value and opportunity

When I go home from work, it is usually quite late and I don’t have a lot of time for shopping, as shops close at 8 pm sharp.

The next store for me is actually a “Karstadt” branch, which has a nice but VERY expensive grocery department. The interior looks like this:

The stuff they are offereing is good quality but it is in general very expensive (like 2 times the price compared to a normal REWE), but they do always have some items on sale. In the sausage department for instance, they will have really good Parma ham at a good price one week, Serano ham the next week and “Südtiroler Speck” the next week. So if you are flexible, you can make a “good value” purchase despite the fact that the store on average is really expensive. The interesting thing about being flexible is that if you always go for the “on sale” item, which I do for instance also for cheese, you sometimes discover interesting new things. One of my favourite cheeses (goat cheese with cranberries) for instance is one which I would never had thought of buying before. But as it was on sale, I bought it and really liked it.

The big trick is not to buy (too much) of the expensive stuff. Sometimes you can’t avoid it, but if you have a plan and stick to it, my overall bill is relatively similar to a “normal” Supermarket and I often end up with new and interesting items.

If I would always buy the same item, for example Parma ham, my favourite ham, I would end up paying on average far too much or, if I would use a hard cap on price I would end up hungry on many days. In my case, buying nothing and being hungry often ends in eating really unhealthy stuff like chips and chocolate, so this is a rather “high risk” strategy.

So why am I writing about my shopping habits ? Did I run out of investment ideas or what

Well, I do think that the current stock market is, to a large extent similar to my Karstadt grocery department. There is no doubt that on average stock prices look very expensive. Especially my favourite “hunting ground”, quality small caps are on average really expensive, same as US blue chips etc etc.

On the other hand, if you look around a little bit further and allow some flexibility like in my Karstadt grocery store, there is almost always something on sale in the stock market. For instance in 2011/2012 when German small caps already looked very rich, I decided to look into Italian and French stocks (which I had never done before) and I was genuinely surprised how many “good value” stocks existed outside my native environment. Clearly, not every new item will be of good “Taste” as some of my early experiments with Greek and Italian stocks showed. But the gain of the positive surprises more than made up the items which were not to my liking.

Although it is much early to tell, my trip further away into markets like Russia and Turkey seem to confirm my theory. Those markets are clearly on sale, but at a first glance, it is an unusual taste. On a second glance, one is often surprised how good those companies are.

Here are, in no particular order, some areas where I think “on sale items” can be found:

– Emerging markets stocks (Russia, Turkey etc.)
– Eastern European stocks
– European utility stocks
– European financials (banks, insurance)
– Oil majors, oil service
– Dutch real estate companies
– “traditional” Hong Kong companies
– UK grocery companies
– shipping

Clearly, not everything on this list will turn out as “good value” and some of them might even be far over the “consume until” date. And none of them will most likely prvide you with a “quick double”. But medium term, 3-5 years, many of those areas will contain stocks who will provide more than ufficent return compared to their risk.

Coming back to my grocery example: Many of those “sale items” aren’t even in the sausage and cheese department, they might be in the fish or salad area or even at the vegetable stand. But if you are flexible enough to go home and eat a delicious “oriental bulgur salad” instead of cheese or Parma ham, you will not only make a good deal but gain an interesting perspective.

One advice however: if you try something new and exotic, don’t go all in and buy 3 kilo for the next two weeks. Just buy a small amount and look if it is your taste. At Karstadt for instance i ended up once with a pink fish egg paste which I really didn’t like at all. But as I had bought only a small portion, I just threw it away with no loss.

Back to the stock market: What I see at the moment is that many good stock pickers are going into cash because their favourite area has become to expensive. They “slavishly” follow Buffett’s advice to buy only what they know and wait for a crash in order to buy back their favourite shares at low prices. For me however this strategy resembles a little bit this well-known strategy:

Additionally, many investors seem to be influenced by guys like John Hussmann who claim to have statistical proof that nothing can be earned on average at the current valuation levels. Ignoring the fact that Hussmann’s performance numbers short, mid and longterm totally suck, I think the problem with all those “backtesting” gurus is that their market timing asset allocation look great on paper and charts but rarely work in practice.

I personally think that “contrarian, value based” stock picking without active market timing will beat any “asset allocation backtest” strategy over the long run. Especially for smaller investors, the coming years might be very very good years for stock pickers if one stays away from the beaten paths despite most likely weak returns for the overall market.

As a stock picker, I think times likes these are a great opportunity to expand one’s circle of competence and look for bargains outside your favourite areas as there might seem to be plenty available. As I said in the headline: There is always something on sale.