Performance Review of Student of Value Write-Ups

In my last post, I decided to implement Value and Opportunity’s idea of tracking stocks that I have sold or passed on as a great way of calibrating my investment process.  Here are the results.

It has been a little over a year since I started Student of Value.  Don’t get me wrong.  I don’t think one year is a particularly revealing performance period.  But, it is a good time to review one’s holdings and, in this case, could-have-been holdings.

All in all, 10 unique investment ideas have appeared here since that time.  Of these 10 ideas:

  • 2 I bought
  • 3 waited for a lower price that never came
  • 5 did nothing about.

 

Buys

First, to get the two buys out of the way.  I still hold OPAP (posts here and here) at an average cost of €6.80.  Standard Chartered (post here) I sold early this year for two reasons.  It was a small position.  I prefer scaling into positions and this one moved away from me very quickly.  Also, I tend to clean up my small positions occasionally.  It helps me focus on the important stuff.  The second, more mundane reason is that I needed cash to fund a new brokerage account.

STAN got slapped with “the largest fine ever collected by a single U.S. regulator in a money-laundering case.”  The combined fine weighed in at $667m.  This is huge and could have damaged the company severely.  But as it turned out, the loss of $12.5b market cap was somewhat exaggerated.

Including the dividend I collected, I made ~40% in less than half a year.  Since I sold, STAN peaked at ₤18.60 and then descended to current levels.  In the very short term since I sold, I have lost ~10% to the top.  That’s not much.  What is much more important here is STAN’s future, which I believe is bright.  So, I am keeping it on my watch list.

 

Analyzed and Wanted to Buy

In the category of companies that I liked, discussed here, wanted to buy, but didn’t quite manage to we have: CTC Media, Yuri Gagarin, and Jumbo.

My major concern about CTCM (post here) was that it is in Russia.  I was determined not to pay more than $7.  Now, the 52-week high is almost double this amount and the company had a pretty good year in 2012.  As of today, my waiting, looks like a mistake of omission.

Another one is Yuri Gagarin (posts 1, 2, 3, 4).  Here again my major concern was country risk.  Some may find it paradoxical, but I worry way more about most companies in my home country than about most companies in the US (and other developed markets).  From a frontier market perspective, I don’t think this is such an uncommon way of thinking.  Actually, it is so common that the risk free rate is equated with the US Treasury bill rate.  It is a reflexive process that has made US capital markets what they are.

As I wrote about political risk back in my September 11, 2012 post:

In the case of Yuri Gagarin, it manifested itself in a law change which, on June 19, 2012 banned the manufacturing and selling of cigarette tubes – the company’s growth engine.  At first, only sale was banned, which was not as damaging since most of the cigarette tubes are being exported, but soon an amendment banned production as well.  This ruling, probably with no precedent worldwide, seems uniquely aimed to maim the company as there is no other company manufacturing cigarette tubes in Bulgaria.  In interviews, politicians who voted in favor of the law gave lame excuses such as fighting the black market for cigarettes.  The real motives and lobbies behind this remain hidden.  But it is a cautionary tale of how tangible political risk really is.

Together with decreasing orders from its largest client (former parent and tobacco monopolist Bulgartabak) and amid a shady change of owners, the company was facing serious challenges.  I attended the special shareholders’ meetings and did a ton of research on the company.  After the meeting finalizing the change of control, I mustered the confidence to place an order at €14.  It didn’t execute.  After this, the stock came back to this level several times.  I missed it again.  As of today, I have missed on an ~80% return.  At the price I bought my one share, it’s a 100% gain in a little over a year.

The last of the companies that I liked but couldn’t buy is Jumbo (post here) – the Greek toy store that children in this part of the world love and that at one point during the crisis was selling for 3.5x earnings.  I pondered whether macro-economic risk could be ignored entirely at such ridiculous price levels.

Meanwhile, by the time of my write-up, the price had tripled from the crisis bottom.  The earnings yield was below 10% – still good but not good enough.  I wasn’t willing to pay the market price and again missed on some good gains.

Overall, my waiting has proven very costly.  But I keep in mind that the period in question is far too short and unidirectional to base any sweeping conclusions on.  So, I wouldn’t read much into it.

I was recently reminded of this Warren Buffett quote:

When we look at the future of businesses we look at riskiness as being sort of a go/no-go valve. In other words, if we think that we simply don’t know what’s going to happen in the future, that doesn’t mean it’s risky for everyone. It means we don’t know – that it’s risky for us. It may not be risky for someone else who understands the business.

However, in that case, we just give up. We don’t try to predict those things. We don’t say, “Well, we don’t know what’s going to happen.” Therefore, we’ll discount some cash flows that we don’t even know at 9% instead of 7%. That is not our way to approach it.

The cash flows of the companies in question could vary a lot through no fault of management.  CTC Media could see different sources of advertising revenue dry up quickly due to regulatory changes such as the ban on alcohol advertising, not to mention how its TV stations could lose their licenses due to political pressure.  Yuri Gagarin’s cash flows could dry up due to lobbyist laws like the full ban on cigarette tubes or the company could be driven into the ground by its former parent just to be bought for a song afterwards.  Jumbo’s cash flows could get hit by severe inflation (in an “exit” scenario) or prolonged deflation (the “stay” scenario).

These were, and still are, quite possible outcomes.  Could similar scenarios happen in developed markets?  Sure.  But the probabilities are vastly different.

The idea that value investors should ignore such concerns is just as nuts as the idea that their investment decisions should be entirely driven by them.  It’s common sense to check the weather when going out, to look around before crossing the street, and to check the traffic stats when taking the car.  Not being aware of the environment is, as Howard Marks puts it, “unrealistic and hubristic.”

If anything, the mistake that these 3 missed opportunities may be pointing to is not that I wanted to buy but waited for a better price, but that I wanted to buy in the first place.  In all 3 cases, I was comfortable with the companies and the amount of research I had done.  I was uncomfortable with the macro factors.

It is no surprise that the companies I am discussing are located in Russia, Bulgaria, and Greece as it is also no surprise that there are not many value investors active in these markets (with the notable of Greece, which seems to have bottomed out).  Even the mightiest ships sink and those are dangerous seas.

 

Analyzed and Passed

Back to the topic at hand, the last group is of ideas I researched, and thus sort of liked but not enough to pull the trigger.  Maybe the price was nowhere near my comfort level.  Maybe the risk was too high.  Maybe I just had better ideas at the time or preferred to put more money in my best ideas.

National Western Life Insurance (post here) was a very close call.  I liked the company and the valuation, but there were some yellow flags.  So, I stuck with my better ideas.  I missed a 40% return and this is more than my last best idea (out of those I invested in) generated, meaning I would have been better off going with NWLI instead.

Fazerles (post here) is the largest hardboard manufacturer in Bulgaria and it’s price has dropped 90% from its all-time high.  This is what made the company interesting to me but not interesting enough to add it to my portfolio.  The reasons: country risk and bad business economics.  Incidentally, the stock has performed well in the 7 months since my write-up, but nothing stellar and definitely not something worth the accompanying loss of sleep.

The remaining 3 companies – FairPlay (post here), Quality Products (post here), and Metka (post here) – underperformed my benchmark and two actually lost money.  I passed on all of them because the risk was too high for my taste.  Good that I did.

 

Conclusion

As I stressed at the start, this review is just to give me an idea of how well the ideas that I discuss here fare, including the ones that I don’t end up investing in, with the goal of honing my investment process to better discriminate between good and bad performers.

The companies I invested in have done well for me despite the fact that the ones I came just short of investing in did much better.  But it shouldn’t be surprising that high risk occasionally gets rewarded with high returns, especially in periods of general market ascent.  My solace lies in the fact that the most of the investments I consciously chose not to make were the worst performers of the group.

My takeaway from this post is that I am pretty satisfied with my selection process so far.  I will keep extending the time period and the number of picks so that one day I will have a decent sample to draw significant conclusions from.

Concerns about the length of the period and the choice of a benchmark are legitimate, but they don’t negate the usefulness of turning this review into a habit.