This is the second full year of running this portfolio and im pleased it has outperformed compared to slight underperformance in it’s first year.

A reminder of the portfolio criteria:

  • Approx 20 companies. Each stock circa 4.5% position.
  • Each company must be >£1billion market cap
  • Pick of 2 stocks from each of Stockopedia’s ten sectors with stockrank >90. If there are none I will relax this to SR>80. If there are still no matches, I will not select a company.
  • I may choose up to 3 companies above $1m market cap at entirely my own discretion

Over 20% outperformance is partly driven by my discretionary choices to invest in gold miner Centamin and stockbroker IG Group which were 4th and 5th best performers.

Note: Acacia mining was bought by Barrick shortly after this years selections were made with shareholders being swapped into Barrick shares. If this was reflected in the portfolio(rather than assuming position frozen at buyout calculated value), this position would havegrown another 60% over the year.

The individual returns look like this:

This years picks

Following portfolio rules i have selected the below for 2020-21. There was only one company available for selection within healthcare and none within telecoms. My discretionary choices were BATS, HOCH & BOO making a total of 20 selections.

A letter to Investors: The Case for Bitcoin

In this article I give an ‘entry level’ overview to people already familiar with investing, as to why I believe Bitcoin is worthy of your attention. I touch superficially on many topics to provide a starting point for your own research and debunk some common misconceptions. Many of you will have heard of Bitcoin already and I ask you to approach with an open mind…

 

Why was Bitcoin created?

Bitcoin’s very first block in 2009 incorporated a message at the heart of Bitcoin’s purpose.

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

The creator of Bitcoin laid bare their opposition to bank bailouts, the moral hazard involved and set a path towards a new sound money standard. Later in 2011, the creator, who went by the pseudonym of Satoshi Nakamoto, stepped away from Bitcoin leaving it as an entirely open source form of money under no-one’s direct control.

11 years later Bitcoin has grown from a handful of extremely early adopters to an estimated 50 million users, a daily average transaction volume equal to $1 billion USD and the hash rate of the network (a measure of network security) sits near all-time highs. The current price is c. $7,000 USD per Bitcoin with a market capitalisation of c. $133bn.

 

Who values Bitcoin and why should it be worth anything?

The reason Bitcoin is valuable is because it is money, the best money to have ever existed in fact. Increasing numbers of people are recognising this by asking a question most have never asked – what is money?

Various monies have been used throughout human history as a store and exchange of value across time, space and scale. Money solves problems such as how do economic actors exchange the fruits of their labour, when

  • neither is producing a good that the other wants,
  • neither want to transact at this very moment,
  • or indeed in the quantity offered.

Seashells, cattle, wooden sticks, Rai stones, glass beads, gold and paper have all been used as money in different cultures and during different periods of history. The requisite attributes of ‘good’ money are well understood.

Below shows a comparison across Bitcoin, Gold and Fiat (government issued currency) against these attributes:

(table taken from Vijay Boyapati in ‘The bullish case for Bitcoin’)

The stand out score is Fiat money’s scarcity – F! It is not at all scarce and is created at will by governments around the world.

As well as excelling at the various attributes of ‘good’ money, Bitcoin also solved the Byzantium General’s problem – how to transfer value between two parties without an intermediary. Solving this allowed Bitcoin users the ability to transact peer to peer without requiring trust between them. It also sits at the heart of Bitcoin’s censorship resistance whereby no-one can interfere or interrupt a transaction between two parties.

 

More than just money

Bitcoin is money to a growing number of people, yet it is also more than just money – as viewed through these various lenses:

  1. Digital gold – a scarce, high stock to flow asset.
  2. The world’s first and only immutable digital asset – no other digital asset can realistically claim they are unable to be copied – like a photo or an mp3 for example. Bitcoin is absolutely unique in this sense.
  3. Payment network – a global network capable of transferring $billions of value daily
  4. A protocol – the protocol for trust-less value exchange. Just as IPv4 became the standard for data packet transfer across networks in 1983 and continues to power the internet today, bitcoin is becoming the de facto protocol for digital exchange of value. Protocols once in place are notoriously difficult to dislodge.
  5. Truth machine – An ultra-secure distributed ledger. Once information is committed to it by way of a transaction, it is permanent and unalterable for all of history.

These different perspectives chime differently with different people. Interestingly Bitcoin appeals much more to the younger generation. A United Kingdom YouGov poll in 2018 found that “one in eleven (9%) 18 to 24 year olds say they have bought the cryptocurrency, compared to one in a hundred (1%) of those aged 55 and above.”

As a digitally native audience, the idea of a digitally native money resonates. As wealth is passed down through the generations, an increasing amount of it will find its way into Bitcoin.

 

As an investor, why own Bitcoin?

  1. Asymmetric risk reward. Ask yourself if Bitcoin were to become the new global monetary standard, what market capitalisation would be appropriate? Gold has a total capitalisation of c. $8trillion at current prices. If Bitcoin were to match this, divide $8trillion by the 21 million bitcoin fixed supply and you have a price per bitcoin of $380k – 54 times higher than the current c. $7k Bitcoin price. Many would argue that this is conservative with Bitcoin eventually equalling all global monetary bases which again would be many magnitudes higher.

On an expected value calculation – you should invest in Bitcoin if you assign a higher than 1.85% probability of Bitcoin reaching golds market cap. If you are wrong, you may lose 100%, if you are right, you stand to make 5,400%.

  1. Sharpe ratio. The Sharpe ratio is a common metric used in investing to denote the risk-adjusted return of an asset. Bitcoin has a higher ratio which means that you are getting higher returns compared to other assets for the risk taken. If this continues to be the case, there’s a strong argument for an allocation to Bitcoin in your portfolio.

  1. Non correlation. Bitcoin is generally uncorrelated to stock markets. The below chart shows that Bitcoin has historical low correlation to the S&P 500. (1 is correlated and -1 is oppositely correlated). From a portfolio allocation perspective, a prudent investor wants to own uncorrelated assets. If Bitcoin continues to be uncorrelated, then owning some as part of a larger portfolio is entirely sensible.

  1. Inflation Hedge. As a finite and scarce asset Bitcoin can be viewed as an inflation hedge similarly to Gold or other finite assets such as land. With the unprecedented actions governments and central banks around the world are currently taking, there is a growing possibility of inflation or even uncontrollable inflation in the future. Owning Bitcoin may be an insurance policy against this. It is also a hedge against negative interest rates which in previous decades were considered fantasy but are now closer to reality – with interest rates now sitting at next to zero.
  2. Ownership in a new financial system. Bitcoin is a standalone and separate financial system. Global massive investment into ‘on and off ramps’ from fiat currency have been built in the last 2 years allowing greater funds to flow into and out of the Bitcoin network. If Bitcoin’s success continues however, it’s not hard to imagine at some point in the future a world in which Bitcoin becomes a standard denominator of exchange and from a Bitcoin user’s perspective, there being no requirement to interact with fiat currency whatsoever.

 

But Bitcoin is bad!

In quickfire fashion I tackle a couple of the common myths and misconceptions around Bitcoin that people may have, particularly if they are new to the space.

  1. Terrorist money. Bitcoin is pseudo-anonymous, not anonymous. It’s public record of all transactions actually helps law enforcement track bad actors in many cases. Not to mention that bad actors use all forms of technology including mobile telephony, the internet, transportation, pounds and dollars.
  2. Governments will shut it down. Bitcoin was designed with this in mind. It’s decentralised and open source, running on many thousands of nodes and miners across the globe. As the network grows, the possible forced shut down of any of them becomes increasingly irrelevant. There is no person or organisation in charge. No group or person can be coerced in any way that can stop the Bitcoin network.
  3. Bitcoin is Myspace, the next coin is Facebook. Bitcoin was not the first digital money but was the first successful one. This supposition makes even less sense if you think of Bitcoin as a protocol rather than a company. Protocols once established are difficult to replace, even when a new improved protocol is available. The Lindy effect states that the longer a technology has existed, the higher the probability it will continue to exist. Bitcoin’s 11 year track record is a hurdle any competing money would need to overcome. Finally, the network effects at this point are huge with recognition and mind share amongst consumers, developers and investors increasing relentlessly. The 11 year growth of the network explains the current high security of the network. Any competing money would need to convince possible users to store value in a less secure money – clearly against a rational economic actor’s best interests.
  4. It cannot scale. Think of Bitcoin as the base settlement layer of a new financial system. It exhibits properties of security and trust-lessness and it fulfils these properties vigorously. It could be changed at the base layer to enhance another attribute – for example increasing transaction throughput. But in doing so there would be an engineering trade off and some of the prior attributes would be diminished. Ultra-secure and ultra-fast are mutually exclusive. Bitcoin would become a swiss army knife able to do a lot of things but none very well.

But actually Bitcoin is scaling. There are improvements being made to enhance throughput at the base layer, but the majority of scaling enhancements will come at the second layer and above – these are protocols and applications built on top of Bitcoin. The lightning network is a brilliant example of this – allowing 1 million payments per second! And although still extremely secure, not as tremendously secure as a base layer transaction.

  1. Bitcoin mining uses too much energy – Bitcoin miners spend energy in mining on the bitcoin network as it makes economic sense for them to do so. They perform costly ‘proof of work’ and in doing so contribute to Bitcoins security. But compared to what does it use too much energy? Do we compare to the energy used in servicing the existing financial system or gold mining for example – which are both enormous. This misconception neglects the innovative use of bitcoin mining in reducing oil and gas field waste emissions and in enhancing business cases for renewable power generation which, often in remote locations, have difficulty in selling energy produced back to the grid. This is a whole topic worthy of further investigation.
  2. Volatility makes it worthless – Bitcoin is volatile but in the medium to long term this has been reflected in ever increasing prices. At only $133billion in value it is small compared to other asset classes such as stocks, bonds or foreign exchange which measure in the tens or hundreds of trillions. As Bitcoin grows, expect this volatility to diminish.

Getting Exposure to Bitcoin

Bitcoin is a digital bearer asset and taking self-custody of your own bitcoin at some point is important, however falls outside the scope of this article. At present you can:

  1. Buy Bitcoin on an exchange. There are many well known exchanges with Coinbase being one of the biggest brands globally and CoinFloor being a popular UK based exchange. Once purchased, your Bitcoin resides on the exchange where you have the option to leave it there on the exchange or take self-custody into your own wallet. The most secure and safest method of owning Bitcoin is to take self-custody by using a hardware or ‘cold wallet’.
  2. There are two existing funds: Grayscale Bitcoin Trust based in the United States and Bitcoin Tracker One based in Sweden. Access to these may be possible through a stocks and shares trading account/ISA/SIPP.
  3. Spreadbetting/Contracts for Difference. Companies like IG markets allow you to take a position on the Bitcoin price, albeit it with a high funding cost – so not ideal for long term holding.
  4. Bitcoin ATM. It is possible to exchange cash for Bitcoin at one of many Bitcoin ATM’s around the world, although fees can be in the region of 10%+. Note: using a Bitcoin ATM involves taking immediate self-custody of your Bitcoin.

 

Final thoughts…

Bitcoin has come a long way in 11 years but is just getting started. There is a huge community of people around the world dedicating their lives to Bitcoin. Their numbers grow and they are absolutely committed to the concept of sound money and the societal and economic improvements this will bring. Through exploring this new technology and dedicating many hundreds of hours to understanding the space, I now count myself amongst them.

Hopefully this article has provided ideas for further investigation on your own part, satisfying any burgeoning curiosity. Below is a handful of places you may like to start for further research.

 

Raoul Pal (Real Vision) and Dan Tapiero (DTAP Capital) discuss Bitcoin from a macro and institutional investors perspective https://www.youtube.com/watch?v=BtjziNDqC4E

Vijay Boyapati outlines The bullish case for Bitcoin in early 2018 https://medium.com/@vijayboyapati/the-bullish-case-for-bitcoin-6ecc8bdecc1

Jameson Lopp with a number of links to Bitcoin investment thesis’s and approaches to valuation https://www.lopp.net/bitcoin-information/investment-theses.html

‘Bitcoin for beginners’ YouTube playlist from Anton Antonopoulos – one of the space’s foremost thinkers https://www.youtube.com/watch?v=l1si5ZWLgy0&list=PLPQwGV1aLnTuN6kdNWlElfr2tzigB9Nnj

Bitcoin Wiki page https://en.bitcoin.it/wiki/Main_Page

And finally, one of the best known Bitcoin related podcasts, Peter recently recorded a season of interviews aimed at newcomers to Bitcoin. Start with the first 2 episodes and you’ll be gripped https://www.youtube.com/watch?v=RpcZ1DvCAf8

Model Portfolios for 2020

January 1st, 2020 | Posted by shauniekent in Uncategorized - (0 Comments)

 

The NAPS discretionary long has a mid cap blend bias whereas the NAPS discretionary short has a mid cap growth bias. There were no longs or shorts within the telecoms sector to select that fit the criteria.

Again i find it difficult choosing stocks within the rules as i often don’t have an opnion or i simply don’t want to buy housebuilders for example! But the rules are there for a purpose and i follow them. I was more than happy to include Capital Drilling and HAT who i believe are both going to benefit from a rising gold price.

I find the shorts much easier to pick however I did not like having to pick Hurricane Energy as a mechanical short – i have picked this as one of my 5 stocks for the stockchallenge.co.uk annual competition!

The selections for 2020 are below.

NAPS Discretionary Long 2020

NAPS Discretionary Short 2020

Mech NAPS Short 2020

Mech NAPS Long 2020

So how did these model portfolios do in 2019? The combined portfolio scores are on the performance page(weighting longs 2/3rds and shorts 1/3rd but the individual components are below:

The NAPS discretionary shorts performance for the year was -11.6% so pretty good. The shorts were very volatile – plenty of 100% swings in both directions. Noteably Codemasters was up 73.7%, it’s StockRank went from 25 to 75 over the year. The SR hit 57 in March so perhaps this might have been a trigger to cut the position if that was permissible within the rules. This would have kept the individual stock damage to around 40%.

The Mechanical short portfolio was up 33.6% – terrible! Silence therapeutics was up 570%! Despite this the comapnies stock rank is still 25 so a stock rank stop loss wouldnt have helped. Excluding this outlier then the portfolio would have returned +4% performance – what a diffrence one huge outlier makes. Team17 the second biggest gainer hit a stock rank of 68 in April and a stop loss here would have cut the damage to the portfolio in half. At a glance – it doesnt appear that any of the shorts falling (ie favourable direction) YoY had a rising SR that would have got stopped out by such a tactic during the year.

The mechanical long up 10.6% benefitted from 2 big winners. Notably about a third of the stocks now have a SR under 70 after one year.

The NAPS discretionary long portfolio was up 23.4% – a solid performance. Noticeable it had only 5 losers compared to the mechanical long’s 10 losers.

I’ll be picking the 2020 portfolios shortly and will post their composition.

Below are the portfolios and their 1 year performance.

Since starting investing years ago i have moved from barely tracking overall performance to annual reviews which attempt to track overall portfolio performance but this is hindered by the my various accounts, cash balances and leverages that have been used. My investing style was varied, entirely discretionary and ad-hoc.

I would like to more clearly track portfolio performance and furthermore i want to improve my investing returns which have led me to create a number of factor based systematic portfolios – heavily influenced by the collation and summary of investing research by the team at Stockopedia.

On my ‘Performance’ page you will see the portfolios i have ran in the past and those i will either continue or create.

Personal/StockRanks NAPS Mix (discontinued) portfolio.

This is the model portfolio i’ve tracked on this blog for 3 years based loosely on a NAPS High StockRank portfolio. I selected at the start of each year a numer of companies that either had a fairly high stock rank or that i simply found attractive for one reason or another. I will no longer continue this portfolio as i moved to a stricter rules based approach.

A year ago I created the following model portfolios to track – some of which are entirely mechanical, some are mechanical but allow some personal discretion, some also allow short positions. My hope is to build up a track record over time and discover whether i can beat the mechanical portfolio with a little of my own stock picking (within rules).

I’ll post the 2019 results in a separate post – but realise that i need to lay out the portfolios and rules first!

Description and Summary of Portfolios

StockRanks NAPS (long/short)

  1. A Portfolio of approximately 36 to 40 stocks. Half being long and half being shorts.
  2. Longs are stocks with a market cap > £20M and i pick two stocks (StockRank > 90) of my choice from each of 10 sectors on Stockopedia.
  3. Shorts are half the position size of longs with mkt cap > £150m and i select 2 stocks with StockRank <30 from each of 10 sectors. I can choose not to pick a short if none fit the criteria. In working out annual performance i will assume longs make 2/3rds of the annual performance figure and shorts 1/3rd.
  4. I have some choice in which stocks to choose as long as they fit the above rules i can select the ones i want – often this gives me a choice from a couple that meet the criteria. I may want to look at price chart for shorts for example to avoid bottoming or curving up charts.
  5. Portfolio revised and re-balanced annually.

StockRanks NAPS (long only)

This is the long only part of the above portfolio.

Mechanical StockRanks NAPS

This mimics the above portfolio but with no discretion – simply choose the highest or lowest ranked stocks.

  1. Longs are stocks with market cap > £20M and the two highest ranking stocks from each of 10 sectors are selected.
  2. Shorts are half size of longs with mkt cap > £150m and the 2 lowest from each of ten sectors are selected.
  3. Shorts are selected even if the stock rank of the lowest in the sector is not *that* low.
  4. I have no discretion or choice in stock selection – it is entirely rules based.
  5. Portfolio revised and re-balanced annually.

UK Large Caps StockRanks NAPS

  1. A portfolio of approximately 20 companies.
  2. Each company must be > £1bn minimum market cap at selection.
  3. I pick two stocks (StockRank > 90) of my choice from each of 10 sectors. If there are insufficent stocks with StockRank >90 I may move to choose from stocks >80 else I will not select a stock if none fit this criteria.
  4. Each stock will be a 4.5% position.
  5. I can then choose 3 positions at my complete discretion as long as they are over £1bn market cap. For 2019 these were tetragon and randgold.

Personal Purely Discretionary

  1. This is my bucket for purely discretionary stock picks and trading. This may include longs and shorts. In 2017 I included crypto currency trades in this portfolio however I may separate these in the future.
  2. Can include growth/excitement style.
  3.  The place where I can put resource companies, high growth and other stocks thta may not necessarily have a high stock rank.

General Guidance for personal portfolios.

  1. I want to be able to select high stock rank companies that other investors online also really like – it’s a double confirmation imo of a stocks appeal.
  2. Use stops (and limits) for every position so constant monitoring is not required.
  3. I only sell every 3 months – else I use limit orders. I can open a new position with a stop at any time.

Family Member Portfolio – Discretionary

This is a portfolio i’ve managed on a purely discretionary basis for a family member which is now discontinued as money was required for a property purchase.

UK Stock Challenge Competition

This is the 5 stock portfolio selected at www.stockchallenge.co.uk every year under alias shauniekent.

It’s a year since I created a rules based dummy portfolio which I’ve been tracking on Stockopedia’s fantasy funds. The aim of this was to see if I can’t beat an imagined institutional fund, by only investing in larger companies in an attempt to beat the market.
I also created some other model portfolios with which I want to track long term performance and I’ll try and get round to posting these before their annual review at Christmas.

I’m calling it ‘UK Large Caps StockRanks NAPS’. The rules for the first model portfolio are as follows:

  • Approx 20 companies. Each stock circa 4.5% position.
  • Each company must be >£1billion market cap
  • Pick of 2 stocks from each of Stockopedia’s ten sectors with stockrank >90. If there are none I will relax this to SR>80. If there are still no matches, I will not select a company.

I may choose up to 3 companies above $1m market cap at entirely my own discretion. For the year passed I selected tetragon and Randgold.

So how did I do? A rather disappointing -2.4% slightly under the FTSE350 performance I chose as a benchmark.


There was a broad range of winners and losers.

So on to this year’s picks. Following the rules most sectors gave me very little choice with only 2 or 3 companies within the criteria. Only utilities had less then 1 company with a stock rank above 80. Interestingly this year the selections are less recognisable than last year.
I want gold exposure so I’ve found two miners in Acacia Mining and Centamin from perhaps only 3 gold miners to choose from. I’ve also included IG Group.