The Value and Opportunity “All Time Flop 10”
During my Silver Chef “Post mortem” some days ago, I decided to look at the 10 biggest losses I made since I started the blog in order to check if I have actually learned from mistakes.
These were the (by absolute performance) 10 worst investments in the 7+ years of Value and Opportunity:
10. Medtronic -18,93% (2011)
Medtronic was one of the initial portfolio investments. I kicked them out in August 2011 as I was not very comfortable owning US large caps and I never deeply looked into the company myself. Medtronic since then outperformed the S&P 5000 IN USD terms (~17,1% p.a. vs. 15.3%) or ~ 233% in EUR terms. This is slightly better than my portfolio which made around 215% in the same period.
I think my major mistake back then was that I did not take into account the quality of companies that much in my investment process but tried to stay “cheap” and therefore sold this quality company much too early.
9. Einhell Vz. – 20,63% (2011)
Einhell was one of the initial stocks as well. I sold the stock in November 2011 because I thought that the stock could be a value trap. Interestingly, Einhell remained a underperformer until mid 2017 before the stock exploded and more than doubled in a few months. Interestingly, only in 2017 Einhell could surpass the 2010 level earnings wise. I am not sure if Einhell is now a “P/E 18” company but I have confess that I didn’t really follow the stock which was kind of mistake.
8. Portugal Telecom -23,75% (2013/2014).
Portugal Telecom was initially part of my “PIIGS” project in 2013. I did 3 posts on them in 2013 (part 1, part 2, part 3). The reason for my investment was a relatively complicated merger with Brazilian Telco Oi.
Then however Portugal Telecom got caught up in the Banco Espirito scandal and I sold the stock in 2014. The best thing about the investment was that I only had a very small position (1% of the portfolio). One of the lessons learned was that in more difficult jurisdictions many totally unexpected things can happen as corporate governance is often quite weak.
For Portugal Telecom the story didn’t end very well. The company seems to have been acquired by Oi but subsequently Oi filed bankruptcy and lost more than 90% of its value.
7. KSB -23,86% (2011/2012)
Again a stock of the initial portfolio, which I looked at in some Detail in 2011 (part 1, part 2, part 3, part 4). At that time, KSB seemed to be moderately undervalued. Although it looked cheap at that time and the company appeared solid, I did not have much confidence that they will improve a lot going forward.
I sold KSB one year later. This decision turned out to be a good one as KSB significantly underperformed since then and the stock price today is even lower than in 2012.
The lesson learned here was clear: Just being cheap is not enough and looking to historical data is irrelevant if fundamental things change.
6. Fortum -24,17% (2011-2012)
Again, Fortum was a stock from the original portfolio. I considered Fortum to be the best run European utility company. Plus, I was convinced at that time that Fortum would benefit from the fact that they didn’t use a lot of fossil energy and didn’t need to buy expensive carbon credits. And at that time I really thought: What could go wrong with a utility stock ?
Then however a few unforeseen things happened: The Finish Government introduced a special tax, their dedicated growth market Russia struggled and carbon credits became very cheap.
I sold Fortum during an Autumn cleaning exercise in October 2012..
Fortum since then did kind of OK (120%) although my portfolio did slightly better (+130%). The remarkable aspect is that Fortum actually turned out to be one of the best performing utility stocks since then, far better than for instance the german players which lost -40% over that time period.
The lesson here is clearly that even in once rock solid industries things can change a lot but that it pays to invest into the best companies as they often manage to do quite well despite strong headwinds
5. Noble Drilling -29,00% (2011)
Noble came into the portfolio in February 2011 and was then sold in August 2011 with a loss of 29%. I never really analyzed the stock properly but thought it is so cheap that you can’t do anything wrong. As we all know now, there was a reason why oil drillers were cheap and the stock lost ~-85% of its value since I sold it.
The learning here again was that just looking at past numbers does not help if something fundamental is changing. Plus in this case the realization that buying cyclical stocks when they are “looking cheap” is mostly not a good idea.
4. Apogee Enterprises -32,31% (2011)
Apogee was again one of the initial stocks but I sold it in September 2011. Looking back, this was clearly a mistake as the stock went up 6 fold over the next 4 years. In contrast to Noble Drilling, 2011 was actually their cyclical low and they managed to increase earnings significantly.
My problem at that time was that I didn’t like US stocks at all and did not invest enough time to really understand the business. If you have no real conviction then it is really difficult to hold a good stock if it goes massively against you.
3. Bijou Brigitte -37,18% (2011)
Bijou Brigitte used to be a “superstar growth stock” in the late 90ies and early to mid 2000s, For instance in the 10 years from 1996 to 2006, the stock went up ~8000%. In late 2010, the stock suddenly looked cheap and so we bought it into the initial portfolio. The financials were solid and the family behind it was considered to be a good owner/manager. This was the summary of the case:
Costume jewelery and accessories retail chain, former growth „star“ company. Peak of sales and profit in 2008, since then shrinking sales and profits. However, company produces lots of cash and is relatively cheap. 100% equity financed, family ownership, attractive dividend yield and share repurchases make the stock attractive.
Then two things happened: The company was hit by the Euro crisis as Spain was their target growth market and their concept was copied more and more in their core markets.
I sold the stock in August 2011 when it became clear that margins were dropping and sales stagnating. This turned out to be a good decision as the company never really recovered. Including dividends the stock is now flat against August 2011.
The lesson in this case is clearly that retail chains rarely recover once the hype cycle is over.
2. Silver Chef -39,58% (2016-2018)
“Post mortem” and learnings are to be found here. SHort version: Be careful when you enter into new markets and act swiftly if fundamentals deteriorate
1. Short Kabel Deutschland -53,17% (plus some, 2011-2013)
My biggest loss so far was actually a short position. I started shorting Kabel Deutschland in early 2011 as I thought it was grossly overvalued.
When rumours about a potential acquisition came up I closed out at a significant loss. But then I shorted the stock again and made another -22% on that one.
There were a few notable learnings for me:
- Don’t do “valuation shorts” in a sector where acquirers are not fully rational.
- Don’t underestimate subscription models
As a consequence of this I haven’t shorted any stock for a long time now as I am not so confident that I can add value by shorting.
Looking back at what has been going wrong in the last 7+ years, I guess the most common issues were the following:
- over reliance on historical financials
- not enough insight into the business and underlying trends
- not enough focus on quality of business and management
- overconfidence especially on the short side
Interestingly, despite all the mistakes made especially in the beginning, the relative performance of the portfolio was very good. I guess this has to do with the fact that in 2010/2011 there was so much opportunity that it was hard to miss some of the really good stocks.
It is also pretty clear that I will make more mistakes in the future but hopefully not the same ones,,,,