About Richard Beddard

Vicissitudes

This interview was originally published at EuroShareLab in February 2011 and is reproduced with permission. I’m re-publishing it because I thought readers of this blog might be interested in the writer...

Value investor Richard Beddard writes the Interactive Investor editors’ blog and is a columnist for Money Observer magazine.

How did you get started in investing?

One of us had to work out what to do with our savings, and my wife wasn’t showing much interest so back in the mid nineties I subscribed to ‘Successful Personal Investing’, a correspondence course. It was on paper, and I believe it still is. Soon after, I set up an investment club at work with friends, and although we stopped investing together in the dot.com meltdown some of us still meet once a month. We even talk about investing occasionally!

Can you talk about your investment approach and how it has developed over time?

It’s always been based on company fundamentals and financials as I don’t really see how you can be an investor if you’re not trying to understand businesses; how they make money, and what makes them go bust. I briefly dabbled in charting in the early days, but couldn’t make any sense of it.

I describe my method as ‘screening plus’. I screen the UK market for companies that look cheap and financially strong and then investigate them further, mostly by reading their annual reports going back ten years. Different numbers tell different stories. The combination of a low valuation and high financial strength (improving profitability and leverage ratios, for example) are signs a company is recovering. Sometimes I’m looking for recovery, and sometimes consistent profitability and financial strength, which I might be willing to pay more for. Looking back ten years, I’m trying to establish whether the story the numbers are telling me is true and enduring, or just an artefact of creative accounting or the result of a particular, temporary, set of circumstances. I describe my approach in more detail here:

How did you weather 2008 and the first part of 2009?

Personally, about as badly as the market. It was a big shock to me. SCS Upholstery, a company I owned, went bust very quickly, which demonstrated (painfully) that a company with no bank debt can go under. I didn’t start the Thrifty 30, my public portfolio, until September 2009 but one of the reasons it’s so diversified (up to 30 companies) is that I lost a bit of confidence in my stock picking abilities during the credit crunch (another reason is that people would get pretty bored if I wrote about the same five stocks all the time).

How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?

I screen the market using a database called Sharelockholmes. I update the screens monthly here.

How many positions do you typically have in your portfolio?

A maximum of 30. I try to keep at least 10% of the portfolio in cash, so that if the market crashes I have the firepower to buy really excellent companies when they are cheap. The amount of cash may go over 10%, if I can’t find enough good companies at cheap prices, and it may go to zero in a crash.

Describe some of your most notable investment mistakes and what did you learn from them?

Well, SCS is the biggest. The shares had already fallen 99% when I bought a significant stake (in terms of the overall size of my portfolio). I remember somebody saying they couldn’t believe I was buying the shares as trading at SCS had declined so rapidly. I even went to an SCS store, sat on the sofas, and experienced the desperation of the salesman trying to flog me one before the end of the month.

It was obvious the company was in trouble, but I felt reassured by its lack of debt. I didn’t understand the doomsday mechanism that would undo the company. We all do now, because other high profile retailers like Woolworths died the same way. Although SCS had no bank debt it still had to pay rent. When people stopped buying sofas, credit insurers stopped insuring its suppliers’ invoices. The suppliers, themselves probably not in too healthy financial condition, demanded quicker payment and SCS couldn’t pay suppliers and the rent. Recently, I got a couple of quid back from the administrator.

Call it a salutary lesson. The lesson I learned is that all liabilities are important, not just interest bearing debt. Some liabilities, like non-cancellable operating leases, aren’t even on the balance sheet. Most retailers have these.

If you’re a rubbernecker, you’ll enjoy this post.

So far there has not been a failure in the Thrifty 30. Armour, which makes car stereos, home entertainment systems, and all manner of audio visual equipment for homes and vehicles has fallen about 50% since I added it to the portfolio, but my response has been to buy more shares, so we shall have to see how that goes.

What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?

I think there’s a very simple rule. The more confident you are in your analysis, the fewer holdings you need, and the less diversified they need to be.

Do you follow any key risk-management guidelines in managing your portfolio?

Yes. I’m constantly seeking to make sure that individually, and as a group, the companies are as undervalued by the market as possible, and their finances and businesses are as strong as possible. I’m trying to guard against paying too much for shares, and suspect companies. That’s it.

What is the current geographic mix of your portfolio?

Entirely UK, although even though they are smaller companies, some derive only a small proportion of their profit from the UK.

How do you manage currency exposures?

No need.

How did you get involved in writing an investment blog?

In 1999 I joined Interactive Investor, already one of the UK’s biggest investment communities, as community editor. Previously I had managed a team of designers and editors for an internet publisher and part of the job was to design and implement online communities. That and my interest in investing probably got me the job. Then I became companies and markets editor. Mostly I commissioned and edited other financial writers and I started blogging as a channel for my own research into companies and markets. As it’s grown in popularity it’s taken over more and more of my time.

I write two columns for Money Observer magazine as well, one of which talks about companies in the Thrifty 30 portfolio.

What has been your most notable success while blogging and why?

That I’m still doing it nearly a year and a half into a five year project! The aim is to beat the market handsomely over five years using value investing techniques, and it’s gruelling. I’m looking at companies that are dull, out of fashion, and often doing badly. Not only do I have to muster the enthusiasm to decide whether or not the companies make good investments, but I have to write about them in a way that won’t totally depress my readers. In its first calendar year the Thrifty 30 rose 27%, against 9% for the market, which is an achievement, I think, because for much of the year I was adding companies to the portfolio, so the level of cash was higher than it will normally be. Anything can happen in a year, of course. The real test is over five years and longer. You only really know if you’ve succeeded at investing when, on the day you cash everything in, you’ve made a good return. Bearing that in mind, here’s a review of the year.

Back in the mists of time I remember writing a blog post that actually brought the server down. I think it was “The Great Crash of 2009”, written in May 2007. I got my timing wrong, but I it was a success of sorts. Here it is.

What has been your most read blog posts and why?

I don’t know, maybe The Great Crash post I just mentioned. I concentrate on the posts, and not the stats. I mean that. I don’t even know where the stats are, although people tell me how many ‘unique users’ the blog has and I’m aiming to grow that number as a measure of long-term success. I think the blog will be a success if the Thrifty 30 achieves its ambition to beat the market handsomely over five years. At worst, worrying about the popularity of individual blog posts would distract me into putting my effort into the sensational, and not the successful.

What company do you find interesting at the moment and why?

I’m reading a book called “Hidden Champions of the Twenty First Century”, which I highly recommend. These champions are the middle-sized specialist companies driving globalisation. Most of them are German; the only British one mentioned in the book so far is De La Rue, the banknote printer that lost its lustre recently. But I think lift component manufacturer Dewhurst is a hidden champion and perhaps FW Thorpe, which manufactures lighting, too.

Who do you think I should interview next?

I’d love to read an interview with Geoff Gannon of gannononinvesting.com. There’s no shortage of material coming from him, he’s very prolific. It’s all good, so let’s have some more.

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