2013 - Year in review

So as the markets close for the last time in 2013 I've totaled up my figures for this year in terms of investment performance as well as over my investment lifetime. All stocks are valued to bid prices, with dealing charges and stamp duty costs included (but before capital gains tax). As I am often adding to / withdrawing from my portfolio for various reasons I track IRR as my main investment metric and benchmark myself to the FTSE All Share and Small Cap Indices:

2013

My IRR: 50.45%
FTSE All Share IRR: 14.22%
FTSE Small Cap IRR: 40.00%

Lifetime (Began 2011):

My IRR: 44.88%
FTSE All Share IRR: 9.48%
FTSE Small Cap IRR: 29.06%

So it's been another year of a strong bull market in small and micro caps UK stocks and a rising tide has lifted all boats - my 50.45% IRR doesn't look all that exceptional when you consider the Small Cap index has risen a whopping 40% this year. In fact I'm surprised I'm actually ahead of the index at all as looking around the UK small cap market now the equities that are really taking off are often low-quality 'story stocks' as the bull market becomes more mature. This year I feel like I've been pretty lucky overall with my investments as I've had so many different ones work out positively and few losers (C21, CLIG and 3LEG have been the main detractors). I certainly still expect my Lifetime IRR to trend down over time to a more reasonable figure as the benchmark IRRs mean-revert to their long term averages although I'm happy with a ~16% out-performance since I began investing.

My main mistakes this year have been those of selling investments too early. As a fundamentals-oriented investor, I have a natural bias towards over-focusing on two of the three main sources of empirically confirmed equity out-performance (value and quality) and ignoring the third - momentum. Whilst I'm aware of this and try to compensate by holding on to well performing equities that were cheap until I feel full value has been realised I have sold a number of stocks that have gone on to do very well in a relatively short period post selling. Staffline I sold at 339p and it went on to touch over 600p. I sold ACSO at 340p and it's now trading at 780p. I don't feel that bad about the prices and multiples I was generally able to sell these at (I sold ACSO at a ~30x multiple at the time and it's gone to ~55x!) but I often find that I when I sell a well-performing share they often go on to do another 15-20% in a short period afterward, although that's probably an artifact of the bull market in general anyway.

Right now I'm finding it harder and harder to find undervalued equities in the micro and small cap markets although I'm still happy with my existing investments - the nice thing about micro caps is you can be very selective and there's always something about that's cheap. On a valuation basis most markets seem at best 'fair value' to me and often quite a bit toppy - some of the small caps have re-rated on to multiples that imply low forward returns on any reasonable expectation of business performance and when people can get away with stuff like this you know the temperature of the market is starting to get quite hot.

I hope you've had a good year investing, here's to many more in the future!