This is the editorial of our monthly Quant Value Investment Newsletter published on 2023-10-03. Sign up here to get it in your inbox the first Tuesday of every month.
More information about the newsletter can be found here: This is how we select ideas for the Quant Value investment newsletter
This month you can find out why paying less attention can increase your return.
But first the portfolio updates.
Portfolio Changes
Europe – Sell Two
No new recommendations this month as the index is below its 200-day simple moving average.
Stop Loss – Sell
Sell Smiths News Plc at a loss of 15.0%
Sell Kitwave Group plc at a loss of 14.5%
North America – Buy One
One new recommendation this month as the index is above its 200-day simple moving average.
It’s a dirt-cheap Canadian metal distribution company trading at Price to Earnings ratio of 7.6, Price to Free Cash Flow of 6.0, EV to EBIT of 6.2, EV to Free Cash Flow of 5.9, Price to Book of 1.5 and pays a dividend yield of 4.0%.
Asia – Buy Two – Sell One – Hold Two
Two new recommendations this month as the index is above its 200-day simple moving average.
The first is a Japanese manufacturer of mechanical and functional parts trading at Price to Earnings ratio of 12.1, Price to Free Cash Flow of 11.1, EV to EBIT of 4.9, EV to Free Cash Flow of 5.3, Price to Book of 0.8. It pays a dividend of 4.3% and in the past 12 months bought back just under 7% of its outstanding shares!
The second is an undervalued, fast growing Japanese food logistics company trading at Price to Earnings ratio of 10.4, Price to Free Cash Flow of 4.3, EV to EBIT of 6.5, EV to Free Cash Flow of 4.1, Price to Book of 0.9 with a dividend yield of 3.0%.
Hold - Two
Continue to hold APT Satellite Holdings Limited +16.7% (recommended October 2021), and E J Holdings Inc. +40.9% (recommended October 2021), as they still meet the portfolio’s selection criteria.
Crash Portfolio – Sell Two
No new Crash Portfolio ideas as most markets have recovered.
To date the 15 Crash Portfolio ideas, recommended since August 2022, are up an average of 20.2%!
Sell Delfi Limited at a profit of +86.4% as it no longer meets the portfolio’s selection criteria.
Stop Loss
Sell Groupe LDLC Société anonyme at a loss of 5.6%
Want to Be a Better Investor? Stop Staring at Your Portfolio
In the world of investing, we are often guided by two powerful fears:
- The fear of missing out when the market is on an upswing.
- The fear of losing money when the market takes a downward turn.
These fears can lead us to make bad irrational decisions. One approach to help you maintaining a clear and logical mindset is to stop checking stocks obsessively.
Understanding Stock Movements
When one of the stocks in your portfolio goes up or down, it's important to remember that investors own stocks for various reasons. These reasons range from mutual and hedge funds seeking quick results to computer algorithms trading based on patterns. Some investors even buy or sell stocks solely based on price trends, paying little attention to a company's fundamentals.
The truth is, daily stock price movements are, in most cases, effectively random. Unless there's specific company-related news impacting a stock's price, the most plausible explanation for a stock's movement is an imbalance between buyers and sellers. Attempting to attribute daily fluctuations to specific causes is a guessing game, a game that the media plays all too frequently.
My Weekly Portfolio Check
A few years ago, I adopted the practice of reviewing my portfolio only once a week, and I highly recommend you consider it too.
Every weekend, the screener automatically emails me my portfolio spreadsheet with Friday's closing prices, along with all the ratios and indicators we track.
On Monday, I update my portfolio spreadsheet, examining price movements, assessing stop-loss levels, and evaluating company valuations.
This approach has shifted my focus from individual stock movements to overall portfolio changes.
It has effectively eliminated the two fears mentioned earlier from my weekly thought process.
Knowing that I'll evaluate my portfolio on Monday frees my mind to concentrate on other things during the week. It's as if my mind has learned that Monday is the day for portfolio review, sparing me from constantly monitoring individual stock movements.
Act on a Monthly Basis
Reviewing my portfolio weekly doesn't mean I trade based on weekly movements. The same as the newsletter’s investment strategy, I only trade on stop-loss levels monthly. This approach significantly reduces trading costs. If a stop-loss level is breached during the week, I take note of it, but I only buy or sell monthly.
I've discovered is that breaches of stop-loss levels within a month may correct themselves when evaluated monthly.
Implement a System
To fully free myself from the two fears during the week, I adhere to a strict system, the same one we follow with the newsletter:
- Buy and sell companies only once a month.
- Act based on trailing stop-loss breaches monthly.
- Stop buying if markets are below their 200-day simple moving average.
This system effectively dispels both fears.
It eliminates the fear of missing out because I know I'll be making monthly purchases. And it addresses the fear of losing money during market downturns due to the trailing stop-loss and the fact that no new companies are bought when a market is below its 200-day simple moving average.
If you're still glued to your portfolio daily, I urge you to review the rules followed by the newsletter. You may find they give you peace of mind, allowing you to redirect your focus to other endeavours and unclutter your mind.
Invest wisely, invest calmly.
Reading Recommendations
How to become an agile investor
A good friend Raman Minhas wrote a very personal and insightful second quarter letter on How can you become more agile as an investor.
So, what do I do now?
The approach combines elements of valuation, using ~5 year historic numbers and near-term projections, with simple charting and trading rules. I run a fairly concentrated portfolio with usual entry positions to test of around 3%, eventually building up to 10%. Risk management comes from (i) margin of safety, (ii) portfolio sizing, and (iii) stop loss rules around charting.
Back then to the question in this letter – How can you become more agile as an investor?
Always be learning. Always be humble.
You’ll have a leaning towards a style. Meanwhile, by always being a student of investing, by embracing that you can never know everything, and staying humble keeps you keen, receptive and open minded. It helps you develop a bespoke approach and one that fits with your inherent biases and emotional makeup.
You can’t rush it (but you can get busy learning and doing); it’s a never-ending process rather than a destination.
Enjoy the journey.
How serious is the debt problem in China
Nils published a thought provoking and worrying letter titled How serious is the unfolding Chinese debt crisis?
How serious is all of this?
Going back to the point I made earlier, i.e. that a slowdown in China can impact the rest of the world in three ways, allow me to finish this letter with a few observations on those points. As far as exports are concerned, an economy like the German could be severely affected, as Germany exports a great deal to China.
The US economy, on the other hand, will hardly be affected, as US exports to China are miniscule when compared to the size of the US economy – a $25 trillion monster economy. Last year, ‘only’ about $155 billion worth of goods and services were exported to China. Therefore, even a severe Chinese recession will hardly be noticed on the bottom line in the US.
Having said that, and as stated earlier, a Chinese slowdown can, and probably will, affect the rest of the world in other ways. My biggest concern is the psychological impact a meltdown might have on other financial markets, should things go from bad to worse in China. If investors collectively conclude that China has indeed reached the end of the road in terms of debt accumulation, the fact that the impact on the real economy would be quite modest will probably be ignored.
As I write these lines, I note that the DAX index of German equities is up 14% year-to-date, while the S&P 500 index of US equities is ‘only’ up 12% over the same period. If my logic is correct, the German economy will suffer a great deal more than the US economy, should economic fundamentals deteriorate further in China.
Therefore, from a fundamental point-of-view, one should favour US equities over German equities, if one is concerned about China. On the other hand, as we learnt in 2008, once the cat is out of the bag, fundamentals do not necessarily apply, and the collateral damage can be immense.
Wishing you profitable investing
Not a subscriber? Click here to get ideas from the BEST strategies we have tested NOW!
