Investment Principles & Shareholder Guidelines (or Dave's Lament)

I had said I wouldn't make a post this Sunday, but I am finally able to submit the Investment Principles & Shareholder Guidelines, those who have secured one of the initial places in the foundation format can contact us to receive the form. The contact details for Dave and I are in the document, please call us before committing cash, because we are limited to 20 shareholders under our foundation (Pty Ltd) structure, and we don't want the cash for the July 1 issue to hit our account until the last part of June.
I have to report Dave and I find ourselves in a slightly upsetting position at the moment, whereby the 2 shares that were going to be two of our heaviest holdings have appreciated substantially of late. In fact since January 1 this year, what was to be our No. 1 holding is up nearly 40% and what was to be our No.2 holding is up nearly 85% since January 1.  These 2 holdings combined were likely to make up over 40% of our asset allocation, and now we have to decide if they still make the grade...
This burns especially, because since January 1, the indices have moved by a much more modest 1.18%, so we have foregone the prospect of substantially augmenting our performance track-record.  I am not completely upset though, these are the 1st & 3rd largest holdings in my family portfolio, and while I've liquidated substantial holdings in order to contribute to the start of the fund this week, I retained all of the No. 1 and 2/3 of the stock that was to be No. 2.  Spare a thought for Dave, though.  About 1/3 of his equity-holdings were in this stock that was to be our No. 1 holding, and in order to have the cash available for the launch of the fund, he had to liquidate this holding, it has subsequently risen over 22% in the 8 days since.  He tries to console himself that he had already booked a 57% profit on a stock he had held barely 18 months, and in a period that the market has traded sideways, but I know his secret pain... We expected that having this cash out of the market for less than a fortnight would not cost us too heavily, well it seems it may have, selling, I maintain is the hardest part of owning stocks.
I will describe the difference these movements have made to my expected return.  On January 1 with stock No. 1, at its then price, it was my favourite stock in the market, now I always view a purchase with at least a 10-year time-frame and at January 1, I expected that every $1 I put into my favourite stock, in 10 years time, I would have about $8.88 to show for it at the end of 10 years (you see why it was my favourite).  With the intervening nearly 40% increase in price, every $1 of this stock, I now view as likely being worth about $6.45 at the end of 10 years.  That is still pretty compelling in my view, but given that this stock was earmarked to make up at least 30% of our portfolio, this basically means if I still proceeded with this 30% allocation, I would expect to make 1.3% less per annum for my investees (over a 10 year measuring period), as I now expect this stock will appreciate by 3.92% less annually.  So that is the bad news, the good news is that I have a few other 'Aces' up my sleeve, and it is my job as the asset allocator to now redesign my portfolio, to snatch back as much of that 'lost' 1.3% per annum as I can.
I will post next on 31 March, the eve of the launch of EGP fund No. 1 Pty Ltd - Tony Hansen 27/03/11

P.S. Dave wanted me to mention that one of the shareholdings I liquidated in the process of compiling my share of the seed funds announced only 58 minutes after I sold the last parcel that they had been subject to a takeover offer they'd declined.  Their share price subsequently & rapidly rose nearly 12% and cost me more than $6,500 in foregone profits.  I had to console myself with the handsome profit I crystallised instead.