Fliujniligui's Blog : Lessons I got from my short investing career

I have been with mutual funds for 10 years, from teenager to young professional and last September and October, when I saw most of my professional managers did not foresee anything and were very performing at losing as much or more than whole market and charged me 2.5 to 3 % annual fee for doing this, I just began my investing career by selling all of this and trying to do better pick by myself for better short term and long term results.

I got decapitated by my short term results, but as headless as I could be, I believed my analysis was right and that the picks I had made were going to avoid bankruptcy. My pick log is representative of the stuff I bought for real. The trick I found is that every time AIB was going down 40%, GE down 40% or anyother, I would reassess the situation and throw as much money in it, because I tought it was sending good money after bargain making previously sent money look bad.

All of the market action seems to be driven by the difference between what it looks like and what it is and this is where my short term underperformance seem to have been the prerequisite for mid term outperformance. Indeed, if you look at my picks and the charts of them you can see how good and bad companies behaved similarly in the peak of crisis. Also the recovery doen't always look related to the quality of the underlying business. As an example, Deutsche Bank looks as awful as Barclays or UBS when we look at charts and superimpose them on google finance.

Let's look at fundamentals grossly.
Barclays had a lot of bad assets, it has around 30 billions pounds of shareholders equity, it had to go to Arabic Prince to get billions of preferred share capitalization at a hefty cost and it had to shed Ishares to get further capital. All of this was done to avoid government help. Barclay's share recovered a good part of its peak value, 17$ now vs 60$ peak means that now we are at 28% of peak value. Barclays market cap to shareholders' equity stands at around 73%. It is a relative bargain on this since 73 buys 1$ of equity. Assuming that Equity will not take further hits from bad things.

I go to Deutsche Bank now. It did not need government help. It raised its tier 1 ratio to 10 + % by itself. It managed to expand in reliable retail banking business during the crisis and did so without hurting capital by getting stake in Postbank paid in shares. It also avoided massive losses except for Q4 2008. We must say that losses from Q4 2008 came with the positive side that massive derisking and deleveraging was done when this kitchen sinking came. Also, DB will hire its CEO for 3 more years when everyone elsewhere gets forced to step down because of incompetence. DB shareholders equity is 33 billions Euros. Its market cap is 41 billions $. Market cap to Shareholders' equity is 87%. It is, on this basis, a little bit more expensive than BCS. Ah, I forgot to say that DB earning power is not endangered by Arabic Prince Dividend payments, and it is also preserved by the fact that if you buy a Powershares, it is still owned by DB. They did not shed assets and do massive sacrifice. This being said, DB peak was around 160$ and now it is at 67$. It is 40% of peak.

So, how do I see the situation and what would I buy from these 2 today. I think DB share price when we look at it as a % of shareholders' equity, % of peak value, % retracement from bottom are all things that seem to ignore how better that business was managed than many of its peers, especially BCS. When I see that BCS is valued and performs as well or better than DB, I think that market has a good chance to be dissociated from the reality no one knows perfectly. If I had to buy something I would buy DB. For sure, I was more comfortable buying DB at 29$, but I still hold it since I have a lot of fundamental reasons to believe it is worth a lot more than 67$.

This is my logic in building my portfolio. I try to find the best stuff first, and once I screened it, I check the market cap, shareholders' equity, management quality, a thing made easier to assess by reading boom years publication. If nothing is said about loan to value ratios and risk management systems in the annual report of a bank in 2004 and if return on equity is all what is talked about, this rings an alarm. (Anglo Irish Bank vs Allied Irish Banks and Bank of Ireland). When Allied Irish went to 3$ from 20$, I went and read all the annual reports from 3 Irish banks to grasp the better possible idea of what was really considered in risk management. AIB looked ok to be worth more than 3$, and it still looks so even if I did not foresee how bad a turn things would take for AIB. They still had a lot of their business well run and this will save them along some external help.

I can give another example of quality bargaining. You have material stocks. BHP Billiton is a king in the mining and minerals sector and everyone knows it. Stock is not very expensive but it is not a crazy bargain because everyone knows that. I look elsewhere. AWC is linked to bauxite production and selling to Aluminium producers. Its market cap is half of shareholders' equity and its indebtedness is very low. I bought some, should it go down I buy twice as much and so on. A company with a very positive enterprise value won't go to 0 if nothing bad is done. If it goes to 0 without a good reason, I will buy it all, so it won't hehehe. This means that if analysis is accurate with a fat enough margin of safety, a drop in share price now becomes an opportunity to make the same investment with a greater return potential and a lesser risk. Funny eh ? There is TIE too, a titanium alloy dispatcher producer. Bought it when market cap was equal to shareholders' equity. They have no debt and eke out a profit in the mess. They can wait forever for economy to recover and eat up on the cheap some failing competitors if the occasion presents itself.

This is enough for today. In my pick list, I have 2 or 3 dogs, COP ING and AWC. If I want to make a buy I know where to look. ING is in no way inferior to BCS and it is still respected by customer masses...