5 years and blog still going strong!

It’s 5 years since I started this blog and what a journey it has been so far! When I set out on a mission, of becoming a better investor through this blog, I realized it would be hard to consistently keep posting. With life having it’s ups and down it has from time to time been a challenge to do so but I’m proud to have been able to keep up the pace. I have at least posted once every month since I started, and on averaged slightly above 2 posts a month. This sometimes cathartic exercise of publicly sharing all my investment decision has really been helpful in honestly reviewing what works and what does not work. Some of you readers have been part of most this journey and some might have scrolled back through my posts. But most of you are likely readers that found my blog in the last 3 years. So let me take the opportunity to introduce how I view my journey and also highlight some older posts that might still be worthwhile for you to read.

Pre-blog days

Everyone have their story of how they started investing and how they became better investors. My early days of investing is very colored by the 2003-2007 bull market. I had fantastic returns, about 200% return in 4 year time period. I really thought I had investing figured out back then, the 2008-2009 period taught me I did not. I like explain my feelings around how skilled of an investor I am with the hype cycle:

For me I was at the clueless stage in the early 2000’s, I got naively confident around 2006-2007 and discouragingly realistic around 2008-2010. I understood around 2011-2012 that the path to “Mastery Achieved” is extremely long. I needed to find a venue to set a long term plan to become a better investor. I considered just writing a personal diary, but realized it would be hard to keep it up. At the same time, I had been doing deep research into Electric Vehicle investments, trying to understand the whole supply-chain. This theme I spent some 6 months to research and that was how it started. I wanted to write down everything I had learned about this emerging sector and share it online. I realized I could use a blog format to share such information and at the same time structure the thoughts in my head around investments. I really wanted to get on the journey towards “mastery” in investing and a blog seemed like a good way to structure it.

First year of the blog

So my first big investment theme was that Electric Vehicles would totally change the car industry, below is the post where I truly kicked off my blog. Back in 2015 people did not talk about EVs like today, most people were still great skeptics that EVs would take over the car industry, I believed after all my research that they would. I think I have been proven right by now (sentiment actually turned already around late 2016). In the same post I formed my early thoughts around what kind of edges you can have in the market. I identified that investing with a longer term horizon was one such way.

Investment Theme: Electric Vehicles

As you know by now, my blog mixes discussions about my current portfolio, sometimes dropping a shorter note on a holding and writing lengthier write-ups of stocks. One of my first lengthier write-ups was of NetEase, which has been a very strong performer in the stock market since:

NetEase – Chinese Gaming

One of my more important posts which shows that I started this blog to go on a journey to become a better investor, was the following post:

Investment styles and lifelong learning

I particularly like this point I made in the post. I will come back to this later:

“but for me personally I want to spend a few more years understanding both stock markets around the world, different sectors, as well as different investing styles. Because if it’s one thing I learnt from meeting all these great managers out there, with great track-records of alpha generation – there is not one style that is superior to others, all different styles of investing can work, if you do it right. And maybe as important, different investing styles will outperform during different times.”

Second year

I started the second year with the best analysis I probably produced on this blog. At least if you evaluate it in terms of stock price returns (I don’t count stocks I just mention, like the DNA discussion I start of the post with – CRISPR there would have been a fantastic buy). The post was followed up with an equally good commenting from many of you readers.

Nagacorp – Casino in Cambodia

I was very early on the sneakers trend in China and invested long before Anta and Li Ning moved up multiple-fold. I did get a good return with XTEP in the end, but it also shows that buying value is not always the best case. A lot of the value sits in a brand and here Li Ning for example was a much stronger candidate. I understood that during my due diligence, but instead went with what looked cheap on fundamentals. As often is the case, cheap is cheap for a reason. I have gotten better at being skeptical against cheap companies, although I still do mistakes.

Chinese shoes – XTEP

Another analysis I spent a lot of time on was YY, which recently changed name to JOYY and which I re-bought into the portfolio. I was way too quick to sell the company as it doubled after I sold (and later came back down again).

YY.com – Full Analysis

Since I started the portfolio I always had a fairly high weight towards companies with exposure in the Chinese market and often listed on the HK exchange. The reason for that has been valuation and the nice growth prospects. At the same time I’m always fully aware of the Macro backdrop, which always scared me. I’m pretty sure at some point we will see a major economical collapse in China (before they really take over the world), maybe it will come now triggered by Corona. Anyway, the first time I got cold feet was in 2017 and I wrote this post.

Rotate away from China & Portfolio changes

Well in the end I have not been able to stay away from China, I still have a lot of China exposure in my portfolio, perhaps I should take a look at that once again?

Tokmanni was a company where I did the analysis correctly, but I did not have the patients to wait for the stock to reprice (which it did in the end):

Buy the dip – Tokmanni

One of the larger write-ups and due diligence processes I ever done on a stock was Teva. That taught me a lot about the industry which was good, but it also taught me that it’s not really worth it. A large Pharma company is just too complex to value and it takes too much of my precious time. Time better spent on smaller companies. I guess my analysis is still somewhat relevant (written in two parts) and the company is still a controversial highly leveraged investment:

The Perfect Storm – Teva – Part 1

Finally in December 2017 I did another large piece on a company I still hold, Dairy Farm. The company really is in a pickle right now with Corona virus, HK protests and in generally mis-managed supermarkets. The valuation also reflects it. This post gives a good overview what the company is about:

Dairy Farm – Asian food giant

Third year and onward

Given that these are more recent I will keep a bit more brief.

I was very proud of how I combined my knowledge of China and an entity listed in Europe when I presented this idea (which turned out be perfectly timed):

Adding Rezidor Hotel Group – HNA related idea

I also want to highlight a stock a still own, which continues to trade on a very low multiple, Dream International:

Dream International – a dream investment?

One of the post I’m most proud of in terms of originality is my Art of Screening post. I took a fairly scientific approach of trying to find out which markets have the lowest retail stock investing participation and through that approach find the stock that are most overlooked. This concept has stayed with me since and is another important puzzle piece to what today is how I go about finding new investments and building my portfolio. I think I will have to follow-up on this post, there never was a Part 2 written..

The Art of Screening – Part 1

Another major stepping stone in my approach to investing came with this post, where I introduced 3 buckets of investing, Long Term, Opportunistic and Speculative:

GlobalStockPicking 2.0 – Major Portfolio Changes

Just as Electric Vehicle was this big theme I researched I in the same way researched the Dental Industry in a three part series. Unfortunately most of the investment cases were in my view priced for perfection, but I learned a lot, which will be helpful to pick up these stocks in the future if the market provides a buying opportunity. The stock I choose to invest in which I still hold is Modern Dental Group:

The Dental Industry – Part 1- Overview

2019 saw my first guest post from a friend of mine. Maybe given the current situation is worth revisiting some Macro thoughts?

Guest post about the US debt cycle

And finally, in my view another one of my very solid write-ups, Polish listed LiveChat, which so far has had a very strong stock performance:

LiveChat Software – company with a strong track record

Readers input please!

I hope you liked what I have written over the years! What were your favorite posts? What would you like to see more of and what should I spend less time on? Please comment!

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A look in the rear-view mirror

This time around I thought I would take a different approach. Recently I walked through all my current holdings: Short comment on all holdings

Today as a year end evaluation I will do the opposite, go through all companies I held but sold. This will also give new readers who hasn’t read through my blog from the start a better understanding what has built my performance over the years. For every holding, if you want to kno more, check through the drop down menu (if you are in a web browser) and select the stock in question. The purpose of this exercise which took quite some time to compile is to evaluate if I’m turning over my portfolio, too much or too little. And even more importantly of all the investment ideas I put in my portfolio over these years, are they of high quality? Have they kept performing after I sold or am I buying too many poor performing businesses?

All stock performance data is converted into USD and total return (meaning dividends are reinvested) and benchmark against my GSP portfolio. Also take note that the Y-axis varies in scale, let’s get started!

Press “Read More” and be ready for a lot of graphs!

In stock code alphabetic order, all stocks I held but sold:

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The Art of Screening – Part 1

This will be an exploration in how to set up stock screenings, if you have a lot of experience of playing around with this, please do comment and help me out.

A stock screening could have many purposes, most screens are not related to finding the “hidden gems”. The screening could be used to list companies with certain characteristics, for example all Bank stocks in Asia. This post will not be about these type of screens. It will be about screening for stocks you otherwise would struggle to find and stocks that hopefully few others have looked at. Later post will explore other angles of screening, for example dive deeper into what stock characteristics I’m looking for. The beauty of being a Global investor is that you work with the widest possible set of publicly traded companies. I think would be a waste if you as a Global investor did not take advantage of having access to all markets. This should be exploited to the largest extend possible. According to Bloomberg there are 61 000 listed companies in the world. Just like my catch-line of this blog, surely among the 61 000 companies there is bull market somewhere? But with 61 000 companies it is like finding a needle in a haystack, the question is, how do we find the needle?

I will divide the challenge of finding the needles in the haystack into two parts:

  1. Where should one look? Meaning what should be filtered away from categorizing metrics. Examples being: Country, Company Size, Industry
  2. What type of metrics? Meaning what company specific criteria are on average delivering out-performance? Examples being: Price to Book, P/E, Growth, Piotroski F-Score, Momentum

What universe?

Obviously in practice as a private investor you do not have access to every single market in the world. Few professional investors do either. So in practice, in my case the Global Universe of stocks is listed on one of these countries exchanges: Australia, Austria, Belgium, Canada, China (Shanghai & Shenzhen), Czech Republic, Denmark, England, Finland, Germany, Greece,  Hong Kong, Hungary, Indonesia, Ireland, Italy, Japan, Malaysia, Netherlands, Norway, Philippines, Poland, Portugal, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey and USA.

What is the competition?

To understand where we should look to find the hidden gems, we first need to understand the current investment landscape and competition. I’m a firm believer that markets are fairly efficient. One should respect the huge amount of clever highly educated people spending all their efforts trying to find the best investment cases, all with the goal to outperform markets. Lately a lot of money has gone into passive investments but there is still a lot of money sitting with fundamental active managers.

Not only passive investments drive return today, we also need to compete with machines. In the last 10-15 years the competition from computer algorithms have increased significantly. In the beginning it was only hedge funds, like AQR, Renaissance Capital and a few other that were using statistical analysis to find stocks characteristics that on average outperformed the market. They applied much of their strategies in a market neutral or at least hedge manner. Meaning going long the stocks they thought had the right characteristics and short the ones that had the opposite. Today this market has exploded, Smart Beta, Factor/Style investing has gone mainstream and huge amounts of money is invested in it. Also fundamental fund managers use these screens to come up with stock picking ideas and evaluate their fundamental portfolios from a factor/style perspective. When I started this blog my ambition has always been to apply similar screens, but on parts of stock universe which institutional investors can not reach.

On top of that, with internet, cheaper brokerage fees and everyone having all the information in the world at their fingertips, private individuals have entered the space of stock picking in a way never seen before. Just look at the amount investment blogs out there, with young and old trying to dig up new investment cases.

To summarize – Three categories of investors:

  1. Professional investors, most of the money sitting with long only mutual funds, but also hedge funds and family offices has large pools of money to deploy. Through company visits, and deep analysis they find the miss-priced stocks according to a multitude of investment styles and approaches.
  2. Smart Beta / Factor / Risk Premia / Statistical Investing, it has many names, but all of them is based on the idea of sifting through large amounts data, finding patterns in that data that indicates as high probability as possible of out-performance. The styles here are also developing, but having worked in this field, the strategies tend to be more similar. The sophistication is rather related to the type of Quant strategy, the simplest being large smart beta ETFs and Funds and the most sophisticated are still firms like AQR and Renaissance Capital.
  3. Individual investors – everything from total beginners, to very professional individuals, investing mostly their own money. Here many have no idea of what they are doing, but there is also wisdom in crowds and on average they might be right, that’s all that matters. There is also a large group of clever hobby investors or finance professionals who invest their own money.

Where to look

My main thesis is to look where few are looking. Do not look for stocks in the same pool as where one or all three above listed categories of investors are looking. The probability to find something “unique” is pretty low, but at least concentrate your efforts where the above three categories is looking less.

Sabre Capital (John Huber) wrote an excellent piece on this, well worth a read: What is your investing edge?. As is argued, many investors believe that if you just look for small caps you have an edge. You have then solved the problem of competing with the “big fish” in category 1-2 above. That is probably true, but one then forgets the “small fish” in category 1-2, as well as the whole category 3. Meaning just buying small-caps is simplifying it a bit too much. Actually as we all know many private individuals love investing in small caps, penny stocks etc. This is appealing to anyone with some gambling genes in them, the thrill of fast gains is exciting even for the most professional investor. Just like the option market has a volatility smile, meaning investors are willing to pay more for call options with a high return potential. I believe small and micro caps in bull markets could actually on average be overvalued, due to this effect, people love buying a lottery ticket. Again, in bull markets this might be an area to avoid.

Avoiding Category 1 & 2

Professional investors come in all shapes and sizes, but to manage money in today’s world comes with certain levels of costs. If your AUM (Assets Under Management) is too small, those costs become unreasonably large compared to your potential income. Without doing a big deep-dive into this, this is my thinking in a few sentences. I would argue that firms with less than 200-300 million USD in a fund, does not really bear itself long-term. There is definitely a lot of funds smaller than that. But they either do not have the resources to actually do all that research that we are afraid of competing with, or they belong to a larger fund group, where they have some small funds but total AUM is higher. Such a firm usually will focus its research on larger companies, for its larger funds.

What are the smallest companies these funds can then reasonably invest in? Again we want to avoid the stock pickers, small funds that run a 200 stock portfolio, would not worry me. The amount of research spent per company, by a small fund with 200 holdings, will be more like an index fund than actually doing deep research. Let’s say 30 holdings for a small stock picking fund of 250 million AUM. That gives us 8.3 million USD invested per holding. What would such a fund managers requirement on liquidity be for buying position in the 8 million range? Well I don’t think they would be comfortable holding anything more than 10 daily turnovers. Actually if the fund is registered under UCITS or such, this would not be allowed for a daily traded fund, but some funds are not daily, like hedge funds. So let’s stick with the generous assumption to begin with. This means that stocks with daily turnover below about 800 000 USD would be a no-go.

If we look at Quant funds, I would say their requirements on liquidity is much much higher. Having worked on building such quant strategies, in a long/short context, for Europe we would not go outside the Stoxx 600 companies, so anything below that, would be under the radar for our factor strategies. Some other funds do go lower, but not much much lower, meaning there is still a huge chunk of the market where factor strategies is not applied. Again this something we then instead could explore to copy their ideas, but in a stock universe they can not touch.

Avoiding Category 3

So my first idea of avoiding the three types of investor above would be something like this: Avoid category 1-2 by looking at small enough companies so most of the competition is gone. Avoid category 3 by looking at markets where individuals are not participating to a large extend in direct ownership of shares. This idea led me to a fairly lengthy search trying to finding out, what markets have low direct ownership of shares from the local population. The data is somewhat sketchy on this and some of the data is unfortunately old, but I managed from several research papers collect together a fairly good overview of direct ownership:

Country stock market participation rates

The source of this data is 3 different studies: “Participation Matters: Stock Market Participation and the Valuation of National Equity Markets – Journal of Financial and Quantitative Analysis”, “Stock market participation and household characteristics in Europe” and “The Effect of House Price on Stock Market Participation in China: Evidence from the CHFS Micro-Data – Emerging Markets Finance and Trade”.

For the few markets that has data both from 2000 and 2007, one can see stock participation in most developed economies has increased significantly (Sweden, Denmark) over the year. In general if we would have data for 2018, participation it probably higher in most markets. Better data would be great, but if the pattern stays the same the above is still useful.  We can definitely conclude that less people are participating as direct owners of companies in Italy, compared to Sweden. My thesis here is that on average one would have more success looking at smaller companies in Italy, than in Sweden.

From my list on markets that I’m able to trade, data on participation rates are missing in some cases. But a good guess is that also these markets have low participation rates, just because they are not very developed. So adding those back in and making a somewhat arbitrary cut, I come up with these markets as good hunting grounds:

Low participation countries

How many companies are we then left with?

Applying the above Country Filter: 61 000 –> 12 700 companies

Now let’s also define a liquidity filter. Unfortunately my screening does not support a turnover screening, instead I have translated it into a rough estimate in terms of MCAP. After some sample checks a Market Cap below 500 MUSD combined with a free float above 30%, is more or less in line with a daily turnover under 800 000 USD. Another filter I throw in putting floor on MCAP at 15 MUSD. I’m not interested in investing in too small companies.

MCAP < 500 MUSD: 12 700 –> 9400 companies

MCAP >15 MUSD: 9400 –> 7700 companies

Free Float > 30%:  7700 –> 5774 companies

So by trying to look in the right place, where other people are not looking, we are down to 5774 companies. This is how they are distributed country-wise

Hunting Grounds Stocks

Hunting Grounds established – Time for factors

So if these 5774 stocks is our new hunting grounds, what do we do next? It is still too many stocks to read up on, now its time to apply different metrics. These metrics should be something you believe in that your companies should have to be great investments. One such metric is the Piotroski F Score (More about Piotroski).

Applying Piotroski F Score > 8

5774 –> 111 companies

Here are all the 111 companies

Piotroski Screen_20180902

Summary

Now we got the universe down to something manageable. From this stage on, its time to go back to the regular due diligence process. This list above contains 111 new companies for me. The screening has helped me with:

  1. Pick out a universe of stocks where few others are looking.
  2. Use a quantitative metric like Piotroski F-Score to within the this universe pick out stocks with good characteristics.

The idea of this is that this selection should on average out-perform the market. For this to be true, one has to believe that these are stocks less covered by the market and that Piotroski F-Score actually works as an indicator for alpha generation. If you start a fund investing according to my steps above, basically you then have a Piotroski Quant Fund. This fund is probably picking stocks where no other Quant-funds are looking. I hope such a Quant fund would outperform the market, and we could back-test this model (if I just had the time). But even if it does not, my idea is to apply my own due intelligence on top of this, to pick the best companies from the above 111. So for me it matters if the above 111 stocks generates alpha, but its not the end of the world if they do not. As long as the stocks I pick from the 111, generate alpha.

Another way which I played with earlier to find certain investments, has been identifying sub-sectors with future great prospects. For example I believe certain type of beverage and brewery companies have a very attractive business profile. Instead of using countries to define the universe, one could combine sub-sectors with metrics to find the for example few undervalued Beverage companies.

This was one example of a screening process. One could endlessly modify how one picks out the first the universe, and then the metrics. A will write more on this topics in a follow-up post, creating especially more metrics. The trick is to figure out what your investment style is, express that in metrics, and the screening will do the rest. Well maybe not the rest, you still need to decide what on the shortlist you want to invest in.

Happy to take any input on what you think would be successful screening methods, preferably backed up by some good reasoning!

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Thoughts on the market and portfolio construction

The last month I have not written much here on the blog. However the inactivity does not mirror what I have been up to. I spent a lot of time lately, screening for stock picking ideas, reading, listening to inspiring podcast and most of all thinking and contemplating.

My screening which will be covered in a separate post has made me realize that I need to significantly improve the way I look for new potential investments. The power of screening increases significantly when you have the luxury (like I do) of looking for stocks all over the world in all market cap sizes. The reading I have done lately has in part been inspired by trying to understand more what metrics I’m looking for in companies that I want to invest in over the long term. Hopefully the steps which I’m about to take over the coming months will be crucial to take my portfolio and investment process to the next level. Slowly but surely the aim is to move towards a more structured and professional investment approach.

My thinking and contemplation has mainly been around two things: 1. What markets are up to currently, if and how I need to adjust my approach. 2. How my portfolio construction should be structured to maximize my changes of success. That’s what I thought I write about today.

Markets and the Trade War

Let’s start with the current market environment. Anyone not living under a rock for the last six months has been flooded in the news about Trump, China and the Trade War. But return wise for most global stock portfolio this has so far had minor impact. US stock markets are at all time highs, Europe is doing pretty well (except Turkey). So far only one major stock market has really fallen significantly and that is China/Hong Kong. Although I made a point of reducing my exposure towards China already back in May 2017 (Rotate away from China). I still keep a large overweight compared to MSCI World in Chinese related stocks. Either that they are listed in Hong Kong, or that they actually are materially exposed to the Chinese economy. Below is the total return of both benchmarks since I made my post about rotating away from China.

WorldvsHangSEng201808

The trade war puts a stock picker in a bit of a conundrum. Most Macro events should be ignored by a stock picker, but the Trade War actually becomes a company specific event as well. In my view it can not and should not be ignored. The effects of the tariffs are so big that a producer in China could be totally out-competed by a producer in another country, as soon as the tariffs comes into place. One could say that the Trade War is bigger than just China and USA, that’s probably true and Trump might for example still have a beef with the Japanese car producers and the imbalances created there in trade. But for now I have just focused on US/China conflict and how that has affected my portfolio.

I have not looked at the stock market in this light before, but I tend to group companies like this since the Trade War started. Especially for stocks listed in Hong Kong.

  1. Companies which mainly sell products and/or services to Chinese consumers. Here the main risks are more subtle, how will the Chinese economy fare if the Trade War intensifies? For the first time ever since I started visiting Mainland China, the people I talk to are afraid of the Trade War effects on the Chinese economy. I just have to point out how rare this is. I discussed everything from ghost cities, rampant borrowing, spiraling property market etc, nothing has really moved the belief among the Chinese I talked to, the only way was up. This is the first time I hear the Chinese people themselves admitting that this could end badly. One should not underestimate the effects such a psychological shift has on an economy which has been a one way street for so long. This makes me worried about my large China exposure.
  2. Companies producing products in China and mainly selling products to the USA/World, but products currently not on the list of tariff goods. Here the risk is more obvious and probably the area where one should be most careful. The stock market has probably not fully discounted that the companies products will fall under future tariffs. An excellent investment thesis could be destroyed by the stroke of a pen from Mr Trump.
  3. Companies producing products in China and mainly selling products to the USA/World, products already on the list of US tariff goods. These companies have probably already seen most of its initial stock price fall already. There might be opportunities here if the company somehow can navigate through this mess, perhaps relocating production or other measures.
  4. The rest – Companies with little or no direct exposure to the Trade War. Here we should more be looking at indirect effects. A lot of companies producing products in other countries are reliant on parts from China, which might be under new tariffs. This could quickly alter margins and shift advantages to producers in other countries which has non-Chinese suppliers of their parts. The problem here is it requires very very deep due diligence to understand these dynamics, if the management is not upfront about it.

Looking at my holdings grouped into the above categories:

  1. NetEase, Fu Shou Yuan, Essity (mainly its holding in Vinda), Dairy Farm (mainly its holding in Yonghui Superstores), Nagacorp (Chinese going to Cambodia to gamble), Coslight
  2. Dream International (although majority of production is now in Vietnam).
  3. I don’t hold any company with significant portion of their goods under current US/China tariffs.
  4. Since I have very few US based holdings I don’t see any major effects here for my portfolio.

So the conclusion for my current portfolio is that I have to be mindful of the general economic strength of the Chinese consumer. If they stop spending, my portfolio would be hurt significantly with so much direct exposure to Chinese consumers. So should I reduce my exposure? If this really pulls down China into a recession and all the unraveling of leverage that would mean, then yes, I really should reduce my exposure. My this is threading dangerous grounds, because now we are not talking about company specific effects anymore, this is Macro. As we concluded many times before as a stock picker we should be wary to try to time too much macro. The truth is I haven’t really made up my mind yet. Let’s look at the other side of the coin too, opportunities.

Opportunities?

Such serious fall in one stock market also gives rise to opportunities. The same reasons why I had such an overweight towards China when I started the blog was partly due to the relatively low valuations compared to other markets. When the Hang Seng now is falling when other markets are rising, this puts me in a tough spot again. Hong Kong stocks looks cheap, but I already have a significant exposure, if I find something very interesting, do I dare to add more China exposure? I think my conclusion so far is, very selectively and with a larger margin of safety than before. I have one investment idea (again in a fairly illiquid company unfortunately), if it falls a bit further, it might enter the portfolio during the autumn. Please give your comments on what do you think of my portfolio taking larger tilts towards China in such sensitive times?

My new portfolio construction

I written quite a lot about the importance for me to find investments that I’m comfortable holding long term. I think this will always be main foundation of my portfolio, lower turnover and a long-term approach to investing. Although a few of my holdings to do not fully meet all my investment criteria (which I by the way will define more clearly later), in general I hold a portfolio now which I’m more comfortable with holding for the long term. I realized now, that reaching this is actually a very nice feeling in many ways. Mostly because I can relax more in terms of following up on my holdings. Instead spend that time on rather finding new good investments and taking my time to do so. Before there was always a stress to find something new to invest in, since many of my investments were short term and I knew I needed to replace them with new ideas rather quickly. This brings me to my next point.

I actually miss not being able to invest in what I would call a swing trade. A large part of my investing “career” I dedicated to following the markets very closely. I’m a contrarian investor at heart and I almost love catching knives (until I cut myself badly on them and need to lick the wounds for a while). Many of my investments in the past were at infliction points in stocks and actually I think I’m rather good at it! So this focus on long-term has taken away some of my possibilities for short term swings when I see an opportunity. Supposedly I could just do these trades outside of the GSP portfolio, but that’s not really what this blog is about. This is my journey to become a better investor and if I think I’m good at something, it should be evaluated properly under the scrutiny of the blog.

Another type of investment which I since the beginning have left outside of the blog is smaller positions in (usually loss making) companies with a return profile somewhat more like a out of the money call option. There is tremendous upside if things go right, but in most cases it turns into a dud and depending on sentiment money will be lost. This is also something I have been decently successful in outside the GSP portfolio. Again the exact same reasoning, if these strategies should be evaluated properly I should include it into the GSP. So with no further ado, I present to you my new future portfolio construction:

The new Global Stock Picking Portfolio

80% Long Term Holding – My current portfolio of long term holdings, target holding period 5+ years, maximum 15 holdings, range of allocation allowed 65%-90%.

10% Opportunistic Holdings – Holding period maximum 2 years, maximum 2 holdings at any one time, range of allocation allowed 0%-20%.

10% Speculative Holdings – Holding period could be short or very long term. Minimum position size (at acquisition) 2%, Maximum position size (at acquisition) 3%, range of allocation allowed 0%-20%.

0% Cash – Maximum Cash position 15% – I reduce my max cash position from previously 25%.

The idea of the speculative trades is to be able to sustain larger losses on several speculative positions, but hopefully that one or more will make up for it, by its high returns. The speculative positions could be everything from a micro cap with a potential success product, or even a larger company, where earnings are yet to be proven (think Biotech etc). More on this later.

During the rest of the year I will restructure my portfolio and introduce especially new holdings in terms of the speculative positions. In due time I will evaluate the performance of the different “buckets”, but main focus will still be on total performance of the whole portfolio.

All comments on my changes are appreciated, since I feel they are not 100% set in stone yet.

 

 

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Reflections and how to improve

Its been a few slow weeks for me with vacation, which is usually when I find time for reflections and lessons learned. My thoughts below are a continuation of this post 6 months ago: Portfolio changes larger reshuffle Part 1. I started out this blog and investment portfolio in March 2016. My portfolio at the time had a heavy tilt towards Hong Kong listed companies and holdings with exposure towards China. The big theme I had been researching for the past year, before starting the blog, was Electric Vehicles and this theme had a large presence in the portfolio as well. That was my starting point almost 2.5 years ago, since then I realized a lot of things on how I should build my portfolio and only three of the starting holdings are still around.

A picture says more than thousand words, so I will try a new format here showing the buy and sell timings of some of my holdings. The performance for all stocks is restated into USD, since my portfolio is in USD. As a reference the GlobalStockPicking portfolio performance is also shown, rebased to start at the same value as the stock price. The data series looks slightly choppy since the GSP portfolio returns are only calculated on weekly basis.

Step 1 – Rotate away from China

My main focus for quite a while has been to find new investment cases and at the same time becoming a better stock picker. The stock picking was needed, to find new type of investments when I decided to start reshaping my portfolio. As important is the portfolio management, side, what should I be looking for, and what kind of companies do I want to have in my portfolio? The starting point of that reshaping was to say, what I did not want to have too much of. In step 1 by decrease my portfolio country tilt, away from China (Rotate away from China). This was done in somewhat of a haste, since my bearish market view meant that I thought a stock market downturn was imminent. My views were based on that I thought the Chinese economy was (and still is) severely overheated, with all the stupid investments that goes along with such a overheating. In this haste to transform my portfolio, I tried to replace the Chinese holdings with less cyclical and defensive companies (like Huhtamäki and ISS). I have to confess here, these investments were made without going the full mile in due diligence. Of course I had done some sort of due diligence, but not really drilling into detailed valuations. More recently I understood that I bought some of these holdings at fairly stretched valuations. I just sold my Huhtamäki holding and I would say the next holding I’m closest to selling right now is ISS. Other non-cyclical defensive investments, like Swedish Match, has performed extremely well in the last year.

Lessons learned from this: Don’t overthink Macro, it still OK for me to make a Macro bet that something big is going to happen in the future. But starting to rush into new investments due to a Macro call of rotating away from China, is not OK anymore. It is very rare that there is such a rush to act, take the time to fully analyze what I’m buying before jumping in. I also have a tendency of finding some new investment and get very excited. It gets even worse when the stock is trending upwards and it feels like I’m missing out, classic FOMO. Investing in this way is not acceptable for me anymore, I have to do a proper deeper due diligence before anything goes into the portfolio. Although I have not formulated that here on the blog yet, this is something that has become a hard requirement in the last six months.

Huhta_20180629

SwedishMatch_20180629

China rotation – missed opportunities

My bearish China view obviously did not materialize at the time, rather Chinense stock markets continued to outperform for quite a while. Most of the holdings I sold, outperformed massively and only one, CRRC performed fairly poor. More recently though, Chinese stocks have turned bearish, with Trump trade wars having the most sever implications for China.

BYD_20180629 CRRC_20180629 PingAn_20180629 ShanghaiFosun_20180629 YY_20180629

Another lesson learned here is to scale out of winning holdings, rather than cutting the whole position. Sure the stock could be more closely to fully valued, but momentum should not be neglected. Both in terms of stock price momentum, but usually the stock price increase is on the back of better fundamentals, where there is usually also some momentum, bringing the valuation downwards all else equal if you just hold on for a while. The way I sold out of YY (Further China reduce Sell YY), on a China Gov clampdown scare, rather than valuation, and how the stock afterwards continued to soar, that is hurtful to look back at.

Part 2 – Easier companies to understand with a longer term view

I stated a quite long term ago, a desire to have less portfolio turnover and take a longer term view on my holdings. The next step of the portfolio transformation was something I realized I had to do, to come closer to such a investment style. That was to remove holdings that is hard for me to fully understand. Meaning companies that I spent quite a lot of time understanding, but the nature of the business just makes it very difficult to fully penetrate. I had a discussion with value and opportunity blogger on this. His comment was that its no point in fooling oneself that you will ever fully understand any business. I agree with him, but the point for me is to understand the company to such a level, that even if a lot of factors around the company changes, I at least have a reasonable chance to grasp what does the changes mean. Hopefully I will also be able to understand if a stock price fall is warranted, or if its just market sentiment shifting. My experience is that when a stock just keeps rising, it doesn’t really matter how well you know the company, it feels great owning it anyway. The stock price increase just confirms how right you were buying it. Its when an investment falls significantly that your investment thesis is really tested, then at least I need that confidence that you understand the company well. I felt there were some holdings I would never reach that understanding of, at least not without a very serious continuous research effort. Companies that had to leave for these reasons were Criteo and Catena Media, one being one of my larger laggers and the other one of the largest gains.

Catena_20180629 Criteo_20180629

Part 3 – Long term yes, but to what cost?

The main reason why I want to be long term in my investments, is that I firmly and strongly believe that one of the last untapped pockets of easily available alpha out there, is to have a longer term investment horizon than the market in general. Given that we want to be long term investors, how do we merge that with an analysis of the current valuation of the company? Should I buy great companies that currently looks very expensive, because they will do great long term? I think there is more alpha in finding great companies, that also currently have some margin to safety. That means you both are looking at good returns just from the business growing, but also a one off multiple expansion, as the market also realizes that this is a great company. In the very very long term, that multiple expansion probably does not matter as much for total return, but when I say I’m long term, I do not mean 30 years, I mean that I have an investment horizon of 5-7 years. Finding such companies is the ideal case, usually it’s only possible to find these among small caps, which then usually comes with other problems. So it doesn’t mean I never buy companies that are trading at high multiples, it all comes down to what opportunities are available in the market as well. Inditex, Diageo and NetEase are all examples where I paid up an fairly high multiple, clearly there is little multiple expansion to hope for, rather I just think they are great businesses which will continue to do very well, again, long-term.

Part 4 – Stock picking efficiently

Stock picking/research is what I enjoy the most, but it is also a time consuming process. Before I present a new investment case for you, I have looked briefly at many different companies, done a lighter due diligence on 5-10 cases and one of these hopefully is interesting enough to add as a new holding in the portfolio, which is then presented to you. I do not spend my time doing full write-ups of companies I do not invest in, just because time is precious, and I don’t have enough of it, to “waste” my time doing nice write-ups of something that I’m not investing in. The only exception was Teva, and that was a stock I thought I would invest in, but during my deeper dive, I changed my mind. Another lesson learned, is that I need to become more time efficient in my stock screening/searching. Currently my screening process is very much random, reading about one company leads me to another company and so on. Another way has been a general investment idea around for example electric vehicles, this leads me to read up on 10-20 companies in and around that sector. In the past I have done certain screenings, for example I screened for all brewery companies world wide, which led me to investing in Olvi. I have also done some screens on Australian and New Zealand listed companies, where I still currently have a few stocks on my observation list. Since my investment universe is global I think I should utilize this more in the future and use screens/filters as a more efficient way of generating ideas and companies I would never otherwise find.

Summary

  • Having limited time and resources to find investment cases marries well with being a long term investor. Long term investing gives the opportunity to extract alpha where few others are looking. For me only certain types of companies can become truly long term investments. For example the company should be fairly easy to understand.
  • I should focus my search and research on long term type of investments and also try to come up with a screening processes which makes it quicker to find such companies.
  • No more rushing into new investments and never make hasty portfolio changes due to changing Macro, better to be late and do correct portfolio changes than rushing into new holdings.
  • When a company re-rates in the market and starts to look expensive, do not sell the full holding, rather scale back the position, my track record shows I’m often not just early to sell, but way too early. Something of a let your winners run, cut your losers short strategy, but with less emphasizes on cutting losers.

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Investment process in more detail

The Funnel

When I evaluated fund managers, I often asked them to describe their full investment process. Most fund managers present this as some sort of funnel, where you start with your whole investable universe at one end, and the stocks in your portfolio in the other and in between the steps how you got there. Just as an example it could look something like this:

funnel-graphrev

This is my first post where I start defining my own funnel, which in essence is a filter process to get a huge universe down to something manageable. This process is currently rather unclear even to myself. An important part of starting this blog has been to force me to define a funnel, or at least something similar. I need a strategy both for which companies I should look closer at and what to focus on when valuing the company. This may sounds easy, but currently I have a huge lack of consistency on what parameters I evaluate a company on. In a similar way I do not have a process for finding what company is most worthwhile to research.

1. The Universe – Global

As the name of my blog implies my universe is global and also not restricted at the moment to any minimum liquidity cap. Meaning I more or less have the full world universe at my disposal. Minimal constraints in theory gives most room for out-performance, but looking at it practically a small one man show as mine has no possible chance in a lifetime to evaluate all existing companies, so something clearly needs to be done to narrow this down.

2. Filtering the Universe

2.1 Liquidity

I henceforth put a minimum cap on liquidity of average 3 month volume at 100 000 USD. This is very low and I probably will revise this in the future, but I currently have one holding which has poor liquidity and that is Highpower International. Given that I just invest my own money I don’t have a need for high liqudity at the moment. In the future I intend to make my process scalable for investing larger amounts and then I want to already have the same process in place. My thoughts for future minimum liquidity is around 1 million USD average daily volume. This will be my first step in narrowing down the universe.

2.2 Investable countries

Currently I don’t have brokerage accounts to invest in every single country in the world (few professional investors do either). My investable markets can be summarized as follows: North America, Western Europe, Turkey,  Japan, Hong Kong, China, Philippines, Korea, Taiwan, Thailand, Indonesia, Malaysia, Singapore and Australia.

3. Generating Investment Ideas

Mainly I use what I see, read and experience around me to find interesting prospective investments. I try to think far ahead, what the world will look like in 10 years. I travel quite a lot, that helps for being able to invest globally and to understand consumer around the world. For example I never visited South America and I’m much less confident to invest in that region just for that sole reason. I also spend a lot of time online reading forums and news. This is close to the core of why I love investing. I’m curious about what people think and I like to learn and understand new things. My investment ideas are seldom totally unique, it’s hard to be in a world full of investors, so I steal ideas without shame from all possible sources: fund managers, sell side research, investment blogs, podcast, news articles etc.

4. Specific Screening

Here all types of screens could be applied that is relevant for the current Investment Ideas. Something that makes sense in most cases is screening down to Sector/Sub-sector/Industry for a specific country or region. This comes in handy later when doing peer valuations or just comparing which company is most interesting to look further into. As examples one could try to screen for companies involved in battery production all around the world or consumer staples in China.

5. Factor/Style Screening

I’m a big believer that its favorable to invest along with some well known factor risk premia. When analyzing famous fund managers that have fantastic track records of generating alpha, their out-performance can often be explained in large part through their investment process. Knowing or unknowingly they have built their investment process tilted towards a risk premia that over time has generated some or all of their funds out-performance. One famous example is Warren Buffet’s value investment-style, in combination with a company structure which has enabled him to take on some leverage to the Beta he has been exposed to. Other famous fund managers have exploited Low Vol strategies or more recently Quality and High Dividend tilts.

So the first step for me is to understand/decide what risk premias that are worth investing along with. From the research I read and the experience I gained professionally I have decided to initially focus on Value and Momentum. The reasons for this I will need to explain in further detail later, although some explanations have been given in earlier posts.

6. Invest with tailwind

One important aspect of my investment style is finding some sort of future tailwind in my investments. For me these tailwinds can be of very different types, one example would be investing in stocks with Value characteristics. The normal way of thinking about tailwinds would be and industry that has potential for good growth. This type of tailwind that I focused during the last year has been the development of Electric Vehicles (EVs) and the emerging Chinese middle class. Another tailwind I use frequently is just what the market tells me about the price of a stock (price momentum). During the 15 years I invested I always looked at charts and been intrigued by how Technical Analysis (TA) try to capture psychological aspects of investing. My belief is that there predictive power in price momentum and this has also been shown in numerous research papers.

Long term (5-20 years) upwards price trend is also important to me. It tells me that the company has created share holder value over the long-term, surprisingly many large companies have not. Positive price trend over the long term I also call a tailwind.

6.1 Timing / Short term Momentum

Short term price movements I use to try to time the investment and enter at an attractive level. This is less of a tailwind and more of a proven market anomaly (price momentum) and a personal preference that I like to buy on short term weakness (in general I like to buy stocks on days when the market is down). I realize these attempts at timing might be futile, but I do feel over my 15 years investing I developed some type of fingerspitzengefühl. I might need to back that up with some statistics at some point, that I currently don’t have. When I have more time I will analyze as many past trades as possible and see if I entered the stock at a favorable price point.

6.2 Value Investing

This is such a big topic and also something I still have much to learn about, so I will cover this in Future posts separately.

7. Analysis

For the stocks that passed my filters and requirements I want to do a deep analysis of the company and it’s peers. This step will also need a separate post to go through in further detail. Here I also have much to learn, since by profession I’m not an equity analyst, although I have been analyzing companies for many many years in my spare time. The CFA also helped with some techniques and account knowledge.

8. Portfolio Construction

Finally portfolio construction. My aim is to have a portfolio diversified over sectors, countries, style/risk premias and sometimes even currencies. A colleague of mine used to say, diversification is the only free lunch. The meaning of that is that diversification gives you a higher sharp ratio and less company specific risk for free. What you possibly pay is if you have one outstanding idea and you still just invest with a small amount in the idea, to not give up diversification. But this to me is nonsense (as long as you don’t have insider information, which I don’t). In my belief there are no such investment cases which warrants you to go “all-in”. Here I also have some work to do, one reason I have not come so far, is that the amount of stocks I have researched is too narrow. I don’t have a pool of 50-60 good investment ideas to chose from and select those that give me good diversification in the way I mention above. So i don’t expect to develop these last stages of my investment process before I have come further in the earlier steps.

Conclusion

So now I have created my first own “Funnel” going from the full investable global universe down to Portfolio construction. All steps are not finalized and I have much more work to do, which will probably take me another year or two to iron out. After that I expect to have a professional investment process to follow. This process will both be built in such a way that it will increase my probability to generate out-performance (by quantitatively filtering out companies with favorable metrics) and suit my investment style and the way I like to invest. Both are equally important to me. I believe that merging quant with stock picking skills is the future and exactly what the most advanced investors are already doing today.

 

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