About the Thrifty 30
An experiment in value investing
The Thrifty 30 is a model portfolio inspired by the great value investor Benjamin Graham.
It’s thrifty because the shares are all cheap, usually in comparison to their average profits over the last ten or-so years.
The companies are thrifty too. By picking profitable companies with relatively strong finances, I expect to reduce the chances of any company going bust and losing the portfolio a large chunk of money.
And since, despite all precautions, the unexpected still happens, I’ve limited the damage that could be caused by investing in a dodgy company by committing only 1/30th of the value of the portfolio to any single share.
The idea is, companies with high share prices and poor finances make poor investments (especially when they occur together).
Good companies, at cheap prices, make profitable investments.
Here’s the current portfolio:
First transaction: 9 September 2009
Valuation date: 12 February 2010
Cost includes £10 broker fee and £5 stamp duty
Cash earns no interest
Dividends and sale proceeds are credited to the cash balance
Usually I find these companies by screening the London Stock Exchange, investigating those with low long-term price earnings ratios (preferably less than 10, definitely less than 20) and high F_Scores. The F_Score is a nine point measure of financial strength, and I look for companies with a score of five or more (for a more detailed explanation of these measures, please see the notes on The Thrifty 30 shortlist page)
The third part of the equation, whether a company has a profitable future, is the bit I’m least confident about since the future is unpredictable. By reading a company’s annual reports I form an opinion on the challenges facing it, and whether they are temporary or permanent.
For example, competition from the Internet is a permanent change that reduces the readership of newspapers, and the amount of money they can earn from advertisers. Most of the listed newspaper publishers are also heavily indebted.
They could, of course, do very well, but, based on what we know now, I think the odds are against them, and so in recent years, the shares have been deservedly cheap.
Every time I investigate a company’s annual reports, I check:
- There are no impending events (like results) that I should wait for
- There have been no announcements since the last annual report that might change my view
- The key financial statistics, including the long-term price earnings ratio, the F_Score, and pension liabilities
- Important non-financial information, including the exchange market size, spread, and substantial shareholdings (to check liquidity), directors’ dealings, and the auditor’s report
- I can explain how the company makes money, and previous peaks and troughs in profitability.
After that, if I’m confident the company has a profitable future, it’s cheap and financially sound and the shares are liquid (i.e. easy to trade in the amounts of approximately £1,000 required by the portfolio), I include it in the Thrifty 30.
I’ll ‘sell’ when:
- The share is no longer cheap.
- I’ve run out of patience.
The curse of cheap prices is they often get cheaper. Investors are, after all, selling, probably because the company is in some difficulty. I’ll give a company at least three years to turn itself around unless… I realise I’ve made an awful mistake.
Each transaction goes in the blog, so we can learn from my successes and failures, and judge how the experiment is going.
A brief note on performance: I expect at least a positive real return (i.e. taking inflation into account) over any five year period, and also to do better than the stockmarket average. Over five years or more, I hope to achieve an average annual return of 15%. Benjamin Graham thought this a reasonable target and Warren Buffet still does.
If it’s good enough for them, it’s more than good enough for me.
But that’s a long-run rate of return, so the corollary is, I won’t be able to say anything serious about performance until oooh, September 2014.
A brief note about my trading: These are my best ideas so I own many of them. But I don’t buy or sell shares I’m writing about and I inform Interactive Investor’s editor-in-chief when I blog about a company I already own, in line with the Press Complaints Commission’s code of practice.
In short, I won’t profit from short-term price movements that might result from something I’ve written.
