QUALIPORT
Five Years Of Managing A Public Portfolio

By Maynard Paton (TMFMayn)
November 23, 2004

I wrote my first Qualiport article five years ago this week. To celebrate this milestone in Motley Fool literature, I thought I'd look back on what I've learnt from running this public portfolio. Here are some of the more important lessons:

* Investing is not a team sport: Prior to my involvement, the Qualiport was managed by Fool UK co-founder Bruce Jackson. Then for a time in late 1999/early 2000, we co-managed the portfolio. But I soon discovered we had some differences of opinion. For instance, Bruce liked Warren Buffett's Berkshire Hathaway (NYSE. BRK.A) -- I didn't.

With the Qualiport's decision-making committee going nowhere, Bruce decided to leave me to it and spend more time managing Motley Fool UK. Since then, I'm pleased to say Bruce has steered the Fool to even greater success (and his share picks have come on too!). The portfolio still presents some tough dilemmas, but I find it much easier to argue with myself.

(Bruce: Berkshire's stock is up 59%)

* Keep on top of your companies: Back in the days of regular portfolio cash injections, it was all too easy to look for something to buy than check what was going on at existing holdings. Only when the market started turning sour in the second half of 2000 did I really investigate Bruce's portfolio legacy. And by that time, a lot of market value had already left the building…

Company updates are now a regular feature of Qualiport articles. Boring to some perhaps (judging by the page views), but it's here where the real groundwork for the portfolio is done. My general rule is that portfolio members get covered once or twice a year, while watch list shares ought to get some sort of review once a year.

In fact, one of my favourite Qualiports is Why Stock Picking Is A Loser's Game, not least because I wrote: "Almost all of the really big investment trouble you're going to experience in the next year is in your portfolio right now."

* Start a watch list: I consider starting the portfolio's watch list to be one of the main landmarks in Qualiport history. When the list was first introduced in June 2001, the FTSE 100 stood at 5,948 and the portfolio was valued at £21,037. At yesterday's close (22 November), the blue-chip index had subsequently lost 11% (with dividends reinvested), while the Qualiport had gained 21% (to £25,447).

There are several advantages to running a watch list. First, updating the list every quarter forces me to keep close tabs on the companies involved (see above). Second, the list generally stops me from straying off and looking at non-quality companies. Third, continual company coverage helps build a circle of competence. And fourth, I'm ready with 'buy' prices when the markets hit the panic button.

However, one side effect of running a watch list is that I'm less likely to be swayed by reader opinion…

* Stick to your guns: Running a public portfolio with an educational stance invites portfolio criticism. However, with investing not a team sport (see above), I've got to make decisions I'm comfortable with.

A notable event in my Qualiport career was looking at Games Workshop (LSE: GAW) in early 2000. The subsequent feedback was universally negative, but during the worst bear market for a generation, the shares have since rallied 150%. In retrospect, I was swayed by the comments deriding the company and its prospects, something which I've regretted ever since.

These days, I'm almost immune to reader criticism. Indeed, I knew selling Lloyds TSB (LSE: LLOY) in early 2003 would create a backlash on the discussion boards. But I also knew it was the right thing to do. Eighteen months on, Lloyds TSB shares are up 4%. The sale proceeds were invested in Halma (LSE: HLMA), which is up 41%.

* Look for the obvious: Too often I've got lost in a maze of corporate details and missed the big investment picture.

As Warren Buffett once said: "Investors should remember that their scorecard is not computed using Olympic-diving methods:  Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternative characterised by many constantly shifting and complex variables".

In the past, I've found being too clever and relying on cunning business strengths rarely pays off (e.g. PizzaExpress, MMT Computing). I now select companies whose competitive advantages are obvious.

'Value' has to be obvious as well, because in my experience the best returns come when a cheap share is staring you in the face. After giving up discounted cash flows long ago, I now use free cash flow as a simple valuation benchmark.

* Don't believe the directors: Working full-time for the Fool has given me the opportunity to speak with the directors of several listed companies. This may sound surprising, but afterwards my investment judgement on the firms in question took a notable turn for the worse.

My prize gaffe was Independent Insurance. I came away feeling good about the insurer after speaking with boss Michael Bright in October 2000. But eight months later, the company went bust. Other conversation-based blunders are detailed here.

Apart from the very rare exception, I now purposely avoid speaking to company bosses. They're generally too optimistic and will be the last to tell you bad news is on the way. If I must speak to a director, I focus only on the facts and ignore all the adjectives.

* Get tough on losers: Over the years, I've realised bad or deteriorating companies become a huge drain on time and money. So when a portfolio mistake starts to appear, I've learnt to get rid quick. Independent Insurance was dumped promptly (thankfully), but dithering with MMT, PizzaExpress and Misys (LSE: MSY) sadly cost the portfolio dear.

Summary

I've learnt a lot in the last five years and I like to think I've been doing something right. The Qualiport has outrun the market in 2001, 2002, 2003 and 2004 (so far) and is today worth £5,336 (or 27%) more than it would have been had I switched everything into an index tracker on 24 November 1999.

Of course, the next five years will teach me many new lessons!

More: What Went Wrong At The Qualiport… And Why | Five Top Qualiport Decisions

Maynard owns shares in Games Workshop and Halma.

Portfolio value

Holding	Number of shares	Closing price 22/11/04 (p)	Value (£)
Associated British Ports	681	469	3,193.89
Emap	372	792	2,946.24
Halma	1,920	155.25	2,980.80
Johnston Press	1,608	527	8,474.16
London Stock Exchange	2,018	384.75	7,764.26
Cash			87.41
Total			25,446.76