Ouch!! That’s what this month felt like, particularly on the last day when the market enjoyed a face-melting rally into the quarter end with the Aussie Dollar, Euro and S&P moving very strongly higher and therefore against me.
The problem this month is that basically, everything went wrong. Kelpie was down 1% relative to the FTSE All Share which was up 3%. The largest holdings in the portfolio did poorly;
- Third Point Offshore down 3%
- Energold down 10%,
- Zicom Group down 12%
- Aberdeen International down 12%
- Sandstorm Metals & Energy down 21%
Pretty tough in a rising market! The hedge book took some serious pain costing the portfolio several percentage points.
The only strong performer in the portfolio was Yukon Nevada Gold, up 13%, which made several major announcements particularly drawing a conclusion to their “turnaround” and announcing that they are up and running as a fully producing gold miner on track to achieve 150,000 ounces for the year. Should they meet this target the stock is very cheap on all metrics, they are a possible takeover target in the near future.
The underperformance of the portfolio is in my opinion due to many of the positions being “deep value” in a time where the market has been rewarding momentum and quality at any price and ignoring the cheaper segments of the market. The charts below from Cannacord Genuity demonstrate the wide gulf in factor performance.
Below we can see the quarterly performance of value relative to the market. This is demonstrably one of the longest and deepest periods of value underperformance we have experienced. What can be seen in August 03 and Feb 09 is that these periods were ended by very strong rallies where the market re-assessed the sustainability of these ultra cheap stocks and rewarded them with higher, more realistic valuations. It is my contention, and that of the analysts who put together the data, that we are due another one of these periods of outperformance soon.
Regular readers of the blog will probably know that there is a vast array of academic research on the long term outperformance of value factors but for those who don’t or those looking for a quick refresher, I recommend the following from Eyqyuem Investment Management.
“Nothing tells in the long run like good judgment, and no sound judgment can remain with the man whose mind is disturbed by the mercurial changes of the Stock Exchange.
It places him under an influence akin to intoxication. What is not, he sees, and what he sees, is not. He cannot judge of relative values or get the true perspective of things. The molehill seems to him a mountain and the mountain a molehill, and he jumps at conclusions which he should arrive at by reason.
His mind is upon the stock quotations and not upon the points that require calm thought. Speculation is a parasite feeding upon values, creating none”.
The sitting, never the thinking.
Carry on soldier.
Great Quote! Not encountered that one before. I could do with remembering that at times likes these. Hussman’s weekly comment was expressing similar exasperation and the desire for patience that I’m currently feeling.
A long walk in the countryside also has a spectacular therapeutic benefit on an investor’s mind disturbed by the hectic, meaningless and always temporary volatility of the market, I’ve noticed..
shaun noll, cfa said:
great quote and 100% agreed. I’m a big fan of a long hard punishing workout of some kind and a jog to the type of some nearby mountain to clear my mind from the short term insanity of this market when possible.
Mountain? Where do you live Shaun?
shaun noll, cfa said:
live in northern california bay area so I guess “mountain” is a relative term to those of you that may live in Colorado, Switzerland, etc I have some 1k foot mountains around though that are plenty big enough to smoke me on a punishing run
thought you might be interested in FBIZ
I know you’re big on the balance sheet recession but you also have some belief in a US housing recovery. This stock could be a nice hedge in case the economy grows off to infinity.
You have become my favorite investing blog. Looking forward to your next posts and updates.
I think part of the reason for your portfolio performance is that the junior resource sector has gotten crushed. Look at the TSX Venture index (or Aberdeen itself). It’s going through a 2008-like crash. Energold, Aberdeen, Sandstorm, and Yukon Nevada are all caught up in that.
These companies are serial issuers of capital, or own companies that are serial issuers of capital (Aberdeen).
If there is ever a time to invest in these companies, it is now when share prices are low. The volatility is extreme and you should buy low and sell high. (But personally I think that some of these companies are destroyers of value.)