Performance review 9m 2020 – Comment “Covid 19 Portfolio Lottery & the allure of speculation”

In the first 9 months of 2020, the Value & Opportunity portfolio gained  +3,7% (including dividends, no taxes) against a loss of -6.9% for the Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%), all TR indices).

Since inception (01.01.2011), this translates into +201 % vs. 98%  for the Benchmark.

Links to previous Performance reviews can be found on the Performance Page of the blog. Some other funds that I follow have performed as follows in the first 9M 2020:

Partners Fund TGV: +6,3%
Profitlich/Schmidlin: -4,1%
Squad European Convictions +5,99%
Ennismore European Smaller Cos -19,82% (in EUR)
Frankfurter Aktienfonds für Stiftungen -6,1%
Evermore Global Value  18.37%(USD)
Greiff Special Situation -3.69%
Squad Aguja Special Situation 12.45%
Paladin One 15.94%

Performance review

Q3 was relatively calm compared to Q2. Gains in July and August were followed by losses in September. What I find most interesting is however the extremely divergent performance in my “peer group”. I think I cannot remember such divergent outcomes for these funds as in principle they share a similar philosophy. it clearly is a stock pickers market, but you need to be lucky in having some big (tech) winners in the portfolio and hopefully very few losers.

Transactions Q3:

In Q3, I sold some further Zur Rose shares with lucky timing near the peak at around 290 CHF/share. My timing was a lot worse with Tiffany, where I sold at 109 USD when it was clear that LVMH wanted out with a loss of -8,40% including the USD devaluation. If I would have waited one day more, I could have reduced my loss by +5% or so.

I also sold German Startups and Miko as outlined here.

New positions were the Active Ownership Funds, Netfonds, Freenet and Grenke bonds.

The current portfolio as always can be seen on the portfolio page.

Cash is at around 9 % per end of September.

Comment: “Covid-19 portfolio lottery and the allure of speculation”.

As mentioned above, the performance of my small “peer group” is extreme diverse in 2020, although all these guys use a similar “value based” approach. Without digging into each fund, part of the explanation is that all fundamental investors unwillingly and unknowingly participated in a Covid-19 lottery.

When you do your fundamental research and try to find stocks that perform well in the long term, I guess the impact of a pandemic has not been part of any check list or analysis. As we found out now, some areas are hit super hard like anything with tourism, restaurant, aerospace industry, oil, retail/malls etc., other areas actually profited like home improvement stores, E-Commerce, video chat, tele medicine or certain medical equipment,

For a trader/speculator this is not such a big issue as one they are able to turn the portfolio quickly and ride the next wave. For fundamental investors however, turning a portfolio is not so easy and not so quick. Bill Ackman famously identified the thread early on, but I guess for many fundamental investors the strategy was “wait and see”.

If you were given a few winning ticket (Software, home improvement, e-commerce), YTD 2020 your performance looks great without that much active contribution. If you got the losing side (hospitality) your performance most likely sucks. SO I guess 2020 perfomance comparisons must be taken with a grain of salt as this external shock was clearly not foreseeable and the outcomes at least in the short run are driven by some kind of “systematic luck” or bad luck.

Personally I was lucky to have some winning tickets (Naked Wine, Zur Rose, Bouvet) and only very few loser tickets like TGS Nopec, so overall performance is pretty OK.

The allure of speculation 

I get often asked if the blog portfolio represents my private portfolio. I usually say yes, (besides the assumed size) and to a percentage of 90-95%. The main differences are slighly different weightings, cash in- and outflows, legacy positions, super tiny small cap stocks and a single “Angel investment” in a start-up of a friend of mine (the company still exits after 2 years which can be seen as success).

More recently however, the divergence became greater. The reason is that I found it harder to identify long term attractive stocks and that I had some shorter term ideas that I didn’t think were “good enough” or “too speculative” to publish in the blog. For some reason or the other, I made these trades in my personal account anyway (too high cash position, too much time…).

Now a strange thing happened: These “Trades” are much more successful than my current portfolio, As an example, I invested small amounts into 2 recent spin-offs from Aker Solutions, one called Aker Carbon Capture, the other Aker Offshore solutions. Both spin-offs are essentially Venture Capital style situations with some cash, a small team, a technology and a project pipeline, but no sales and losses. Aker Offshore is up around +70% since then and Aker Carbon Capture almost doubled, both without any specific additional news and within a few weeks.

Interestingly my own brain is now trying to play tricks and I am starting to come up with a lot more short term trading ideas. One idea which unfortunately I didn’t do was Canada Goose. The idea would be that people stay more outside this winter than usual and will want a real warm jacket. Since I first had the idea, the stock went up more than 30%. I actually started doing a write up but thought that the idea is not “Good enough” for the blog.

As this kind of divergence is first of all even more work intensive and secondly not intended, the question now clearly is: What to do going forward ? Should I introduce a “pocket” into my blog portfolio where i publish these ideas without a deep analysis ? Or should I just stop doing these trades. The last time I was doing similar trades was 1999/2000 and we know how that ended. On the other hand, maybe a bit more agility is a good thing in these times ?

I am currently not sure what to do here, so some structured input and personal experience with “Trading pockets”  from my readers would be highly appreciated !!!! 

12 comments

  • ” Should I introduce a “pocket” into my blog portfolio where i publish these ideas without a deep analysis ? I am currently not sure what to do here, so some structured input and personal experience with “Trading pockets” from my readers would be highly appreciated !!!! ”

    Just from an opportunistic viewpoint, it would not be smart (a polite way of saying being dumb) to not publish those, because you haven’t researched them deeply, before opening a position in them.
    First of all, you as an outsider, never has full knowledge of any stock you put your hard earned money into, so you might get yourself into a big hole instead of earning a big profit cash pile.
    Second, a reader of your blog might give you vital new knowledge thru a feedback reply, that instantly will change your tack on this “investment”, before you get hurt.
    Third, your readership has a lot of hidden knowledge and you are forgoing access to this Artificial Intelligence Database by refusing to post your “gambling investments that are not well researched but can be phenomenal profit makers”.
    And fourth: you may learn a new trick or two just by bothering to write a few lines on each of those investments and getting replies on how to better play those investments (using options, warrants or other lower invested cash capital with far more upside % capabilities on that stock) OR getting a list of FAR better competitors to really put decent investment cash into.
    So by deciding to not post them ‘pocket investments’ is simply deciding to close a lot of doors and putting a curtain over a lot of windows for yourself.
    And given that you are an adult, I am sure that you will deal very well with any reply that refute your ‘thesis’ or give you a cold shower, or make you think of stuff you didn’t consider.
    After all, surviving first and then making money is the whole purpose of any successful investing strategy, whatever name is being tagged on it, no?
    I also want to thank you for spending some serious time and effort to keep your blog alive, well appreciated. I’ll try to paid it back with replies and other ways, if they don’t involve money wiring demands.
    That is how we “humans” made it from the stone age to the 21st century.

  • “Should I introduce a “pocket” into my blog portfolio where i publish these ideas without a deep analysis?”
    Some short sentences still would be nice, so you also may get qualified feedback. And you might call this pocket your “opportunity investments”. 😉
    Reminding your blog name you claimed over years to be not only investing in value.

  • My personal “lessons learned” out of the corona downturn:

    Going through the volatility of the last months, I am really happy that I was almost completely in long term high conviction stocks, although more concentrated in a smaller number (14). Only 1 stock was a short term opportunity stock, and I’m lucky the business was somewhat neutral to the Covid-19 impact. I would have hated a portfolio where a bigger number of “opportunity“ stocks would have seen their business impacted majorly. I would have had to react fast, decide to keep or sell them; it would have torn me apart. The high conviction stocks I was/am in were super easy to keep and even add for some.

    Overall, I think experienced and specialized investors (like you) can earn outsized returns with the kind of bets you describe in the post. But it is high maintenance. Not my cup of tea.

  • I truly struggle with the same issue/problem, though it may be a luxury problem…

    I have far too many research and investment ideas, than I could possibly research and write my usual lengthy analysis blog posts about. At the same time, I believe almost all of my initial ideas delivered a great performance (or would have if I invested, i.e. Flow Traders and BlackRock, initially featured in a write up about passive investment trends). Currently, I have so many draft posts it will take months to finish them all…

    Thus, recently I started to write a series of Quickies (on new companies). Based on them I might initiate small positions without very detailed analysis in more companies… Another reason is to get a better understanding of various business models…

    The above view, that every idea performs well, is of course dangerous, and it might be easy to overestimate one’s skill/talent/etc in rising markets!!!

    • I will think more about how to structure my portfolio regarding a few bigger positions (thoroughly researched, high conviction) / more smaller positions (initial research)

  • Hi MMI. On the one hand, I think that successful investing necessarily requires an ability to adjust one‘s target/focus over time. Simply because different classes of stocks undergo different cycles of investor appeal. Just compare Buffet‘s shift from deep value stocks to branded growth to capital intensive utilities. So I think personal flexibility is very helpful to recognize changing opportunities.

    On the other hand, my personal experience has been that venturing into more risky bets as a result of holding excess cash has not usually been rewarded. I hate holding cash, but impatience in buying has definitely had an opportunity cost for me.

    The trouble is that, ex ante, it’s much harder to understand whether one is not demanding enough than ex post. With the benefit of hindsight it all looks a lot clearer…

    Final comment: We probably all suffer from excessive Bayesian updating based on limited observations. Just because something has worked twice or three times doesn’t mean it will work again. But a small number of successes quickly creates a deceptive feeling of certainty… I‘m certainly guilty of that fallacy.

  • I know technology is not appreciated in the value community, but in an age of technological change, many business are disrupted by technology. The1999/2000 bubble had the right investment thesis (most valued companies now are internet related) but the who and the when was wrong.

    More technological changes come ahead (cheap batteries, AI, autonomous driving, etc) and it will bring new winners, and more important, new losers. Avoiding the later are the most important part in this times.

    As how deal with technological revolutions, I will recommend to everyone the work of Professor Carlota Perez (http://www.carlotaperez.org/?l=en). I highly recommend her book (http://www.carlotaperez.org/pubs?s=tf&l=en&a=technologicalrevolutionsandfinancialcapital), written in 2002 it’s kind of prophetic.

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