Performance review October 2014 – Comment “Stress testing”

Performance October 2014

In October, the portfolio lost -0,8%. Compared to my benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)) at -1,7%, this is an outperformance of +0,9%. YTD the score is +4,2% for the portfolio against -1,2% for the benchmark.

Positive contributors were Koc Holding (+9,7%), G. Perrier (+7,1%), Cranswick (+6,2%). Loosers were Draeger (-9,2%), Bouvet (-7,1%) and Miko (-5,8%).

Obviously, October was a relatively volatile month (more to that in the comment). However, in the worst days in mid October, the portfolio behaved as expected with a max. draw down of “only” 1/2 of the benchmark.

Portfolio transactions:

October was relatively quiet. Citizen’s Financial, my first US stock since a long time entered the portfolio as a “special situation”. In between I did a little “special situation” trade with Rhoen, netting me ~2% in the process.

The current portfolio can be seen at the usual place here.

Comment: “Stress testing”.

The first “Stress test” I want to refer to is the “comprehensive assesment of the financial health” of 120 major European banks by the ECB. The press feedback was quite predictable, mostly saying that it was only a first step and is not tough enough.

In my opinion, two important aspects have not been highlighted very often. First, I think the major achievement of this is to make all the different bank models comparable. In my opinion, this is a result which should not be underestimated. Everytime when some kind of international standard is released, all the local governments try to lobby as hard as they can for exceptions for their own players. The result then is basically a general standard with very few “teeth” and no one is able to compare the results. In this case, the ECB has been quite succesful to make the results comparable and even get the approval of all the regulators which I find is quite an achievement.

Additionally, for me it was quite surprising that some banks actually failed. I would have expected more like “ok, they failed based on 2013, but have restored their capital already” outcomes. So I was quite surprised that especially for some Italian banks, the situation became quite difficult (esp., BMPS and Banca Carige). In my opinion this indicates that the ECB will not be a “lame duck” regulator, which in the long run is good news for the Euro zone despite more short-term issues. Plus, as Draghi is alway accused of helping the “Club Med” countries, this outcome shows that this is not the case.

Overall, despite all the negative opinion about the Eurozone, my opinion this is a very important and constructive step to get the “financial plumbing” right within the Euro zone. If and when this leads to a revival is another question but personally I think that the public opinion is underestimating what is actually being achieved here.

The second but more personal stress test was clearly the sudden drop in equity markets in mid October. Especially for the US market, this was the biggest drop since 3 years or so. I guess for many investors this was quite “spooky” as there was no apparent reason. In my opinion, a potential reason for this kind of volatility is the fact that many people who are owning stocks now shouldn’t own stocks. Buying stocks because the dividend yield is higher than the yields on deposits sounds good at first, unless your shares suddenly drop 10% or more. Often such investors are called “weak hands” because they sell just because of a drop in the share. After the financial crisis, many “weak hands” stayed out of the market for quite some time but are now returning mostly because of the low-interest rates.

Normally I don’t give general investment advise, but here I make an exception. Two points of advise to investors:

1. Don’t buy stocks because of the dividend yield
2. Stress test yourself: If October made you nervous, or you can’t afford your stocks dropping 10%,20%,30% or more, then you maybe shouldn’t be in stocks at all

I have clearly no divine insight where the stock market will go in the future, however we should expect the ride to be quite bumpy.


  • Might be an usual question but i’d like to ask it: Have you ever considered buying BitCoins as a special situation investment? Of course, this would be an exotic investment. But this price is rather low and the currency obviously is quite successful…

    • Thanks for the comment. But no,i would never buy Bitcoin, or gold or something similar. As neither Bitcoin nor Gold are creating cashflows, both for me would be a pure gamble and not an investment. Without cash flows, you are not able to determine any kind of “intrinsic” value.

  • Different topic: MMI, are you looking at the LVMH/Hermes case?

  • Because the same rules doesn’t fit for everyone… We can take a look further: Same rules (banks only?), same interest rates, financial equalisation, etc. etc. Yes, you’re right we’ll get a safe harbour in the short run, but as I sad: We are going to pay in 10-15 years with a “european rubel”. It makes no sense to apply the same rules to different countrys or banking systems. Potatoes and Carrots both growth belowground, but they need different treatment to get the best result out of it. Just my opinion..

    • well, this has been the argument that has been used by local governments and (bank) lobbying groups for a long time. However in a common market with a common currency and many cross border relationships and a common central bank, in my opinion common rules are essential.

      For me the danger of a European ruble would be much worse if Europe continues as in the past, with different rules for different countries. This apporach didn’t work and let to all the regulatory arbitrage we have seen. You have problems in one EU country ? Then just move a legal entity into another country with an easier regulation and continue what you are doing. This created no value.

      • Well.. the whole world is a common market.. by definiton (Currency is just the medium of exchange). There is no example in history where a common currency survived different currency cultures. Yes, common rules are essential. But the rules have to be made AFTER problems are solved or in detail debts repaid or cutting off.
        For example you can’t give your neighbor a credit and than change the rules.. it’s ridiculous.

        Well.. you’re the opinion different rules for different countries let to all the regulatory arbitrage we’ve seen? Competition creates value in capitalism, not 5 year annual plans.. ūüôā Can you say for sure, the entire rules in future are that good. If not, how can good rules figured out if the central planned rules are not working? There is nothing called Utopia. It will end like always. Greetings from human nature.
        Your blog is great, don’t get me wrong.. I like your financial analyses.. Just was thinking about he topic…

    • Ich muss hierzu mal etwas auf Deutsch schreiben, denn die bisherigen Posts hierzu kommen ja wohl alle von Landsleuten und sonst geht einfach zu viel durcheinander.

      Erstens: Wir haben bereits – falls nicht bekannt – seit fast zwei Jahrzehnten einen einheitlichen EU-Binnenmarkt im Finanzsektor mit weitgehend vereinheitlichten Rechtsvorschriften f√ľr Kapitalad√§quanz, Liquidit√§tsvorgaben, Gro√ükredite, etc. ebenso wie f√ľr die Aus√ľbung von Bank- und Wertpapiergesch√§ften usw.. Alles ist rechtlich vereinheitlicht. Nur die √úberwachung der vereinheitlichten Rechtsvorschriften obliegt immer noch nationalen Beh√∂rden …das ist schon seit zig Jahren ein Anachronismus und geh√∂rte dringend ge√§ndert. Dass bei den von der jetzt neugeschaffenen Bankenaufsicht im Wesentlichen zu √ľberwachenden Eigenkapitalvorschriften von Banken “nationale Besonderheiten” zu ber√ľcksichtigen seien, ist schlicht gesagt Bl√∂dsinn.

      Zweitens: Der Finanzsektor birgt – und das weiss man schon seit √ľber hundert Jahren und nicht erst seit der letzten Finanzkrise – volkswirtschaftlich relevante Risiken und zwingt den Staat zur Regulierung. Es macht aber keinen Sinn, eine weitgehend auf einem europ√§ischen Binnenmarkt operierenden Industriezweig nach nationalen Regeln zu beaufsichtigen – und noch weniger macht es Sinn, europaweit dieselbe Regulierung zu haben und sie dann durch verschieden nationale Beh√∂rden nach unterschiedlichen Standards beaufsichtigen zu lassen. Genau Letzteres haben wir derzeit n√§mlich: ein einheitliches Regelwerk, welches in √ľber 20 L√§ndern von unterschiedlichen Aufsichtsbeh√∂rden zT sehr unterschiedlich interpretiert und vollzogen wird. Wie MMI sagt ist das √ľbrigens tats√§chlich eines der Grund√ľbel, welches die Folgen der Finanzkrise in Europa bspw. gg√ľ den USA noch versch√§rft hat.

      Drittens: Nicht nur die Regeln f√ľr Banken sind (seit Jahren) in Europa vereinheitlicht: Gleiches gilt f√ľr Wertpapierfirmen, Versicherungen, Investmentfonds…..und der vereinheitlichte Markt funktioniert sehr gut. Mit dem Thema W√§hrung, EUR hat das √ľbrigens wenig bis gar nichts zu tun. Die Basis f√ľr das europ√§ische Regelwerk zur Vereinheitlichung des Bankensektors stammt noch aus DM-Zeiten und ist seitdem nur konsequent fortentwickelt worden.

      Und noch eine abschlie√üende Bemerkung ganz konkret zu der neuen Beaufsichtigung des Bankensektors durch die EZB durch den “SSM”: Die EZB hat hierzu 900 Stellen europaweit ausgeschrieben und mehr als 20.000 Bewerbungen von den zT bestqualifizierten Leuten aus allen nationalen europ√§ischen Verwaltungen aber auch externen Beratern, Wirtschaftspr√ľfern etc. bekommen. Die komplett “europ√§ischen” Teams stehen mittlerweile, denn seit gestern ist die Beh√∂rde in Aktion und ich prophezeie, dass wir eine komplett neue Bankenaufsicht erleben werden, endlich mit Biss und ohne grosse politische R√ľcksichtnahmen wie es die Einzelstaaten seit Jahren leider praktiziert haben.

      • Na dann ist ja alles super! Vorw√§rts immer, r√ľckw√§rts nimmer…

      • Die Eurozone ist kein effektiver W√§hrungsraum, weil in den einzelnen L√§ndern ein unterschiedlicher Nat√ľrlicher Zins vorliegt, die Zentralbank aber nur einen Nominalzins f√ľr die ganze W√§hrungszone festlegen kann, der f√ľr viele L√§nder nicht angemessen ist. Daher sind weitere Krisen wahrscheinlich.
        Das eine Zentralbank f√ľr ein stabiles Finanzsystem notwendig ist, ist √ľbrigens auch falsch. Kanada ist ohne Zentralbank sehr gut gefahren, es blieb sogar vor der Weltfinanzkrise von 1929 verschont.

        • Es gibt keinen Grund warum in einem W√§hrungsraum f√ľr unterschiedliche Emittenten nicht unterschiedliche Zinsen gelten sollten. In USA zahlt Kalifornien z.B. auch deutlich mehr Zinsen als z.B der Bundesstaat.

        • Ja, das mit Kalifornien stimmt. Allerdings haftet kein Bundestaat f√ľr den anderen und sogenannte “Target” Salden gibt es nicht bzw. werden ausgeglichen. Die USA hat au√üerdem, im vergleich zur Eurozone, durchaus bessere Kriterien um als W√§hrungsgemeinschaft zu funktionieren. BTW gibt es dort auch nicht nur eine Zentralbank…

  • I like your comment about the ECB stress test and cannot agree more. Nowadays the ECB and Draghi in particular is blamed for almost almost every single policy step they take. The stress test outcome was indeed a major step forward in (finally) harmonizing the still shaky European banking sector. I also believe that going forward the ECB will be a much better regulator than the various national regulators were in the past (admittedly the BaFin will be easy to top).

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