value and opportunity

Mental preparation

Another week and the war still goes on. My subjective feeling is that currently, a surprising large amount of investors still believe that this war will end relatively soon, one way or the other. However, if the war will last for a few years, we would be still far away from a turning point with a lot of escalation potential (stopping the oil and gas pipelines, “dirty weapons”, tens of millions of refugees etc). In the short term however, especially in European markets we could see some rallies if some good news is surfacing.

Consequences As mentioned already, I desperately hope (and still pray) for a quick end, but mentally, as an investor, I prepare for a much longer conflict. What does that “preparing mentally” mean ?

• This means not to expect a quick recovery but continuous volatility for many months to come
• This does not mean that one should sell now and wait for cheaper valuation. This approach almost never works, a least for me and is often very stressful.
• It rather means cleaning up the portfolio, concentrate on “high conviction names” and looking out for opportunities that are on the watch list anyway
• It also means making sure that I have enough liquidity to meet any “real life” demands without requiring to sell anything in my portfolio for the next 2-3 years
• Finally it means to mentally play through a further significant draw down. Another -50% from here ? Unlikely but not impossible. An even larger draw down ? Who knows. Looking at my own history, I have experienced a -70% draw down from top to bottom in 2001-2003. Does that create unbearable stress because you are close to retirement ? Then maybe you should overthink your strategy as a whole.
• In my experience, these mental exercises help to control the “animal brain” in really difficult situations. Especially now it is important to use “System 2” thinking.

Other observations:

1. European “Quality stocks” starting to suffer (Admiral)

In the stock market we are now in a phase where even quality names lose significantly if news are not good or just without cause. On example was Admiral, which lost ~15% after presenting extremely strong 2021 numbers but hinting that 2022 will not be as good as 2020 and 2021. To me, this is part of the normal Insurance cycle, that pricing discipline deteriorates and high gasoline prices are actually good for Admiral (less distance driven, lower claims). Another example is Knorr Bremse, a German High quality stock that is on my watchlist and just lost -25% in one week without any news. At the moment, it is mostly single stocks but towards the end of last week this could be seen more often.

2. Oil & Gas stocks

Oil stocks seem to be an absolute no-brainer these days. As with all “no brainers”, in my opinion the situation is not that easy. Yes, oil is rising and prices might go higher. This means that oil companies will earn more. On the other hand, high oil prices will speed up the already ongoing shift to green energies and many of the new technologies will reach cost break even much earlier. Paradoxically, it could turn out that the overall value of the oil reserves might actually suffer from the crisis in the long term.

3. US vs. German/European stocks

As in almost any other crisis over the last 35 years (that’s as far as I can remember), European stocks are doing worse than US stocks. On the one hand, that can be explained by more direct exposure, especially in the case of the “Russian gas addicts” like Germany, Austria and Italy. On the other hand it is just something one has to accept. The US market is just so much more liquid and diversified that especially global investors will cut European exposures first.

4. Inflation Inflation was a problem already before the Ukraine war. What we see know is that it accelerates. Especially in Europe, the ECB will not be able to do much about it. I think this is the price we are paying now for the ultra low /negative interest rate policy that lifted asset prices for more than 2 decades. If the crisis deepens, monetary tools are most likely not efficient. Fiscal tools will be inflationary.

Portfolio transactions

Following my first “panic series” post from last week, I followed up in selling positions where a saw issUes with Russia exposure or where my conviction was low. The overall idea here was not necessarily to build up cash but to allocate money from less conviction positions to higher conviction ones . Portfolio actions of last week in review:

• Sold “pandemic buy” Richemont (4,3% of the portfolio) with a gain of 150%. Why Richemont ? Although I think it is a very good company, the valuation was quite rich and there is clearly exposure to Russia. In comparison for instance, I have more conviction with Sixt
• Sold Nexans, Washtect, Play Magnus. All three were not high conviction stocks. Play Magnus does have some Russian exposure, but I’ll keep watching them
• Bought a “freedom energy” basket of four German Developers/Operators of Renewable Energy: ABO Wind, Energiekontor, PNE and 7C Solarparken (1% portfolio weight each)-  All three are mid-size developers and/or operators of renewable energy with an European focus. I do think that developers do have more leverage towards an accelerated build-out of renewable energy. Operators often have long term fixed contracts and will not see that much upside form the change in strategy. Just at the time of writing, the German finance minister announced to spend 200 bn EUR until 2026 into renewable energy and electrification.
• added to Admiral (1%) after the 15% drop and Meier & Tobler (0,6%) after reporting really good numbers.
• Bought a new 4% position in Gaztransport & Technigaz, a high quality company that can benefit significantly from a big push into LNG

To be continued