Cutting our losses on Dominos Pizza and Dignity

[TheMotorcycleBoy]

It's good that you log all trades. I hope you also provide a comment with each trade to explain your thought process at the time and reason for the trade. This is something I failed to do for many years and so I never really learnt my lessons from mistakes and was unable to correct faulty thought processes. You will never get all decisions correct but if you are right on 60% of your investments you will make a lot of money over time.

re. the emboldened point - that is a really good idea. Do you mean just for sales? I guess for us, the thought process for buys, is mainly going to be (from now on): "Topping this up, price looks good, recent drop of 4% etc.. etc.."

Can you elaborate a bit on the kind of sort you write? If poss...

These days I have an Excel spreadsheet that logs all trades with buy and sell prices against the current price (using eventide's very excellent tfl plug-in) so that I can check my thought processes are correct and see where I have gained or lost money on each trade. If the overall total is positive it shows I am adding value to my portfolio with my trades, if it's not then I need to give myself a kick where it hurts and closer examine all the buy and sell decisions where I gave up gains by selling or bought stupidly into losers. However, it is not something I look at on a daily basis - that way madness lies - maybe only every 2 or 3 months.

All we are really now is
1. logging all trades just "date, action, ticker code, quality, price/share"
2. logging all cash inputs to ISA (never withdraw), and extract market value each month - hence the ingredients for unitising a portfolio, something we are doing since 31 December after lots of recommendments from folk on the M&M portfolio review thread.

Matt

[simoan]

It's good that you log all trades. I hope you also provide a comment with each trade to explain your thought process at the time and reason for the trade. This is something I failed to do for many years and so I never really learnt my lessons from mistakes and was unable to correct faulty thought processes. You will never get all decisions correct but if you are right on 60% of your investments you will make a lot of money over time.

re. the emboldened point - that is a really good idea. Do you mean just for sales? I guess for us, the thought process for buys, is mainly going to be (from now on): "Topping this up, price looks good, recent drop of 4% etc.. etc.."

Can you elaborate a bit on the kind of sort you write? If poss...

I log all trades. I normally use a different worksheet for each account. I only add comments along the lines of your example but if you don't trade much there's nothing to stop you writing war and peace It's up to you.The main point of the exercise is to see where you have made bad trades rather than get all self-congratulatory about the good ones. The bad trades can be buys or sells. I have just opened my spreadsheet for the first time this year and updated it with a couple of trades. Let's just say I'm not sitting here feeling smug looking at a top-slice of Sopheon at £6.87 last March... however, there were good reasons at the time to sell as part of keeping the position size under control.

All we are really now is
1. logging all trades just "date, action, ticker code, quality, price/share"
2. logging all cash inputs to ISA (never withdraw), and extract market value each month - hence the ingredients for unitising a portfolio, something we are doing since 31 December after lots of recommendments from folk on the M&M portfolio review thread.

Matt

For logging purposes I would add a few more columns - current price, current value, change in value and a comments field. Stick it all in a table so you can filter the columns too.

Good luck with unitising! I have better things to do with my time

All the best, Si

[TheMotorcycleBoy]

OOI The fund "UK Buffetology" run by Keith Ashworth-Lord, sold out of it's DTY and DOM holdings last year. This is from the Jan 2019 fund commentary:

For the third month running, the UK stock market fell in December, this time by 3.9%. This meant that the correction from the peak reached on 22 May was a sizeable 15.0%. During the month, the Fund's I Class share price fell by 4.6% from 296.64p to 282.98p. The corresponding drawdown of the I Class SP from the May market peak was 4.2% from 295.61p. Outperformance over the course of the year meant that UK Buffettology was one of only three funds out of 262 in the IA UK All Companies sector to record a positive total return in 2018. It is worth recording that we too would have been down but for selling the holdings in Dignity, Mattioli Woods, Domino's Pizza and Dixons Carphone during the year, the shares of which were all trading well below our exit prices at the end of December. This proves the wisdom of protecting the downside as much as seeking the upside. In my opinion, 2018 was the most difficult year we have encountered since launch in 2011. Most asset classes suffered in a volatile market.

I'm not sure about his exact reasoning behind those exited positions.

[westmoreland]

read this article from investors chronicle which i thought was a bit lazy.

The refusal to negotiate new terms with franchisees is concerning. This adds to our existing list of bear points on Domino’s, including the increase in capital requirements, the quick succession of chief financial officers, rising competition in the casual dining and takeaway sectors, and the risk of cannibalisation of sales from narrowing catchment areas. Shares have lost more than a quarter of their value over the past 12 months and now trade at 263p, or 16 times forward earnings. We think more problems could be on the way. Sell.

capital requirements remain very low - the upgrade in the supply chain provides capacity for at least another couple of hundred stores. do they think adding hundreds and hundreds of stores comes with no extra capital investment? in any case, the return on that capital is likely to be high.

there is rising competition, but the economics do not stack up as well for casual dining chains. often the food isn't expensive enough to justify delivery. in any case they are reliant on aggregators who take a large cut. it should be simple to run a profitable delivery business, but in practice it's very hard.

the one that takes the biscuit is cannibilisation from splitting territories. that risk is borne by franchisees, not DPG, who make a royalty on sales. splitting territories is an essential part of the dominos strategy, increasing address coverage, making it very difficult to compete. as they charge roughly similar prices, who are you going to choose? the one that advertises all the time and has better and more reliable delivery, or the one that doesnt?

the turnover of financial officers is concerning, but i invested for the business model.

[westmoreland]

in the buy zone again.

how can it be that the market is valuing greggs, a more risky, low quality company, much higher than domino's? 4% dividend yield DOM, 1.8% greggs.

the market seems concerned with the ongoing dispute with franchisees, but franchisees earn huge returns in comparison with almost all other franchises / similar businesses. split territories are an essential part of the domino's strategy. it improves service levels, making the reliability of delivery wider, and is very difficult to compete with. there is no such thing as 'cannibalisation' for DOM as it takes a royalty on sales, not profits.

all the while, the company are buying back shares at these depressed levels, using the excess cash flow this business generates.

[TheMotorcycleBoy]

in the buy zone again.

how can it be that the market is valuing greggs, a more risky, low quality company, much higher than domino's? 4% dividend yield DOM, 1.8% greggs.

the market seems concerned with the ongoing dispute with franchisees, but franchisees earn huge returns in comparison with almost all other franchises / similar businesses. split territories are an essential part of the domino's strategy. it improves service levels, making the reliability of delivery wider, and is very difficult to compete with. there is no such thing as 'cannibalisation' for DOM as it takes a royalty on sales, not profits.

I don't really know the whys and wherefores of the market re. your cited DOM vs Greggs. I personally think that DOMs model has probably run out of steam in the UK some time ago. We live in a rural area, but our nearest small town, has no Dominos Pizza, and I'd imagine they would struggle if they tried to muscle in - plenty of others in the town know how to cook and deliver pizza! And there is enough competition to ensure that delivery is very reliable.

all the while, the company are buying back shares at these depressed levels, using the excess cash flow this business generates.

From what I've observed the DOM management are completely insane regards buying back their own stock. They even bought back at 375p in May last year:

viewtopic.php?f=78&t=11751
https://www.marketscreener.com/DOMINO-S ... -26610507/

My bone of contention with DOM is that they don't seem to have much logic in how the business is run. They bought their shares last May at a terrific premium, and now they are buying back when they should IMO better use the £££ to invest in their business.

FWIW I'd read that the franchisees are not just angry since they see themselves missing out "their part of the profits" (or whatever), but also because Dominos IT systems and general infrastructure is shoddy and the franchisees end up being the ones to suffer. Don't forgot also that franchisees have to buy their ingredients from Dominos at DOMs prices.

But whether the above is why the market (as you've pointed out) seems to prefer Greggs over DOMs is anyone's guess. If you like DOMs yield then just stick with them....

Matt

[PrefInvestor]

Hi TheMotorcycleBoy, the subject of how best to manage losses is something that has interested me for a long while. I see many people posting on other boards who are holding the likes of VOD and CNA and are down considerably, over 50% in some cases. I think thats scary and personally I never want to get into that situation. So IMHO you have to review your stocks at certain points (profit warnings, major falls, trading updates etc.) and decide what to do.

I used to hold a lot of single stocks and my criteria for these was that typically if a stock got to be 10% down (including all dividends received) then I would review it. The result of the review might be:-
a) to sell (because you've concluded it was a bad stock pick and isnt coming back anytime soon)
b) to average down ie buy some more (because you ARE convinced that its a good company with good prospects, no major debt problems, dividend likely to be maintained etc.)
c) just to continue holding (just a fudge ! dont do this too often !)

But investing in single stocks (and especially AIM and those outside the FTSE 100, and even some that are within that) then big moves can happen on a daily basis. Look at PLUS just recently, dropped by 50% in a couple of days. So investing in these is risky and you just have to live with that. These days I have only a very few single stocks in my portfolio and most of my investments are in Investment Trusts and ETFs. The price movements in these are far more sedate as they invest in a large number of stocks and so the effect of big changes in any one are greatly reduced. ETFs are good as they dont incur stamp duty and the spread (difference between the buy and sell prices) are low and ongoing charges are low - which is good. You might care to think about investing in these rather than single stocks if you want to avoid significant price movements. It works both ways though, as you wont see major one day gains either !.

ATB

Pref

[PrefInvestor]

Hi Again TheMotorcycleBoy , Another key thing I do in terms of loss management is to NEVER invest too much in any one holding. I work with three holding sizes as follows:-
a) Small (about £3,000). Big enough for stamp duty, broker fees and spread not to distort the price too much. Makes a 10% loss on a failed stock pick cost ~£300. If I buy something new then I always buy a small holding.
b) Medium (typically £4-6000). For things that I have greater confidence in and have held before. Typically get here buy buying some more to add to a small holding.
c) Large (typically £8-9000). For things that I feel REALLY confident in, that pay good dividends that are never likely to be cut and which arent likely to go bust anytime soon. Typically get here buy buying more to add to a medium sized holding.

Personally I NEVER EVER invest more than a large holding size in any single stock ever. This provides an element of disaster protection.

What do I do when I get to a large holding size and want to by some more ?. Simple, I just DONT I buy something else.

All this is part of my personal investing strategy and no doubt others may think its nonsense. If so then fair enough, everybody has their own ideas on how best to manage their investments. I wouldnt suggest to anyone that they should copy what I do, I merely suggest that limiting the maximum size of your investments is something you might like to think about as a way of limiting the damage if a stock pick goes wrong.

Your money, your call !!.

ATB

Pref

[TheMotorcycleBoy]

Hi PrefInv,

To be honest we (my wife and I) are pretty new to this. We started private investing in March 2018. We are in it for the long term (i.e. LTBH), but in our eagerness to "get involved" we made a few purchases a bit too quickly (e.g. Dignity, Morrisons, and ComputaCenter). We discovered these after the kind of reviewing which should have preceded their purchase.

With DOM - this was our first ever stock purchase (actually my wife pressed the buy button), and in hindsight this was mainly off the back of books such as "How to Pick Quality Shares" (Oakley) and "Invest in the Best" (Ashworth-Lord) that showcased Dominos. This is not the best way to choose a stock! Now whilst I agree with many others about the advantages of the "Franchise" model, I do think that Dom have milked it till it's empty, and after a lot of research I decided I didn't want holdings in this firm. We have/do have holdings in other firms whose valuations sunk more heavily (for us) e.g. Next, Persimmon and Zytronic, but we continue to hold (and have even topped up) in their recent times of lower valuations.

But as you say cutting ones losses is a tough one. In my naive (one year of investing!!) view, I don't think it should to be based on how many % you're down (since that's relative to one's entry point not the health of the stock per se), but on many other things (company health, or one's second thoughts on the firm's fit into ones folio etc. etc.)

The discovery and debate of the act/rationale/ mindset of "cutting losses" was my big objective behind this thread, not the ups and downs of DOM and DTY.

Many thanks for your replies, (I've been following your thread too!)
Matt

[PrefInvestor]

Hi Again TheMotorcycleBoy,

The discovery and debate of the act/rationale/ mindset of "cutting losses" was my big objective behind this thread, not the ups and downs of DOM and DTY.

Yes indeed, that’s a topic of personal interest to me also. All a very personal thing I quite understand. FWIW The percentage loss figure is merely a convenient metric that I use to monitor the performance of all my investments. Anything more than 10% down I refer to as being on the “sick list” !.

ATB

Pref

[westmoreland]

in the buy zone again.

how can it be that the market is valuing greggs, a more risky, low quality company, much higher than domino's? 4% dividend yield DOM, 1.8% greggs.

the market seems concerned with the ongoing dispute with franchisees, but franchisees earn huge returns in comparison with almost all other franchises / similar businesses. split territories are an essential part of the domino's strategy. it improves service levels, making the reliability of delivery wider, and is very difficult to compete with. there is no such thing as 'cannibalisation' for DOM as it takes a royalty on sales, not profits.

I don't really know the whys and wherefores of the market re. your cited DOM vs Greggs. I personally think that DOMs model has probably run out of steam in the UK some time ago. We live in a rural area, but our nearest small town, has no Dominos Pizza, and I'd imagine they would struggle if they tried to muscle in - plenty of others in the town know how to cook and deliver pizza! And there is enough competition to ensure that delivery is very reliable.

all the while, the company are buying back shares at these depressed levels, using the excess cash flow this business generates.

From what I've observed the DOM management are completely insane regards buying back their own stock. They even bought back at 375p in May last year:

viewtopic.php?f=78&t=11751
https://www.marketscreener.com/DOMINO-S ... -26610507/

My bone of contention with DOM is that they don't seem to have much logic in how the business is run. They bought their shares last May at a terrific premium, and now they are buying back when they should IMO better use the £££ to invest in their business.

FWIW I'd read that the franchisees are not just angry since they see themselves missing out "their part of the profits" (or whatever), but also because Dominos IT systems and general infrastructure is shoddy and the franchisees end up being the ones to suffer. Don't forgot also that franchisees have to buy their ingredients from Dominos at DOMs prices.

But whether the above is why the market (as you've pointed out) seems to prefer Greggs over DOMs is anyone's guess. If you like DOMs yield then just stick with them....

Matt

greggs i chose because it is a good example of a fast food rollout which has much better sentiment at the moment. it is valued at a higher rating than DOM, despite being more capital intensive, and subject to the risks of cost increases (living wage, food price inflation etc).

domino's can make good money in smaller catchments than its rivals. that's not to say that domino's plc takes the risk of expansion, that is borne by the franchisees. taking a cut on sales is much lower risk than being directly exposed to the rising costs that have caused margins to collapse in the casual dining sector, as evidenced by the CVAs and admins.

i do agree they appear to buy back shares indiscriminately. this is a bone of contention of mine, but at the moment, they are doing so at depressed levels.

the IT and infrastructure is industry leading - they have led the industry in terms of applying technology. they control the whole supply chain, unlike say pizza hut or papa johns. this allows them to capture more of the profit, whilst ensuring reliable supplies to the franchisees (remember KFC running out of chicken?).

[TheMotorcycleBoy]

I don't really know the whys and wherefores of the market re. your cited DOM vs Greggs.

greggs i chose because it is a good example of a fast food rollout which has much better sentiment at the moment. it is valued at a higher rating than DOM, despite being more capital intensive, and subject to the risks of cost increases (living wage, food price inflation etc).

Yes I understood entirely as to why you used Greggs as your comparison (indeed I'd considered replacing the diversity we lost from selling DOM with a holding in Greggs but I didn't like Greggs' numbers as much). My point was that I didn't understand the whys and wherefores of the market for currently valuing Greggs higher. But, then again, the market is fickle - one can only assume it values Gs growth prospects as being as higher. (Who knows??).

domino's can make good money in smaller catchments than its rivals. that's not to say that domino's plc takes the risk of expansion, that is borne by the franchisees. taking a cut on sales is much lower risk than being directly exposed to the rising costs that have caused margins to collapse in the casual dining sector, as evidenced by the CVAs and admins...

the IT and infrastructure is industry leading - they have led the industry in terms of applying technology. they control the whole supply chain, unlike say pizza hut or papa johns. this allows them to capture more of the profit, whilst ensuring reliable supplies to the franchisees (remember KFC running out of chicken?).

I kind of agree. This model pursued by DOM is potentially a good one. I did umm and ahh a lot about our exit from them. Perhaps I was somewhat irrational.....we'd probably still own them were it not for their leadership. David Wild. He didn't do a great job with Halfords - but perhaps that's not a great comparison....but regardless the three recently departed CFOs (from DOM) may paint a different picture?

But anyway, as I shared with PrefInv a couple of posts back, I'm more interested in the logic behind loss cutting than the holdings we cut loose!



Matt

[westmoreland]

Hi Again TheMotorcycleBoy , Another key thing I do in terms of loss management is to NEVER invest too much in any one holding. I work with three holding sizes as follows:-
a) Small (about £3,000). Big enough for stamp duty, broker fees and spread not to distort the price too much. Makes a 10% loss on a failed stock pick cost ~£300. If I buy something new then I always buy a small holding.
b) Medium (typically £4-6000). For things that I have greater confidence in and have held before. Typically get here buy buying some more to add to a small holding.
c) Large (typically £8-9000). For things that I feel REALLY confident in, that pay good dividends that are never likely to be cut and which arent likely to go bust anytime soon. Typically get here buy buying more to add to a medium sized holding.

Personally I NEVER EVER invest more than a large holding size in any single stock ever. This provides an element of disaster protection.

What do I do when I get to a large holding size and want to by some more ?. Simple, I just DONT I buy something else.

All this is part of my personal investing strategy and no doubt others may think its nonsense. If so then fair enough, everybody has their own ideas on how best to manage their investments. I wouldnt suggest to anyone that they should copy what I do, I merely suggest that limiting the maximum size of your investments is something you might like to think about as a way of limiting the damage if a stock pick goes wrong.

Your money, your call !!.

ATB

Pref

if you're not prepared to put a large chunk into a company, you shouldn't invest anything. if you limit the maximum size of each holding, you are ensuring that you reduce any possible outperformance. if you hold a great company that is becoming stronger, why sell?

the best 'disaster protection' is cash or bonds. the next best is some combination of index funds.

[PrefInvestor]

westmoreland wrote:
if you're not prepared to put a large chunk into a company, you shouldn't invest anything. if you limit the maximum size of each holding, you are ensuring that you reduce any possible outperformance. if you hold a great company that is becoming stronger, why sell?

Well because any stock pick can go wrong and some very badly wrong. I do not seek "outperformance" but aim to make money through receipt of the dividends. I just dont want the capital value of my investments to drop significantly. I am quite happy provided that any of my investments stay above about a 5% capital loss - provided that the dividends are secure. I dont want to get stuck with a BT-A, VOD, CNA, KIE, INTU, PLUS, RMG (need I go on) which are down big time, and which may never recover. And lets face it more and more single stocks are suffering significant falls it seems to me. So I am using ITs and ETFs in the main, restricting my single stock investments to those I trust not to let me down AND working to the maximum investment sizes that I have indicated.

Each to their own.....

ATB

Pref

[PrefInvestor]

Its just occurred to me reading westmoreland's post again that perhaps people might be reading my post about maximum investment limits and thinking that I might sell when I get out of the ranges that Ive quoted. But no, the limits apply to the amounts of MY capital that I have invested. If the capital value increases as a result of the share price rising that's fine, it can do that as much as it likes !!. Should such gains ever get to a point where the capital value has doubled however (never happened to me yet !) then I would be inclined to sell to extract my initial capital and leave only the balance (the gains) invested for the future.

ATB

Pref

[westmoreland]

post from phil oakley on twitter:

Further thoughts on #DOM: it has just over 1100 stores in the UK and wants to get to 1600. This will involve splitting territories which damage the profits of existing franchisees. If compensation continues to be paid to keep them happy then this will be a drag on profits.

the problem with not splitting, is that high returns attract competition. splitting territories prevents competition from being able to make incursions in an area, because domino's will have more advertising, and better, quicker delivery. each stores return on capital is diluted, but this is better than fighting out a one on one battle with a rival.

new store incentives average £75k per store as a payment to compensate for temporary loss of trading. as 3/4 of all new store openings are splits, if they open 50 stores a year this means total payments of £2.8m a year. when DOM are making FCF of about £75m per year, it's a cost, but needs to be kept in perspective.

[TheMotorcycleBoy]

Apologies for slightly old articles (Jan 2019)

Up and coming competition for DOM
https://www.thedrum.com/news/2019/01/06 ... mer-client

More board shakeups
http://www.cityam.com/271156/dominos-pi ... over-board

(have to say I'd probably still be holding our DOM shares were it not for David Wild being the CEO)

[Dod101]

Its just occurred to me reading westmoreland's post again that perhaps people might be reading my post about maximum investment limits and thinking that I might sell when I get out of the ranges that Ive quoted. But no, the limits apply to the amounts of MY capital that I have invested. If the capital value increases as a result of the share price rising that's fine, it can do that as much as it likes !!. Should such gains ever get to a point where the capital value has doubled however (never happened to me yet !) then I would be inclined to sell to extract my initial capital and leave only the balance (the gains) invested for the future.

I missed Prefinvestor's earlier posts, but as his name implies he is clearly very risk averse. Putting actual numbers on his investment limits is not I think very helpful. I appreciate though that for a new investor mechanical limits are probably a good idea. I put a percentage of the portfolio on mine. For new investments (quite rare for me nowadays) I am most likely to start modestly and if everything looks OK, might well ramp up the investment as time goes on. In terms of percentage, to be meaningful, I think we need about 3/5% of the portfolio in a new share, probably at the lower end to start with. As for cutting losses, I look at all sorts of things, but for a relatively new investor (like the OP) pay attention to what the market is telling you. If the share price is sinking and the rest of the market is not that is a signal to take a look and maybe sell, but you need to try to identify why it is sinking. A consequence of a sinking share price is often a rising dividend yield. Such a share is going wrong somewhere, and means a lot of sellers. Are you sure you know better than them?

I could go on, but if you do sell, do not look back. Sell and move on and do not worry about what might have been.

Dod

[PrefInvestor]

Hi Dod/All,

I make no apologies for being extremely risk averse, indeed I have explicitly declared that I am in quite a few of my posts.

I believe that my approach of applying limits to my investments has been useful to me in two ways:-
a) The lower limit of about £3,000 is driven by what I consider to be the minimum cost effective trading volume. I would never want to buy fewer shares than that due to the effects of stamp duty and commission. It also seems a sensible first step in building a larger position, allowing time to get experience with a stock before further adding to that position.
b) My limits are also driven by my personal approach to loss management, where I review the situation should I get to be 10% down (including all dividends received) and may decide to either sell, average down, or sometimes just hold. This process is designed to stop a 10% loss becoming a 20% loss, and then a 50% loss etc. and then becoming trapped in the stock just waiting and hoping for a recovery. In this way I hope to keep the cost to me of a failed stock pick to not much more than a few hundred pounds.

I quite accept that the larger your portfolio value the less appropriate fixed values probably are and at some point working on percentages instead is likely appropriate. But I have been running with this practice for some years now (albeit on a much smaller equity portfolio prior to March 2018 when my portfolio was 80%+ in preference shares to which I did NOT apply this method) but I feel comfortable with it. It has kept me out major losses with the likes of VOD and CNA for example, where the stock price just drifts down over time.

But each to their own.

ATB

Pref

[TheMotorcycleBoy]

A couple more bits of news on DOM. Firstly the "reason" for this morning's SP drop:

https://www.telegraph.co.uk/business/20 ... ofit-year/

However for me, this 1 month old article:

https://uk.reuters.com/article/uk-domin ... R71QL?il=0

could spell good news for me, since if David Wild goes I might open another (cheap!!) position in DOMs.

Matt