Oh my god, a bank again…. But Deutsche Pfandbriefbank is actually a pretty simple case: As a “forced IPO” of the good part of Hypo Real Estate, the bank is comparable cheap (P/B ~0,61) against its main peer Aareal bank (P/B 1,0). In my opinion, the risk is limited despite the recent HETA losses as the German Government has absorbed all of the really bad stuff in the bad bank. Similar to cases like Citizen’s, NN Group and Lloyd’s, PBB offers an interesting and mostly uncorrelated risk/return profile for patient investors provided that valuation multiples normalize at some point in time. Positive surprises like M&A are potentially on the table as well.
DISCLOSURE: THIS IS NOT INVESTMENT ADVISE. Do your own research. The author might have bought shares already.
Ben from Wertart has collected an interesting portfolio so far
Great post from Punchcard Blog on Discovery Communication and the Future of pay TV
David Einhorn had better quarters than Q2 2015
The guy who runs Google’s driverless car project with an interesting TED talk
Nate from Oddball wisely prefers neglected stocks vs. distressed ones
Frenzel & Herzing with a post on their favourite stock Vitec Software Group AB
Morgan Housel from Motley Fool (one of the best financial writers in my opinion) had a great post on short investing philosophies. Boiling down rather complex “animals” like a whole philosophy on the one hand is a little bit dangerous, on the other hand, a good philosophy like a good red wine based gravy gets better and better the more you reduce it. I did write down my general investment rules here but it is much more a description than a (short )philosophy. Before moving to my own short version, I liked those 3 statements best:
Eddy Elfenbein, blogger, Crossing Wall Street: “Be patient and ignore fads. Focus on value. Never panic.”
Barry Ritholtz, Bloomberg: “Keep it simple, do less, and manage your stupidity.”
Bryan Hinmon, Motley Fool Asset Management: “Own compounders. Buy smart. Be patient.”
So my own statement doesn’t look that innovative: Be patient, think independently and protect the downside Actually this statement is the combination of 3 very basic principles: 1. Be patient The most important of all: Think long-term, invest long-term and let the “Magic of compounding” work for you. Cancel out the noise like quarterly earnings, monthly macro statistics or weekly employment figures. Don’t trade in and out of stocks frequently, this will save costs and nerves. Don’t market time. Make sure you don’t need the money you invest elsewhere. I am still in the learning phase which regard to this but achieving true patience is maybe the ultimate “black belt” of investing. 2. Think independently I would say that trying to think independently is the fundamental character trait which then helps to prevent of falling for fads, manias and panics. The hard thing is to actually to do it. For me it helps enormously NOT to read broker research but focus on original information first (annual reports, balance sheets, original press releases) and then read comments etc. later when researching an investment. Also reducing the amount of input can help. Don’t look at real-time price changes and ignore “real-time news”. Twitter is not a good investment advisor. Do read financial news with a time lag. I read the FT for instance more often than not with a 1 week time lag and annual report often several month after they were released. Avoid “Hot stocks” and “crowded trades” as a matter of principle. 3. Protect the downside No one can avoid losses, even Warren Buffett makes the occasional mistake (Tesco). However you can try to minimize this risk by doing a good Due diligence and focus on what can go wrong first. Try to “kill the investment” first and then look at the potential upside. If there is any doubt on the validity of the business model or of the industry make sure you understand it better than everyone else before investing. If there is any doubt with regard to the financials and/or integrity of management, stay away. As Charlie Munger said it “Stay out of trouble”. If you estimate the upside, stay conservative. For me this also means not being to concentrated on single positions. Anyway, I can only recommend any reader trying to come up with a short “philosophy statement” as well, it is definitely a very god exercise.
At a first glance, Globo PlC looks like a highly profitable, strong growing and incredible cheap software company suffering only from overall bad sentiment against anything which is related to Greece. A second short look however shows clearly that there are a lot of issues in their accounts (capitalization of expenses, revenue recognition) which in my opinion already raises a couple of red flags.
Additionally, some of their behaviour like taking on expensive loans despite a comfortable cash position does make no sense at all.
As for me, value investing is foremost about protecting the downside, Globe PlC is not something I am interested in as a potential investment and not worth additional analysis.
Among value investors, Globo PlC, a UK listed mobile phone software company is no stranger. Almost any screener will have Globo as one of the top investments.
Here are the current ratios which clearly look attractive:
Market cap 186 mn GBP
Operating margin 35%
yoy revenue growth +49%
yoy EPS growth +27%
Net cash 40 mn EUR
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|
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:
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 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
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.
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 ?