The Value & Opportunity portfolio grew in the first 6 months of 2021 +14.7% (including dividends, no taxes) for a profit of +13.8% for the benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%), all TR indices).

Links to past performance reviews can be found on the blog’s performance page. Some other funds that I follow have done as follows over the first 6M 2021:

Partner fund TGV: + 22.1%
Profitable / Schmidlin: 13.3%
Squad European Beliefs + 18.54%
Ennismore European Smaller Cos + 16.01% (in EUR)
Frankfurt equity fund for foundations 7.42%
Greiff special situation 3.45%
Kader Aguja special situation 10.37%
Paladin One
5, 94%

performance evaluation

For the first 6 months, the portfolio was more or less in line with the underlying benchmark, although my readers know that the composition is very different and I had allocated around 10% cash on average.

On the plus side, I made few obvious mistakes, such as selling SFPI too early. On the negative side, I’m a bit angry that I didn’t turn some of my brighter moments (BionTech, Couche Tard) into bigger positions.

I am very surprised at how strong the stock market is still doing overall. Overall, YTD 2021 far exceeded my expectations for potential returns, but more on that later.

Transactions Q2:

In the second quarter I have my remaining travel basket items (Southwest, JD Wetherspoon) as I had growing doubts about how well tourism is recovering. This seems to have been one of my better timing calls as both stocks are now trading well below the levels I recognized. I think there are many reasons for this; for JD Wetherspoon, the lack of willing employees and possible wage inflation could also play a role.

I also sold SFPI, obviously too early in retrospect. The reason was, as explained, that I initially got into DOM Security and should have left SFPI after the takeover / exchange offer, as SFPI is very different from DOM Security (cyclical, lower margins, turnaround). I also left Just Eat Takeway.com Grubhub (JET). As I have written, I feel that my analysis has been incomplete and that the stock and business are “too tough” to be comfortable with right now.

I also reduced it Euronext by the amount I bought through the rights offering and reduced Agfa by 1/4.

The new position in Q2 all went into the energy transition basket: Aker Horizon, Orsted, Nexans and NKT. All of these positions were in the green at the end of the quarter, but stocks are surprisingly volatile.

As always, the current portfolio can be seen on the portfolio page of the blog.

Comment: “Expectation management”

As I have already mentioned several times, I believe that behavioral aspects are at least as important in investing as technical aspects in investing.

Knowing how to analyze complex balance sheets is good, but it doesn’t help if the professional is unable to manage a portfolio through the inevitable booms and buses of the stock market.

A very important point in my opinion both in business is how to set ambitious but realistic expectations. Especially these days there are many books about very successful founders who are known to set very unrealistic expectations and to be successful. Steve Jobs with his “Reality Distortion Field”, Elon Musk, Jeff Bezos, Jack Ma or Masa Son are among the most popular founders who have become mega billionaires by pursuing super high goals and always pushing their companies to the extreme.

On the business side, these success stories are subject to what is known as survivor bias. These individuals are indeed successful, however It is never clear whether they succeeded in “aiming very high” because of or despite their approach.

In contrast to the already mentioned founders Adam Neumann. Lex Greensill and Markus Braun were also founders / CEOs who wanted to aim very high, but in their cases (and in many others) that approach often ends in disaster. There are now several books about Wirecard, for example, and the gap between Markus Braun, who formulated growth targets, and the business, which now had to achieve these unrealistic goals and was making profits in some places, is striking. The same thing happened at WeWork, and most likely Greensill, as well as Enron and General Electric. I think when the current tech mania ends we will see much more worn Wirecard or Greensill-like situations than the next Google / Amazon / Alibaba etc.

On the investment page, I have already linked a very interesting article by Michael Batnick, which shows that investors have clearly increased their return expectations in recent years. I found this graphic particularly impressive:

returns

As can be seen from the graph, these are return expectations above inflation, so that nominally this translates into current return expectations of over 15%.

Such expectations are dangerous in my opinion, especially if it leads to the following behavior:

  • increased risk taking to meet these expectations (leverage, theme / hype / meme stocks, crypto)
  • Dependence on these returns (e.g. return targets for pension funds, settlement of expensive mortgages, etc.)

The combination of these two aspects often leads to disastrous results for those who are affected, and often these investors do not survive a downturn that will inevitably occur.

I think it is very important for the “average investor” to set realistic expectations and achievable benchmarks. Ted Weschler with his 40-year track record of 30% pa may not be the right yardstick. If you start playing golf and you think Tiger Woods is your benchmark, you will most likely be on your way to long-term disappointment.

And in order to achieve your own savings goals, you should be aware that a “normal” long-term equity return from the current level is more in the nominal range of 5-6% than the nominal 15% + in the graph above.

To be successful in the stock market, the most important “superpower” is the ability to stay invested for long periods of time. I think this can be better achieved by lowering expectations to realistic levels and then potentially getting better results than the other way around.

For my own portfolio, I don’t think the 14% pa since the blog started is a good indicator of what I can expect in the future. I would be pretty happy to get the nominal stock premium of 5-6% plus maybe 2-3% pre-tax outperformance over the next 10-15 years, assuming interest rates stay low.

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