Over the past few months we’ve seen some downward volatility
in markets:
-
Emerging market currencies have crashed.
-
The Chinese equity index has fallen sharply
(although it had previously risen extremely sharply in the previous year or so.
-
Developed market indices have fallen and most
are now in negative territory for the year.
So finally I am outperforming, partly because I am not fully
invested, and partly because my bigger holdings have avoided losses reasonably
well. Of course this is a relief because
it seems to be validating my thesis that I should preserve capital reasonably
well when market are down. However, I
have mixed feelings because I haven’t hit my 12% target for the year, and
psychologically this means a lot to me.
It’s funny because if I were a fund manager, my performance this year
(which I’ll post an update on at the end of September) would probably have me
popping the champagne but because I have a different benchmark my mood is
muted. Maybe that’s partly because I’ve
had my share of disasters and my decent performance has been those disasters
have been smaller holdings. I like to
think that I put most money into the biggest ideas but who knows if my escape
was luck or skill?
Anyway, I’ve been stopped out of several of my smaller positions
in the last few months:
Hargreaves Services 24/8 @316p
Hargreaves was a mistake, pure and simple. I thought that the market had underestimated
the length of its demand tail, and that a skilful operator like Gordon Banham
could continue his policy of consolidation with success. I further thought that falls in the coal
price might be temporary and they might yet rebound. But what I did not realise the sheer quantity
of oversupply (partly caused by the rise of solar), and the effect of cheap
production in places like Colombia and the US on the industry in UK. Prospects for the industry look awful and
while the company might yet successfully transform itself into a property
company, and has done a lot of things right, I won’t be buying this any time
soon.
Goodwin: 25/8 @2201p
While I believe this is an extremely good business with an
outstanding management team, there is no escaping from the fact that a large
part of its revenues are linked to oil and gas.
So it was no surprise to see it sell off. I am keen to buy this again, but would need
to do it within my pension portfolio, rather than via spread betting as the
margin requirement is high and this really is the longest of long term
holdings. Recently Goodwin released a
statement which said revenues were up on a quarterly basis but margins would be
down.
While they have a great management team,
Commerzbank: 6/7 @
1119
Honesty forces me to say that I didn’t and don’t understand
banks as an investment. All I say when I
put money into Commerzbank was a huge discount to tangible book, a general
hatred of the banking sector, and no imminent risk of distress. The stock sold off quite seriously during the
greek crisis, which highlighted the enormous dislocations in the European
financial sector, but also the underlying issue that Euro interest rates are
going to be at zero for many, many years, and profitability in a structurally
unprofitable sector is going to be even further stressed. I have made a bit of money on Commerzbank but
probably won’t be going back in.
Emeco: I intend to
close this out next week. Another
colossal mistake. I thought I had
protection buy buying at a substantial discount to book, but didn’t take
account of the fact that liquidation was never an option. I also didn’t realise that margins in the
business would completely collapse as collapsing investment in the mining
sector prompted miners to pass on their distress to equipment suppliers via
significantly lower rates. Emeco has a
large debt to service with a 10% coupon and I don’t see much prospect for
revenues and margins recovering. Indeed,
bankruptcy may still loom. What have I
learnt? To focus more on margins and the
competitive position of companies within the value chain.
