investing etc. 0017

Sizzling summer edition: Shadow Trading v rolling your own system, Pimms, Celebrus, James Latham, Jet2, Kainos, Games Workshop

It was the coolest summer for nine years in the UK, but August in Cambridge was more like the rest of the world, sizzling. Here is a gratuitous pic taken on the hottest day (34.8 degrees)...

Why would you go away? I worked sitting on scorched grass under the shade of desiccated leaves and in tents erected in the courtyards of Cambridge University Library. 

A month in the life...

New ideas: 5 Strikes

Top of a list of summer sizzlers was software company Kainos, which achieved no strikes for the second year running. PHSC, Berkeley and James Latham (more on James Latham later) also got a look in.

A reader frustrated by Kainos’ weak share price prompted me to probe my insecurities about the company’s business model in an article that also touched on Iomart, and IG. All three companies have few flaws in their financial track records.

The next step for Kainos, if I take it, is to score it in the Decision Engine...

Scoring shares: Decision Engine

In August I scored James Latham, Celebrus, and Games Workshop

I worried these indecisive lines about systems integrator turned software firm Celebrus might annoy people: 

“A score of 4.9 means I am not confident Celebrus is a good long-term investment. But I am also not confident in my lack of confidence! Because I like what the company is doing, and there are signs that it is working. 

In other words, it is an interesting speculation.”

The Decision Engine accommodates indecision by limiting the potential damage. Celebrus' low score limits the investment to around 2.5% of the Share Sleuth portfolio’s total value (aka the minimum holding size). 

Celebrus contrasts with James Latham, the timber distributor I scored the previous week. 

Lathams enjoyed a surge in demand during the pandemic and a subsequent reversal. But the underlying business is unchanged, so it can be scored more confidently.

Perhaps Games Workshop is the most reliable Decision Engine share, though. It came to the end of a prolonged period of introspection nearly a decade ago, and has since established itself as a true stalwart in my opinion. 

Games Workshop shares a characteristic with leisure airline Jet2, the most recent share I have scored. Both companies are vertically integrated. They have developed and own most of what it takes to bring a product or service to market. 

Jet2 calls this “end to end ownership and control of the product.” I call it internalising risks. The difficulty with this policy is that the business has to do a lot of things well. 

Jet2 and Games Workshop have proven they can, which makes them uniquely prosperous. Such companies can be an irresistible force.

But the airline industry has a problem the fantasy tabletop miniature world does not: The carbon emissions released by jet fuel. 

This problem is too big for one business to internalise. It requires action from governments and manufacturers to develop more sustainable fuels and planes. There are many technical and economic challenges.

Climate change is like the immovable object in my irresistible force analogy. It is the reason I score Jet2 less highly than Games Workshop (though it breaks my heart to do it).

Trades: Share Sleuth portfolio

Having scored James Latham so highly, I took the opportunity to rebalance the Share Sleuth portfolio’s holdings in timber-related firms. 

Howden Joinery, a manufacturer and distributor of fitted kitchens and joinery products, was the portfolio’s biggest holding, and I wanted to add more shares in Lathams, which was the top-scoring candidate.  

Since the Howdens holding was oversized, a simple solution presented itself. 

Feedback: Shadow investing v rolling your own score

A reader emailed to ask how they could “shadow trade” my selections - a question I get quite often. 

This is not something I encourage. 

My scores are confidence scores, and confidence is not something I would outsource. 

It is impossible to copy me precisely as I publish my trades once a month but can do them any time. 

Availability also depends on my publishers continuing with me and me continuing with my publishers. Either one of us could stop, though I believe we’re in a long-term relationship!

My ambition is to introduce people to shares with long-term potential and a method of managing them.

So imagine my joy when I received an email of a different, and less common timbre. 

It came from a scorer who had been inspired by (the famous behavioural psychologist) Daniel Kahneman and me (and the book Superforecasters and no doubt many other sources).

I give three scores for each of the nine factors I evaluate: “Confident” (score: 1), “on the fence” (score 0.5) and “not at all confident” (score 0). 

My correspondent discriminates down to 0.05, constantly tweaking as the story changes. 

Thanks for reading

Here’s another gratuitous picture. This one is of Cambridge South station, currently under construction and expected to open next year.

When we moved to Cambridge in the mid 1990s the city only had one station, but soon it will have three. Cambridge North opened in 2017.

The next scheduled investing etc. should be with you on Saturday 4 October!