Annual review 2022
Portfolio review
Happy New Year!
The year is now over and My returns are around 0.5% in my local currency the Euro, after a good 2021 of about 30%. This is still a loss of purchasing power due to inflation but I feel that I dodged a bullet. My dividend income also increased, which allows for more reinvestment at high rates.
The Market
The year was exhausting for all of us, and stressful for our companies income statements. This was the year where anything built on thin air and speculation started coming down back towards zero and anything too richly valued came back towards normal valuations.
The year where you could throw fancy disrupting companies 10 year DCF models in the bin, only 1 year after their modeling.
I do not think that the correction process is complete, many sectors are still overvalued with weak prospects for profits. However it can be said that we already overshoot to the downside in some sectors, like the FAANG maybe that should not have gone under 20 times P/E Ratios. FAANG and their Chinese equivalent have been trading up and down like cryptocurrencies, and I am not sure if they can provide low volatility holdings when their prices fluctuate so much without a solid shareholder base. I understand why some people invest in them however and they should provide good returns. The oil sector did well, it is needed a lot, but it is going to be taxed to oblivion, and probably emerging markets will do the drilling that the west won’t do anymore. It could be a great opportunity in energy stocks, but the regulatory environment is getting more and more complicated.
Good things
What went well was generally the stock picks did not have crazy blow ups, by focusing on defensive stocks.
Defensive stocks provide defense in tough years, but will they provide adequate returns over 15% in the next years? tough to know because they barely moved up in the risk off scenario, due to the small cap or emerging market characteristics.
I also screened and read a lot and discovered many hidden champions that I incorporated in the portfolio, and others that I have on watchlist. This year, rather than discovering new businesses, I should focus on understanding businesses I already bookmarked.
Errors:
The thing I did not manage well was Russian war risk.
What I did well was the diversification strategy. The Russia issue is a blip on my long term profit generation, as it was 3 relatively small holdings, one that I sold at a profit when it was getting hot on the border, and 2 with about 50% loss on the day of the invasion before things started to be delisted. The reason I didn’t sell the other two prior to the invasion, is that I wanted to avoid to realise a 10-20% loss. That was stupid. Stick to your decision to sell if you see the risk being too high, no matter if you have a loss on the position.
Another thing I did not do well but managed well was having two Hong Kong stocks suspended for Fraud. But what I did well was diversify my HK investments a lot, which made that some other HK investments (realised profits) more than covered the losses. When I am not investing in my cultural zone of comfort (Western Europe, The Americas, Africa - places where I understand the languages and cultures more or less), I diversify. At the end of 2022, one of the HK investments positively resolved the situation and went back to trading. The other, a good business, could have some issues including bankruptcy. I value it at a zero for now.
GO HARDER?
While I have a lot of low growth companies at 5-12 P/E ratios, I am thinking if I should increase my allocation to companies that are growing faster, or go harder on the deep value chain.
That will be the challenge of 2023, and I don’t know the answer. I do not like selling good positions for greater positions because sometimes I get it wrong.
Should I just hold to good businesses at cheap valuations that should do relatively fine, or go harder?
1- Faster growing businesses like IT services acquirers or disrupters. (Growth of 20%+). However avoiding these riskier business models in 2021-2022 served me well. Some were built on shaky foundations and crashed, and some were overvalued.
2- Super deep value like Petrobras, Ecopetrol, Kazakh stocks. (PE ratios of 2-3)
Should I concentrate more? I don’t view this as necessary, since the stocks owned are statistically cheap, the aggregate is cheap with less risk, and the performance is an outperformance this year. But I could/should exit fully valued positions to rebalance to absolute bargains.
Portfolio review
Big news:
Tianyun International, A HK canned fruit and energy drinks maker resumed trading after 6 month suspended for irregular accounting. The issue was not major and was sorted, so I decided to hold. The stock opened minus 50%, but has since recovered a bit. Zero covid affected H1 2022, but I think it’s going to do well in the future.
Sold:
Vermillion Energy and Seplat Petroleum, simply because I saw that windfall taxes will start hurting these kind of businesses.
JARDINE CYCLE & CARRIAGE LTD (SINGAPORE): Sold on relative valuation and quality to increase many 1% positions.
SINGAPORE MEDICAL GROUP LTD: Sold because there was a mandatory buy out offer. Decent return, value investing works.
LVMH: To increase other cheaper positions. Maybe it’s an error, but at the moment, value is too much “value”.
New positions:
Melcor REIT and Melcor Development: See last monthly recap:
I got the idea in my head (REITs in Alberta), then found the names on a Twitter response, these are real estate companies in Alberta, which should boom if Oil remains elevated in the next few years. They replace my oil holdings in an indirect manner with longer duration assets and will benefit from windfall taxes when the governments will inevitably milk the producers profits to pay social grants or green projects. They are also cheap and well managed.
Fairfax Financial: What more to say? The Canadian Berkshire will benefit from higher rates, trades under book value and has a growing portfolio of good assets including in India. It has already rerated a lot since the purchase. I like Canada.
Other new positions: