Alternative Asset Opportunities, Avangardco, checklists, CLOs, correlation, European Islamic Investment Bank, FBD Holdings, Fortress Investment Group, German property, home bias investing, KWG Kommunale Wohnen, Petroneft Resources, portfolio allocation, portfolio performance, quantitative easing, Richland Resources, risk aversion, Sirius Real Estate, Tetragon Financial Group
I remain (somewhat) uncomfortable with performance reviews. Inevitably, they produce a pretty meaningless snapshot…but we just can’t help ourselves, eh? 😉 [I covered this whole topic in greater depth here, in my 2012 Performance Review, so that may be worth another look]. OK, once more unto the breach, dear friends, once more…
Let’s first check how the indices performed in H1-2013:
The performance of Ireland & the UK nicely supports my theory that the northern periphery (inc. Scandinavia – lots of interesting stocks there right now) offers some of the best (& lower-risk) plays on Europe. Then we have the US, which continues to demonstrate how much further along it is (vs. Europe) in the cycle – as Bernanke reminded the market recently, to its (feigned?) consternation! [And to the genuine consternation of the ECB & BoE – oh boy, there’s going to be plenty of playing chicken, on all sides, in the months & year to come]. I’m profoundly suspicious of the US market now – it’s not that rising bond yields can cause much damage, they’ll obviously remain low in absolute terms for a v long time. But the market’s a discounting machine – when buying stocks gets easy & the economic outlook starts to look rosy for the average investor, that’s when things turn dangerous: Because how much of that’s already been priced in? Too many times, this scenario leaves you at break-even for a couple of years (if you’re lucky), or much worse…
And if you think this time is different – well, I actually agree, but not in a good way! There’s no free lunch – you can’t just print your way to prosperity & expect to escape scot-free, there are always (unpredictable) consequences. So, has that been priced in also..?
Now, here’s how my portfolio performed in H1-2013:
[NB: I’ve tried to (simply) reflect incremental buys & sells by calculating an average stake size. This also allows me to calculate a weighted average gain for the portfolio, to reflect the contribution of my specific portfolio weightings. I haven’t included dividends for the moment, and I continue to ignore foreign exchange rate changes. Not to suggest FX is unimportant – in fact, I encourage you track & diversify your currency exposure – but it’s a separate exercise & readers have multiple base currency perspectives anyway. If you wish to drill down, I’ll include a copy of my Excel file below – it will also include links to each corporate website].
I’m v pleased with this relative 5.5% out-performance, but my wallet’s even more delighted with the 14.4% absolute performance! It also comes as a bit of a surprise, as I’ve primarily focused on the monetary value of my portfolio this year (not percentage gains). [In fact, now I check, my total portfolio delivered a significantly better return – my undisclosed holdings have out-performed & FX has also made a positive contribution]. But for most of us, this is where the coulda/woulda/shouldas usually kick in, like:
Why didn’t I just buy into the best market(s)?
Er, how..? Very few of us can actually manage that bloody feat! In fact, I’m resigned to generally being in the middle of the pack – there will always be markets & investors who outperform me, sometimes substantially. But many of those investors are simply enjoying the fruits of a gigantic dose of home bias, and they forget how savagely this bias can treat them on other occasions. I can’t & don’t want to take that kind of risk, knowingly or unknowingly – my aim is to diversify my portfolio as much as possible. In fact, ideally, I’d like to diversify away from the stock market & the economic cycle altogether (with Alternative Asset Opportunities (TLI:LN), for example). This inevitably means selective under-performance in the short-term, but will hopefully produce superior & consistent performance in the long run.
Why didn’t I buy more of my best stocks?
Again, how? Weighting your portfolio towards your best ideas is generally a good idea, but one is always surprised by the best & worst performers in any one period! This is one of the best arguments there is for a widely diversified portfolio, regardless of your conviction level in your best ideas. You also have to think about the risk & correlation implications of each stock within your portfolio. For example, I limited my holding in Sirius Real Estate (SRE:LN) because of my already large exposure to German (residential) property, via KWG Kommunale Wohnen (BIW:GR). I also sold down my stake in Livermore Investments Group (LIV:LN) because their core portfolio’s focused on CLO residual equity tranches – this is a highly leveraged investment, and LIV’s also potentially highly correlated with my holdings in Tetragon Financial Group (TFG:NA) & Fortress Investment Group (FIG:US).
On the other hand, the large gains in FIG, LIV & FBD Holdings (FBH:ID) in both 2012 & 2013 are a (galling) reminder to actually believe in & bet on your strongest convictions (& price targets)! Once they get started, shares often run far higher & longer than you might ever expect… Also, averaging up is usually far better than averaging down – definitely a difficult (but v profitable) lesson for any value investor to learn!
Why on earth didn’t I just avoid my dud stocks?
Another tough proposition… And for many years this is where most investors’ greatest failures (& lessons) will be realized – because, in reality, faulty analysis and/or poor judgement are usually to blame. The solution for both is pretty simple, but difficult: Checklists, and reading, reading & more reading!
My obvious failures are Petroneft Resources (PTR:LN) & Richland Resources (RLD:LN) (fortunately, and somewhat deliberately, they’re both small holdings). PTR’s obviously got the 2P reserves, but that’s irrelevant when the share price is getting hammered by the lack of cashflow, and cash! RLD also has decent resource backing, and even looked cheap on an earnings/cashflow basis, but foreign companies digging/drilling in emerging markets seem to inevitably attract local politicians’ xenophobic wrath (or neglect, to often devastating effect). And both are a great reminder that stocks can simply keep declining, no matter how much they collapsed last year – it’s never too late to sell! Which I should really tell myself again…
Fortunately, with my other stocks, I believe I’m mostly just seeing noise. However, Avangardco (AVGR:LI) is a classic example (rightly, or wrongly) of a particularly reviled & neglected company – while I clearly think it’s a cheap high growth stock, it’s probably a good idea to limit such holdings unless you’re prepared to absorb significant pain & losses (ideally, on an interim basis!).
Of course, once/if you solve those problems, you’ll still have to deal with those ever-present enemies of all investors – fear & greed. These are far tougher to beat. 😉
But enough of the navel-gazing, let’s finish on a far more positive note:
I look at my entire portfolio & continue to be hugely enthused about its prospects. I particularly focus on KWG Kommunale Wohnen, Alternative Asset Opportunities & European Islamic Investment Bank (EIIB:LN). These are my largest holdings & comprise a full third of my disclosed portfolio, but ironically they’ve produced pretty much zero returns year to date!? However, this hasn’t affected my evaluation of their respective fundamentals an iota – I still believe each stock offers substantial (unrealized) upside potential, while also providing exceptional low(er)-risk diversification.
Wexboy Mid-Year 2013 Performance (xlsx file)
Wexboy Mid-Year 2013 Performance (xls file)