Aviva Stock: The Key to Long-Term Investment Success as Picked by James Goodwin

Stocks: AMD, INTC, TED, TMI.L, AV.L, SOM.L

What is your background?

I originally studied Physics at university, but started my career as a Software Engineer after completing a postgraduate degree in Computer Science. I’ve been working in this sector for the last 5 years over which time I’ve progressed to being a Tech Lead and managing a small team.

When and how did you start investing?

I started investing almost exactly 3 years ago. My wife and I were in China visiting her family for Chinese New Year (right as the pandemic was starting) and I decided I wanted to buy some shares in AMD. I’d been a long-time user of AMD’s CPUs and Graphics cards and had seen how they dramatically improved with the release of the Ryzen chips, which were competing with and even surpassing similar products from Intel, but this didn’t seem to be reflected in the share price.

I had no idea what I was doing to begin with, so sought to get myself up to speed by reading The Financial Times Guide to Investing by Glen Arnold which I bought as an ebook and read on my phone (the only device I had with me). Something else I did on my phone was remotely set up a UK brokerage account in order to purchase the shares.

AMD subsequently doubled during that year and I made a tidy profit, though on a modest initial investment. I sold my shares and sought to diversify my portfolio amongst a number of holdings, chosen at this stage largely on the general prospects for each company rather than an appraisal of their fundamentals or valuation. This led to some educational losses that set me on the right path - the path of value investing - which I have followed since.

What was your biggest investment mistake you have made? And what did you learn from it?

I’ve been quite fortunate so far that I’ve not had to pay too high a tuition bill for my investment education. As I described before, I made some early mistakes around lack of due diligence and overpaying for companies which I was thankfully able to sell without substantial losses.

A more recent and pertinent example was my investment in Ted Baker (TED). While the investment was certainly attractive and could very well have delivered substantial returns, I underestimated the risk posed by being a minority shareholder. Shortly after I purchased the stock, it started receiving buyout offers from a number of interested parties. The highest disclosed publicly was £1.375 per share, which the board rejected, before entering a formal sale process in which participants were invited to make bids privately. The result of the process was a board approved offer from Associated Brands Group (ABG), which it selected as the preferred counterparty. Unfortunately, this coincided perfectly with the start of the market downturn in 2022 caused by sharply rising interest rates and inflation, which led to ABG retracting their offer. At this point I was content to hold the stock longer term and enjoy the recovery I was sure would come in due course. However, the majority of shareholders panicked and accepted a much lower offer of £1.10 per share from ABG which forced me to do the same.

I made a couple of mistakes here: I was too focused on the fundamentals of the business and missed the risk of the company being sold out from under me by the other shareholders; I also fell into the trap of continuing to buy as the stock fell until I was over-concentrated. I have since determined to strictly limit my position sizing on a cost basis to avoid being lured into value traps such as these in the future.

Who are the best investors you follow?/What investors do you admire most?

I first found out about all the usual suspects, Warren Buffet, Charlie Munger, Benjamin Graham, etc, and went through a lot of the resources they’ve put out - books, interviews, etc. Since then I’ve found a few other investors and resources that I’ve learned a lot from, especially as I reached an intermediate-to-advanced level of knowledge in finance and accounting.

A couple of these that stand out are: Stephen Clapham, who started out as an accountant before entering the hedge fund industry and now runs an education company for analysts as well as publishing a book called The Smart Money Method; Monish Pabrai, an entrepreneur turned hedge fund manager who has written a book (The Dhandho Investor) and gives frequent talks to MBA students which he publishes on YouTube.

What is your investment strategy? And has your investment strategy changed from now and a few years back?

I didn’t really start with much of an investment strategy but have gradually developed one. I focus on industrial and geographical diversification. So for example, I don’t want to only hold companies that are dependent on one country for revenues, and I equally don’t want too many companies from the same industry. In terms of duration, my holdings are largely long-term, though some have a structural macroeconomic component to them which in some cases may play out relatively quickly. In any case, I will sell a position if it gets too overvalued or another opportunity looks more attractive.

Describe your risk management practices. How do you prevent losses from getting out of control? Do you use stop-loss? Do you have a maximum drawdown that you are willing to accept?

I touched on a key component of my risk management strategy in the previous answer: diversification. Being diversified by industry and geography helps to protect you from total wipeout if a major geopolitical event occurs in a particular country, and equally if a particular industry suddenly becomes a lot less profitable.

I’m generally unperturbed if a stock price falls and base my sell decisions on the underlying performance of the business. I have however become more disciplined with regards to buying as a stock falls. As mentioned earlier, I’ve previously fallen victim to value traps that have left me over-concentrated in a particular stock. I now have strict limits on how much I want to allocate to a given position and if the stock price falls after I’ve fully sized the position, I won’t buy more.

How concentrated is your portfolio? How many stocks do you have in your portfolio?

Currently I have 5 equally sized positions, but I’d ideally like 8-10 as that’s a number that offers decent diversification while still allowing me to follow the companies I own closely. The five I currently hold are quite diverse. I have two life insurers (though I plan to reduce this to one) that are titled to slightly different business models, a shipping company, a mining royalty company, and a manufacturer of concrete levelling equipment.

Describe your stock analysis step by step.

My due diligence process has increased substantially since I started investing. It’s now fairly typical for me to spend 80-100 hours researching and analysing a company before opening a position. I started my newsletter as a way of enforcing this due diligence process - I don’t buy a stock before I’ve done a full write-up on it.

I start with a general appraisal of the company and look at a few valuation metrics before committing to doing an in-depth analysis. I like to have a rough investment thesis in my head at the start of the process. The backbone of my research involves reading the company’s latest annual report and any subsequent interim reports in their entirety.

I then look at historical data for a longer period if appropriate (some companies have gone through a recent change that makes historical data fairly irrelevant) to get a picture of the trends in various financial figures. If I have any unanswered questions at this point I might look at other resources like interviews or earnings call transcripts. I also find it beneficial to look at some competitors and see how the company compares.

I tend not to use specific checklists as I find companies rarely conform to one. Instead I look in general for low risk, which usually coincides with strong balance sheets that are able to withstand downturns, and resilient business models that are not vulnerable to disruption.

The second thing I’m looking for is value, which can be assessed in numerous ways, but generally boils down to the cash flows of the business exceeding my cost of capital. I’m looking for an equivalent cash flow yield of 15%, some of which can come from future growth discounted back, but I’m quite conservative and look for a minimum of 10% in the next year. This helps to avoid over-exuberance in growth rate estimation.

Often value can be found in companies whose earnings are temporarily depressed, and your investment is based on a recovery to historical earnings levels. Book value is another metric that can be used with certain company types, though it pays to be cautious of asset write-downs, and conversely to acknowledge that it’s fairly irrelevant for asset-light companies which generate high ROE.

Do you invest only in stocks?

I currently have 10-20% of my portfolio in some high yield and government bonds, which have now become more attractive as interest rates have risen. If rates fall again, I’ll likely trim these positions and put the money back into stocks. I have also previously bought shares in an ETF that holds commodity futures in order to gain exposure to oil prices. I bought these when the oil price was around $60 a barrel and sold when the shares doubled in early 2022.

Tell us your 2023 outlook. What scenario are you counting on this year?

I won’t be able to add much value with a macroeconomic forecast, but I can tell you that I see a lot of opportunities in the market today and will be buying as much as I can while prices remain attractive. The only thing slowing me down is the time it takes to do sufficient due diligence on each new position!

What were the biggest/most significant changes in your portfolio last year?

Probably the most significant change in my portfolio last year was building a position in Taylor Maritime Investments (TMI.L). It’s an attractively priced minor bulk shipping company that has grown substantially in the last year through accretive acquisitions made at below market rates with the windfall from high charter rates.

What is your ROI of last year? And what is your ROI since you started investing?

I can’t tell you exactly what my returns were last year as I’ve added to it continuously throughout the year, but I can say that I’m pretty much flat relative to my average cost basis and have earned around 6% in dividends over the period, so not a bad result relative to the market. I’d like to be more transparent with these figures going forward, so once my portfolio has reached the desired number of holdings I will start publishing my portfolio and calculating its yearly performance more accurately.

What is the best performing stock in your portfolio currently?

I have done very well with Aviva (AV.L), a UK headquartered life insurer with operations across the UK, Ireland, and Canada. I first bought shares in the company back in 2020, when they were trading at a share price of £2.60, which equated to 0.6x book value. The company had cut its dividend in anticipation of potential pandemic related insurance claims, and they were undergoing a process of divesting their non-core assets - both factors that added significant uncertainty and scared off a lot of investors.

Over the next two years the company successfully sold off assets representing ~25% of the business and returned £4.75bn to shareholders through dividends and share buybacks. The shares now trade at around £4.40 and the dividend has been raised back above £0.30, equating to a substantial double digit yield on my original purchase price. The company still looks attractive at this price, so I continue to hold it. Read the full analysis of AV.L in James' newsletter.

What is the worst performing stock in your portfolio currently?

My worst performing holding is currently TMI, which has fallen ~15% since I bought it and currently trades at a 35% discount to its net asset value (NAV). Part of this is due to currency fluctuations between GBP and USD which is the currency used to value the company’s assets, and in which it earns its revenues. It is also due to a general drop in sentiment towards the shipping industry and the expectation of a decrease in ship values and charter rates.

However, I believe the discount more than compensates for this and I’ve earned a tidy dividend holding the company over the last year. The medium-term trends in the minor bulk market are likely to serve as a tailwind to the company, and the management have proven themselves to be shrewd operators and capital allocators. Read the full analysis of TMI in James' newsletter.

Which stock do you believe has the biggest potential in your portfolio and why?

I recently wrote an article on Somero Enterprises, Inc. (SOM.L) which is a small US industrial company specialising in the manufacture of machines for levelling concrete. They trade at a very modest valuation relative to their growth prospects, which I believe are considerable. Currently 80% of their revenues come from the US and they have only recently begun expanding into international markets including Europe and Australia, which have both shown early shoots of growth. They operate very efficiently and have significant pricing power, recently managing to achieve a phenomenal 50% return on equity (ROE).

What do you believe will be the next black swan event in 2023?

If I knew that it wouldn’t be a black swan event! But probably the biggest tail risk I see is a Chinese invasion of Taiwan, which would have very large global repercussions. Hard to say how likely it is, but it’s definitely something I keep in mind.

What is the best stock for the long-term to buy?

I’d have to say Aviva. It’s been around for close to 300 years and I don’t see any reason why it won’t be around for another 300. Insurance is a very durable business when done prudently. Follow James on Twitter @FirmReturns and don't forget to subscribe to his newsletter (www.firmreturns.com).