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Monday, May 27, 2024

Performance review Q1 2024 – Comment: “Contrarian Investing – Easier said than done”


In the first 3 months of 2024, the Value & Opportunity portfolio gained  +3,2% (including dividends, no taxes) against a gain of +6,0% for the Benchmark (Eurostoxx50 (25%), EuroStoxx small 200 (25%), DAX (30%), MDAX (20%), all TR indices).

Links to previous Performance reviews can be found on the Performance Page of the blog. Some other funds that I follow have performed as follows in the first 3M 2024:

Partners Fund TGV: +9,0%
Profitlich/Schmidlin: +4,0%
Squad European Convictions: 3,4%
Frankfurter Aktienfonds für Stiftungen: +5,9%
Squad Aguja Special Situation: +1,2%

Paladin One: -5,9%
Alphastars Europe: +0,6%

Gehlen & Bräutigam: -1,3%

Performance review:

Within my subjective small cap peer group, the portfolio performed slightly above average. Overall it clearly mirrors the divergence especially between Large caps and small caps. Within my mixed benchmark the performance for Q1 was as follows:

Eurostoxx 50: +12,8%
DAX: +10,4%
Eurostoxx small: +1,6%
MDAX: -0,4%

As most of my portfolio plays (on purpose) in the German/European Small and Midcap space and in the absence of “lucky punches” like Schaffner and Logistec last year, the performance is quite OK.

WIll it remain like this ? Who knows, but from a valuation perspective, I see more and more attractive opportunities in my “circle of competence” which makes me quite optimistic in the mid- to long term. Short term, as always, anything can happen.

Transactions Q1:

The current portfolio can be seen as always on the Portfolio page.

In Q1, Logistec left the portfolio due to the closing of the take over. Including dividends, the gain was around +52%. Not bad for around 9 months, but on the other hand also below my estimate for intrinsic value.

Two new positions were entered, both in Germany with Eurokai and Amadeus Fire. Eurokai is rather a deep value play, Amadeus Fire a “decent quality at a decent price”.

Later in the quarter I reduced the Admiral position to a 5% (from around 6,3%) and I added to Sto (+0,5%) and Energiekontor (+1%).

Average holding is 4,1 years, Cash is at ~9% and the 10 largest positions are ~51% of the portfolio.

Comment: “Contrarian Investing – Easier said than done”

Contrarian investing, i.e. buying out of favor assets that have fallen in price for some time is maybe one of the most popular ways of investing especially for value investors but also for many retail investors, alongside momentum investing, where one just buys what is performing well.

Of course, Warren Buffett was/is famous for Contrarian investing, such as Amex after the “Salad oil scandal” or buying banking stocks during the GFC. Other notable Contrarians were of course Ben Graham, Peter Cundil or Walter Schloss just to name a few.

It sounds very easy: Just look at what has performed really bad, buy it and wait until the value rebounds.

In reality, this is however much more complicated: First, you need to be sure that the value will eventually rebound and second, you also need to be right about timing.

  1. Will the stock/asset/market rebound ?

In a lot of books you only read about the successful examples, like Warren Buffett. However, I guess you will not read a book about the guys who invested a significant part of their portfolios into Russian stocks before the attack on UKraine because these stocks looked “so cheap”.

Or those guys who followed Charlie Munger into Alibaba some years ago. One of the worst “offenders” in this regard in my opinon is Monish Pabrai with his incredibly bad book “Dhando Investing”, where he outlines a highly risky bet on an highly indebted stock as a “no downside” investment, because it worked out. Funnily enough, fate punished him soon afterward with a huge loss on an equally “no downside risk” investment called Horsehead Zinc. This is a very important topic to remember: Just because a bet worked out, doesn’t mean that there was no risk in the beginning.

Avoiding value traps is much harder than it sounds. Everyone dreams of buying the next Amazon after the Tech crash, but no one talks about the thousands of Dot.com companies that didn’t make it. Structural industry poblems often look like temporary problems in the beginning.

There are also cases where a company is so fuxxed up that little or nothing can be done about it, even if parts of the company are OK. General Electric was one example, or Bayer. Such companies might rebound at some point in time but from a much lower level than everyone expects.

One also needs to look out for any politcal or macro-economic risk that might make a company, industry or even country uninvestible for some time to come. Russia was one example, China is another. Yes, maybe we will see a major rebound in Chinese stocks if tension will go away around Taiwan. However, if the Taiwan issue heats up, there is a real risk that foreign shareholders might end up in a similar position like those of Russian stocks, especially as you don’t actually own shares in Chines companies but rather some exotic derivatives with Caribean entities as counterparty.

2. Timing of the rebound

Another big issue with Contrarian investing is timing. You can be right in the end, but especially as a professional money manager, someone else might manage your fund if you don’t get the timing right.

A lot of the hot Dotcom stocks that actually survived, took a very long time to recover. Another sector that impacts me personally is construction. After such a long, low interest rate fueled, boom, it might take a few years until the sector recovers to levels anywhere near recent peaks.

For a patient private investor, with no bossess to please, howveer the timing factor can be a very good opportunity.

What worked best for me in the past ?

For me, in the past the following approach worked best: Look for a very broad and “public” downturn (preferably country or even continent) and then focus on quality companies that are relatively cheap to their intrinsice value, not on the absolut cheapest stocks. My biggest “goldmine” clearly was the Euro crisis in 2011/2012.

At the moment, I do have the feeling, that European small caps offer a similar opportunity than back then but if that is true we ill only be able to see in a few years.

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