What are your Investment Rules?

[kiora]

"Active versus Passive Investment Management"

Sounds good in theory but in practice?
Some are value adding,some are not.

https://www.goodreturns.co.nz/articl...or+10+Apr+2024

https://www.octagonasset.co.nz/asset...h-Fund-9.0.pdf

[Snoopy]

"Active versus Passive Investment Management"

Sounds good in theory but in practice?
Some are value adding,some are not.

https://www.goodreturns.co.nz/articl...or+10+Apr+2024

https://www.octagonasset.co.nz/asset...h-Fund-9.0.pdf

From the goodreturns link above

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Limited detailed market knowledge of an asset.

In the United States, companies can have over 50 broker analysts writing detailed research about them – discussing their prospects, looking at the company accounts and providing views on valuation. In New Zealand, there are some sizeable companies that only have one analyst covering them. The chance of an Octagon analyst or portfolio manager discovering something about a company that allows us to form a different view on valuation to the market is likely to be higher in thinly covered stocks.

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This point resonates with me. I hold Accordant, which has no analyst coverage, and Scott Technology which is only covered by Forsyth Barr because Scott's commissioned and paid for that firm to do so. There are a couple of big downsides investing in a firm with no or doubtfully unbiased analyst coverage.

1/ You have to do all the analyst work yourself, which requires a fair bit of technical skill to accomplish, plus a lot of time.

2/ You will likely find the share very thinly traded. I tend to think in blocks of around $6k, as that was the minimum size of parcel to get over the minimum brokerage fee charge, 'back in the day.' That means that if one investor sold one block of shares in one day, the turnover of that share on the market would be $6k (on most days both SCT and AGL would struggle to reach that level of turnover). That in turn means that if you build up a 'decent size position', and I used to think of that as 'three blocks' or $18k worth in one share, it would take 3 days to exit. Straight away you can see the problem of 'trading' such a share. There is no path to exit quickly at the 'quoted price'. Thus if you own such a share, you have to be prepared to hold through the problem times. It took me a while to get over the fear of being 'locked in' to such positions. I overcame my fear by realising that if the dividend stream was high enough, then there would be no reason to completely sell out. But you could still use the market to tweak your position. The ability to 'look through the short term', is, I believe, an essential psychological asset to have when owning such shares.

Things have worked very well with Scott Technology over the years. Accordant is a bit more troublesome. The dividend stream at Accordant has really fallen away and the share price has come down in sympathy. Still I have a portfolio allocation where even a 'problem child' will never make up more that 1/10th of my portfolio. And if a cash issue is needed for a bail out, I will keep enough cash on hand to support such a thing.

One thing I have found though. All of the truly out size returns I have made on the NZX have been buying shares outside of the NZX50, even if latter success means they ended up in there. So if you have the time, knowledge and the temperament, there is a lot to be said for looking at opportunities outside of 'the index.'

SNOOPY