This the editorial of our monthly Quant Value Investment Newsletter published on 2022-03-01. 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 I answer your email questions from last month. But first the portfolio updates.
Five companies to sell this month. After the invasion, as you can imagine Kernel Holding the Ukrainian agribusiness lost 40% but the other companies all had solid profits ranging +9.6% to +57.1%.
Portfolio Changes
Even though we found three compelling ideas this month:
- a United Kingdom-based footwear retailer
- a North American metal processor and
- a Japanese manufacture of food and industrial packaging materials
No new ideas are recommended because all markets are below their 200-day simple moving averages.
Europe – Sell two
Stop loss - Sell
Kernel Holding S.A. -40.1%
Asseco Poland S.A. +57.1%
North America – Sell one
Sell Diamond Hill Investment Group +44.7% as, after a year, it no longer meets the newsletters’ idea selection criteria.
Asia – Sell two
In Asia sell Shinagawa Refractories Co +51.2% as it no longer meets the newsletters’ idea selection criteria.
Stop loss - Sell
National Tyre & Wheel Limited +9.6%
Corona Crash Portfolio – Nothing to do
Nothing to do in this portfolio this month.
No more ideas: +57.7% average return
To date the Corona Crash portfolio has done extremely well with all 26 investment ideas returning an average of +57.7%.
Subscriber questions and answers
As you saw in the email last month, because of all the uncertainties and wild market movements, I asked you to send me your most burning question.
Here are the questions and my answers.
What about China’s impact on Hong Kong and Taiwan?
“The last two years I am hesitant about investing in Hong Kong and Taiwan because of the political moves of China.
Therefore, what is your opinion on how to factor geo/political risk in the investment decision process?”
The only way to deal with geopolitical risk is to treat it the same as with any risk in your portfolio and to diversify.
Because nobody, and I want to emphasize this, no one has got any idea what will happen in the future so you must diversify.
This means you must set and follow your own limits (there is not “right” answer here) in terms of the following:
- Currency - Not too much of your investment in anyone currency
- Company - Not too big a part of your portfolio in anyone company
- Industry - Not too much of your portfolio in one industry
- Broker - Have multiple brokers to decrease the risk of any one broker going bankrupt and your assets being trapped
- Country or region - Not too much of your assets invested in anyone country or region (This includes your home country! Remember the risk of home country bias)
- Asset class - Don't invest too much in any one asset class - stocks bonds or bank deposits
What about ethics?
“Do you consider the ethics of companies/countries at all?
The potential of war in Ukraine and the rising price of oil has obviously meant a lot of oil companies are making a lot of money. I imagine the same goes for arms companies.
Then there are the usual suspects of tobacco, coal, gambling etc. There are also ethical questions about investing in China, Russia, and other autocratic countries.
Do you have a stance on these (no stance is still a stance in my mind), maybe one month you would consider a chapter on ESG risk or your own ethical guidelines/policies (or none if you have them)?”
Our job with the newsletter is to give you the absolute best investment ideas we can find. Irrespective of where these companies are and in what industry sectors they operate.
We do not take ethical considerations into account.
Each person has his own ethics and values, and it would be unfair if we apply a filter of our values and ethics to the ideas.
What do you do with the recommendations is up to you.
What about scaling into investments
“I've been dealing in fairly small chunks with your recommendations as I wanted to test your returns before betting the house, but I developed the following strategy to overlay on top your own one.
Buy in with €1000
Wait for it to go up 25% gain
Buy in with another €1000
Wait for it to go up to 26% gain (25 + 1)
Buy in with another €1000
Wait for it to up to 27% gain (26 +1)
And so on...
So, my investment question to you is: rather than applying a flat buy-in (e.g. each share = 2% of the portfolio) how does a strategy like the above work out historically?
In other words, does buying more of the high performing shares lead to better outcomes than only operating with single buy and hold transactions?”
What you are doing is classic momentum investing and it is something that I should do more in my portfolio. It is a turbo version of letting your best performing ideas run while cutting your losses as fast as possible.
Let me give you an example for my own portfolio.
In 2020 I became really positive on the shipping industry. Mainly because the industry has had no investment in new ships since the financial crisis and capacity was getting extremely limited.
In 2020 I made two investments in a shipping company called MPC Container. Both investments were sold after the 20% trailing stop loss was breached.
Early in 2021 I made another investment in the company and this time the stock price took off. As the price increased, I kept on buying. I cannot remember exactly how many times I bought but I think it was three times which means this company had a position size of about three times my normal position.
Stock price went on to increase more than 450% making it a really successful investment.
What you must be careful of
What you must be careful of is when this positive trend (momentum) goes into reverse. This can happen suddenly with a big price move down.
You can mitigate this risk by setting a limit, for example of not investing more than three times your normal position in anyone company.
You can also set a smaller trailing stop loss limit on the position overall, 10% or 15% instead of the 20% we follow in the newsletter.
What you can also do to increase your chance of getting it right in the beginning, is to buy a smaller position, for example 50% of your normal position size. And then buy the other 50% if the stock is up 10% or whatever price movement you want to set.
As with all rules in investing there is no right answer to any of the above percentages.
The main thing is to think of these things in advance and set rules for yourself, especially to limit your downside
Is market timing possible?
“Is market timing possible to improve value investing?”
I have looked at market timing from all sides, reading all of the investment research and letters of great investors I could find.
The simple answer is you cannot time the market.
The most important thing is “your time in the market” and not your time spent “trying to time the market.”
This of course does not mean that you can invest blindly. It is only prudent to avoid volatile over valued part of the market an invest your money where you are getting value for your money, in other words quality undervalued companies.
Avoid a permanent loss of capital
The thing you must avoid is a permanent loss of capital.
If you invest in a company that is undervalued it may fall further in a crash, but when the dust settles and things returned to normal, this company will return to the price before the market crashed. You would not have a permanent loss of capital.
If, however you bought extremely over valued growth companies, and there is a market crash. It is very unlikely that this company would return to its previous valuation - which means a permanent loss of capital.
Have enough cash
Make sure that you have enough cash so that you will not be forced to sell your investments.
The money you invest must be available for a long time!
At all costs you must avoid any risk of becoming a forced seller. This also means avoiding leverage in your portfolio.
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