Financial Commentary on Quarter

It’s time to post Q1 portfolio results and they do not make pretty reading.  While I try and always remember the Charlie Munger quote along the lines of “unless you are able to react to a 50% drawdown with equanimity, you are not fit to be an investor in common stocks”, it is incredibly jarring to lose over a 1/3 of your net worth when you had mentally earmarked that for certain things such as a house deposit and a retirement done day.  Such a drawdown will cause anyone to reassess their life plans and, combined with the certainty of a massive global recession, which can affect job prospects, it’s extremely worrisome. 

In terms of the drawdown itself, I am of the belief that no one could have incorporated the possibility of this pandemic into their portfolio positioning and outcomes have been somewhat random.  If you owned a portfolio of tech stocks, for example, you’ve probably done relatively well, but you didn’t own that portfolio because of the possibility of a pandemic so I wouldn’t call that “skill”, per se.  I think the true skill will be in how people react from here and rebuild portfolios in a world of uncertainty and binary outcomes.  Will we have a prolonged depression?  Will there be the sudden announcement of a vaccine?

I have taken a hit of approximately 33%, and there’s really only fall that really bothers me – that of Crystal Amber, the UK activist fund that I bought as a market hedge of all things.  It’s true that they held FTSE put options that came good in February.  They weren’t rolled into March.  And so I was left owning a portfolio of poor quality UK companies which all fell precipitously at the same time as the fund itself went from trading at a 10% to 30% discount to NAV.  Result – a disaster.

Another disaster is Dignity.  Now I think some its terrible performance is due to the coronavirus epidemic and the fact that it will be overloaded with deaths, and it won’t be able to service those at a price point that enables it to benefit from increased demand.  But I also missed the fact that it would need to bring property leases onto its balance sheet, as well as the possibility which that it would consolidate its trusts as it has done.  Along with its securitised debt and the pension liabilities, the debt load will look terrifying to investors, and events have represented an almost perfect storm.

Two of my market hedges that have performed reasonably well are Berkshire and IG Group, and I think both can emerge well from the current crisis.

Rolls Royce, Allied Minds, Fiat and Card Factory are collateral victims of the virus, nothing more and nothing else.  Maybe I should have sold Rolls Royce sooner but I’m not going to beat myself up about these.

So now… the rebuilding has to begin.  I think we are in an incredibly bifurcated market where part of the market has been virtually untouched by events and the half that has seen its revenues affected by the shutdown has been absolutely slammed.  Given that many, including me, feel that the “quality” basket is due some punishment, where does this leave me?  Rooting around in the bargain bin I guess, trying to find a few gems and trying not to continue my mistakes of the last half decade.

In the meantime, this lifted my spirits and resolve: https://www.longriverinv.com/blog/the-practice-of-value-investing-by-li-lu

Quarterly Portfolio Return

Portfolio as at end of March	Bloomberg Ticker	Percentage
Value Fund		10%
Howden	HWDN	9%
Exor	EXO	8%
Berkshire Hathaway	BRK/B	8%
Facebook	FB	7%
IG Group	IGG	6%
Rolls Royce	ROLLS	6%
Jefferies	JEF	5%
Bayer AG	BAYER	5%
Allied Minds	ALM	4%
Dignity	DTY	4%
Crystal Amber	CRS	4%
Imperial Brands	IMB	4%
FIAT	FCAU	3%
Card Factory	CARD	2%
Character Group	CCT	1%
Aryzta	ARYN	1%
Seritage	SRG	1%
Dolphin Capital	DCI	2%
Onthemarket	OTM	1%
Spectrum Brands	SPB	0%
GBP Cash		9%
Quarterly Return	Quarterly Benchmark Return
-33.10%	-15.56%
Return Since Inception	Benchmark Return since Inception
8.22%%	124.71%
Annualised Return since Inception	Annualised Benchmark Return since Inception
1.10%	11.81%

Coronavirus: Non Financial Post

When I started to write this blog, I think part of the reason was to create a record that I could look back upon in the future.  This could help me learn and become a better investor and it would also be nice on a human level to remember how I felt at moments that were historically and economically important.  

I must say, now very definitely feels like one of those moments.  Unemployment claims are soaring, and economists are issuing dire predictions of the blindingly obvious – that GDP is plunging the real question being how long the recession lasts for.  My fiancé and I live I a flat in pleasant central Cambridge and we do not have kids, so life for us is pretty easy at the moment.  We are working from home, and although there are possibly dark clouds over the horizon, in terms of our jobs, right now things are fairly nice.  I don’t have my long daily commute and we are eating well, given all the extra time we have for home cooked meals.  Once a day, generally, we will go for a walk or a bike ride.  Spring is coming in the UK, and Cambridge is a very pleasant place normally.  With the lockdown in place, there are very few cars on the road.  I imagine it is currently a little like my mother knew it, when she was growing up in the 1950s, with lots of cyclists on the road, 2 abreast and moving at a leisurely pace.

Our parents seem to be coping pretty well with the situation.  They are all taking the required precautions and all have access to food and a TV!  The internet is a godsend as well.  It allows families to keep in touch in a way that they would never have done before.

I guess what I’m trying to say is that – apart from having a glimpse of a slower, older world – I am extremely insulated from what must be a near hell a short distance up the road at Addenbrooke’s hospital.  If news stories are to be believed, and why wouldn’t I, medical staff are short of equipment and are trying to do a job which requires close contact, diligence and compassion in an environment which must feel chaotic and uncontrolled at times.  Elsewhere in Cambridge, good people are trying to make the best of life when their businesses have been forced shut by the virus, not knowing when to open.  Japas Sushi, where we go for our weekly date night, is now takeaway only and it seems to just be the proprietor and chef working there.  They seem stressed and rushed off their feet.  The beauty of sushi is that it doesn’t have to be ready at a set time.  It comes when it comes and people sitting at the restaurant table don’t expect it all to be at the same time.  It’s different with takeaway and I’m sure that’s why they seem so stressed.  The proprietor told me on Friday that he wasn’t sure he could stay open because he couldn’t get supplies.  So it looks like he will join all the other business that are shut down.  Very often, these are individuals that had a dream – of opening a neighbourhood café or arts & crafts shop - and those dreams are shattered.  And there’s still a load of pain to come.  We are in the eye of the economic hurricane here in the UK.  The chancellor has announced all sort of economic support measures, many of them delivered via the retail banks, who “owe the nation” after being bailed out by the taxpayer in the 2008 financial crisis.  Those measures include the furlough, whereby lots of employees that would have been made redundant are effectively having their salaries paid by the government for three months.  But the question is – what happens after that?  It seems clear that the current lockdown of the population is not something that will end, just like that.  Rather, we are set for a long grinding year of phased lockdowns and there will undoubtedly be economic scarring.  Who knows, maybe myself or my other half will be victims but for now, we should be grateful for what he have – our health, our comfort, and that of our loved ones.