Movie review: “The Big Short”



This is a clearly a first for the blog: A movie review and not a book review.

I had read the book from Michael Lewis a couple of years ago and it was clearly the best of many books trying to explain the sources of the “financial crisis” 2008/2009.

Honestly, I could not imagine how you can  make a Hollywood movie out of this book.

The  story is mainly about a couple of  fund managers who discovered at the same time around 2006/2007 that the US mortgage market was deeply flawed especially in the subprime area and that it was only a matter of time until everything would break down.

Most of those fund managers were “ousiders”, so not mainstream super star hedge fund managers but strange guys like Michael Burry, the now famous medical doctor turned fund manager with the Asperger Syndrom or the 2 guys who founded their fund as students with 100k start capital in a garage.

Another important role was played by a Deutsche Bank investment banker Greg Lippmann (in the movie the guy is called Jared Venett) who tried to sell the instruments to bet against sub prime mortgages.

Overall I found the movie extremely entertaining and very good. Why ?

First of all the actors are really really good. Especially Christian Bale (M. Burry) and Ryan Gossling (DB trader) play extremely well.

Secondly, the movie gets surprisingly almost all the facts right. They do explain the underlying concepts very well and often in surprisingly funny ways. One of my favourite scenes is when Selena Gomaz and Richard Thaler explain the conceptof CDS/CDOs at a Las Vegas Black Jack table.


Of course they made some compromises to turn it into a Hollywood movie. Nevertheless I do think that the movie actually shows a pretty acurate picture of investment banking back in the heydays of 2006/2007.

Best learning experience: negative carry & patience

Of course the characters in the book and the movie were not the only ones who predicted the subprime crisis. Back then a lot of people were sceptical with regard to mortgages banks etc.

But I think what the movie really showed was how difficult it is to actually bet significantly on a “doomsday prediction”. Betting against subprime CDOs required those  guys to pay signifcant amounts of “insurance premium”. In Michael Burry’s case, the “negative carry” was something like -20% p.a. for the full portfolio. In all cases the managers were not credit specialists and investors clearly  didn’t like what they saw at first and in Burry’s and Iceman’s case tried to force them out of their positions because very few people are willing and able to sacrifice yield in order to make big returns.

It is very similar to what I wrote a couple of months ago: A great idea or a great strategy alone is worth exactly nothing. Yes, you can maybe sell some books as the guy “who predicted the last 5 crashs”. But if you manage money you have to actually execute it well in order to create value.

And I do think that this is the main lesson form the book and from the movie: It takes a lot of guts and a kind of “outsider” status to actually be succesful when you bet against the overall consensus. Talk is cheap, actions matter.

The second lesson was that patience also plays a big role in actually scoring big. All the portrayed fund managers were early with their trades and the position went against them at first. In Eismann’s case all his partners for instance wanted to sell quickly after they were back in the green, but he insisted on waiting.

Another good example of this rare persistence in adverse situation was Bill Ackman who at the same battled mortgage guarantee company MBIA on their role within suprime mortgage business. Hi fought them over years until he had finally his big pay off. There is a good book about this story as well, “Confidence Game”



So my recommendation for anyone at least partially interested in finance is clear: Go and see the movie !!!!

I actually think the movie should be a mandatory part of any finance course at schools and universities like the original “Wall Street” movie.











Gaztransport & Technigaz (GTT.FP) – Wide Moat at a bargain price ?

Imagine you could invest into a company with the following characteristics:

– Global market leader with 70-90% market share (95% new built)
– Net margins after tax of 50% or more
– business protected by patents
– almost no capital requirement, negative working capital
– a potentially huge growth opportunity
– conservative balance sheet (no debt) and “OK” management
– at a very reasonable price (11x P/E, 7,8% dividend yield)

At a first glance, Gaztransport et Technigaz (GTT) from France seems to be the ideal cheap “moat company”. What do they do ?

Gaztransport is the global leader for “LNG containment systems”. LNG is liquified natural gas and is the predominant method to transport natural gas over long distances. In order to become liquid, natural gas has to be really cold,at least -162 degrees celsius. GTT’s technolgy is required to safely store and transport LNG on ships.

Problem Number 1

Before going into more details, it is pretty clear that GTT is an energy related company. But looking at this chart from their investor presentation we can clearly see what the real problem for GTT is:

gtt sales profit

Ultracyclical sales. We can see that within 4 years sales dropped -75% only to quadruple again in the next 4 years. Although the overall strength of the business model clearly shows in the fact that even after a -75% drop in sales, they still earned a 30% net margin.

So what do they actually do (The Moat) ?

Gaztransport has been IPOed in 2014 in France (although it was technically more a “carve out” as the company itself did not need any money. They have extremely good English language investor material, for instance the Q3 2015 report.

I try to summarize their businessin my own words:

– if you want to build ship to transport LNG, there are effectively only 2 technologies available to ensure that the LNG is contained safely, one of them is owned and patented by GTT. From inside it looks like this:

– there is a relatively large moat with regard to technology. GTT has developed that technology over the last 50 years or so and it is superior to the only competitor (“Moss”), both in price (for the total ship) as well as in utility (ships are lighter, easier to maneuver, overall cost is cheaper)
GTT charges royalties, both, for the technology and “consulting” during the building of the ship. After the ship is finished, there are no royalties. Service is currently only a single digit percentage of sales
Sales therefore directly depend on the number of LNG tankers being build
So the future of GTT clearly depends on the future of LNG. More LNG means more ships and more money for GTT and vice versa.

The Moat vs. new competitors

There are potential new competitors, mostly the handful of Korean companies who actually build the ships. The Koreans for some time now try to develop or copy their own version of the technology. I assume that they clearly know how much money GTT makes with the patent and that they woul love to cut GTT out of the process.

GTT themselves think that the threat is not so big in the near future. The ship certification companies would need to approve first as well as the oil companies who are finally responsible for the LNG tankers and the administrators of any harbour or docking station.

So far in the 50 year history both, Moss and GTT have a 100% safety record with no accidents. The cost for GTT technology within the overall price of a LNG tanker is around 4-5% of the total constructon price. So the question is really why should any energy company take on the risk for a new unproved technology when the potential cost savings are pretty low ? LNG Tankers do carry the equivalent “firepower” of dozens of nuclear bombs, so risk aversion is pretty high especially in developed world harbours.

The LNG market

There is a lot of material on LNG but most of them are very optimistic, some links:

BG LNG Global market outlook
McKinsey LNG study

Again in my own words my thoughts on LNG:

– LNG is considered “clean fuel” compared to oil and coal and should benefit from climate issues
– Natural gas is abundant and in many cases cannot be transported via pipelines
– A lot of the natural gas comes from “stable” countries like Australia and the US and is therefore strategically interesting

But clearly, low energy prices take a toll on LNG as the liquification, transport and regsification are expensive. A year ago I looked at Seth Klarman’s investment Cheniere Energy and I was not convinced. However a lot of money has been now invested into liquification facilities especially in the US and Autralia, so it is not unlikely that the amount of LNG to be transported might rise as projected and the need for transport and storage increases.

So just some rosy LNG projections alone would not be enough to make GTT interesting for me.

The “carrot on the stick”: Bunker fuel

Big Ocean going ships burn a fuel called “bunker” which is extremely filthy:

As ships get bigger, the pollution is getting worse. The most staggering statistic of all is that just 16 of the world’s largest ships can produce as much lung-clogging sulphur pollution as all the world’s cars.
Because of their colossal engines, each as heavy as a small ship, these super-vessels use as much fuel as small power stations.
But, unlike power stations or cars, they can burn the cheapest, filthiest, high-sulphur fuel: the thick residues left behind in refineries after the lighter liquids have been taken. The stuff nobody on land is allowed to use.

In the meantime however, stricter requirements for ship fuel have been installed. Current caps are mostly effective in Europe and North America, but starting 2020, globally much tighter rules will come into effect.

There are several possible solutions to the problem:

– using cleaner fuel which is however more expensive and limited
– cleaning the exhaust with expensive technology
– use LNG as alternativ fuel

If LNG would become popular in the future, GTT’s technology would suddenly be required everywhwere, from every port and every big ship, which would mean much more steady business than in the past and a strong structural growth over many years.

However, at current prices this is far from a sure thing, so in any case as an investor I would not want to pay for this at the moment.

Stock Price

For an energy stock, GTT has held up quite well since their IPO until late 2015 but then got hammered, howevr as we can see less than TGS for instance:

gtt chart



How to value GTT ?

The problem is the following: GTT is a cyclical company and we are most likely at or near the top of the cycle with regard to the “core” business. One could argue that with an overall size increase of the LNG tanker fleet, the replacement requirement increases but with an expected life of around 40 years, the replacement cycle  for the current fleet is a long way off in the future.

So using current profits and saying” Wow the stock is cheap” clearly doesn’t help. Comparing it for instance with a less cyclical stock like G. Perrier and saying: 11x PE is better than G. Perriers 15x PE is nonsense.

As I said before, I would not be willing to pay for the “Option” of LNG powered shipping so I need to come up with a way to value the company based on the cyclicality of earnings.

So what I did is that I tried to “simulate” future earnings with roughly the same kind of cyclicality that we have seen in the past 10 years. This is the resulting “Model” for the next 35 years:

gtt earnings

I have “modelled” somehow similar cycles as the current one, with the peaks increassing first and then trailing of somewhat in the future.

We can then discount this cyclical earnings stream by our “required rate of return” to see if GTT is a real bargain or not.

Under those assumptions my results were the following:

10% discount rate: 20,80 EUR per share

15% discount rate: 14,26 EUR per share

So now one could clearly challenge my “model” and tweak it somehow, but in general it looks like that GTT is not a bargain at current prices (34 EUR). To me it rather looks like that the current valuation already implies a certain value for the LNG ship fuel “option”. Therefore GTT at current prices is not interesting to me as an investment.

One important learning experience for me is that I guess one should value all cyclical stocks like this, i.e. really model the cycles and discount those cashflows instead of just looking at current multiples and say “wow that’s cheap”. I think I made that mistake to a certain extent with TGS Nopec.


Overall, GTT is a very interesting, unique company. It combines a “wide moat” with regard to technology and patents with a very cyclical business.

Although the company looks cheap at current multiples, over the cycle there is more downside than upside at current prices in my opinion.

If LNG will become the dominant fuel for ships in general, than the investment case might change significantly to the upside but for me this is not given at current energy prices.

In the future, I will need to analyse and value cyclical companies the same way as I did here: With actually modelling cycles instead of (implicit) constant growth assumptions.













Book review: “The Shipping Man” – Matt McCleery


This is a book reader “JJ” recommended to me somewhere in the comments. Its a very unique book as it says “A novel” on the cover but in effect is the best book I have read about the shipping industry.

The story is about a NY based hedge fund manager who decides that he wants to own a ship. He buys an old ship with his personal money from a strange Greek guy and then gets into the world of shipping. Along the way he loses his hedge fund, encounters many problems and sells his ship with a lot of luck at a profit.

By pure coincidence he ends up as the CEO of a Norwegian Oil Tanker company and tries to raise senior debt funding at Wall Street.

The book seems to be at least partially autobiographic. What I really liked about the book is that despite telling a funny and readable story, the author also manages to include many great insights on the shipping industry specifically and financing, cost of capital and other financial aspects of Wall Street along the way. 

One of the key messages is that financing ships economically sucks because a lot of the players think quite uneconomically. They want to have the biggest ships or the biggest fleet and always manage to lure in many gullible investors on the way. The whole industry seems to be like a big casino where some insiders always get their cut and all the oher “players” lose in the long term by design.

Actually I do think that the same principle applies for any other very capital intensive businesses.

Anyway, I can highly recommend this book. It is a good read and interesting for anyone who has ever thought about investing into something related to shipping.

At least for me, I am now completely “healed” from even looking into shipping companies or Off-shore drilling etc.


Oil stocks / TGS Nopec “Do something” or better hunker down ?

One reader clearly didn’t like what I said about TGS in my last post:

Overall I think the best advice in such a situation is: Either you panic early or you don’t panic at all. For the early panic it is already too late for oil related stocks in my opinion, so the only alternative is to sit it out.

IMHO this is a quite bad, perhaps even dangerous advice.

I think it is OK to revisit and reassess the single share in regular periods only, like once a year, and not everyday. But blindly holding a share only because you missed selling it in better times is IMHO not much different to throwing good money (the remaining money in the share) after the bad (the money already lost due to a missed time of selling.)
When reassessing the share the question should be “Feel I comfortable with the share for this price right now?”, but not “How much did I win or loose with thisshare in the past, so can I afford to sell it?

Read more

Short cuts: Greenlight Re, Hornbach & TGS Nopec

Greenlight Re:

One reader Emailed me that I had made a mistake in my initial post with regard to the book value and P/B ratio. This is what I wrote in December:


2007 2008 2009 2010 2011 2012 2013 2014 2015
P/B Ratio 1,24 0,96 1,23 1,23 1,08 1,03 1,19 1,05 0,78
P/B Ratio adj. B Shares 1,48 1,15 1,46 1,47 1,29 1,23 1,42 1,25 0,93

For some reason, the official Bloomberg ratios do not include the class B shares held by David Einhorn, so I adjusted them accordingly.

Actually, the B shares are included in the stated Bloomberg Ratios despite showing the wrong number of shares, so the “true” P/B ratio is around ~0,79 which then of course makes the “mean reversion” story even more compelling.

Additionally, Greenlight already released the monthly investment return for December which was -0,1% against -1,6% for the S&P 500. So at least its going into the right direction.

Maybe one quick point on comparisons of Greenlight Re to Berkshire, Markel or Fairfax: Although it is true that the other companies have better track records, I do think that Greenlight has one big advantage: The company is transparent and relatively easy to value as the whole investment portfolio is marked-to-market. And as I pointed out, Greenlight for me is not a long-term compounding story but a mid-term special situation betting on a David Einhorn outperformance.


After Hornbach’s profit warning in December, a lot of people asked me: What are you going to do ? Are you selling now ? Why do you own Hornbach at all ?

First thing: I wil do nothing and watch. For me , the profit warning was very surprising as I thought that they are on a good track and have the right strategy, although the business they are in is very tough.

For me, Hornbach is a pretty low risk position. My expectation was that I can make around 10-12% p.a. with very little risk. Until Q3 2015, that was on track but now of course it looks like a clear underperformer.

One of the reasons for this is clearly the fact that in contrast to almost any other stock in Germany, Hornbach did not enjoy any multiple expansion over the last 5 years. For a capital intensive, real estate dominated business like Hornbach, book value is one of the relevant measures. If we look at this we can clearly see that Hornbach now is valued at the low end of the historical range of P/B which ranged from ~0,8 – 1,8 in the past 15 years:

P/B BV/Share
30.12.1999 1,86 8,335
29.12.2000 1,46 8,679
28.12.2001 1,07 11,654
30.12.2002 0,99 11,642
30.12.2003 1,09 12,103
30.12.2004 1,10 13,201
30.12.2005 1,17 13,661
29.12.2006 1,33 15,182
28.12.2007 1,31 16,441
30.12.2008 0,81 18,784
30.12.2009 0,89 20,584
30.12.2010 1,09 22,947
30.12.2011 0,93 24,900
28.12.2012 0,99 25,881
30.12.2013 1,03 27,101
30.12.2014 1,04 29,023
Jan 16 0,84 31,230

Obviously, Hornbach does have some issues. Personally I think one needs to watch the E-Commerce issue most closely. So far I thought that DIY does not have big issues with Amazon & CO but this now needs to be tested.

TGS Nopec

Tgs Nopec released preliminary 2015 figures and a first outlook for 2016. Naturally, the outlook is rather subdued. Combined with the drop in oil prices, the stock got hammered. For shareholders, the only positive aspect is that TGS still is doing a lot better than its capital-intensive competitors, for instance PGS or CGG:

For the moment I will not do anything. Clearly the oil price went lower than I ever thought but TGS has net cash and will manage the cycle conservatively. So I don’t think one has to panic now.

Overall I think the best advice in such a situation is: Either you panic early or you don’t panic at all. For the early panic it is already too late for oil related stocks in my opinion, so the only alternative is to sit it out.

Performance review 2015 & 5 years 2011-2015

Performance 2015

2015 is now in the books. For the full year, the portfolio gained 14,13% (including dividends, excluding taxes) vs. 12,47% for my Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%)). With +1,7% the relative performance was very small but nevertheless positive. However if we look at the monthly returns for 2015, we can clearly see that for most of the year I was trailing the benchmark:

perf 2015

After trailing the benchmark almost -9% in the beginning of the year, the pull back in autumn brought the portfolio back above the benchmark for the year, overall the outperformance for 2015 is clearly in the “not significant” range of outcomes.

The top performers in 2015 were (incl. dividends, in EUR):

TFF Group (+54,3%)
Miko (46,1%)
Admiral (43,3%)
NN Group (37,9%)
Gagfah (30,0%)
Van Lanschott (29,4%)
Bouvet (28,5%)
IGE & XAO (26,6%)

The major detractors were:

Romgaz (-16,7%)
Depfa TRY Zero (-16,7%)
Koc Group (-15,3%)
TGS Nopec (-13,9%)

If you had asked me end of 2014 which stocks would have been my favourites in 2015, only Admiral would have been in my list. I clearly did not expect Stocks like Miko and TFF perform so strongly. This is also one of the reasons why for me too much concentration wil lmost likely not be value enhancing.

The 2015 performance was OK, although compared to the overall performance of European small and Midcaps it was not spectacular. Actually for anyone investing in the European small and midcap area, 2015 was an extremely good year. The German MDAX increased around 23%, the SDAX around 27% and the tech oriented TecDax even 34%. Also the French CAC 90 small index gained 30% and the Italian Star index around +40%. So you will see some European funds posting spectacular results for 2015 if they invested mostly in those markets. However many of those markets are now very expensive, trading at trailing P/Es of high 20ies to high 30ies. It remains to be seen if they can hold those valuations in 2016, I am somehow sceptical. I think in those markets too much growth is priced in already into many of the stocks.

My “adventure” with Emerging markets clearly was negative for the 2015 performance. If I would have stuck to my “core competency”, European small and Midcaps, I would have certainly performed a lot better. In the long run however, I do think that there is a pretty good chance that this pays off as those markets will come back at some point in time. Es with the European stocks, I think it is very important to get familiar with those markets already when they go down. I do think it is unrealistic assuming to be able to enter any such market at the bottom. There will always be some pain in the beginning when you extend your circle of competence.

Portfolio transactions in 2015:

The current portfolio can be found as always on the portfolio page of the blog.

Stocks bought in 2015:

Lloyds Banking Group
Greenlight Re
Partners Fund

Stocks sold in 2015

Kas Bank
Depfa LT2 (maturity)

Interestingly, 4 out of 6 new stocks were special situations and one of my new value picks was a fund. So I only found one “core value” stock in 2015. Of the sold ones, Cranswick was clearly a mistake. Though it now looks very expensive, I clearly should have captured more of the positive momentum as the stock increased another +40% since I sold it. This has cost me around 2% of portfolio performance.

5 year performance review 2011-2015

Bench Portfolio Perf BM Perf. Portf. Portf-BM
2010 6.394 100      
2011 5.510 95,95 -13,8% -4,1% 9,8%
2012 6.973 131,81 26,6% 37,4% 10,8%
2013 9.017 175,04 29,3% 32,8% 3,5%
2014 9.214 183,60 2,2% 4,9% 2,7%
2015 10.363 209,53 12,5% 14,1% 1,7%
Since inception   209,53 62,1% 109,5% 47,5%
CAGR     10,1% 15,9%

So 2015 was the fifth year with a outperformance in a row although a very insignificant one. Since inception, the portfolio now has more than doubled. The annualized return has been a healthy 15,9% compared to 10,1% for the benchmark. Looking at the performance graph one can already see that this has been achieved with less volatility compared to the benchmark:

5 jahres perf

For statistic freaks a few maybe interesting stats for the 5 year period:

– there were 24 months with negative performance. On average the portfolio participated only with 67% of the negative performance
– there were 36 months with positive performance. On average the portfolio participated with 115% of the positive performance
– The Sharpe Ratio for the 5 year period is 1,53
– the highest monhtly loss for the benchmark was -15,1% in August 2011, but only -7,4% for the portfolio in the same month
– The highest monhtly gain for the benchmark was +14,9% in July 2011, however for the portfolio the best month was January 2013 with +8,6%
– in relative terms the worst month for the portfolio was July 2011 with a -11,0% underperformance
– in relative terms the best month was June 2011 with +9,2% outperformance

As I have mentioned several times, the portfolio does show some time lag. In months with very strong benchmark returns, the portfolio sometimes underperforms significantly but then manages to catch up. I think this is very typical for less liquid and out of favor stocks in general, they are not leading any market advances.

How to explain the 5 year performance

First and foremost I think the start of the blog and the portfolio was lucky in regard to timing. In 2011, there were many “casualties” from the finanical crisis available, both on the “special situation” side as well as within “normal” value stocks. A relatively risk free bond like the 2015 Depfa LT2 which matured a few weeks ago could be bought with a yield to maturity of 20%. Even in 2012 solid UK companies like Dart Group could be bought at incredibly low prices at a 5x trailing P/E.

Then the “Euro crisis” in 2012/2013 offered a further chance to buy very cheaply into Italian and French quality stocks at very low prices like SIAS or G. Perrier at low single digit P/Es.

Besides lucky timing of starting the blog and the portfolio, I think the main reason for the relatively good performance was not what I did but what I didn’t do. Some examples for this:

– I didn’t try to time the market
– avoided most stories, trends and “Fads” like “Real assets”, “Chinese consumer”, BRICs forever etc.
– stayed away from optically “falling knifes” with structural problems
– stopped selling short when I found out that I am not good at it

My biggest achievements within those 5 years were that I manage to hold my winners longer and that i corrected my mistakes usually quite fast.

Outlook & Strategy 2016-2020

I think the probability is high that the next 5 years will be not as good as the last five years, both in absolute terms as well as in relative terms for my portfolio. “Value” in the areas of my core competency (boring European small caps) has become extremely rare. Maybe my shift to larger cap companies and Emerging market related stocks will work out, maybe not. On the other hand, if someone would have asked me five years ago if I would more than double the portfolio within 5 years I would have clearly said “no way”.

As my readers know, I don’t make predictions about future stock prices. I do think that there is some value out there but mostly in areas where I am not an expert. So one of my tasks will be to learn more in areas where I only have very superficial knowledge such as Emerging markets, commodities and energy.

Will there be a big crash at the stock market in the next 5 years ? I don’t know and I wouldn’t bet on it. Market timing for me is something which clearly doesn’t add value and spending too much time on macro economic issues is also not time well spent.

So for me the strategy will remain the same as for the past 5 years: Analyze company by company, buy if they are cheap, sell when they become to expensive. Maybe the companies that I analyze wil become a little bit more exotic.

My “slow investing” philosophy so far has clearly not directly improved my returns but my nerves. So I will stick to the maximum of 1 transaction per month. The only thing I might change is that I will maybe allow myself to exchange one position per month. Otherwise I will have some indirect market timing if I sell first, then go in cash and invest again with a 1 month time lag.

Some Links

As aways, don’t miss Eddie Elfenbein’s annual 20 stock buy list which has an incredible good track record

Clark Street Value’s 2015 portfolio review with a nice list of very unusual positions

A good write up of Leucadia

Unfortunately only in German: A 45 minute documentary about the Samwer brothers (Zalando, Rocket Internet)

Great advice from Farnamstreet blog how to get your reading done

The 2015 review from Frenzel and Herzing

A good summary of links on what is going on in Brazil (H/T Abnormal Returns)

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