Black Earth region, catalyst, German property, home bias investing, Ireland, Irish shares, Irish Stock Exchange, Irish value investing, IRR, Jim Rogers, market mastery, portfolio allocation, Prem Watsa, teenage dating, TGISVP, Warren Buffett, Wilbur Ross
Continued from here. In my last post, I reflected on how pernicious the effects of ‘home bias‘ are, and asked:
So why on earth did I launch something like The Great Irish Share Valuation Project..?!?
What am I trying to do, even inadvertently? Encourage readers to abandon their current portfolio, and go all-in on Ireland and a Top 10 of high potential Irish stocks? Good grief, no…not at all! Actually, my first (and perhaps primary) motivation has been to share with you more of an investing idea, rather than any investing recommendations:
This is the idea of mastery of the markets. I say this with all appropriate humility, I must hasten to add..! Mastery is an impossible ideal, especially in the face of the much larger size and complexity of markets today, and the thousands upon thousands of stocks to analyze and choose from. But sometimes, do you ever look at a v small slice of the market and feel like you’ve (somewhat) got to grips with it? Through study and experience, you know the names and stories, the important drivers and ratios, the risks and rewards etc. in this little part of the world?
This is mastery, and it’s an intoxicating feeling..! It’s all about the love of investing, simply for itself, not just a means to earn a return or have a flutter. When I look at the blogosphere, especially for value investing, I see this love of investing shining through – I think it’s the primary motivation for the writing, learning and investing. I look in other ‘forums’…and this true love of investing seems sadly all too rare to me…
I used to enjoy Jim Rogers‘ books (and here), more for their stories than anything, and sometimes thought wouldn’t it be amazing to strike out for one of these frontier markets!? Much as I like guns, alcohol, strange food & teenage hookers, what perhaps excited me more (at least in daylight hours…) was something quite different: The idea of rolling into town, lording it into the nearest brokerage house, slapping my money down for an a/c, and taking their stock directory and starting with the As…1
I think I fondly imagined I could become a master of one of these small markets. But what I finally realized was that I was already sitting on such a market…Ireland! It mightn’t have the same frontier excitement (though it feels like it in the past few years!), but it was relatively unique in the Western world as a market with a limited number of stock listings2.
Ireland offers the rare opportunity to strive towards mastery of a complete market. Even if you’re unfamiliar with the Irish market, but you love investing, this must be an intriguing prospect. Spend enough time and you’ll begin to know these stocks like your own relatives – love ’em, hate ’em, but you’ll never forget ’em..! You will begin to understand their business models, their operating metrics, their exposure (or non-exposure) to the Irish economy, and the particular risks and rewards each faces/presents. You will begin to remember their corporate histories, their successes and failures, and their share price histories. You will recognize companies who deliver and those who don’t, (management) good apples and bad apples, and key shareholders who actually exert some influence. You will develop a valuation framework, and a fair value, for each stock, and this mental model will sync. up with newsflow (which is pretty manageable) and market prices to flag potential buys and sells.
And what better time to invest in Ireland than now, after the crash, and with valuations still a little fragile..? If it’s good enough these days for Wilbur Ross and Prem Watsa, it should certainly be good enough for the rest of us! But, of course, I immediately bang up against this home bias issue again… If you’re Irish, you really need to get most of your eggs out of the Irish basket, while if you’re overseas, how much of your portfolio would you want to commit to such a small economy?
And this is my secondary motivation for TGISVP, just as much for myself, as for my readers. Most people’s portfolios are usually limited more by capital, than stock ideas. Drill down to a potential Irish allocation in your portfolio, and capital becomes even more limited… This is especially true if you want individual stock holdings to be (somewhat) meaningful (say, 2%+) within your overall portfolio.
Before earning your value investing chops, valuation was always the key dilemma (and mystery), and investing probably felt like being swamped in a fog of uncertainty and message board hell. Now, many of us are past that…but as a reward we’re faced with this equally tough allocation problem. This is something I bang on about quite a lot, and it’s really at the heart of my whole Catalyst series (original post, and most recent) also. The presence of one or more catalysts is a great way to prioritize your stock picks, based on the improved IRRs catalysts can offer (due to the hopefully faster/fuller realization of a stock’s intrinsic value).
Buffet talks about a punch-card: ‘I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.’ This is really in a different context (‘buy and hold’, which I’ve decidedly mixed feelings about), but it’s a v useful metaphor to remember. Speaking of metaphors, I think this is where my teenage dating rules can make a useful re-appearance:
i) Never, ever, just pick the first girl you see.
ii) Study the place, study the girls, study the dating rituals – and figure out what makes them all tick.
iii) Rank the girls – and don’t just rank on looks, also consider height, weight, ‘get-offability’, and even personality (Heaven forbid!).
iv) Start at the top, and systematically work your way down, until you’re successful.
v) Don’t just stick to your ‘type’ – try as many others as you can, you’ll probably enjoy it and you might just learn something!
vi) When you get kicked in the teeth, pick yourself up and (always) try again – and, of course, take all the help you can get!
Not so much explaining to do for these rules now, I think..! Personally, I now find I have a bit of a mental model for all Irish stocks, but when it comes down to a (limited) portfolio allocation I prefer to be much more systematic about it. Hence, TGISVP.
Despite home bias risk, I’m comfortable with having, say, 3 good Irish stock picks in my portfolio. This implies a probable average Irish allocation range of say 6% to 15%, averaging out around 10%. I want to be timely and efficient about this, but I don’t want to grab a stock this week…and then find a far better stock next week, and have no capital left to invest, grrr…! I want to choose the highest potential (and lowest risk!?) stocks, but still be ready and able to switch horses if it becomes compelling enough. The only way I can hope to achieve this is by valuing, ranking and tracking all Irish stocks.
Actually, this is not an inordinately difficult task – there were 54 ISEQ listed stocks to value (though I’ll still be covering another 20 or so non-ISEQ listed stocks), and newsflow’s manageable/limited. Also, for the purposes of tracking, a 6-12 mth old valuation will almost always still be a perfectly adequate indicator of value (but I recommend you thoroughly update your valuation on any stock before actually pulling the buy/sell trigger).
I’m not actually recommending you grab the top 3 stocks from my latest TGISVP Excel listing. You’ll notice that isn’t what I’ve done myself… While I recommend you start at the top, and work your way down (and consider all ‘types’..!), feel free to pick stocks that suit your own profile/requirements. You might want to stick to blue chips/large caps, perhaps you actively seek out small caps, you prefer to avoid levered stocks, you prefer to avoid certain sectors, whatever. You might even prefer to limit individual stock holdings, and just buy a basket of attractive Irish stocks. Of course, I’ve provided limited financial info., so plse drill into any interesting candidates further to confirm, revise (as you see fit), and/or refresh my valuation, and to rank them on other characteristics than just potential upside.
I’ve increasingly applied this approach over the years, and even for individual stocks these days. It’s perhaps delayed me jumping into buying some exciting new stock find, as I spend time finding/researching similar peer stocks, but it’s always paid off in spades. Through my research, reading (and reading, and reading..!) and new-found knowledge, I understand the sector better, the metrics that are actually important, the industry trends and competition, and I often find a better peer stock to actually invest in..!
It also works really well if, like me, you sometimes approach investing ass-backwards… By that, I mean that I first come up with an investment idea/theme (yes, more reading…extensively!), and then I have to scramble and hunt around for stock(s) to actually exploit that idea. Recent ranking exercises for me have included listed hedge funds, German property companies, fishing/fish farming companies, and Black Earth agri-stocks..! Now, listed UK property stocks, and global tanker stocks, are some of the other ‘tables’ that are starting to percolate in my brain…
Don’t forget we’ve another 20 odd stocks to cover, the non-ISEQ listed Irish stocks, and we’ll also look at some updated aggregate Irish stock statistics also. A couple of readers were kind enough to remind me of a couple of stocks I’d originally missed in this bunch, so please take a look at the following list – any non-ISEQ listed Irish stocks missing still?:
|iShares MSCI Ireland ETF|
|New Ireland Fund|
|Real Estate Opps|
|San Leon Energy|
1 Spot the Buffett reference..?! I was going to squeeze in some further commentary here, but my thoughts keep expanding beyond this post… A future Buffett post may be warranted, if anybody’s interested?
2 Thanks to the pathetic efforts of the team over at the Irish Stock Exchange. They crow over launching a new listing every couple of years, while glossing over the fact that takeovers/delistings have actually reduced the total company count in the same period! Their only defence really is that they’re coining it in right now…with countless obscure investment funds and notes now listed on the Exchange. Of course, most of us will never hear of, or invest in, these…
Surely a little more time and profit could have been diverted into marketing the Exchange more aggressively, and streamlining the listing requirements and process, for Irish companies? Real companies are the life-blood of any exchange, and a thriving stock market is something that should be a source of national/government pride. It’s also a store-front for Ireland Inc., and the window display’s looking a little dated…
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Hi Wexboy. I am not sure that I get this post. That is Home Bias – yes it exists, but is it real or imagined. Real would be to buy BKIR when you have identified that banks are great value, you are based in Ireland, but that say BAC may be a better bet.
Imaginary would be to buy BKIR because you identified that it was a good opportunity, but that you just happened to live in Ireland.
I am not the biggest fan of diversification on the planet. I dont think you need too much of it. Switching between real and nominal investments over various investment horizons is sufficient diversification for my purposes.
I think that stocks exist to make you a real return over time. Sometimes I find that that leads me to clusters (be it geographic markets or global sectors) then so be it. I see my role of being to go where the opportunities are. As it happens, I know have the highest proportion of my investments in Irish equities than I have ever had. Is that home bias or is it where the opportunity is – reality is it can be both.
I think where home bias is a factor is where one looks at investments close to home and does not consider what alternatives further away may exist (and yep, I am certainly guilty of that at times).
I am not at all convinced that is is necessarily pernicious for an Irish investor to have his eggs in an Irish basket, if that is where he really feels the returns are best gotten by his particular skill set.
I invest counter-cyclically as that way has been most successful for me. SO I am early to the party and early to leave also (hopefully). So my investment opportunity set changes with what is available.
I pretty much agree with everything you say. I would classify in a similar vein: Conscious, and UnConscious.
There’s nothing worse than seeing someone who’s partially/totally unconscious of home bias (often flagged by the fact they’re horrified you invest, say 3% in Vietnam, but see nothing at all risky about their 75%+ allocation to their home market..!?). If we look at the US, these people were often the same folks who got crucified on company stock in their 401Ks… Mainstream & general finance media need to be a lot more aware of home bias, and take responsibility for informing their readership about it, and its pros & cons.
If, on the other hand, you’re v conscious of home bias (and share(s) of world GDP) but decide to focus on home market investment because of compelling valuations, that makes perfect sense. Once you have this awareness, it comes down to risk, and your own comfort level.
I think you know I’m not risk averse (and obviously any individual company/fund I buy is probably far above its respective benchmark weighting – so I suffer the same issue), but when it comes to home bias, risk aversion kicks in for me. To me, home bias is a more unique/significant risk, with some (perhaps small) probability of catastrophe (which unfortunately is often amplified in the rest of your life/finances in the worst case scenario), and something I want to avoid. For similar reasons, I gave up on buying employer stocks years ago – I felt confident (?) I was in a much better position to value/trade their stock, but ultimately didn’t want the ‘tail risk’.
But it might just be me! – like life, with investing people often seem to have one risk they confidently embrace, while being terrified of another which might be empirically less risky!
Richard Beddard said:
I loved Jim Roberts books too, for much the same reasons and your idea of mastering a market resonates with me. I kind of think I’m trying to do that, or at least trying to master a bit of a market – long listed undervalued UK companies! It’s a bit of a cop out – but in a sense you have to specialise in something. You can’t be good at everything. It doesn’t have to be a geographical market you set out to master. Others try to master mining, or technology, or net-nets globally. As you say, perhaps best not to put all your eggs in that basket ‘tho.
Is Jim Roberts a preacher – has it helped your investing? 😉
Your comment about specialization is v warranted. No point in avoiding one risk (home bias), and jumping right into a worse risk… Like investing into all kinds of exotic individual companies around the world – I admire people who do it, but I’m not at all confident myself about many markets/companies after dealing with/considering language barriers, transaction difficulties, missing newsflow, disclosure/accounting problems etc.
Have got a bit better over the years, and try to take full advantage of investment trusts and companies particularly, but yeah sure there’s always quite a gap between what’s ideal and what I/we do in practice…