Airing my laundry

One of the reasons I decided to start this blog was to force myself to publicly account for my investment decisions and the returns of my portfolio. As physicist Richard Feynman put it:

"The first principle is that you must not fool yourself — and you are the easiest person to fool."

I have been putting off this post, which requires me to divulge some information about my personal finances, for some time. It would be much easier — and pleasant — to keep the wool over my eyes and simply believe that I'm an above-average investor. The truth is that very few investors are able to beat the average return of the stock market over long periods, and it may be that I'm simply not good enough. If that's the case, I'd like to know, despite the potential for damage to my ego. As I pointed out in my earlier post, small changes in the compounding rate add up to a great deal over years and decades. 

While I'll mostly be talking about my own direct stock investments on this blog, it's important at this stage to discuss everything I own. There are two main reasons for this: firstly, because I have outside investments, I size positions differently than I would if my entire portfolio was in direct stocks. Secondly, because I have investments with fund managers who I think I will beat the average return of the stock market, it will influence my assessment of my returns over reasonable periods. In short, if my returns are above average but lower than the after-tax returns of my outside investments, I will still have lost due to opportunity cost.

Because of this risk of opportunity cost, and the uncertainty as to my merits as an investor, I have limited direct shares to a relatively small portion of my total wealth. It is important to note that I am willing to bear something of an opportunity cost while I improve my investing skills. But, if the evidence in a few years suggests that I am substantially worse than proven and available alternatives, I'll be happy to throw in the towel.

As of November 30, 2017, my total investments were as follows:

• EGP Fund No. 1/EGP Concentrated Value Fund — 66.21%
• Castlereagh Equity Pty Ltd — 10.69%
• Directly owned stocks — 10.77%
• Partnership investing in stocks with two family members — 5.88%
• Cash — 6.45%

As of the time of writing, December 4, 2017, my direct shares portfolio consisted of five stocks:

• Spicers Ltd (ASX:SRS) — 39.92%
• Undisclosed NSX stock — 16.54%
• Kangaroo Island Plantation Timbers (ASX:KPT) — 16.13%
• Undisclosed NSX stock — 14.14%
• Global Construction Services (ASX:GCS) — 13.27%

I won't go into much detail about the family partnership, but I will note that I'm responsible for investing the funds and that it also holds SRS and KPT. I don't intend to track the performance of the partnership in the blog, but may mention it from time to time.

A note on position sizes

When I size positions, I think in terms of my total investable capital, not any given portfolio. So while SRS is about 40% of the portfolio above, and also held in our small family partnership, it only accounts for 5.64% of my total wealth (excluding any stock which might be held by EGP or CE), which I think is reasonable. KPT shares in the direct shares portfolio and partnership account for 3.25% of my total wealth. (KPT stock is also held by EGP and I suspect CE, which almost certainly makes it my largest position in total.)

I will continue to size positions in this way, because it's sensible from a wealth-creation perspective. Occasionally it will result in wonky positions, such as the 40% in SRS at present, but over time the portfolio will start looking slightly more "normal". I'm not too concerned about any of this, but it's worth noting as I'd almost certainly do things differently if I was only investing in a portfolio of direct shares.

In my next post, which is hopefully not too far away, I'll examine the returns of the direct shares portfolio since its inception in August.