2013 – A Game of Two Halves

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AIM stocks, Alternative Asset Opportunities, Asta Funding, benchmarking, correlation, fear and greed, hedge funds, home bias investing, KWG Kommunale Wohnen, Petroneft Resources, portfolio allocation, portfolio performance, Richland Resources, Saga Furs, Tetragon Financial Group, Titanium Asset Management, US Oil & Gas

Yup, it’s that time of year again… [For reference, here’s my mid-year 2013 performance report, plus my FY-2012 report]. Right off the bat, I have to admit assessing annual performance isn’t my most favourite of activities (as I’ll explain). It also reminds me how easily our (personal) fear & greed equation can magically transform itself as we finish an old year & head into a new one. While most traders tend to start a new year cautiously, investors often set out brimming with over-confidence – which can prove pretty hazardous…

The UK’s AIM market, for example, has enjoyed significantly positive returns in 14 of its last 18 Januaries. This annual love-fest is even more remarkable when you realize the AIM index has declined 17% since its 1995 inception. [Growth and value investors, take note!] My favourite muppets provide a more ludicrous example: Shareholders of US Oil & Gas (USOP:G4) (I’m presuming no new suckers are buying at this point) hailed the new year by immediately buying/running up the price 60% from its yr-end close! Sure, hope springs eternal…but with most USOP investors having lost 95%+ of their investment to date, this kind of new year exuberance is wildly irrational.

Thinking about & tracking your stocks (& portfolio) on some kind of calendar basis is yet another fixated version of tracking individual stock gains/losses. And that’s how fear & greed grabs hold & encourages you to play the ‘if…‘ game. I’ve already recommended you Forget Your Purchase Price – now I recommend forgetting your Year-to-Date Gains. Free yourself of those deadly anchors, and you’ll be forced instead to look afresh at your holdings every single day. For each stock, that’s an exercise in assessing upside potential (i.e. current share price vs. your latest estimate of intrinsic value), and then weighing that reward against the level & range of risk(s) involved. Which boils down to one simple question for each of your portfolio holdings:  Should I buy, sell or hold this stock today? And your cumulative or calendar gains/losses on a stock are irrelevant to that question – no matter how small, large or goddamn painful they might be…

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Fear & Greed (I)

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biofeedback, black box, fear and greed, home bias investing, investment checklists, literature, Nudge, portfolio allocation, The Checklist Manifesto, trading, value investing, value-trap

Great traders don’t necessarily have to be that smart, but mastery of their emotions – specifically, fear & greed – is absolutely essential. The same is equally true of great investors, except it just happens in slow(er) motion… But most people end up choosing investing over trading. Which is pretty fortunate – the trading gods delight in seeing meticulous logic & analysis abruptly savaged by fear & greed.

Many would-be traders never recognize this, and fail accordingly. Others grasp it, but remain trapped in a never-ending struggle. Only the brave few ever learn to fully master these emotions. Investing, on the other hand, seduces you with the luxury of time & positive long-term equity market trends. Which often makes it far more difficult to recognize the corrosive impact of fear & greed on your portfolio returns. The fact many of us shy away from any kind of critical self-examination doesn’t help either. But there are two solutions available to us:

The first is reading. In my last post, I argued for an important alternative to most investors’ non-fiction diet – literature, and lots of it. The great novels, plays & poetry are windows into the hearts & minds of other people – and in turn, yourself. Learning to actually recognize emotions like fear & greed in yourself, and their potentially disastrous impact on your investing, is the first & likely most difficult part of the battle you face.

Now, I didn’t cover the second solution – how to actually conquer those emotions. Because unfortunately, when it comes to that challenge, we are all truly alone… 

Mid-Year 2013 – Performance Update

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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..?

2012 – Aaah, How Was It For You..?

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alternative assets, Argentina, Argo Group, Avangardco, Baker's Dozen, diversification, dividend yield, EIIB, frontier markets, hedge funds, home bias investing, Irish shares, JPMorgan Russian Securities, NAV discount, Petroneft Resources, portfolio allocation, portfolio performance, Renaissance Russia Infrastructure Equities, Richland Resources, Russia, Sirius Real Estate

[Here’s my last performance report, for reference].

OK, just in time, my performance analysis got a bit more sophisticated. It now includes dividends, and is calculated on a weighted average gain basis, so now the impact of larger & smaller portfolio stakes is recognized. I think I’ve tracked any increase/decrease in portfolio holdings pretty well during the year, via Twitter (so plse sign up as a follower!) & blog comments. [No point in having interested readers if I don’t post such relevant info on a timely basis]. This allowed me to calculate an average portfolio stake for each holding, which I think is the best metric to use.

I did, however, stick with my original yr-end 2011 or 2012 write-up prices as a cost base – I didn’t want to drive myself crazy calculating average net purchase prices! However, I know I’ve subsequently added to portfolio holdings at higher & lower prices, so I think that pretty much cancels itself out. It also means I’ve omitted partial profits harvested on certain holdings, so my total return may be marginally understated.

Overall, eyeballing my respective analyses, dividends & portfolio weightings have in total (on a pretty even split) added about 2-3% to my annual return. The pretty low contribution from dividends may surprise you, but don’t forget I’m none too enamoured with them… See here, here & here. As far as I’m concerned, if you’re impressed enough with a stock’s valuation & prospects to actually buy it, surely you’d prefer to see it compound its earnings?! Only a third of my holdings pay a dividend.

Hitting The Century (V – Ireland)

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% of world GDP, Andrew Langford, COR, default, Emerald Isle, Europe, European sovereign debt crisis, Event Driven, Fairfax, FBD Holdings, Greece, home bias investing, Ireland, Irish value investing, ISEQ, Prem Watsa, Price/Book, Return on Equity, taxes, Thatcher, Total Produce, Trinity Biotech, UK, Wilbur Ross

Continued from here. OK, let’s take a look at my next investment allocation:

Ireland (16%):   So much for all my rabbiting on about home-bias, what a terrible job I’ve done here..! Ireland accounts for a whopping great 0.3% of world GDP, and yet I’ve got 16% of my portfolio invested in the Emerald Isle (yes, please visit, all tourist revenues gladly accepted)!? OK, so, in my defence:

i) C’mon, everybody’s doing it! I’m confident 16% is far lower than the average Irish investor (and US investors are just as bad – how many realize US GDP is now just 22% of world GDP?).

ii) As Philip O’Sullivan (taking off the green jersey?!) reminded me, these stock picks are not that Irish anyway! Total Produce (TOT:ID/LN) is essentially pan-European, Trinity Biotech (TRIB:US) operates primarily in the US (& Europe) – I guess FBD Holdings (FBD:ID, FBH:LN) is my only true Irish exposure!

Hitting The Century (IV – UK)

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alternative assets, benchmarking, currency allocation, emerging markets, Eurogeddon, Europe, frontier markets, home bias investing, portfolio allocation, rationing, thematic investing, UK

Hitting my 100th blog post (hence the title!) in late June, I thought I’d celebrate with a more in-depth series looking at my portfolio construction (i.e. approach to stock-picking), allocation & valuation metrics. Part I briefly revisited (plenty of other commentary recently) my stock-picking approach, and then tackled currency allocation – a surprising introduction for some readers, perhaps!? I suspect it was also my most footnoted post ever…aah, those were fun! Part II touched on the risk of home-bias, and then reviewed my portfolio investment allocations from an overhead perspective.

Part III would logically have continued with a drill-down into these allocations… But I’d just updated a few missing figures in my valuation & analysis file(s), so I opted to first share some detailed portfolio valuation (& performance) metrics. I was actually surprised not to see greater feedback on this post – I don’t think I’ve seen many (any?) analyses of this sort across the web. Anybody out there fancy doing something similar? – I’d love to see it 🙂

Hitting The Century: It’s Pretty Panties Time..! (II)

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absolute return, alternative assets, closed-end funds, currency allocation, distressed assets, emerging markets, frontier markets, FX rates, home bias investing, NAV discount, portfolio allocation, quantitative easing, real assets, special situations, value investing

Continued from here – we examined the true underlying currency allocation in my portfolio (incorporating other financial/investment assets & liabilities). I encourage you to perform a similar exercise (on an ongoing basis). Some will discover unexpected allocations, but more will discover how concentrated they are in a single currency! Of course, I’ve written about home bias before, but that was in relation to equities: I beg your indulgence as I take another brief look from a currency perspective.

If you suffer from single currency concentration (ouch…I think about the EUR/Eurozone so much it bloody hurts! ;-)), presumably it’s in your home currency? Think about the fact your job, your house, (much of) your wealth, the level of your taxes, even your (assumed) social order is already inextricably linked to that currency & country. How much do you want to keep adding to that bet? But the majority of readers live in developed markets, and may ask: ‘How seriously could my home currency decline?‘. Well, say you live in Japan: The USD/JPY‘s 80.53 right now – how outlandish is it to picture it at 120+, or even 150+, in 5-7 years?!

AGI Therapeutics – Anatomy of a Takeover (III)

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AGI Therapeutics, currency allocation, denarii, Event Driven, Expected Value, FX rates, Gross IRR, Gross Return, home bias investing, probabilities, Recommended Cash Offer, takeover offers

Continued from here.

Expected Return‘s probably the most important, and most difficult, return to calculate & focus on. In its simplest form, it’s binary (deal success or failure), but by all means incorporate multiple outcomes into your analysis, if appropriate. In fact, if you’re contemplating other types of Event Driven investing, this multiple outcome approach will prove essential. However many outcomes, you calculate a Gross Return and a likely probability (which must sum to 1.00, of course) for each, and then combine these to arrive at an Expected Return. This will give you a much more accurate (and lower) deal return. Of course, you won’t actually see this return on any single deal – but over time, this is the best risk/reward measure to employ to evaluate deals & your potential average return. Of course, you can calculate an Expected IRR also, if you wish, but let’s not go crazy here..!

TGISVP VII (More Disco!)

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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:

TGISVP VI (or What I Learned Down the Disco)

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home bias investing, investing rules, Road House, Saturday Night Fever

Continued from here:

My parents trusted me at far too early an age. They’d go off for weekends, and leave me alone and ‘in charge’. I took this responsibility seriously enough… Enough, that is, to conscientiously remove all evidence of debauchery¹ before they returned a day or two later. Enough even to look up the Golden Pages and call the french polisher..!

Then again, at that age, debauchery mostly consisted of staying up v late, drinking absolutely anything we could get our hands on (cooking sherry, anyone..?!), seeing if stereo speakers can actually blow, and being (almost totally) unsuccessful in getting girls to ‘just drop by’. In the usual absence of girls, our mission was to persuade older friends/cousins to bring us to the disco on Saturday night. Saturday Night Fever this was not…