No. of Recommendations: 71
Dear Foolish Investors,

The bad news is that I have decided to terminate my VSL portfolio experiment slightly prematurely, after just over four years. The good news is that this is to a large extent because the rest of my portfolio has outperformed it to such an extent that it’s now approaching my target value and I’m having to rejig it for (I hope!) the run up to “retirement”. I.e. being able to spend less of my time on financial/investment matters. The VSL experiment has started to interfere with my overall aims.

I “liquidated”, the VSL portfolio on 29th December and detailed results are presented below. I have put the term “liquidated” in quotes because I did not actually sell all the holdings – some I held elsewhere in my portfolio and I have simply consolidated them with those holdings. I also provide my thinking on specific holdings below.


To sum up, the experiment has not exactly been successful. An original investment totalling £40,000 in October 2006 has turned into £34,870, including dividends received, whereas my overall portfolio, including the VSL component, has more than doubled over that same timeframe. My broad conclusion is that not only do mechanical investing techniques not work (see Jason Zweig’s commentary on Chapter One of the Fourth Revised Edition of “The Intelligent Investor”) – but even this semi-mechanical one, based on voting by Fools, doesn’t work either. What I have learnt over the years, not just from this experiment, is that each investor needs to develop their own approach to succeed. That approach needs to be closely adapted to your own temperament, ability and resources. You cannot make money simply by trying to copy another investor – but you can learn a lot from them, as I have done from many Fools, to whom I owe a debt, and from other sources of knowledge.

My own investment approach, which appears to have worked well for me, especially as I have refined it, is to use a strict asset allocation policy. This ensures that I continuously rebalance my holdings to control risk. I may not make the massive returns that can (with luck*) be achieved by holding a highly concentrated portfolio, but neither do I risk losses far in excess of overall market falls. Because my portfolio is spread across more than 30 holdings (with a further 20 odd on my watchlist) that need careful monitoring, this requires substantial effort and is a full-time activity for me. Clearly such an approach will not suit many investors.

All of this is not to say that the VSL itself isn’t a very interesting forum. Many thanks to Apanda for maintaining it so diligently. However, IMO the VSL is best used as a forum to seek investment ideas and gauge other investors’ views. Usually, those views are well founded, but on occasion, as happened with RBS, herd mentality, even amongst Fools, can creep in. In the case of RBS, whilst it appeared rational to buy in the early stages of the GFC, I was amazed how many still picked it at the point where RBS’s value was in serious doubt and it clearly could no longer be regarded as a safe value investment. It is incontrovertibly true that the investor can only beat the market by being contrary – but only when you have done sufficient work to be confident that your contrary view is soundly based.


*If I had kept my original holdings in Extract Resources, Norseman Gold and Encore Oil and not topsliced them for risk control, I would have reached my “retirement point” some time last year. Neverthless, I do not regret doing so and retaining my health and sanity should those companies NOT have ultimately delivered as they did and had slipped back again after “merely” 3-4 bagging! Extract 38p -> over 500p now; Norseman 2.25p - > over 50p now; Encore ~15p -> nearly 150p now. The financial crisis certainly threw up some extraordinary pricing anomalies, creating some great opportunities.


Results

                                Stock         Qty       Cost         Divvies   Gain/ Loss    Realised     Total return
VSL1 Bought

31/10/2006 BP. 337 £ 1,994 £ 88 -0.5% £ 1,896 £ 1,984
Sold Soco 131 £ 1,999 30.8% £ 2,614 £ 2,614
18/02/2008 RBS 318 £ 2,005 £ 103 -37.4% £ 1,153 £ 1,256
Annualised rtn Alexon 1050 £ 1,998 £ 551 -18.9% £ 1,069 £ 1,620
1.1% Vodafone 1475 £ 2,000 £ 136 33.5% £ 2,533 £ 2,669

Total cost £ 9,996 £ 878 £ 9,264 £ 10,143


Valuation £ 9,264
Dividends £ 878
Total Value £ 10,143
Total Gain/Loss: 1.5%

31/10/2006 £ 9,996
18/02/2008 -£ 10,143
IRR 1.1%
FTSE All-share IRR -2.5%


VSL2 Bought
12/02/2007 BP. 371 £ 2,002 £ 155 -5.0% £ 1,747 £ 1,902
Sold Soco 160 £ 2,004 14.9% £ 2,302 £ 2,302
01/10/2008 RBS 344 £ 1,996 £ 167 -61.0% £ 611 £ 778
Annualised rtn Royal Dutch Shell 117 £ 2,002 £ 131 -1.3% £ 1,846 £ 1,976
-14.8% Touchstone 1025 £ 1,982 £ 60 -63.1% £ 672 £ 732

Total cost £ 9,986 £ 7,178 £ 7,690


Valuation £ 7,178
Dividends £ 513
Total Value £ 7,690
Total Gain/Loss: -23.0%

12/02/2007 £ 9,986
01/10/2008 -£ 7,690
IRR -14.8%
FTSE All-share IRR -15.8%


VSL3 Bought
25/06/2007 BP. 339 £ 1,997 £ 169 -15.6% £ 1,517 £ 1,686
Sold Soco 103 £ 1,999 -42.9% £ 1,142 £ 1,142
16/03/2009 RBS 374 £ 1,999 £ 106 -91.1% £ 72 £ 178
Annualised rtn GSK 153 £ 2,007 £ 150 -12.2% £ 1,613 £ 1,763
-26.9% HSBC 214 £ 2,001 £ 146 -47.0% £ 915 £ 1,060

Totals £ 10,004 £ 570 £ 5,259 £ 5,829


Valuation £ 5,259
Dividends £ 570
Total Value £ 5,829
Total Gain/Loss: -41.7%

25/06/2007 £ 10,004
16/03/2009 -£ 5,829
IRR -26.9%
FTSE All-share IRR -27.9%


VSL4 Bought
15/10/2007 BP. 323 £ 2,009 £ 202 2.7% £ 1,860 £ 2,063
Sold GSK 155 £ 2,004 £ 177 3.3% £ 1,894 £ 2,070
02/11/2009 RBS 443 £ 2,013 £ 86 -87.2% £ 173 £ 259
Annualised rtn Aminex 9325 £ 2,007 -57.5% £ 853 £ 853
DDC 1960 £ 1,993 £ 170 -73.8% £ 353 £ 523
932.5556
Totals £ 10,026 £ 634 £ 5,133 £ 5,768


Valuation £ 5,133
Dividends £ 634
Total Value £ 5,768
Total Gain/Loss: -42.5%

15/10/2007 £ 10,026
02/11/2009 -£ 5,768
IRR -23.6%
FTSE All-share IRR -12.5%


VSL5 Bought
18/02/2008 Encore Oil 4500 £ 2,028 -64.5% £ 719 £ 719
Sold GSK 176 £ 2,019 £ 234 11.9% £ 2,024 £ 2,258
01/06/2010 RBS 663 £ 2,031 £ 128 -79.2% £ 294 £ 422
Annualised rtn Aminex 9540 £ 2,037 -64.8% £ 716 £ 716
RCG 2400 £ 2,027 £ 12 -36.9% £ 1,268 £ 1,280

Total cost £ 10,141 £ 374 £ 5,022 £ 5,396


Valuation £ 5,022
Dividends £ 374
Total Value £ 5,396
Total Gain/Loss: -46.8%

18/02/2008 £ 10,141
01/06/2010 -£ 5,396
IRR -24.1%
FTSE All-share IRR -6.3%


VSL6 Bought
01/10/2008 BP. 327 £ 1,540 £ 176 11.6% £ 1,543 £ 1,719
Sold KLR 223 £ 1,525 £ 112 -2.5% £ 1,375 £ 1,487
29/12/2010 RBS 884 £ 1,589 -78.0% £ 349 £ 349
Annualised rtn Aminex 12200 £ 1,524 -33.4% £ 1,016 £ 1,016
RCG 2213 £ 1,535 -66.4% £ 515 £ 515

Total cost £ 7,713 £ 4,797 £ 5,085


Valuation £ 4,797
Dividends £ 288
Total Value £ 5,085
Total Gain/Loss: -34.1%

01/10/2008 £ 7,713
29/12/2010 -£ 5,085
IRR -16.9%
FTSE All-share IRR 10.6%


VSL7 Bought
16/03/2009 BP. 261 £ 1,175 £ 92 12.7% £ 1,231 £ 1,323
Sold Lloyds 4666 £ 1,171 170.0% £ 3,162 £ 3,162
29/12/2010 Barclays 1293 £ 1,179 £ 71 196.8% £ 3,428 £ 3,499
Annualised rtn RCG 2122 £ 1,143 -56.8% £ 494 £ 494
National Grid 224 £ 1,171 £ 138 20.7% £ 1,275 £ 1,413 NB 2010 Final divvy only on 144 shs

Total cost £ 5,838 £ 9,589 £ 9,890


Valuation £ 9,589
Dividends £ 301
Total Value £ 9,890
Total Gain/Loss: 69.4%

16/03/2009 £ 5,838
29/12/2010 -£ 9,890
IRR 34.3%
FTSE All-share IRR 30.8%


VSL8 Bought
02/11/2009 AstraZeneca 42 £ 1,157 £ 63 12.8% £ 1,242 £ 1,306
Sold Encore Oil 7572 £ 1,152 753.7% £ 9,834 £ 9,834
29/12/2010 BAE Systems 356 £ 1,153 £ 59 7.9% £ 1,186 £ 1,245
Annualised rtn MBL Group 750 £ 1,153 £ 45 -41.2% £ 632 £ 677
Aminex 12459 £ 1,152 -10.0% £ 1,037 £ 1,037

Total cost £ 5,767 £ 13,932 £ 14,099


Valuation £ 13,932
Dividends £ 167
Total Value £ 14,099
Total Gain/Loss: 144.5%

02/11/2009 £ 5,767
29/12/2010 -£ 14,099
IRR 116.7%
FTSE All-share IRR 17.1%


VSL9 Bought
01/06/2010 BP 248 £ 1,080 8.3% £ 1,170 £ 1,170
Sold Aviva 333 £ 1,071 £ 32 25.6% £ 1,314 £ 1,345
29/12/2010 Quintain Estates 2213 £ 1,072 -16.0% £ 901 £ 901
Annualised rtn Interserve 533 £ 1,086 £ 30 9.4% £ 1,157 £ 1,187
Aminex 14331 £ 1,086 9.8% £ 1,193 £ 1,193

Total cost £ 5,395 £ 5,735 £ 5,796


Valuation £ 5,735
Dividends £ 61
Total Value £ 5,796
Total Gain/Loss: 7.4%

01/06/2010 £ 5,395
29/12/2010 -£ 5,796
IRR 13.2%
FTSE All-share IRR 34.9%




Holdings Review

At the end of the experiment the VSL Portfolio holdings comprised:

Stock             Qty    SP (p)  Value

BP. 836 472.9 £ 3,953
RBS 884 39.9 £ 353
Encore Oil 7572 130.0 £ 9,844
RCG 4335 23.3 £ 1,010
Aminex 38990 8.3 £ 3,236
KLR 223 621.1 £ 1,385
Nat grid 224 572.6 £ 1,283
Lloyds 4666 68.0 £ 3,173
Barclays 1293 265.9 £ 3,438
AstraZeneca 42 2982.0 £ 1,252
BAE Systems 356 335.9 £ 1,196
MBL Group 750 84.3 £ 632
Aviva 333 397.5 £ 1,324
Quintain Estates 2213 41.2 £ 912
Interserve 533 218.9 £ 1,167

£ 34,157


For general interest, here is what I did with each of these at the end of December, and why:


BP

Sold. I had held BP as a “crisis play” in my portfolio until they reached 450p, at which point I sold. I considered that a “fair value” had been reached at that point, considering uncertainty over future dividends and major changes to the business’s strategic direction, post Deepwater Horizon, which introduced new risks. I remain of that view and, personally, feel that Bob Dudley’s decision to invest in Russia is extremely risky. Dividend outlook remains unclear and will almost certainly be at a significantly lower level than pre-crisis levels. I prefer to invest in Shell (modestly), with a pretty sound 5% yield (though I have reduced following recent gains, considering the risk of cashflow impact in the event of a signficant oil price fall).


RBS

Sold. I have little interest in investing in banks at present, having learnt how risky they actually were. Who knows what RBS’s future will be and what it’s worth?

One of my main lessons from the banking crisis is to beware of businesses whose value depends on the relatively small difference between two large numbers. ;0)


Encore Oil

One of my most successful investments (and by far the most rewarding VSL pick). When Encore made the Catcher discovery it was one of my largest holdings (outside the VSL). As the value of that holding has advanced (and has frequently got ahead of what I perceived as fair value), I have topsliced progressively, such that by last December most of my residual holding was the VSL stock (and I had already banked a multiple of my original overall investment). I have consolidated the VSL holding with my holding outside the VSL and am happy to retain a holding that is substantial relative to my overall portfolio, following further success at Varadero and with further Cladhan drilling expected to get underway towards the end of this month.

Whilst drilling failures would likely impact the SP, established successes already underpin a significant part of the SP and, IMO, there is a good chance that further drilling will increase reserves significantly.


RCG

I am pleased to say that I “cheated” with my VSL holding in RCG by selling it in November 2009 @ 83.2p. To maintain the integrity of the VSL portfolio, I effected this by “virtually” retaining the long VSL position but recording a balancing short in my main portfolio. At that time, I had completely lost trust in RCG’s directors, in the light of news that emerged from the Nina Wang trial, combined with the singular inability of the company to actually generate cash for shareholders.

My investing experience in RCG was highly educational for me. Though corporate governance standards in the UK can sometimes leave much to be desired, this appears as nothing compared to Chinese standards. Moreover, I only learnt the details relating to RCG’s directors thanks to a Chinese speaker who was able to translate the local Hong Kong press reports, which were much more illuminating than those that appeared in the English press. There have been too many Chinese companies listed on AIM that have seriously disappointed their investors (with a small number of notable exceptions).

Whilst I remain firmly of the view that China will play a vital role in the global economic future, I will continue to play this theme indirectly via western businesses that will benefit from a burgeoning Chinese economy and via funds staffed with China experts that understand the culture and language, rather than attempting a half-baked job myself. This view has been vindicated over the last four years by the results I have obtained.


Aminex

Simply consolidated with my main holding in December. However, I have now sold my entire holding in Aminex, following their placing announcement. My reasoning is given here: http://www.stockopedia.co.uk/content/tanzania-28710/?comment... and in post #297 of the same thread.


Keller

Sold…. But monitoring closely. I do not feel that the current SP and P/E forecasts are low enough to reflect the risks going forward. I would buy in again at a significantly lower price; if my perception of the risks improves; or if Keller beat current forecasts significantly, without the SP rising too far.


National Grid

Sold. Debt burden too high for safety.


Lloyds & Barclays

Sold. The timing of these investments, originally, proved excellent. I had also invested relatively small amounts directly myself in these, at the point where the market seemed convinced that every bank would be nationalised. Such an outcome seemed highly unlikely to me, so a modest punt on each of them seemed like a decent idea. They doubled-bagged within a week and I reduced as they rose further and sold out by April 2009.

As I mentioned previously, I consider the banks’ current share prices to be “speculative” and not sound for a value investment. Future returns are impossible for me to analyse.


AstraZenenca

Sold. I prefer GSK, where I have a larger holding (in fact, it is one of my largest holdings now). Though GSK is on a higher P/E, it offers a higher yield than AZN and earnings are forecast to rise between 2011 and 2012, whereas AZN’s earnings are forecast to decline. Though western markets may be squeezed, GSK seems well placed to benefit from a growing middle class in Asian markets, who are prepared to pay a premium for branded, genuine pharmaceuticals. That underpins my view that the excellent yield on offer (CY 5.7%, 2012 6.1% forecast) is reasonably safe.

A significant part of the rejigging of my portfolio has been the establishment of a high-yield sub-portfolio to generate a sustainable (and inflation protected) income stream now and in the future. This part of my portfolio will become increasingly important as my portfolio target value approaches.


BAE

Sold. Might reconsider that one. At the time (in December) did not have room for it in my high-yield sub-portfolio, as other investments offered better yields. However, as I have just reduced my holding of Shell, this might substitute nicely and provide diversification…


MBL Group

Consolidated with my main holding. Ouch! Well the value of this holding has certainly not done well of late. Risks to MBL’s contract with its main customer (Morrisons) were not expected, as the contract had been so long-lasting.

However, the fat lady has not yet sung on this… I know that Carmensfella is working hard on getting a meeting with MBL’s principals to try to improve shareholder relations. I would warmly welcome that and the presentation by Matt Porter was an excellent start and encouraging for the future. With more information, I would be inclined to add to my current holding, as the market is pricing MBL for disaster and my present view is that the risks have been overstated and potential rewards understated. We shall see – better relations between management and shareholders are vital to restoring confidence.


Aviva

In December, I bought Aviva for my HY sub-portfolio. The VSL holding was considated with that and more shares bought the next day, to “rightsize” that holding. So far so good and the yield remains highly attractive. However, I remain a little wary as this is another company whose value is the difference between two large numbers. ;0) Nevertheless, Aviva has so far come through the GFC well and the outlook looks sound.

I also hold GACA preference shares, currently yielding 7.9%, in the fixed income portion of my portfolio.

I shall study the next results and accounts carefully.


Quintain Estates

Sold. Need I say more?


Interserve

Consolidated with a larger holding in the HY sub-portfolio. Since December, however, I have trimmed this holding a couple of times, following strong gains. Though the yield is good, I do not want to be over-exposed to Interserve because its accounts make my head spin! Extremely complicated, with all the long-term contracts and I can see that earnings could be highly volatile, depending on future adjustments to arcane accounting values. Nevertheless, a 6% yield and solid management outlook are sufficiently tempting to persuade me to continue to hold some.


Closing words

I can do no better than to remind myself and the gentle reader of Ben Graham’s definition of investment:

”An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

I have to confess to sometimes indulging in “speculative operations” – but only with strictly limited risk and where the upside potential significantly exceeds the risk of total loss. More seriously, I must also confess to not always having done as thorough an analysis as one ought. That is a less forgivable sin and one that I will endeavour to correct.

Remember also the power of compound interest and time. My current portfolio is based on seeds that were planted nearly 30 years ago. With careful nurturing, those seeds have grown into quite a healthy plant.


With thanks and best wishes for future success to my Foolish Friends.

Mark
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