annual review, benchmarking, blockchain, bubbles, bull market, cryptocurrencies, Fortress Investment Group, GARP investing, Kryptonite 1 plc, Newmark Security, portfolio performance, relative performance, Zamano
Hello. Why yes, it’s me…
Happy New Year!
Admit it: You thought I’d bloody well scarpered, to become the Wild Eyed Crypto-Boy from Freecloud – didn’t you?!
Well, not quite…
Though I did a mini-grand tour of Xmas dinners & meetings, and was bemused how often the conversation ended up in crypto-territory. Ha, so it’s not just me!? And even though I enjoyed some lighthearted crypto debate (best to avoid people who get too emotional about investing), I’m also left wondering how high #CryptoFOMO levels are running out there right now?! My new portfolio mantra may be dead on target:
Doesn’t everybody deserve a little crypto pixie dust?!
But anyway: I was actually 100% committed to an incredibly brutal training regime – preparing for my first naked solo New Year’s Day Iron Man Triathlon. Yeah, I know, just about anything to get out of the house…
Haha…again, not quite.
In reality, life simply got in the way, as it has a habit of doing…albeit, sometimes in great ways! But after all, isn’t that precisely what my life’s designed for & supposed to accommodate? Next time you fear dying chained to your office desk, keep your eyes on the prize & remember money isn’t really about buying things – which is just another form of indenture – what it really buys you is freedom!
And more recently, I’ve taken advantage of that freedom to meditate on doing…absolutely nothing! To explain: Over the last couple of years, I’ve executed a sloowww but steady transformation of my entire portfolio: Far less value, far more GARP. [The nay-sayers will insist this is simply an excuse to pay up]. And in 2017, I finally felt like this huge effort had come together beautifully…
[Though I’m frustrated this transformation still isn’t fully apparent in my disclosed portfolio – a combo of write-ups still to come & undisclosed holdings which literally ‘got away’ from me in terms of price/valuation (not a bad complaint to have!). Not to mention, seeing such a wide & unexpected gap in my disclosed vs. actual underlying portfolio performance. Then again, I’m very pleased with last year’s write-ups: Alphabet (GOOGL:US), Record (REC:LN), Applegreen (APGN:ID) & Kryptonite 1 (KR1:PZ) – all excellent examples of long term growth holdings, and each acquired at a reasonable price. And big picture, I’ve consistently developed/shared my larger macro investment thesis with readers, one which still drives this portfolio evolution – it’s worth revisiting the series of links in the middle of this post, not least because of their relevance to debating whether the market’s now in a bubble, and if/when it might ultimately end.]
Unfortunately, that’s often where the real trouble, doubts & second-guessing begins… Some readers here may not realise I’ve been a GARP investor, off & on, throughout my entire investing career – think of any well-known growth stock & there’s a good chance I’ve bought it along the way, at the right price. Except buying at the right price isn’t the problem – that merely requires patience & a value mind-set. Looking back, my big regrets were never my buys…it was my sales. Because in reality, a strict value mind-set may stop you from ever truly enjoying a genuine multi-bagger growth stock – first big jump in the share price, your price target’s triggered and/or your allocation gets too big, and you’re out…
Sure, you can boast a nice pay-off, but does that really justify all the damn work you put into finding & understanding a true high quality growth stock? Not to mention, that pay-off may appear ludicrously small down the road, when you look back & marvel how the company’s continued to compound its business & share price over the years. Truth is, as investors most of us are forced to spend years (& decades) reading, learning & enduring expensive/even catastrophic mistakes before we ever know how to buy stocks well.
Whereas selling well is an art we never quite learn, not least because there’s no obvious body of work out there which teaches us how to sell…or should I say, how not to sell. Incredibly, that’s a classic that still needs to be written, if anyone’s up to the challenge? For me, I now try to meditate far more on what I own, and why I actually own it. All to hopefully realise selling isn’t the obvious objective, nor is researching & buying new holdings (for the sake of it)…almost inevitably, it’s doing nothing! As usual, Jesse Livermore said it best:
‘Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.’
Fortunately, meditating while the market levitated has proved a pleasant experience! But to misquote the commentators, last year was actually a game of two different sides…on average, performance depended entirely on your side of the Atlantic. Here’s a look at my 2017 Benchmark Return – again, a simple average of the four main indices which overlap most of my portfolio (& readers’ portfolios, I suspect):
On the other side of the pond, the average US investor enjoyed a +19.4% S&P return. And if they loaded up on well-known stocks, or tech names (i.e. they were all FAANGed up), both the Dow & Nasdaq delivered 25%+ returns. While chasing hot stocks/sectors would probably have added some extra juice…momentum was everybody’s friend last year. Which left the average investor on this side of the pond feeling pretty useless, earning what would otherwise have seemed quite respectable – an +8.0% return (or a bit less), with the ISEQ, Bloomberg European 500 & FTSE 100 delivering remarkably similar returns.
In reality, this trans-Atlantic performance gap was somewhat deceptive. The US market enjoyed nice tailwinds from (potentially) once-off factors – Trump/GOP tax cuts & a significantly weaker currency (dollar down almost 10%). While in Europe, Brexit was the obnoxious fart that lingered for most of the year, with the region’s net gains mostly arising late in the year, as the UK’s weak & illogical negotiating position became increasingly obvious. [Since confirmed by May’s hapless surrender re the Northern Irish border issue. I stick with my long-stated conviction that Brexit will be far softer & less of a threat for Ireland than many of the dire initial predictions]. Absent this trifecta of factors, I suspect trans-Atlantic returns would have been very similar…and again I’d have asked, in all seriousness (as I did here), so where’s the bull market?!
Except the numbers that count are those on the board…so I’m sure many European investors feel pretty disappointed with their returns. Which is unfair – again, I blame a financial media that’s obsessively US-centric (& FAANG-centric), so by year-end there was an inescapable assumption only complete losers hadn’t clocked a +20-30% return. A drum-beat which only gets worse as the market boasts momentum – the media just can’t help fetishising the biggest winners of the month/year, both the stocks & the stock-pickers. Something you’ll see echoed in every corner of the internet…after all, who cares or wants to talk about the losers?
And adding insult to injury, for unhedged investors, currency was also a slap in the face. Euro-based investors with significant US exposure failed to reap the benefit – the weak dollar (EUR/USD up +14.1%) obliterated most of their return, reducing it to +4.6% in euro terms. Sterling-based investors fared a little better (GBP/USD up +9.5%), but their US returns were still slashed in half, reduced to +9.1% in sterling terms. And for every FX loser, there’s always a winner… [Um, banksters!?] While the average US investor stays (insanely) close to home, those with European exposure (again, presuming they were unhedged) were doubly rewarded – with currency boosting their returns to +18-23% (in dollar terms) across the region (& actually besting their S&P return!).
Regardless, investors should stay focused on stock returns, rather than fret over currency risk (whose impact, longer-term, tends to be diluted away). Last year is a good example – investors exposed to both emerging markets (+37.3% return) & frontier markets (+32.3% return), particularly in Asia, enjoyed the icing on the cake! [Granted, the weak dollar added a nice tailwind]. Frankly, I’m surprised: My default view posited that emerging & frontier markets offer investors some of the cheapest growth opportunities globally…but as long as they enjoyed local bull markets, home bias would deter them from re-allocating/rushing into more exotic markets. Judging by emerging market fund flows, which improved in 2017 but saw no huge step-change in growth, that thesis still seems valid – so while local demand helped, I suspect a significant portion of emerging & frontier market returns simply came from price mark-ups, rather than incremental foreign demand. Which clearly bears watching… Fortunately, I enjoy a 14% Emerging & Frontier Markets portfolio allocation, and with much of the incremental growth in Luxury & even Mobile* coming from these markets, arguably my overall exposure exceeds a third of my portfolio. [See here for my latest portfolio allocation post].
So c’mon, where did all this leave me in 2017?!
Well, here’s my Benchmark Return again, as a reminder…so a +10.7% return is the goal to beat:
And now me…
Here’s the Wexboy FY-2017 Portfolio Performance, in terms of individual winners & losers:
[**Exited holdings (FIG:US sale price adjusted for incremental dividends included in SoftBank offer). *RMA:LN year-end price adjusted (marginally) to reflect part sale in 150p tender offer. Other holdings: Gains are based on average stake size & sale/end-2017 prices.]
[NB: ALL dividends & FX gains/losses are excluded.]
And ranked by size of individual portfolio holdings:
And again, merging the two together – in terms of individual portfolio return:
So yeah, it’s been a good year…maybe even a great year!
At the half-year mark, my return was almost double my benchmark – in the end, I finished out last year with a much improved +26.3% portfolio gain – that’s +15.6% ahead of/two & a half times my +10.7% benchmark return!
OK, let me just take another minute to savour that…
Right, this would be a good place to analyse my winners & losers. Except…as I start working my way through each stock, it’s nigh on impossible to comment on the underlying driver(s) of its 2017 gain/loss, without actually circling back ’round to focus on its valuation & prospects today. Which is ultimately far more interesting…and deserves, I think, its own/separate post to come (pretty) soon? [And helps ensure I’m well & truly back in the posting saddle here!]. Leaving me free to tackle some housekeeping & a couple of important buts/questions.
First, we need to bid farewell to two stocks, one fond & one bitter…let’s start with the medicine:
Newmark Security (NWT:LN): 36% Loss. NB: Sold. Per above, you may have noted I’ve now sold this holding. More fool me…even in my original write-up, I identified Newmark’s fatal weakness – its Electronic division, which in the last decade has proved incapable of generating revenue growth (despite reporting numerous new contract wins), has consumed ridiculous amounts of balance sheet capital, and has allowed a 23% adjusted EBIT margin to steadily erode & turn into losses. I’d presumed this would ultimately force CEO Marie-Claire Dwek to sell/aggressively restructure the business, but she appears more attached to it than ever…and with her family’s controlling stake, an activist campaign is basically a non-runner, while an acquirer would probably require an invitation (not likely at today’s market cap).
Arguably, Newmark’s intrinsic/sale value remains significantly higher than its current market valuation, but noting its current management & governance, cash consumption & net losses, it seems obvious this value gap won’t close anytime soon. In the end, a near-75% rally in November on the back of yet more contract wins (I see no evidence they’ll move the needle any more than previous wins) prompted me to sell off my stake – even if NWT ultimately bounces back here, the funds are best deployed elsewhere.
Fortress Investment Group (FIG:US): 68% Gain. NB: Sold. And is covered already in my H1-2017 performance review. I’m still not fully convinced of the strategic logic of this deal, but thanks again to Softbank for the welcome surprise! While I marveled (regularly) at how cheap FIG was, I didn’t expect it to be acquired. Granted, some shareholders speculated whether a buyout might occur, but I suspected management would remain focused on buying ‘on the cheap’ via share buybacks.
Unfortunately, takeovers are rare in my portfolio* – I tend to avoid chasing potential takeover candidates. [With my portfolio split between value/special situation stocks, which in reality are acquired far less often than value investors would hope, and growth stocks with little desire to be acquired ‘less something starts going horribly wrong]. But I don’t think that’s a foolish strategy – there’s plenty of investors who can boast greater takeover success, but many tend to pay up for the privilege, especially when you factor in dud rumours & deteriorating businesses which nobody ends up buying ’til the share price actually collapses.
[*But 2017 was otherwise a bumper year in terms of returns of capital:
ii) Two of my undisclosed holdings also completed a tender offer & share buyback,
iii) Alternative Asset Opportunities & Altas Investments (NB: I stopped tracking both at end-2016 for performance purposes) paid out interim/final distributions (Altas dividend was almost 150% of the grey market price at the time!),
Moving on, FinTwit Schadenfreude this week was pretty loud & unavoidable…clearly, I should address the crypto-begrudgers here. Presumably, they’ll dismiss/discount my performance last year as being driven by one lucky crypto-bet on Kryptonite 1 (KR1:PZ), which yielded a massive +148% gain in just three months. [Hence, the (bad) pun in this post’s title!] Obviously, I disagree… I won’t start debating crypto/blockchain potential here, but I’d urge you to evaluate my investment thesis again, noting the KR1 share price more than doubled in the week after my post…investing really can’t get more active than that, eh!? I certainly wouldn’t classify it as simply some lucky bet. In fact, I specifically identified Kryptonite as a non-Bitcoin ‘bet’…and was subsequently frustrated how badly its (otherwise magnificent) performance trailed many of its (clearly inferior) listed crypto/blockchain peers* which soared along with Bitcoin.
[*But then again, who could ever possibly compete with Clem Chambers..!?]
And let’s not forget, my 2016 performance was (conversely) hammered by a single stock, Zamano, which transformed an otherwise benchmark-beating return into a loss – after sucking that up, I’ll definitely take the glory this year! But yeah, I specifically flagged my ex-Zamano performance at the time, so I should do the same here: Eliminating Kryptonite 1 from my disclosed holdings, my ex-Kryptonite 2017 performance would actually have been a +15.0% gain…again, a pretty respectable outcome vs. my +10.7% benchmark return. And personally, it’s academic – in reality, my actual/underlying portfolio return all-in (i.e. all disclosed & undisclosed holdings, FX gains & losses, dividends, withholding taxes, fees, etc.) was actually a multiple of both my disclosed 2017 performance & ex-Kryptonite 2017 performance here. [I didn’t even own KR1 in my top-performing brokerage account last year]. Hey, like I said…it was a great year! But that just prompts a final terrifying question for us all:
Ulp, so what happens this year..?!
But frankly, that’s a good question to hear. I think many of us have gotten a little cocky in the last year, but I guarantee the first 2-3% pullback we see – and it’s inevitable – we’ll immediately be quaking in our boots all over again, while CNBC talking heads lose their goddamn minds. But that’s good too…in the end, we continue to climb a wall of worry.
The trouble is, we’re always fighting the last bloody battle. We’re all so scarred by the memory of the Global Financial Crisis (just to properly capitalise it), we forget the US market (for example) has only suffered four major collapses in the last century. [And arguably it’s just three, as the Fed’s handling of the Tech Bubble bust literally spawned the GFC just seven years later]. [Forget Black Monday, it’s merely a blip on the long-term chart!] Which, for the average investor, are ridiculously long odds to be agonising over…so in reality, we waste years & decades sabotaging our returns, fighting a rising tide as we try (fearfully & unsuccessfully) to duck & weave in/out of the market. I mean, how many short-sellers have actually survived & thrived for decades? Not to mention, successful market-timers – long-term – do they even exist?! Truth is, most of us believe we’re brilliant market-timers…but only because: i) Somehow, we’ve decided mental market calls count – we don’t actually need to buy/sell our entire portfolio, and ii) anyway, we only ever remember the one big call that would have worked (with hindsight), and forget the fifteen other times we were dying to exit a raging bull market. So let me repeat:
Market-timing is a fool’s game…
Personally, I still operate with the same macro investment thesis I’ve detailed here for some years now. Well, it’s more of a question (e.g. revisit ‘Welcome to the Floating World…’):
Globally, we’re still conducting a truly unprecedented monetary experiment…couldn’t we ultimately end up inflating the most incredible bubble ever?
[And yes, that question does upset & enrage some people…]
And it’s a wide-open question – I seek no hill to die on here – in fact, for my own sake, it’s a question/thesis I constantly want to refute just as much as confirm. Meanwhile, it encourages me to remain fully invested, and to (increasingly) focus on high quality growth stocks in my portfolio – that’s my skin in the game, so I can certainly encourage you to do the same. And as for the recent crypto bubble, and/or wobble, the doubters & begrudgers should get down on their knees & thank their lucky stars…seriously! For fits & giggles, just look at this 2017 Crypto Performance:
For investors worldwide, starting a new year & looking at these kind of returns, their #CryptoFOMO levels are fast becoming excruciating. And while a significant fraction will dive into the cryptocurrency market (bubble?) for the first time, regardless of price, ultimately I believe the far bigger & less obvious impact will be seen elsewhere…in the equity market. More & more investors will feel like they’re desperately missing out, but can’t necessarily bring themselves to buy crypto…there’s the fear! And they’ll convince themselves they deserve much higher returns in the equity markets (I mean, look at those lucky fools earning bloody fortunes in crypto!?)…and there’s the greed! And an increased appetite for risk will pour fuel on the fire central banks have already ignited in the equity market…so ironically, the crypto-doubters & begrudgers will benefit regardless (well, unless they’re whack-job gold-bugs!).
And think about it…the crypto-wobble this week will only serve to reinforce this equity risk preference/appetite. Not to mention, an actual/potential crypto-bubble presents a compelling asymmetry – in terms of global GDP/money supply/financial assets, the popping of a sub-$600 billion asset class (or even a multiple of that total market cap) probably isn’t all that relevant (esp. as it’s mostly ‘house money’ at this point), whereas the spillover/escalation of risk appetite in a global $80 trillion global equity market is potentially massive in its scale & impact.
Something to digest, eh..?!
Stay invested, but stay safe out there…and the best of luck in 2018!