value and opportunity

Intro

Most readers know that I normally don’t do market comments, however this post will be an exception (and should therefore maybe ignored ?).

To be clear, I have no special information or personal opinion on how far the COVID virus will spread and what the ultimate effect of all this might be. Will there be a recession due to supply chain disruptions ? Will we see another stock market drop like 2002/2003 or 2008/2009 ? No idea, but in any case it makes sense to review what I think is the most reasonable way to behave for long term investors.

20 rules that might help you to survive, or at least sleep better

Situations like this are not unique and over the years I have created for myself some rules that might be helpful or not:

1. Move slowly. Don’t buy /sell on impulse. If you have the urge to do something, wait at least until the next day to reconsider
2. Don’t waste your time looking at real time quotes. Use your time wisely and work for instance on your buy list instead
3. Ignore the usual Doomsayers like Roubini, Marc Faber and all the other who come creeping out of their caves now with their typical “the world is going to end” pitch,
4. Don’t try to time the market. The machines are better than you
5. If you time the market nevertheless, write down your decisions and check later on if and how much value you have added (or most likely destroyed)
6. Just because a stock went down a lot, it doesn’t mean it is cheap. It could have been much too expensive before or it could be especially vulnerable towards short term disruptions
7. Do check your portfolio if you have a large amount of potentially vulnerable stocks. Especially vulnerable are stocks that are financially stretched companies with exposure to supply chain disruption (in the current environment this clearly applies to many automotive suppliers that were already in trouble before  but also to the big car OEMs themselves, many of whom depend significantly on China). Or companies that depend on significant amounts of capital market funding and do not have access to central bank money (yes, this time in my opinion, banks are less vulnerable). One obvious target group would be overstretched real estate companies in “red hot” markets like Germany.
8. Stay away from stocks/companies that depend on equity funding as this will be very hard to raise in the next months (applicable to many VC backed companies, especially the later stage unicorns)
9. Manage the exposure of vulnerable positions in a way that you don’t have sleepless nights
10. Avoid “P&L anchoring” or loss aversion biases. Reduce vulnerable positions first, no matter if you sell at a loss or at a profit. Avoid selling only positions that are still “in the green” compared to your initial purchase price.
11. If you are in general very afraid of what comes next with regard to your portfolio, you have most likely too much exposure anyway and you should reduce your exposure SLOWLY
12. If you are lucky to sit on some cash, start to invest very slowly
13. Buy only stocks that you have identified as attractive before (see rule 5 !!!)
14.  Potential opportunities might be found in stocks that are directly effected but are generally in great shape and have no other big issues. For instance for travel stocks clearly could be interesting, but be aware of the threat of Google to all kind of travel aggregators. For airlines and other “Operators” make sure that they are conservatively financed
15. Don’t try to chase stocks that might profit in the short term. You should have done that before, not now (Zoom, Gilead etc.)!!
16. If you own stocks that are profiting from short term positive effects, make an assessment if the price movement is maybe overdone and consider to take profits. Again move slowly.
17. If you have for some reasons leveraged your portfolio, try to reduce leverage NOW !!
18. If you want to inform yourself about the virus, use official, unbiased sources, such as the WHO or the Robert Koch Institute in Germany. Stay away from publications that depend on Eyeballs (Zerohedge etc.)
19. Force yourself to think about potential positive effects for the future (i.e. better international coordination, strengthening of international institutions instead of hollowing them out  etc.). As Charlie would say “Invert, always invert”.
20. Be however very cautious for any systematic capital markets issues that might develop over time (i.e. the BBB- corporate bond bubble blowing up etc.)

Applying the rules to the V&O portfolio

Potentially vulnerable positions:

Clearly, my collection of “VC like” positions, Vostok Emerging Finance, Vostek New Ventures and German Startups Group are exposed to longer term disruptions of VC funding flows. However the overall exposure (~11%) is Ok for me. GSG has it’s current value as cash in the bank and VNV biggest position is a telehealth provider which could actually profit from all this.

Banks: Handelsbanken in my opinion should always do better than the competition in any crisis, Plus, in case of real distress the Central Banks will open the floodgates. Metro Bank is a special case: The company has released worse than expected results and the business model depends on people physically walking into branches. Raising any form of new capital will be very hard for them, so i need to monitor them closely. With currently 1,7% of the portfolio it doesn’t create sleepless nights though.

The rest of my portfolio should be not too vulnerable to any short time shocks. Most of my portfolio companies are financially very robust

Windfall profits:

My Paul Hartmann position so far was a “dud”, almost down -15% since I bought it. Now the stock went up significantly (~+20%, even more in peaks), mostly because the company also produces sanitizers for hospitals and private persons as well as face masks for hospital staff. I have no idea what percentage of sales is attributable to this, but the 200 mn EUR increase in market cap looks somehow overdone.

One interesting case is Admiral, the car insurer. Low economic activity, i.e. people staying at home and not driving is fundamentally good for a car insurer.

Resulting Portfolio actions:

End of last week I slowly started to buy into some of my German “watch list” candidates, increasing my exposure by ~1,5% of the portfolio (from a cash allocation of ~17,5% before Corona hit). My goal is to create a “German Watchlist” basket which I will present hopefully in a few days/weeks.

I reduced however my Paul Hartmann position by 1/3 (or 1,2% of the portfolio), so that the net effect on the portfolio was only a 0.3% new net investment. I will continue to increase my exposure in very small steps in the next days.

For my research list, I will prioritize directly effected companies that I consider very good companies.