Performance review Q2 2015 – Comment “Great ideas vs. great execution”

Performance Q2 2015 / YTD

Compared to the first quarter, the second quarter was in relative terms much better than the first quarter. The Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)) actually lost -5,8% in the second quarter, whereas the portfolio remained almost unchanged with -0,1%. YTD the score is now 13,2% for the benchmark vs. 11,4% for the portfolio.

For me, the second quarter is a good feedback that the portfolio strategy is working. I expect to underperform in a strong bull market like we had in the first quarter, but then to outperform in weak or sideways markets. The monthly returns show clearly that the portfolio is less volatile and only relatively loosely correlated to the benchmarks:

Start Bench Portfolio Perf BM Perf Portf. Delta
Jan 15 9.977,26 189,81 8,3% 3,4% -4,9%
Feb 15 10.696,03 200,55 7,2% 5,7% -1,5%
Mrz 15 11.078,60 204,69 3,6% 2,1% -1,5%
Apr 15 10.847,76 206,98 -2,1% 1,1% 3,2%
Mai 15 10.871,99 208,60 0,2% 0,8% 0,6%
Jun 15 10.434,47 204,44 -4,0% -2,0% 2,0%

As I have mentioned before, time lags play a role here as well, especially for the lower liquidity small caps. Since inception, the portfolio is up 104,4% vs. 63,2% against the benchmark. Graphically, this looks like this:

vop performance

Within the quarter, outperformers were Van Lanschot (+24,1%), Citizen’s (+13,1%). Lloyds Banking (+8,9%). Losers (not adjusted for dividend) were G. Perrier (-8,6%), Thermador (-7,9%) and Draeger (-6,9%).

Portfolio and transactions

I am actually quite proud of sticking to my 1 transaction per month goal in the second quarter. Overall I did 3 transactions:

The purchase of Lloyd’s Banking, the BMPS “trade” and finally Gagfah a few days ago.

The current portfolio can be found as always if you click the current portfolio page. Most noteworthy “aggregate” changes is that “opportunity investments” went up from 22% to 28% of the portfolio and “pure cash” went down from 15,5% to around 11%.

Comment: “Great ideas vs. great execution”

One of the most remarkable stories for me in the last 3 months was the following: In April, “Bond King” Bill Gross came out with a call that the 10 Year Bund Future is the short of a life time. A day or so later the Bund Future started to drop significantly and Bill’s call should have played played out wonderfully. But then something strange happened: The value of Bill Gross’ fund actually fell and he had to admit that he did not actually implement a simple short but a more complex strategy which backfired and he actually lost money.

So let’s take a step back and look at what has happened here: The best bond investor of all times has a great idea and even has timing right but fails to implement it in order to profit from it.

So clearly, just having a great idea does not automatically lead to great results. In addition, one has to implement it well. Other examples of bad execution: John Hussman with his market timing strategy who suddenly changed the strategy in 2009 and did not go back into stocks again, or Michael Burry, the guy from “The Big Short” who was right on subprime but who couldn’t convince his investors to keep their money in his fund.

These days I often hear from fellow investors: I don’t have any great ideas at the moment. If you look around in financial media and service providers, very often the focus is on idea generation. The more ideas the better. There is a lot less literature etc. on how to execute ideas.

If you look at Warren Buffett, it is clear that he is the master of implementation and execution. His success in my opinion relies to a large extent on only two factors:

1. Buy and hold
2. Permanent capital / safe leverage

Especially now in his later years, he is not the great genius stock picker anymore that he was in the past but he has structured Berkshire in the way that he still creates a lot of value even by buying “mediocre” assets like wind farms or solar power plants.

So why I am telling this ? In my opinion, just having great ideas is not enough. Implementation is maybe even more important. I would even argue that average ideas and great implementation works better over time than great ideas and mediocre implementation. As a private investor, it is clearly not possible to set up a reinsurance company but on the other hand there are a lot of simple things one can do to better implement ideas:

1. Don’t act (too) emotionally or spontaneous
2. Try to come up with a strategy or “game plan” for each investment, containing among others:
– target holding period
– targets when to buy more or sell down (based on fundamental data, ratios and/or stock prices)
3. Try to come up with a strategy for your portfolio: What do you want to achieve and especially HOW do you want to achieve it ?
4. Make sure the money you invest in risky assets is as permanent as possible. Do have a personal financial plan and buffers to make sure that you are never forced to sell

Since I started the blog, I made many mistakes and bad execution is clearly one of them.

Some good ideas in my blog which I didn’t implement well were for instance:

– Prada short: Too early, not patient enough
– G. Perrrier long: Started with a half position did not manage to increase position
– Sberbank: Did not cope with volatility, sold out at the worst time
– generally selling to early, not recognizing that fundamentals have improved (example Dart Group)

In other cases, good implementation saved me from an otherwise bad idea for instance when I got out of Praktiker bonds pretty early before the real xxxx hit the fan because I had predefined the condition where I would sell.

Just by chance i came across this article which wants to point out how the Apple watch will “revolutionize” investing. The “1 million dollar” quote is this one:

Another key area of focus is cutting the distance or time between investment research and action.

Vaed described the challenge of remembering a stock after reading an article or watching CNN. “But if you have a plug-in available on your browser that lets you act right away, that’s valuable.”

And that’s why E-Trade created such a browser trading tool on Google Chrome, after discovering it was the browser of choice among its clients.

I don’t want to sound arrogant but this is clearly a recipe for very very bad implementation. I actually do think that a longer period of time between research and action is benefitial for almost any investor. . For a value investor I don’t see any benefit of a mobile value investing app or similar bxxxsxxx.

So as a summary my advice would be: Although it doesn’t look as sexy as generating new ideas, the management of existing ideas or the “execution” is at least equally important. Try to take your time and work on this especially in a time right now where new ideas are harder to find. I think now is a good time to build the “foundation” for good execution.

Special situation: Gagfah (ISIN LU0269583422)–> From take-over to potential Squeeze-out via Delisting

Management summary:

In my opinion, the stock of Gagfah offers an interesting risk/return profile as special situation investment:

– the current price at 12,35 EUR is ~1/3 lower than the expired take-over offer from Deutsche Annington 6 weeks ago
– although the share will be delisted by the end of the year, I do believe that a squeeze-out under Luxembourg law is very likely within the next 12-18 months close to the initial offer price (~ 50% upside from current price)
– the downside is that following November, the stock will be unlisted and hard to sell and that for some reason the Acquirer Deutsche Annington will not squeeze out the remaining minorities

Health warning / Disclosure: This is no free lunch, there are plenty of risks involved among others getting stuck with an unlisted stock. This is not investment advice, DO YOUR OWN RESEARCH. They author might have bought the stock already before posting this.

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Quick update Bilfinger

I looked at Bilfinger for the first time in August 2014, after the price dropped almost 50% from its peak some months before. I resisted again in November 2014.

Again as a reminder my comment from the first post:

– some of the many acquisitions could lead to further write downs, especially if a new CEO comes in and goes for the “kitchen sink” approach
– especially the energy business has some structural problems
– fundamentally the company is cheap but not super cheap
– often, when the bad news start to hit, the really bad news only comes out later like for instance Royal Imtech, which was in a very similar business. I don’t think that we will see actual fraud issues at Bilfinger, but who knows ?

So now the new CEO came in on June 1st. And surprise surprise, the 6th profit warning within a year if I have counted correctly.
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Driverless cars + Uber –> Death of Car Insurance ?

As this became a long post, a quick management summary upfront:

The case for 100% self driving cars without accidents is not so clear for me
1. Based on current facts, the Google car doesn’t seem a lot better than human drivers
2. From other areas (Airplanes, chess) we can learn that a human-machine combination is often better than a “machine” alone
3. Driving cars is also an emotional experience, many people might not fully sacrifice this
4. Some innovations take longer than one thinks, especially if they take away freedom from consumers
5. A gradual decrease of claims could actually be positive for car insurers over an extended period of time

Additionally, I don’t see a combination of driverless cars with a service like Uber replacing private cars anytime soon. There are a lot of practical issues with renting out private cars to complete strangers. However, taxi driver might not be a job with a big future either.

So from my perspective, as shareholder of a car insurer like Admiral there is no reason to panic, however for traditional insurers this might be one more nail in their coffin.

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Some links

The Bank of England (!!) has a new blog and looks at the impact of driverless cars on car insurance. I will follow up on that one…..

The Brooklyin Investor with a deep dive on Brookfield Asset Management

HEICO seems like in interesting player in the aircraft spare parts sector (jnvestor)

Fundooprefessor with a great post on the potential “staying power” of companies

Nate from Oddball with some very good thoughts about FinTech start up Lending Club and if they will make banks obsolete

A very helpful exercise: Think of what can make your portfolio companies going out of business (Gannon)

Update Altamir SA: No “CEO self service vehicle” but still the same fees

A few days ago, I looked briefly at Altamir, the French listed Private Equity vehicle which invests exclusively into APAX funds.

This is what I wrote about the CEO and largest shareholder Maurice Tchenio based on how I understood the fee structure:

So the “privilege” of a shareholder to invest into APX via Altamir is purchased quite expensively. This also puts the CEO investment a little bit in perspective. Yes, he has invested around 100 mn of his own money into Altamir, but in 2014, the management fees and profit share netted him close to 30 mn EUR direct, whereas the proportional profit of his share position was “only” 15 mn EUR.

Last week I got a very friendly Email from Altamir’s IR with the offer to explain the fee schedule in more detail. As a follow up they did send me a nice memo with all the details.

In a Nutshell, Tchenio only receives around 2,5 mn EUR from two sources:

– he is entitled to ~22,5% of the “carry” on the old direct investments

– plus he keeps 5% of the adivisory fee paid to the general partner for the direct investments

As the IR pointed out, Tchenio earns more in dividends on the stock than on those fees, so the alignement between him and shareholders is better then I have assumed before.

Just to recap how the fees and carried interest are structured a short list based on 2014

Fees/costs: 17 mn EUR thereof

– 6,8 mn EUR fund level fees

– 1,9 mn EUR HoldCo cost

– 8,4 mn EUR fees charged by the GP (inlc. 1,4 mn VAT), 95% passed on to APAX

Carried interest: 13 mn EUR thereof

– 4,3 mn APAX fund level

– 8,5 mn direct investments, therof Mr Tchenio as former APAX partner 1,9 mn EUR

Having clarified this, this still leaves the issue that 17 mn cost for a 600 mn portfolio is quite a lot. The almost 3% fee includes ~30% listed stocks (Altran, Albioma, GFI) and cash.

As an investor, I could replicate those stocks much cheaper than what Altamir is offering, or alternatively I could invest in a French based value fund like for instance Amiral. This is a comparison chart between the CAC Small&MidCap index, Altamir and the Amiral Sextant PEA, a smallcap value fund since 2002:


The lowest line is the index and we can see that Altamir has beaten the index by around +1,5% p.a. However the Amiral fund has beaten Altamir by a large margin despite charging also around 2% fees and a 15% performance fee. Although this is clearly no apples-to-apples comparison it clearly shows that Altamir’s perfomance is not that stellar (after fees).


So my assumption that Mr. Tchenio is pocketing a large amount of the fees was clearly wrong. Nevertheless, at least for a “non tax advantaged” investor like me, Altamir doesn’t really offer any value. The fees are much to high and justify a discount. If the right dicount is 30% or less could be discussed but paying 3% + carry on 30% listed stocks is not a real value proposition and will always lead to a discount epsecially on cash and listed companies. Again, if the discount would widen more, it would be maybe worth an investment but for now, I think I can find better investments, especially in France.

Quick check: John Deere (DE) – Great “cannibal” or cyclical trap ?

Looking at Berkshire’s portfolio is clealry a “must” for any value investor. Whenever they disclose a new stake it makes clearly a lot of sense to look at least briefly at what they are buying. Berkshire disclosed the John Deere position in late February this year. I assume this is a “Ted & Todd” stock. Looking at the track record of Berkshire’s public holdings, this is actually a good sign as Ted&Todd have beaten the “master” now several years in a row.

Looking quickly at Deere, it is not difficult to see some of the attractions:

+ relatively cheap (trailing P/E of 12,6, Stated EV/EBITDA of 5,5, EV EBIT 7)
+ organic growth, low Goodwill, good profitability in the past
+ good strategy /incentives in place
+ solid business model, significance of dealer network (quick repairs during harvest season…)
+ “Cannibal”, is massively buying back stocks

Especially the massive share buy backs are clearly a common theme for “Ted&Todd stocks”. Starting in 2014, Deer has reduced the sharecount constantly from around 495 mn shares to now ~344 mn shares.

However we can also see quickly a few “not so nice” things at Deere:

– pension /health liabilities (health – how to value ? 6bn uncovered. Very critical, healthcare sunk GM, not pension (EV multiples need to be adjusted for this)
– they do not cancel shares, held as “treasury”, why ?
– Financing business –> receivables & ROA most likely not “true”..
– lower sales but higher financing receivables ? Channel stuffing ?
– comprehensive income to net income volatility
– cyclical business. current profit margins still above historical average

Financing business

One of the most interesting aspects of John Deere is clearly the financing business. As other companies they offer financing, here mostly to dealers and not to the ultimate clients. A financing business is nothing else than an “in-house bank”, sharing much more characteristics with a financial than a corporate business, for instance requirement of continuous capital market access, default risk etc.

What I found especially interesting is the following: looking at Bloomberg, they already strip out automatically all the debt from the financing business when they show EV multiples. This could be OK if the debt is fully non-recourse however I am not so sure with Deere. Although they not explicitly guarantee the debt, there seems to be some “net worth maintenance” agreement in place which acts as a defacto guarantee for the debt.

An additional important point is the following: Deere shows very good profitability on capital in its “core” business. However, this is partly due to the fact that they show almost no receivables in the core segment. the receivables are indirectly shown in the financing business. To have the “true” ROIC or ROCE, one would need to add back several months of receivables to the core segment in my opinion.

Cyclical aspect: Corn prices

This is a 35 year chart of annual corn prices:

corn annual

We can clearly see that corn prices went up dramatically in around 2006 but are dropping since 2013 back to their historical levels. Demand for farm equipment is pretty easy to explain: If you make a lot of money on your harvest, you have money to spent for a new tractor (with a small time lag).

This is the 17 year history of Deere’s net margins:

Net margin
31.12.1998 7,52%
31.12.1999 2,08%
29.12.2000 3,76%
31.12.2001 -0,49%
31.12.2002 2,32%
31.12.2003 4,17%
31.12.2004 7,04%
30.12.2005 6,89%
29.12.2006 7,82%
31.12.2007 7,68%
31.12.2008 7,32%
31.12.2009 3,78%
31.12.2010 7,17%
30.12.2011 8,75%
31.12.2012 8,48%
31.12.2013 9,36%
31.12.2014 8,77%
Avg total 6,02%
Avg 2006-2014 7,68%
Avg. 1998-2005 4,16%

So it is quite interesting to see, that in the 7 years before the “price explosion” of corn, margins were quite volatile and around 4,2% on average. In the last 9 years however, the average jumped to 7,7% with 2014 being still above that “high price period” average.

Clearly, Deere doesn’t only sell to corn farmers, but many other agricultural prices have faced similar declines.

To be honest: I do not know enough if Deer can maybe keep the high margins they are enjoying currently, but to me at least the risk of margin mean reversion is pretty high for such a cyclical business.
Even if we assume mean reversion only to the overall average of ~6%, this would mean around 6 USD profit per share which seems to be currently also the analyst consensus.


For me, despite a lot of positive aspects, John Deere is not an attractive investment at the moment. Despite being well run, the business is cyclical and has profited from high crop prices in the past. The balance sheet is not as clean as I like it and the valuation is not that cheap if we factor in pensions and the financing arm. Clearly the stock looks relatively cheap to other US stocks but the risks are significant. Maybe there is more if one diggs deeper (network moats via dealers etc.) but for the time being I will look at other stuff. At an estimated 2015 P/E of 16-17, there are many opportunities which look relatively speaking more attractive and where I can maybe gain a better “informational advantage” than for such a widely researched stock.

Edit: By the way, if someone has a view on the moat / brand value of John Deere I would be highly interested……

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