Q1 2024 Performance Review – Commentary: “Contrarian Investing – Easier Said Than Done”

In the first 3 months of 2024, the Value & Opportunity portfolio gained +3.2% (including dividends, no tax) against profit +6.0% for Benchmark (Eurostoxx50 (25%), EuroStoxx small 200 (25%), DAX (30%), MDAX (20%), all TR indices).

Links to previous Performance reviews can be found at Performance page blog. Some of the other funds I follow performed in the first three months of 2024 as follows:

Fund Partners TGV: +9.0%
Profitlich/Schmidlin: +4.0%
Squad European Beliefs: 3.4%
Frankfurter Aktienfonds für Stiftungen: +5.9%
Team Aguja Special Situation: +1.2%

Paladin One: -5.9%
Alphastars Europe: +0.6%

Gehlen & Bräutigam: -1.3%

Performance Assessment:

Within my subjective small-cap group, the portfolio performed slightly above average. Overall, it clearly reflects the divergence especially between large and small caps. In my mixed benchmark, Q1 performance was as follows:

Eurostoxx 50: +12.8%
DAX: +10.4%
Eurostoxx small: +1.6%
MDAX: -0.4%

Given that most of my portfolio plays (on purpose) in the German/European SME space and no “lucky strikes” like Schaffner and Logistec last year, the performance is quite okay.

Will it stay like this? Who knows, but from a valuation perspective, I see more and more attractive opportunities in my “circle of competence”, which makes me quite optimistic in the medium to long term. In the short term, as always, anything can happen.

Q1 Transactions:

The current portfolio can be seen as always on the Portfolio page.

In the 1st quarter, Logistec left the portfolio due to the closing of the takeover. Including dividends, the profit was around +52%. Not bad around 9 months, but on the other hand also below my estimate of intrinsic value.

Two new positions were entered, both in Germany with Eurokai and Fire Amadeus. Eurokai is more of a deep value game, Amadeus Fire has “decent quality at a decent price”.

Later in the quarter I reduced Admiral to 5% (from around 6.3%) and added Sto (+0.5%) and Energiekontor (+1%).

The average holding is 4.1 years, cash is ~9% and the 10 largest positions are ~51% of the portfolio.

Comment: “Anti-Tyrian Investing – Easier Said Than Done”

Contrarian investing, i.e. buying assets whose price has already fallen for some time, is perhaps one of the most popular ways of investing especially for value investors, but also for many retail investors, next to momentum investing, where you just buy what is doing well . .

Warren Buffett was/is of course famous for contrarian investing, such as Amex after ‘salad oil scandal’ or buying bank shares during the GFC. Other notable contrarians were of course Ben Graham, Peter Cundil or Walter Schloss, to name just a few.

It sounds very simple: Just look at something that’s doing really poorly, buy it, and wait for the value to come back.

But in reality, it’s much more complicated: First, you need to be sure that the value will eventually return, and second, you also need to get the timing right.

  1. Will the stock/asset/market rebound?

In many books, you only read about successful examples like Warren Buffett. But I guess you won’t read a book about guys who invested a significant part of their portfolios in Russian stocks before the attack on Ukraine because those stocks looked “so cheap”.

Or the guys who followed Charlie Munger to Alibaba a few years ago. One of the worst “offenders” in this regard, in my opinion, is Monish Pabrai with his incredibly bad book “Dhando Investing”, where he outlines a high-risk bet on highly leveraged stocks as a “no downside” investment because it came out. . Ironically, fate punished him soon after with a huge loss on an equally “risk-free” investment called Horsehead Zinc. This is a very important point to remember: Just because the bet paid off doesn’t mean there was no risk to begin with.

Avoiding the value trap is much harder than it seems. Everyone dreams of buying the next Amazon after the Tech crash, but no one talks about the thousands of Dot.com companies that failed. Problems in the structural industry often appear to be temporary problems at first.

There are also cases where society is so screwed up that nothing can be done about it, even if parts of society are fine. General Electric was one example or Bayer. Such companies may bounce back at some point, but from a much lower level than everyone expects.

One also needs to watch out for any political or macroeconomic risk that could make a company, industry or even a country uninvestable for some time. Russia was one example, China another. Yes, we may see a significant recovery in Chinese stocks if tensions around Taiwan subside. However, if the Taiwanese issue heats up, there is a real risk that foreign shareholders could end up in a similar position to Russian stocks, especially since you don’t actually own shares of Chinese companies, but rather some exotic derivatives with Caribbean entities. as counterparty.

2. Timing the rebound

Another big problem with contrarian investing is timing. In the end, you may be right, but especially as a professional money manager, someone else can manage your fund if you don’t time it right.

A lot of hot Dotcom stocks that actually survived took a very long time to recover. Another industry that personally affects me is the construction industry. After such a long boom fueled by low interest rates, it may take several years for the sector to recover to levels close to recent peaks.

However, for the patient private investor who has no bosses to please, the timing factor can be a very good opportunity.

What has worked best for me in the past?

The following approach has worked best for me in the past: Look for a very broad and “public” decline (preferably a country or even a continent) and then focus on quality companies that are relatively cheap relative to their intrinsic value, not the absolute cheapest stocks. . My biggest “gold mine” was clearly the euro crisis of 2011/2012.

At the moment, I feel that European small caps offer a similar opportunity as they did then, but if that’s true, we’ll see in a few years.

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