Investment Portfolio

As an investor, I strive to consistently make money not to strike it lucky once or twice, and so I have grown to respect the importance of managing a portfolio of share investments.

An ideal Mean Fifth Portfolio consists of between 8 and 20 separate company investments

When considering the goal of Mean Fifth is to achieve an average of 20% gain each year, it is important to manage risk – for which the most important element is ensuring you have a range of share investments. Firstly, I am realistic and I do not expect to achieve a 20% gain each and every year. The importance is to achieve an average 20% gain each year over an extended period of time. When the market is positive, as it has been for a while at the time of writing this, I know I must achieve a greater gain than 20% to compensate for “market corrections” periods where I expect my portfolio to reduce in value, or at best achieve no growth. For example, in the year to April 2020, including the period the Covid pandemic became apparent, my portfolio lost 24% of its value – but in the following year to April 2021 my portfolio gained 58% and in the year to April 2022 it gained another 33% such that the combined performance of the three years beat my long-term performance and exceeded 16% average annual gain.

Why not pick one or two companies to invest in and put all your funds into them?

Of course, if I had invested all my money in my single best performing investment, I would have made a 1,864% gain over 12 years (this is equivalent to an annual average gain of 30%). But conversely, if I had invested all my money in one of my worst performing investments I would have lost everything (most memorably due to internal fraud by the company’s leadership).

For an investor to balance risk and reward, you must spread your investments over a number of companies and keep it balanced so extreme under-performance (and conversely over-performance) does not materially impact your investment returns.

To achieve the aims of Mean Fifth, this means having a reasonable size portfolio to manage the negative risk, but not too large a portfolio otherwise you will reduce the positive gains which deliver the average 20% annual gain. For me, an ideal portfolio consists of no fewer than 8 companies and no more than 20 companies.

All Investments are NOT Equal

Managing a portfolio is mainly focussed on managing risk to deliver your target outcome. Essentially some of the companies which I identify as good investments inherently contain more risk than others and therefore I do not put the same level of investment in each of them. For instance, if company A and company B have the same Y20 but company A has only 10% of the turnover of company B then if adverse situations arise, company A is less likely to be able to borrow additional funds to see it through a difficult situation than company B, or if it could borrow the funds, it is likely to have to pay a higher interest rate. Alternatively if company C and company D have the same Y20 but company C is constantly restructuring and not growing particularly well, whilst company D is continuously growing each year, company D should be a better investment than company C given the same Y20.

I have four levels I generally use:

Risk Band	Approximate Portfolio Weighting
Standard	10%
Solid (standard but little growth)	7.5%
Decent (smaller, less history)	5%
Risky (good potential / poor history)	2.5%

The largest part of my portfolio will be made up of Standard risks, then decent risks with only one or two investments in either the good or risky bands. I try to make clear decisions into either the Standard or Decent bands, and only use the risky band when the Y20 is highly debatable (for example, lots of “Adjusted” reporting) and the Solid band for companies with little growth but which are obviously attractively priced – because all the investments must start with a low Y20.

As an example, currently my portfolio is made up across the risk bands as follows: