Q3 2020 Review +12%, + 39% YTD

A very quiet quarter for me. I have made very few changes. This is being written a few days before the end of September so figures may differ slightly, but baring an unexpected disaster / triumph this is roughly where I will be…

• Got rid of EOS Russia – no real reason – it just hadn’t performed well and a realized loss is good to manage my CGT position. I may well re-enter.
• Sold some Beximco on a ridiculous spike buying some of it back lower down – I will refill my position again lower down.
• Sold a bit of CMC Markets – as my position was a bit big and wanted to buy other things.
• Sold half my SERE on a dip – this was an unwise panicking out on something of a headfake. Could be summer ‘silly season’ low volume move. I am noticing more stocks than usual falling with no reason.
• Sold half GPSS to take some profit.
• Most impactful change was buying 4D Pharma in the placement. This has done brilliantly for me – more later.

My portfolio is below:

Not overly happy with the number of holdings – it’s coming from the greater Russian / Resource / small cap stock weight – I can’t justify putting in the 10-20% weights I like into these sort of things from a risk/ my comfort point of view. Then again I struggle to monitor smaller positions. In addition outperformance, particularly of certain holdings has skewed the weights. One could argue for a rebalancing – selling outperformers and buying the under performers but with large spreads on many of my holdings this is a non-starter.

Cash/gold/silver remain 20% of the portfolio. These are very uncertain times. I’m broadly of the view that the politicians of the leading countries will take the path-of-least-resistance and will print their way out of the crisis. I also hold 10% of the portfolio in gold equities. I am prepared to hold this 30% weight and take quite a lot of pain on it. I do not trust cash and anticipate higher inflation in future regardless of what TIPS expectations say. (TIPS expectations back an inflation rate out of inflation linked bonds). I suspect they are manipulated / inaccurate due to forced buying by insurance companies etc….

Now on to individual ideas – Begbies Traynor / Fairpoint – these are insolvency administrators. So when a company gets into trouble they come in and sort it out and charge a healthy fee in the process. These are the ideas I will likely add to it. Trading statements indicate that government support methods are delaying liquidations. As furlough / support winds down and lockdowns / depressed demand continue I believe the day these benefit is coming. BEG is trading at pre-crisis levels – mid teen PE. FRP is a relatively new IPO. I will wait to add when I see a tick up in insolvency numbers. Right now these are down c30% vs pre-pandemic (source). This is so counter-intuitive that I will ignore the figures for now. Once they tick up it might be the time to get more heavily into this. Another concern is competition – the PWC’s etc may want to get into this business. I think there is opportunity here and its nicely counter-cyclical – if everything else goes to hell these should do well.

4D Pharma – I have been long this since it was £2.47. It’s now £1.66 but I have made money by ferociously averaging down. I was able to add quite substantially in the placement at 35p so on that tranche I made (unrealised) returns of over 400%. So 4D has risen from 1% of my portfolio at the end of June to almost 8% now. I saw this coming due to very heavy management buying. So the question is how to manage this now, at a 7.9% weight in my portfolio this is a very important question.

There are many clinical results due before the end of Q4 2020, primarily an IBS treatment and one for covid – full details here (Slide 18). I think this was depressed by forced selling by Woodford who was a big holder. Its a bit outside my comfort zone but they have many patents, been published in Nature, got collaborations with MSD – a serious player. Couple this with management buying. There are also some interesting reddit posts:

Blautix update.. from IBSResearch

Also

Blautix Clinical Trial from SIBO

Now this could be a scam, or it could ignore the people who this makes 100x worse but, to me, it indicates a good result is likely. This is reasonably widely known about on some bulletin boards / groups / twitter. Though it was apparently deleted from the LSE website…

I am a bit sceptical of some of their areas of investigation – to me being microbiome they should focus on digestive issues as these are more bacteriologically rich rather than cancer etc. Due to past health issues I have a lot of faith there is something in this so am content to let it run.

In future I would like to identify more ideas like this – quality stocks, possibly highly risky, pushed down by forced selling before key catalysts for high double digits to triple digit returns. It will take a bit of a change in my approach and more time to track / monitor these things but there is potential there.

A note on ASTO – my biggest position, (9.7%). They won the appeal – though the amount was reduced. The appeal court has refused permission to appeal to the Supreme court and now the Supreme court decides if Assetco can appeal. Asset co can distribute about half the current share price. I wouldn’t recommend anyone buy or sell this at current prices as there is a spread of over 9%. I expect there will be a liquidation at 420 – 430p per share. Hopefully this will liquidate in the next six months or so… Despite appearances this hasn’t been a success, if I get 420 in two years that’s a 27% gain. far less than the rest of my portfolio – likely at 50%+ for a big weight position, though the award was reduced so I didn’t get quite what I expected. There is a counter argument to this – in that I should run a geared / low/no cash position. I can borrow at 4% per year so there is sense to it… I just don’t feel like doing it – maybe for something more compelling…

For a while I have had an ‘experimental’ section of the portfolio – more growth-like companies. I have had mixed results with minute positions. Wey – online education +315%, COS – collagen solutions medical collagen / knee replacement – +36% (Due to be liquidated). EML – developing Potash miner – +8%, HUR – risky fractured basement oil play -94%. Savannah Minerals (SAV) – developing lithium miner -66%. This gives a return of 40% averaged out – over about a year and this is for a part of the portfolio I have given little attention / love to beyond the original purchase. I intend to try a few more of these types of ideas, hopefully at low prices with impeccable timing and greater weights. Not sure what the lessons are, other than buy when things are really, really cheap before the herd arrives and avoid ‘promoted’ stocks, also these need more of an eye kept on them more than my usual companies that is difficult, particularly as more risk needs more holdings, reducing time per holding.P

I think I need to review the whole portfolio for upside. I hold many ‘cheap’ stocks that I think should rerate – particularly in natural resources, CAML, FXPO, Russian natural resource stocks on single digit PE’s and double digit yields but what’s the catalyst for improvement? Aside from some pretty good market timing a lot of this year’s improved returns has been from me moving capital to / from ideas as they get momentum behind them.

I still like FEES as a name to add money to – its a stable business – Russian Electricity Grid, London listing, PE under 5, yield of 7%.

There are upcoming threats to the portfolio. There is some potential for the US election to be disrupted / Trump not to step down / variants of that kind of event. Interactive brokers are already raising margin requirements because of this. To me VIX is still relatively low so there may be potential to hedge / play this by going long ahead of the election result. I will be watching closesly. There is potential for this to go to a civil conflict situation. I do not trust the polls on this. Trump is considered the choice of the stupid so answers may not be accurate – as with in 2016. As with Brexit, the winners of the current system dismiss those dissatisfied with the status quo as uneducated/ losers etc. This is a mistake, unions were dismantled and much of the economy is a winner-take-all tournament, I believe its inherantly unstable and no-matter who is in charge decay will accelerate, unless the underlying conditions are changed, which is unlikely given the existing elite.

In terms of investing full time I am finally able to cut my hours down to work 3 days a week – from home. I have lots going on, so investing hasn’t been a huge focus this quarter. Other than tweak weights there hasnt been much I wanted or needed to do… More time spent on investing should help boost returns. Though I question my sanity in keeping a job – I have made c5 years income from investing this year – whilst being desperately short of time. I am still concerned economy is so bad we could see a major drop – though my plan is to lever up / use it as a buying opportunity as I believe we are in a pre-inflationary environment. The possibility of a substantial, generalised drop makes me reluctant to quit just now – but I hope as we move into 2021 this should ease as we can price the impact of the virus and things return to normal, a vaccine is nearly here…

Next quarter I hope to come up with 2/3 good ideas that I can ideally put sizable amounts or that can generate impressive returns reasonably rapidly. I’m equally keen to hold on to existing gains – I’ve made more in 2020 than in 2017/ 18 /19 put together (admittedly not the best of years). Equally I dont want to hold too tight as there is more to be made, particularly on 4d, and one has to risk money to make money. Still I think its just the start, I can get to making this sort of return or more, every year, but I need to change what I am doing in a way that works for me. As ever, the best is yet to come….

Suggestions and comments are welcomed…

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