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.

Overall Summary:

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,,,,

 

 

 

 

 

 

 

 

24 comments

  • bezüglich Cashflow ratio liegen kroger und Metro auch ähnlich. Die Frage ist ob da das Leasing schon bereinigt bzw abgezogen ist.

  • Wenn ich bei Metro forward pe ratio eingebe, dann ist Metro aber zb. teurer als Kroger. Weis nicht warum die jetzt so ein günstiges kgv haben? Haben sie stille Reserven gehoben? Hat Metro, Kroger oder Walmart stille Reserven die sie heben? Hornbach hebt ja anscheinend nicht ihre stillen Reserven und schreibt die Ausgaben für die Digitalisierung gleich ab, soweit ich das mal gelesen hab.
    Real würd ich mal sagen hat eine sehr schlechte Marktstellung. Metro-Großhandel kann ich die Marktstellung – auch gegenüber Amazon nicht beurteilen.

  • Pessimistic comment: Perhaps this is the perfect timing for this retrospect.

    Markets are very expensive, and the optimism of the markets shrinks these days. So I would not wonder at all about a new withering of the markets, that may screw your depot and exchange quite some of your entries in the list of “worst 10 performances”. So its good to highlight your loosers pre-crisis.

    I hope my pessimism is unwarranted but I change for getting more defensive in my stock deposit these days, like increasing the cash share.

    • What have you sold ?

      • Several Companies since February, that I would have loved to hold under normal circumstances:
        – Thermador Groupe (bought as a follower of MMI many years ago)
        – SalMar
        – Volkswagen
        – Half of BMW
        – Amaysim
        – Distribution Now

        • Hmmmm…. and what did you keep? High quality ?

        • You can take your own look: http://www.stw-boerse.de/apps/depot.php3?DEPOT=al (page from http://www.stw-boerse.de)

          I do not focus on one parameter like quality, but more on the relation of chances and quality for a price.
          Thermador is high quality, but with a high price sticker (same for others).

        • Thermaor is high quality IMHO, but quite expensive. Quality alone is no sufficent reason to buy, the price has to be fair too. You can my mix here (in German): http://www.stw-boerse.de/apps/depot.php3?DEPOT=al

        • HumbleInvestor

          If i may ask: why do you sell any position that you purchased to a more than fair value? assuming (just for the sake of having an example) you e.g. got volkswagen at around 110 euros. it is a good price that may not resistance in case of a steep market decline. however why sell if the quality of the underlying business is fair and the purchase price as well?

        • Sorry I did not understand your question..

        • The answer to HumbleInvestor is: Roger may sell a) for a feeling of an upcoming turndown in the market, b) because he wants to de-risk his portfolio (current prices are not worth the embedded risk), c) because he thinks there are better opportunities elsewhere… Probably a combination of all the above…

        • Thanks Cardano, you nailed it!
          Actually it is mainly a mixture of (a) and (b).
          In “normal times” it is usually either (c) or
          (d): I am not satisfied with actual (new) developments in a company and/or I had to realize that my investing thesis was broken.
          (In this year I sold Amaysim due to a broken investment thesis, as well as Saga Furs in January)

          @ Humble Investor: The purchase price is only of secondary importance at sell-decisions. The main importance is usually my (very subjective) appreciation of chances and risks at the current share price. Actully it was completed by my desire to de-risk the portfolio by increasing the cash quota.

  • Sberbank rallied more than 100 pct. shortly after you sold it. For me to be included in this list.

  • Sistema didn’t make it? The Bashneft grab was rough but I believe you sold fast. On the other hand, selling Sberbank too soon of course that wouldn’t count as a realized loss. I had held both Sistema (small position) and Sberbank (much larger position) from a little before they were in the blog, and I finally sold Sberbank in January. Together they were very good investments although not my best in ROI terms, and only because the Sberbank position was much larger. That’s how I found the blog initially. Happy I did.

  • Very interesting. How would you compare the market today vs. when you started in 2011? I for one am finding it very hard to find things which are cheap these days…

    • I think the major difference is that in 2011 there were more cheap quality stocks than there are now. There are a lot of very cheap stocks right now but either they are cyclical or they have structural issues.

  • One glaring takeaway: don’t short.

    Not that it isn’t possible to apply solid analysis to going the other way and achieving success, but that in a series of bets, it’s a stupid game to play where time becomes the investor’s enemy and maximum upside is 100%. No CEO goes in every day thinking about how to make money for short-sellers.

    • Indeed, do not short !! :-s !

      Ine of your linked blogs has a portfolio with a short on Netflix…. Shorted at 120 $… while currently price is 310$ (two weeks ago 330$ :-s!! ). That must be painful ! :-c !!

    • hmm, I would not say that you shouldn’t short but that you shouldn’t do “valuation shorts”. I was very close shorting Steinhoff for instance…

      • Agree with that. For me shorting is 90% a bet on the timing and 10% a bet on the what. It amazes me how many short theses I read that make no comment whatsoever on the timing. And I for one know that knowing timing is near enough impossible in most cases, which is why I don’t short (unless hedging something that is).

    • I wish I get a Dollar for every time I read this “maximum upside is 100%” myth.
      Take the time to read through Chanos’ Alphaville interview and you get to bed smarter than you woke up. 🙂

      https://ftalphaville-cdn.ft.com/wp-content/uploads/2016/04/Alphachatterbox-Chanos-transcript.pdf

      • Re: making more than 100% on a short position….umm, aside from buying put options (which wasn’t the topic of reference), I sure hope you’re not shorting $100 and using profits as margin to re-short the same security. Because that’s a most unpleasurable way to lose money, on average. Return on brainpower, return on capital, return on time for shorting securities is simply inferior. I mean, it’s strange that every good investor you read, just (if they disclose) compare their short-sale record to long over time. Other than smoothing volatility and giving you a reason to be glued to the stock ticker (given margin requirements), what is shorting good for?

  • I am afraid the ca. 5% flop of Metro of today is sadly related to the fire on the shopping center in Kemerovo. 😦 All my thoughts go to the victims. 😦

    • Wow, Metro ist at 4,6 EV/EBITDA and 8 EV/EBIT now, this is completely crazy imho.
      Much more selling pressure on the ordinary shares compared to the preference shares which is probably a sign for heavy shortselling activity.
      My guess is that somebody is speculating on a “forced” sell of Ceconomys remaining 10% stake in Metro AG, especially if they are really going for the Kellerhals stake in Media-Saturn in the near future as some media reports indicate. Interestingly if you look at their latest quarterly presentation, Ceconomy has 9% of the Metro stake in their current assets (<1 year) and only 1% in the non-current assets on their balance sheet – which is probably not a coincidence 😉

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