Value Ideas Blog
Looking back on 2014 and ahead on 2015

This year was the year with my lowest portfolio return which was till 1.12.2014 6.21% after taxes and trading costs including an average cash level of 27.8%, the final result with volatility will be send to me on the 17th of January, but I don’t think that there will be a big difference in the results. This is my weakest performance since the real start of my trading history in the year of 2008.

 

As we cannot and will not discuss our Portfolio Holdings in public we have to speak about the things which were related to the performance. In my opinion we made two major mistakes. First of all, time management. We spend a lot of our time on legal issues related to the German regulation (which did not really take us ahead). This time was missing for good analysis work to evaluate companies. But this is the price that you have to pay if you try to achieve everything on your own.   Second, we made fundamental mistakes like the one with Vetropack and with it and our due to our legal structure the mistake of dead money. If a company cannot achieve any growth at all the time plays against you and it doesn’t matter which price you pay. This is something which I learned over the last year and where I would like to give you a short excerpt and math example out of a presentation of RV-Capital:

 
“Whether appropriate or not, the term ‘value investing’ is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, a low dividend yield – are in no way inconsistent with a ‘value’ purchase.” Berkshire Hathaway 1992 Annual Report
 

The math example to it:

 
  1. If you buy a business with no growth and 2% cost inflation for a EV/EBIT 10 in T0 you end up paying an equivalent of EV/EBIT 38.7 in T4.
  2. If you buy a business with no growth and no cost inflation you end up with the same EV/EBIT of 10 in 4 years. (Example: Vetropack)
  3. If you buy a business with 5% growth and no operating leverage, you pay an EV/EBIT of 7.8 4 years from now
  4. If you buy a business with 5% growth and operating leverage, you only pay EV/EBIT of 5.4 4 years from now which is clearly a bargain.
  5. If you take company 4 and add pricing power to this equation you end up with an EV/EBIT of 3.2 in 4 years.

So you can see on this easy example: growth matters

“• Focus on the multiple relative to the business and not the absolute multiple • At nearly all times, the great business will trade on a higher multiple than the value business • For the truly long-term investor, the great business (properly analyzed) beats all other businesses at almost any price. • There is a time horizon arbitrage in great businesses trading at high multiples • It is perfectly valid to invest in non-great businesses, but be sure to pay a lower relative multiple • Longevity of growth is far more important than the rate of growth” RV Capital
 

Furthermore I learned that in investing similar to my favorite sport climbing, it is all about a good fail protection. That is also a reason for the quiet low portfolio transaction and high cash amount. We have only 5 companies from our first goal of 10-12. furthermore I would like to highlight the importance of a defensive thinking and aggressive acting. What do I mean with this? In my opinion it’s about understanding second, third and more level of influence and the time horizon which it takes to affect the underlying stock price. An example can be seen in the Oil and Gas industry where a low oil price isn’t that bad in the short term. But if the oil price stays low for a longer time horizon, like half a year or longer, Oil companies cut back production and CAPEX. As detailed budgets are normally made on a yearly basis and up to 5 years in for big projects, it takes some time till the CAPEX directly influence the earnings of companies which are related to exploration.   Furthermore it takes even longer to feel this influence for companies which are not directly related to the exploration. This has led some investors into paying peak earnings for a cyclical company.  Observation has tought us that many losses for investors came from the purchase of low quality companies at time of favorable business conditions. This only means that purchasers view the current good earnings as equivalent of the EPV of the company and assume that prosperity is a synonym for safety. But this is often not the case.  

Personally 2014 was challenging for both of us: Felix was able to finish his internship, receive good grades in university and lastly score a nearly perfect GMAT score, which he needs for his further studies. For me it was all about finishing my Master, doing the CFA research challenge and the first level of the CFA.  

In 2015, Felix is hopefully about to enter one of the top universities abroad and to improve as a value investor; the only thing that’s left of my studies is my Master Thesis which I will start in the next couple of days and the level 2 of the CFA which I hope to pass in June. Furthermore I would like to correct some mistakes in my analytical thinking to become a better value investor.  

To sum it up: our main aim for 2015 is to get better in the evaluation of the value of growth, spend more time on companies and be more rigorous in our selection of companies which enter our portfolio. And of cause the other necessary university stuff 😉

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