Derek Pain: It's tough – but it's time to build for the future

No Pain, No Gain

The 10-year-old portfolio is still showing a profit. But that is entirely due to past successes. The present bedraggled crop of constituents conceded yet more ground in the first quarter of the year.

Rightly or wrongly the portfolio has kept its powder dry since alighting on Whitbread, the hospitality group, in the summer. At that time I felt the shares were a good recession bet. A year before when there was hardly a cloud in the investment sky, the price approached £20. The shares, despite the group's value-for-money approach, had almost halved by the time the portfolio alighted on them. I thought the worst was over and Whitbread could prosper in the credit storm. But lately the shares have looked increasingly vulnerable as the group acknowledged some falling off in demand.

Still, although the portfolio is out-of-pocket it is, I believe, worth hanging on. The same applies to some other constituents, like Printing.com which, for the first time since I recruited the shares five years ago, are below my buying price. They have been as high as 75p.

Whether Printing.com deserves such a debilitating fall from grace is a moot point. The group remains profitable, offering an attractive dividend yield that easily dwarfs returns available on the high street. It surely has the ability to hold its dividend. My guess is it will.

Because of the anxiety generated by the recession, the printer is producing frequent trading updates, seemingly every two months or so. The next is due on Wednesday.

With the exception of Whitbread, the portfolio is composed of small and medium-sized groups. Smallcaps have been hammered unmercifully in the past two years, suffering more acutely than blue chips. There has been just a suggestion of a smallcap rally in the past few weeks although, regrettably, it seems to have ignored those embedded in the portfolio.

Yet the majority of constituents look pretty reliable. Of course some must be under intense pressure. Indeed it would be remarkable if they were all not feeling in varying degrees the recessionary pinch.

The portfolio is a buy and hold investor. Even so it has been relatively active with around 40 shares departing over its 10 years for one reason or another. Takeover activity has accounted for around a dozen; others have been sold at a profit or at a loss. Three went bust, the net return is that the portfolio achieved a profit of around £77,000 (dividends and dealing costs are ignored) on an investment of £200,000. Not the performance I had hoped for; after all at one time the gain was nudging £150,000.

The portfolio's display does, however, mirror the calamity that has befallen smallcaps in the past couple of years. Its plight must also partly reflect the problems many investors – particularly retired folk – are experiencing. Their shares have slumped, dividend income has been reduced, savings now offer derisory returns and their homes have fallen in value.

With only 11 constituents, the portfolio is looking rather thin. I hope to rebuild it to 15 or 16 in the months ahead. For a long-term investor bargains lurk. I continue to believe the stock market will start to recover this year.

Finally Nighthawk Energy, the US-focused oil and gas explorer and producer. I suppose it is another share where some will advocate that I should have snatched a profit. They hit 116p against my 44p buying price and the current 31p. Like most oil groups it has been savaged by the collapse of the crude oil price. Yet taking the longer view it still looks a promising investment. Oil and gas is flowing in increasing quantities from its spread of American interests. Its growing production is illustrated by its half-year report that shows revenue up by 566 per cent to $319,000 on last year's corresponding period and more than double the figure for the whole of last year. Interim loss is cut to $348,000 from $960,000.

David Bramhill, Nighthawk's managing director, believes the group's intrinsic value will be illustrated when a minority stake is sold in its promising Jolly Ranch development. Talks are going on; a deal should be clinched this month.