have had a devasting impact on some of our positions, the stocks in Rock Stock Insider are holding up rather well. Through dozens of interviews, we’ve been able to speak with experts around the world, giving us some insight into how we can invest with the market.

My biggest criticism of Rock Stock Insider is that I need to do more work on clearly defining what the stock investment strategy is. While gold and precious metals stocks and will be the centre of the service, I need to investigate whether broadening to include other commodities will be of benefit to subscribers.

It’s a good point. Shae’s got the analytical skills to increase her coverage to the broader commodity market. It’s something we’ll seriously consider in 2021.

I’ll leave the review there for today, otherwise this edition will be way too long. I’ll finish the remainder of the services in Wednesday’s Insider. Be sure to tune in.

And, as always, let me know what you think. You can write to Woody and me at letters@portphillipinsider.com.au.

Cheers,

Greg

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Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:


Money Morning Australia