value and opportunity

Performance:

In July, the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25), DAX (30%), MDAX (20%)) lost -4,5%. This is actually the biggest monthly loss since May 2012. The portfolio lost “only” -2,6%, an outperformance of +1,9% for the month. YTD, the score is +7,4% for the portfolio against -0,5% for the benchmark, a relative outperfomance of +7,9%..

Interestingly, especially the German part of the benchmark is struggling, with the MDAX down almost -6,5% for the year. My cautious stance towards German shares seems to have been justified so far.

The biggest looser in %terms in the portfolio were not surprisingly Sistema with -19,4% and Sberbank (-15,9%) followed by Trilogiq with -12,5%. Portugal Telecom would have been even worse with -39,7% but thankfully I sold that one early. Winners were few, among them Koc with +7,6%, TFF +4,7% and Gronlandsbanken +4,2%.

My Emerging Markets “Basket” has clearly added some volatility but on the other hand I think it was a good idea to diversify and only invest small amounts in risky stuff.

Current portfolio & Transaction

In July, I sold my small position in Portugal Telecom at a loss after the connection to Banco Espirito Santo became public. My relatively quick reaction saved me from much steeper losses. Sometimes it pays to react quickly.

Additionally I sold Vetropack as my investment case was clearly not fully valid anymore. The only new position was the Sky Deutschland “special situation”, which is a relatively low risk low upside investment. Finally I scaled down the Draeger position from 6,7% to 5% as the multiple against the pref shares increased to 6 times.

Cash at month end was around 12,4%, with a further 10% (Depfa LT2, MAN, SkyD) invested in special situations which I would consider close to cash. So the portfolio should be quite well prepared for any more significant corrections.

The current portfolio can be seen here.

Comment: “Anchoring”

During the month, I faced 2 situations where I was confronted with one of the most common but also most dangerous behavioural biases: Anchoring. On Stockopedia I found a pretty good description:

The concept of anchoring draws on the tendency to attach or “anchor” our thoughts to a reference point – even though it may have no logical relevance to the decision at hand.

The first situation this month was the case of Portugal Telecom (PTC). PTC announced quite surprisingly that they had extended almost 1 bn EUR to the now bankrupt Espirito Santo Group. When I had time to look at this, the stock dropped already significantly and I was already down -30% compared to my purchase price. For a short time I was tempted to speculate on a rebound as I hated to realize such a “loss”, especially as there were some positive news like potential collateral from ESF etc. But then I realized that I was “anchored” on my purchase price. Even at a loss, the risk/return relationship for the stock had worsened significantly. Instead of a speculation on a Brazilian merger, the situation had changed to a potentially corrupt management, unreliable financial statements and a speculation of Espirito Santo not going bankrupt. If the fundamentals of an investment change so much, being anchored on the purchase price is one of the worst things that can happen. It is much sfer to sell first and then sit back and think about if you would buy the stock again at the current price.

The second instance was Vetropack. Vetropack was one of my original investments. During the 3,5 year holding period, at one time the stock price had been almost 2000 CHF, a nice round numbers. Again, when I reviewed the business case and found some significant flaws compared to my own case, I was tempted to keep the position, speculating that it may reach 2000 CHF again and then sell at least at a small profit. But being anchored on previous higher prices is as bad as being anchored on the purchase price.

Those biases are also quite common in the business world. Selling a subsidiary at a loss, despite how bad and desperate the situation is, is very often an absolute “no go” for most senior managers. Only when the old managers are getting kicked out, the successors then finish the job because it was not “their” purchase price. For me, this is by the way a sign for good capital allocation if the management of a company sells a subsidiary at a loss or closes it down if they can’t turn around the business themselves as this is clearly not easy for any management. Much more often you see companies throwing good money after bad in those situations. The argument is often: “If we sell now, we lose everything we have invested before”. This “sunk cost” fallacy is extremely common and very hard to argue against.

So how can an investor protect against this anchoring ?

An easy solution would be just to forget purchase prices. In practice, this is not that easy as you usually see your purchase price in each and every broker statement.

What works best for me is also very simple: Writing down the original investment thesis and comparing the positions on a regular basis against this thesis. If something has changed significantly to the worse, then sell independent of the purchase price or previous highs. If nothing has changed and the case is still valid, then hold.