Monthly Archives: September 2013

Correcting research mistakes: Pharmstandard – SELL

A few days ago, I introduced Pharmstandard as a potential special situation with a catalyst in the form of a buy out offer.

Thanks to the input of a few commentators, I recognized that I got one very important detail wrong:

The record date for the potential 16,50 USD offer was already on July 5th, so a few days before they announced this offer. Anyone buying now will not be able to tender the shares. Interestingly, this information was nowhere to be found in the English language section of the official releases.

This of course wipes out the most significant part of the investment case at the current stage and explains the relatively low price.

As a consequence, I will therefore sell my 1% position as of today and watch the developement from the sideline. Maybe there will be another potentially interesting entry after they spin of the OTC drug unit.

In general, I think it is quite important to act quickly if a significant part of a stock analysis turns out to be wrong. It would be even better to identify this beforehand, but that is one of the drawbacks of not having an awful lot of time to analyze. In those cases it is even more important to start a position small in order to lower the risk of things turning out like they did here.

I think it is also a good example for extending the “Circle of Competence”: In this case I have learnt that you should not rely only on the English language announcements of a Russian company….

Anyway, thanks to all the commentators for their helpful comments !!! This is what makes blogging so much fun

Performance review August 2013 – Comment: “Circle of Competence”


The portfolio lost -0.6% in August, compared with -1.1% in the BM (50% Eurostoxx, 30% Dax, 20% MDAX). YTD the portfolio is up 21.4% against 12.5% for the benchmark.

The major driver was of course the 25% cash allocation in a down month, the single stocks were all within low single digit perfomance in either direction, so nothing special here.

Portfolio transactions

August was a rather active month with 4 relevant transaction:

1. AS Creation was sold out
2. MIKO came in as new “Core Value” investment (half position)
3. A 1% position in Pharmstandard as potential special situation was established
4. In parallel, I am building up a position in a yet undisclosed French company where I did not yet manage to write a post but I include it “anonymously” in the portfolio

Portfolio as of August 31st 2013

Name Weight Perf. Incl. Div
Hornbach Baumarkt 4.0% 5.0%
Miko 2.6% 2.6%
Tonnellerie Frere Paris 5.7% 82.6%
Vetropack 4.0% 6.8%
Installux 2.6% 14.2%
Poujoulat 0.9% 11.4%
Cranswick 5.4% 33.0%
April SA 4.1% 34.7%
SOL Spa 2.8% 42.3%
Gronlandsbanken 1.9% 12.3%
G. Perrier 3.6% 37.8%
IGE & XAO 2.1% 10.6%
EGIS 2.6% 2.5%
Thermador 2.6% 3.0%
Not yet disclosed 0.6% -1.9%
KAS Bank NV 4.9% 37.0%
SIAS 5.1% 49.6%
Drägerwerk Genüsse D 8.5% 168.9%
DEPFA LT2 2015 2.6% 61.4%
HT1 Funding 4.2% 48.3%
EMAK SPA 4.8% 53.3%
Rhoen Klinikum 2.3% 17.0%
Pharmstandard 1.1% -0.6%
Short: Prada -1.0% -20.7%
Short Lyxor Cac40 -1.1% -13.0%
Short Ishares FTSE MIB -1.9% -11.5%
Short CHF EUR 0.2% 6.9%
Cash 24.8%  
Core Value 45.5%  
Opportunity 33.6%  
Short+ Hedges -3.8%  
Cash 24.8%  

Comment: Circle of Competence

For most value investors, Warren Buffet’s concept of “Circle of Competence” is a very important guideline.

Here is a video of the Oracle himself explaining the concept.

Most famously, he avoided the Dotcom bubble by staying within his circle of competence and not investing in tech companies. Many people therefore take this advice as granted and tend to stay in an area which they know best, like German small caps etc.

However I have a serious problem with this concept or at least with the interpretation of it.

First of all, in reality, each of us is born without any circle of competence with regard to investments. So whatever you consider as your CoC now, has been outside your initial CoC. So at one point in time one had to step out this “zero CoC” to build up any kind of competence.

It is also funny to listen to Warren Buffet explaining this concept. His CoC is HUGE. Clearly, his most well-known investments are Coca Cola, Gilette etc. But if your really follow his investment career, you can clearly see that he continuously expanded his circle of competence..

I mean he started with delivering newspapers and putting pinball machines into Barber shops, but then over his career he almost did everything. Starting with buying department stores, newspapers, he invested in commodities (Silver) Chinese companies, Israeli companies, sold CDS, S&P 500 puts, bought reinsurance companies, provided LBO financing etc. etc.

Expanding one’s CoC however only works if you step outside your CoC a least a little bit at one point in time. Clearly, jumping blindly without any knowledge for instance into US listed Chinese stocks normally does not end well.

I think the best way to expand one’s circle of competence is along the following dimensions:

a) Geographically
So if one has a lot of knowledge in one sector like for instance car manufacturers, it is not that difficult to look at those companies in other countries in order to gain experience. Due to the fact that many companies today are very international, this kind of knowledge in my opinion is extremely important anyway. Just looking at the 3 German car manufacturers for instance is a quite useless task. Usually it is easier to look at “familiar” countries first before going to more exotic places. In that way it is easier to learn about specific issues in other countries if you know the sector well.

b) Sector wise
Similar to geographically, it is also relatively easy to move from a sector one knows well to a sector which is in some way connected. So if you are strong in chemicals, to their direct suppliers (Oil companies) or customers should be easier if not necessary. If you know a lot about consumer staples, retailers would be logical next step etc. etc. For me for instance, it was much easier to understand IGE & XAO, the Electro Cad software company after I had analysed what their client G. Perrier is actually doing

c) Along the capital structure
A more unusual way to expand one’s circle of competence is along the capital structure of a company. Usually many people buy stocks and then maybe some bonds. However if you want to more systematically improve your knowledge, start with a company with a more complicated capital structure, including, bonds, loans, Hybrid debt, convertibles and work your way thorough. You will be rewarded with a much better understanding how the financial side of a company works and you might dicover some interesting opportunities along the way.

There are clealry many ways to expand one’s circle of competence, but the three mentioned have worked quite well for me. I think it is important to move in relatively small steps and be patient. Whenever you step out, you will most likely experience a set back, but one should consider this as an investment.

So to sum it up: Don’t let you fool you by Uncle Warren. If he would have stayed with delivering newspapers and putting pinball machines into Barber shops, he most likely would not be one of the richest people of the world. Only if you expand your circle of competence continuously, you will reap the reward over time. However make sure not to jump too far…..

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