value and opportunity

In the first 3 months of 2021, the Value & Opportunity portfolio gained  +7,6% (including dividends, no taxes) against a gain of +7.9% for the Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%), all TR indices).

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 3M 2021:

Partners Fund TGV: +17,5%
Profitlich/Schmidlin: 5,34 %
Squad European Convictions +9,52%
Ennismore European Smaller Cos +6,08% (in EUR)
Frankfurter Aktienfonds für Stiftungen 7,27%
Evermore Global Value  7,85%USD)
Greiff Special Situation 1,87%
Squad Aguja Special Situation 6,49%
Paladin One 4,75%

Performance review

In Q1 interestingly, both my own portfolio as well as my peer group performed mostly in line or within small bands compared with benchmarks. The big return dispersion that we have seen last year is not visible this year, which could indicate that the positive returns in 2021 are more widely spread across stocks and sectors.

However, at least for the blog portfolio, “under the hood” it looks more interesting. This is how the monthly returns look like:

	Perf BM	Perf. Portf.	Portf-BM
Jan 21	-0.7%	4.3%	5.0%
Feb 21	2.9%	2.3%	-0.6%
Mar 21	5.3%	0.6%	-4.7%

Until January, the” Covid lottery” market continued and at the peak, the blog portfolio was around +8% vs. the Benchmark. But then in February and March the market turned and a lot of my winners from 2020 struggled. So the “benchmark like” result of Q1 is again pure coincidence. Personally I would have expected a lower performance as normally my portfolio has been lagging but I guess my continued shift to higher “quality” stocks has increased beta to a certain extent.

Transactions Q1:

In Q1, I sold most of my travel basket with the exception of Southwest as I grew concerned that 2021 might be another lost year for European travel stocks (ENAV -7,3%, AB Inbev -1,3%, JD Wetherspoon +5,4%, Dufry +16.7%. Hostelworld +48,7%). As of now, especially ENAV has increased significantly whereas the other stocks more or less are flat against when I sold. I bought back JD Wetherspoon as I was more positive on local UK binge drinking this summer. Overall the basket trade has been a “modest success”.

In January I also took partially profits in Siemens Energy (+50%) Play Magnus (+134%), and Naked Wines (+112%, only sold 0,5% portfolio weight) and I exited Installux after almost nine years with a total return of around +205%. I also sold the Mediqon subscription rights.

New positions in Q1 have been Alimentation Couche-Tard, JustEat Takeaway.com, BioNTech and Euronext, Although the timing was not perfect, this reflects a shift to in my opinion “Higher quality” business models and companies.

Comment: 

One upfront comment: In this comment I do not want to attack older investors in general. This should be much more seen as a reflection and warning to future and older self.

Investing is generally thought as an activity where people do get better with more experience. So in theory one could assume that older investors with more experience should have better long term results.

However there are studies that show that this is not the case and that investing ability, at least measured by returns is starting to decline from the age of 60 or so:

George Korniotis and Alok Kumar’s groundbreaking study, “Do Older Investors Make Better Investment Decisions?” considered: (i) whether age, experience and investment knowledge would impact an investors’ portfolio holdings, and (ii) the relation between age, investment experience and investment skill.

The study concluded that “older and more experienced investors hold less risky portfolios, exhibit stronger preference for diversification, trade less frequently, exhibit a greater propensity for year-end tax loss selling, and exhibit weaker behavioral biases…Thus, their choices reflect greater knowledge about investing.” However, “older investors have worse investment skill, where the skill deteriorates sharply around the age of 70.” In fact, “older investors earn about 3-5% lower annual return on a risk-adjusted return basis.”

Michael Finke, John Howe and Sandra Huston, authors of the study “Old Age and the Decline in Financial Literacy,” found a mix of overconfidence and reduced abilities explained the poor credit and investment choices made by older subjects. In their study, financial literacy scores declined by about 1% each year after age 60, but subjects’ confidence in their own decision-making did not decline with age.

Indirectly, Rob Vinall makes a similar point in his latest memo when he mentions that many of his “Value investor” peers seem to be stuck in what they expirienced in their formative years:

The reason it is not obvious to older generations of value investors is that in our formative years, investing based on the assumption that historical patterns of cashflow generation would reassert themselves – better known as “reversion to the mean” – seemed the better strategy. Many of the great investing track records were built by investing in stable, unchanging businesses when they went through a period of underperformance on the assumption that they would eventually recover.

and

The contrasting outcomes of different brands of value investing in different eras pose an intriguing question. If each era selects for the type of investor who is best adapted to it, does the younger investor have an edge over the older one? My strong sense is “yes”. I am fortunate to know several successful younger investors, and they seem perfectly adapted to the market they invest in. I, by contrast, have had to adapt, which in practice does not so much mean learning new tricks as unlearning old ones. The former is certainly easier than the latter as learning is fun, but parting ways with cherished ideas is painful. Reluctant though I am to acknowledge it, as grey hairs begin to colonise my scalp, experience is a disadvantage.

A great example is the famous incident when Carl Icahn sr. sold the Netflix position that his son bought in 2013:

Billionaire activist investor Carl Icahn said on Wednesday that he sold Netflix Inc shares too soon, admitting that his son Brett and fund co-manager David Schechter were correct to believe the stock was significantly undervalued.

Icahn sold 2.99 million shares of Los Gatos, California-based Netflix in October 2013 after the stock rose more than fivefold in 14 months.

“What I was worried about and conservative about Netflix – and obviously I wished I hadn’t been as conservative – was ‘net neutrality.’ which has seemed to go away,” Icahn said in an appearance on CNBC, referring to the U.S. Federal Communications Commission’s work to set new regulations for Internet service providers.

This 10% position in Netflix would be worth 25 bn USD today, or roughly 2 times the market value of Icahn Enterprises today.

My personal experience is very much the same:

• Almost no strategy works over really long time spans. I think what happens is that the big “profit lakes” of successful strategies are literally drying out and leave only small ponds with a few remaining opportunities which makes it much harder to find these opportunities
• However it is not easy to move from a system that works well for some years to a new system or approach that looks more risky in the beginning
• In my own 30+ years as an investor, I started out in “domestic below book value small caps”, went on to “Quantitive value” to “special situations/opportunities” to “Global investing including Emerging markets” and now to a more “GARP” focused approach.
• Many successful value investors have had their 5-10 years in the sun but then disappear into the great nothing (anyone remembering David Einhorn or Bruce Berkovitz ?)
• However the older people get the more religious they get in certain believes and are clearly often prone to some overconfidence
• Successful investors will also have acquired a certain level of wealth which might make them more loss averse
• the biggest issue however that I see is (especially when I look at the mirror) is that older investors do rarely admit that they just do not know what is going on.  
• This fear of admission in my opinion makes older investors generally a lot more pessimistic for the future especially in these areas where change is happening. “What I don’t understand must be bad” seems to be the motto especially of many older investors.
• This goes for food (Stupid Vegans), Media (Streaming is overvalued, content is king) to Digitalization and Energy (Electrification will never work). In the end, many older investors seem to be in a constant fear of an upcoming total meltdown and are positioning themselves far too much in assets that in theory would profit (Gold, etc.) but do not participate in the long term value creation of the world economy
• Some Smart money managers have spotted this issue and ride the “Crash prophet” model: Predicting crashes all the time and being right every 10 years or so guarantees inflow of money from scared investors. Usually these funds have really bad track records over longer terms (like John Hussman or Dirk Müller) but people feel warm and comfortable as this fund manager “really understands their concerns”. This often creates a religious following and criticizing their heroes does not go down well.
• in contrast, if you ask younger investors how concerned they are on future crashes, the answer is often “not that much”. They do not compare this market to an earlier market which they have maybe understood better. Today’s market is what they know and what they have to work with

So what is the solution for investors as each of us will be getting older  ?

Despite his age (and his partial over religious following), I do think Warren Buffett is again a good role model. In my opinion his ultimate super power is not that he reads a lot or understands balance sheets well. Yes, you can read all his annual letter 50 times and analyze every transaction he did between 1957 and 1961 but that doesn’t help at all.

In my opinion,  the fact that he remained an optimist for many decades is the clue. Even when he is cautious at times, I never heard him saying that he sees a big crash coming. Clearly his investment returns have suffered in recent years but that is also a size problem.

Being a cautious optimist has enabled him to adapt to changing markets many times. First, from a Graham inspired deep value investor to a “Phil Fisher” GARP investor, then to a control investor. at the age of 86 he even bought his first tech stock with Apple and multiplied his money many times since 2016. Also hiring younger guys to run a significant part of his empire was a great move, These guys even bought into an IPO at 50x sales (Snowflake).

So taking it from Warren, my advice (mainly to myself) would be as follows in order not to fall into the age trap:

• Don’t turn a certain investment style into a Quasi religion
• admit that you don’t understand current markets
• don’t be constantly afraid but find ways to adapt
• never say it is too late for something new and don’t be afraid of mistakes
• and maybe let some younger guys manage part of your portfolio in order to benefit from their “lack of knowledge”

Clearly you should not just go out and move 100% into hot SPACs but keeping the eyes open and looking for opportunities is most likely the better option than praying on the altar of the crash prophet.

A final comment here again: I do know quite a lot of older investors who are open to new ideas amnd adapt themselves constantly and very successfully. However these “senior investors” are clealry a minority in their age group.