Quarterly Update: March 2020

Quarterly Update: March 2020

So, almost everything I wrote in mid March getting ready for the end of quarter has been invalidated in the month since. Make of it what you will.


Markets, eh?

With the recent set of opportunities and portfolio positioning, I would expect a professional investor in my position to deliver some of the best performance of their life/career over the next 3 years. I don’t know what the future holds – maybe we go into a deep worldwide recession, for example, but I currently have high future expectations over the medium term. If my performance badly lags the market from here, I intend to give up stock picking and will invest >90% of my assets through funds and ETFs in the future. After 11 years a person ought to know whether they are competent enough to participate in the game. The time to evaluate that will be over the next 2-3 years.

From a procedural perspective, I have been absolutely belting it out of the park for the last two months. The numbers themselves are not so great (I held a few distressed stocks into 75% falls etc) and there were a couple of minor issues (too slow to sell shipping) but on the whole I have never performed better as an investor (a separate construct from investment performance) in the 11 years I’ve now been investing.

At various times in the past eleven few years I have made big directional mistakes, had confused thinking, and occasionally outright done dumb stuff.  I have also nailed it a few times – for every Just Group (LON:JUST) or Experience Co (ASX:EXP) there’s been a Probiotec (ASX:PBP) or a Xero (ASX:XRO).  By contrast, I think every decision I’ve made in the last 3 months – and I’ve made a lot – have been correct. A couple were suboptimal – too slow to sell shipping, too early to buy Anheuser Busch, too conservative buying one of the best opportunities I’ve ever seen, didn’t buy enough tobacco at the bottom, but by and large I have been thinking very well, and I’m confident in two or three years I will see the proof in the pudding. There are a few reasons for this which I will go through one by one.

  • I am a net saver & the portfolio is relatively small
    There is no avoiding the benefit here – I was able to contribute a lot of cash in a hurry which meaningfully changed the risk characteristics of my portfolio. This is a lucky accident and I take no credit for it.  For what it’s worth, my portfolio ex- new cash was down approximately 17% over the past quarter. (this is because new cash purchased cheap stocks that went up approximately 4% in aggregate, leading to -13% overall QoQ performance).
  • I have been preparing for this moment
    I have written occasionally in the past about blind spots in various parts of the market. People have been cooking themselves psychologically for years.  I have no particular unique insight (how many people do you know have called the end of the bull market?) and indeed I have always aimed to be more or less fully invested, but psychologically I was ready. I recognised the changing environment early and I became very, very aggressive and active in my mindset towards the market which has been beneficial.
  • I had a plan
    I have been focusing rigorously on strong free cash flow yields and well established moats. In terms of the actual purchasing, I avoided the temptation to make a binary call on the bottom, and purchased incrementally the whole way down. I still have a fair bit of cash on hand.   I would love to be the genius that sits on the sideline, piles all of the chips onto the table at the exact bottom of the market, and mints money.  It’s hard to do in practice so I have avoided binary decision making.


With all of that in mind, let me begin.

Quarterly report

Performance was approximately -13% on last quarter after new cash added.  In early January I was up approximately 26% since inception, now I’m approximately flat since inception in September (and that is true after excluding new cash as well). I began selling positions in mid to late January as it became clear that coronavirus was going to be a “thing”. I cut my shipping positions by 50% between late Jan and mid Feb, and by a further 25% (of the original position size) by late Feb. I sold my distressed oil producer the day after the Saudi price cut, and sold 90% of my Datadog and Entercom holdings and trimmed British American Tobacco by a quarter at around 35 pounds. I sold the rest of Entercom a little after the Saudi oil thing, when the States went into lockdown and it became clear advertising was going to get hammered. Radio advertising may still perform okay while everyone is locked up inside, but Entercom has a disturbingly bad balance sheet and may in fact go bankrupt.  By the end of February I had approximately 40% in cash. If I had my time over I would have been slightly quicker and more aggressive at selling my shipping stocks.

Nonetheless, I have been extremely on the ball in terms of my decisions regarding which stocks to sell. High risk and highly levered stocks need to be sold quickly, and lower risk, less levered/higher quality stocks don’t have to be sold as fast.  In this particular scenario, with me watching the market actively and engaging daily, I would have been better served by going to 100% cash, and this was mostly knowable in advance (this thought is not just the product of hindsight, as I had this debate with myself several times during the quarter). Regardless I performed well here, correctly discriminating between which stocks to sell and which to keep.

Due to aggressive saving I have been able to add a stack of cash to the portfolio, giving me approximately 70% cash at the start of March. This was all USD/EUR/GBP denominated so I have been a substantial beneficiary of the declining Australian Peso, which was an important contributor to maintaining the value of the portfolio in AUD terms.


The upset is something I have been psychologically prepared to handle for quite a while. In March last year I wrote Private Markets Hide All Manner Of Sins and following that, A Polemic On The Great Economic Bus Ride in October about the issues that certain investors in various parts of the market face. I wrote in the polemic that we now live in a self-interested market with a focus on self-interested agitation rather than collectively optimal decision making. That comment is going to haunt us for the next few years as a large number of corporations both here and overseas are agitating for government bailouts.  I am sympathetic to the need for government support for business, as no organisation plans for a 90% decline in revenue and being forcibly shuttered by government mandate, but I do not think that equity shareholders and lenders should be made whole as part of these transactions. The government should absolutely be using its power as lender of last resort to take favourable and profitable positions backstopping the industries that require it.

Consider the shareholders of Webjet (ASX:WEB), which was teetering on the edge of the abyss after failing an emergency capital raise last week.  How great an irony is it that investors who were valuing the business at a couple of billion dollars ($15/share) just last year were not willing to contribute more money at a <$500m valuation just last week. Webjet is an okay business that looks like it is being eviscerated by working capital problems and needs an injection of a few hundred million. That is not my problem but I would be interested in bailing it out if I had the money. Private equity will get it and existing shareholders will lose out.  Too bad, so sad. (Webjet subsequently raised equity capital at a $1.70 valuation after I wrote this comment. I had it pencilled in for a 1% purchase at a down-90% valuation, but not at current prices.)

Trading strategy

I wrote in Scuttlebutt that I have been working very hard on my decisionmaking throughout this period. I have a lot of cash to use and the opportunity cost of investing it in the wrong places or at the wrong time is massive. I have been trying to not make binary decisions like “stocks are cheap so I should buy”, rather I am making lots of small decisions like “this stock is probably undervalued on a 3-5 year view but I don’t know the full impact on its earnings or price, so I will buy a little bit now and a little more later if it gets more attractive”. This has cost substantially more in brokerage but the extra costs there have so far been more than subsidised by declines in stock prices.

There is a possibility that markets go way lower from here.  If corporate earnings fall 20% and earnings multiples shrink 25%, it’s not impossible for the market to have a further 40% downside. It’s also not inconceivable that, for example, peak fear is behind us and the coming government aid packages will stem the economic bleeding. If that’s the case, there might only be another 0-10% decline and we could be close to the bottom. I don’t know which is the case and I’m deeply sceptical if not outright cynical of anyone that says they do.

The way I have dealt with these different future paths is by making small decisions along the way. I have been purchasing consistently for the last three weeks of March and I have gone from 70% cash at the start of March to just under 40% cash currently. I am becoming more aggressive in my purchasing.  I don’t think we have yet reached a point where probabilities are in favour of going all-in. We may not get to see amazingly cheap stocks in this downturn, but i will be prepared if we do. I have additional cash outside of the portfolio and am awaiting approval for a margin loan to provide additional funds. (NB: I have paused all purchasing since late March). 

One curiosity I have noticed in this market is that over the past year or two, old style economy stocks have been getting sold off. There were a bunch of businesses like Anheuser Busch and tobacco being sold off as investors focused on growth / tech stocks. In this downturn, “old economy” and “new economy” stocks have been affected equally, with the result that some old economy stocks are astonishingly, stupidly cheap, and a lot of new economy stocks are really only re-rating to where their P/E (or P/S) ratios were a year ago.

The volatility in markets has been insane. I have never seen an environment like this where stocks go down 8% one day and then up 8% the next day, or they open down 8% and close up 2% – or open up 3% and close down 5%.  I am regularly getting hit on bids that I place 10-20% below market prices. Interactive Brokers (NASDAQ:IBKR) stock closed one day at $44.60ish.  I put an order in at $40 and I got filled on open at $37.  Similarly I purchased Twitter at $20 by lobbing a bid 10% below the (already down 8%) $22 opening price – and the stock hit $20 before closing flat at $24. I have done this multiple times including with Booking.Com and Vienna Airport (more on this below).  That alone says to me that there is severe disruption in markets beyond what the headline numbers indicate.

What we have not yet seen is the corporate detonations.  They are in the post and some of them will be arriving very soon, because although markets are disrupted, the economy in the UK or the USA so far has not really been affected. The last 3 weeks or so we have started to see the bite with shutdowns and layoffs, and in a few more weeks I think we will see the landmines going off. All of the airlines and travel businesses are obvious candidates, but i suspect there are plenty of less-obvious ones that will get caught when fear prevents investors or lenders from making capital available. (again, this was written in the final week of March).


As mentioned above I added substantial extra cash to the portfolio. I began March with approximately 67% cash and currently have ~37% cash. While I mentioned here I had repurchased some shipping stocks, I have been focused almost entirely on higher quality businesses this time around.

I bought shares in Twitter, Booking.com, Flughafen Wien, Anheuser Busch. I also purchased more tobacco stocks and enlarged my holdings in the foreign listed LIC. I sold most of my shares in Datadog, and all of my shares in Entercom and my undisclosed oil producer.

I’ll discuss the new stocks only here as this is a bit of a long post already.


I wrote in my last update that Booking’s business was about to have a close encounter with the zero bound. Recent reports suggest business is down 85%. Booking has a robust balance sheet and enough cash to see it through for a year or so. I probably bought slightly too early but I was holding off, fully expecting the stock to trade sub-$1000 (and it may yet).  Travel demand is being shifted to later periods by the current global situation but I think it is likely travel businesses rebound strongly over the next two years or so. Flight Centre and Webjet were/are both attractive opportunities, down 90% and distressed, quality of the business notwithstanding, although I have made no purchases.

I’ve bought Booking estimating that it will not become distressed, but I would not mind taking the loss and buying a lot more if it did.

Anheuser Busch InBev – purchased at €50, €44, and €37.

Booze, smokes, and boats.  I haven’t bought any KFC but not for lack of trying (YUMC). Sinners of the world, unite!  A good friend of mine goes for the other deadly sins:  envy and lust (Facebook and Match Group). Horses for courses and I had lowball bids in for both of those stocks during the quarter, but missed out.

I probably bought Anheuser Busch a bit too early; its debt load is high and it’s not as undervalued as I’d like on an FCF/EV basis.

Interactive Brokers – purchased at $37 and $34

IBKR is going to be the world’s best and largest broker in its target markets (and arguably already is). Even in the <1 year I’ve been a customer I can see already the incremental steps it is taking to widen its moat in various markets. The only real question is if there is a younger competitor with stronger UI and more efficient, more modern systems that will eclipse it and take the crown. Half of the time when I log into IBKR I get a “property value of undefined”  error when updating the performance chart with a new benchmark and it is frankly pretty shit at customer acquisition – but it is so good at what it does that it can survive these sins….at least until a more modern competitor comes along.

This is an interesting paradox emerging in the space where companies like Robinhood are light-years ahead of IBKR in terms of customer acquisition. But Robinhood is grossly incompetent at actually managing risk or its customers (it is really hard to become a customer of IBKR, because the process is stringent and not well adapted to individual markets).  IBKR by contrast is managed very prudently in terms of its systems, checks & balances, and I think it is probable that it is able to continue adding market share at the expense of other providers, especially when investors get tired of losing money on broker-lite startups.

Twitter – purchased at $20

I bought Twitter on an approximately 6% trailing FCF yield with a great business model, very strong balance sheet, and substantial growth capex being reinvested every year. The sales downgrade at the trailing end of the March quarter suggests revenues were down something on the order of 90%. A good friend bought my attention to Google, another business that is going to be hammered on this front, with the cessation of spending from Expedia alone expected to leave a multi-billion-dollar mark.

I am a strong subscriber to the “Twitter is mismanaged by its philosopher-king CEO” view and only purchased a small amount. Like some others I also can’t figure out how it spends its money. Years ago I tried to buy it at $14 but wasn’t set up for international brokerage at that time. I had several orders in at lower prices this quarter (at a 7% or 8% FCF yield I think TWTR is a no-brainer) but basically bottom ticked the market with my purchase as is. What is really interesting is if you think current bankruptcies will mark the end of VC-funded social media customer acquisition, leading to a marked change in the economics of Google or Twitter.  Hard to say, but an interesting theory. I have no view either way. I think the intrinsic value of these toll roads is likely to hold up well over the long run.

Pacific Green Technologies – purchased at $2.20 and $1.20

I have been looking for a business positioned to take advantage of the IMO 2020 regulations and the (potential) switch to using sulphur-based fuel with scrubbers for marine trade fleets. I wrote here that refineries and scrubber installation businesses were well placed for what was likely to be a structural shift in the industry, but I was not able to find either a refiner or shipyard that appeared well poised to benefit. I was lucky enough to receive a tip on an OTC-listed company selling scrubbers, Pacific Green, and purchased a tiny amount at $2.20.  I purchased more when the stock dropped to $1.20 and with the recent increase in price, the position has become larger than I’d intended.

Opportunities in the market aside I have a couple of key concerns:

  • The business is half owned by a Chinese government entity
  • It is small and unknown and not clear how the company intends to grow its business and distribute its product. The costs of a scrubber installation are only worthwhile if a) the economics of fuel prices support it and b) the scrubber is reliable and can be repaired (e.g. backed up by a strong brand).

In between all of the other stocks I researched this month I have not had the time to look into it as closely as I would like and so this is a preliminary position.

Flughafen Wien

This is one of the best risk-reward opportunities I have seen in a very long time, trading at €17-20 during the quarter, around an approximately 9-10% FCF yield. I began buying the day that I looked at it but I did not have enough time to thoroughly research it and get comfortable, and the stock began ripping higher almost immediately.  I mentally expected a few more days/weeks of malaise where even if the stock price went somewhat higher, it would still be available at cheap prices, but it’s up some 40% in the few weeks since I bought it.

I have not regretted a single investment more than my failure to purchase more of this stock. I bought a 5% position but it should have been 20%. At best it will be a 3-bagger in the next few years but the downside risk is low, as the stock has about a 6% net debt to equity ratio and a decent amount of cash.

Flughafen Wien would be at risk during a long-term downturn. I feel that international air travel will be one of the last things to return to full activity. Nonetheless a primary national airport is (unlike most other businesses) about as close as you can get to a perpetual asset, and I am deeply regretting not purchasing more. I already know this will be by far the most expensive miss I’ve had this quarter. Maybe I will get a second bite at the apple – i sure hope so ! – but I doubt it.

Undisclosed 1 Foreign-listed LIC

This UK-listed LIC fell 30% during the quarter thanks to currency changes and declines in the value of the companies that it held. Sadly there continues to be no discount to NTA whatsoever (at most it was a couple of percent, about in line with daily currency movements). I basically bottom-ticked the market and made the position 1.5x larger, at which point the underlying stocks had almost 100% of their market cap in net cash.

Undisclosed 2 – Foreign distressed oil producer (sold)

I sold my undisclosed oil producer the very first day after the Saudi oil price cut was announced.  The stock is down >70% since then and has a very good chance of going bankrupt.  If it doesn’t go bankrupt, it will go up 3x-6x, and if the world goes back to $100 oil the stock will go up 100x. On average it will go bankrupt. I am inclined to repurchase a very small amount at current prices based on these probabilities, but have taken no action. There has been no need to look too closely at distressed stocks with so many good businesses on sale.

Undisclosed 3

This emerging markets commodity producer held up reasonably well during the quarter, falling approximately 20%.  I’ve made no changes to my position and I don’t think there’s been any fundamental change in its business, although there is a good chance of lower volumes over the next year or so.

Undisclosed 4 – CD Projekt Red

The undisclosed computer game company I purchased one single share of previously is CD Projekt Red. The business fell 20% below my purchase price during the quarter, getting close to buy territory, but not close enough.  It’s now back approximately to where I first purchased and I’m still fence sitting.

What happens next?

That’s the real question. Lots of predictions either of a return to normality or a double dip crash in the market. One thing I feel confident about is that there will be no change to working capital or supply chains over the long run.  Corporate performance incentives on average militate too strongly against tying up “unproductive” capital in extra inventory or more expensive diversified supply chains. Maybe there will be a short term shift. But sooner or later some young buck will unwind all those initiatives (or hedge funds will make you do it). And speaking of agitating investors, I hope that the shareholders who spent the last few years hassling Flight Centre to spend some of its $500m stuck around to cop the 90% drop and distressed raise.  That bloke has been in business a long time and he kept $500m cash because he sat through the GFC and knew he might need it. Such is life. (As an investor, I tell you frankly, investors are fucking hard work.)

On a separate issue,  I think the market is almost certainly disregarding the possibilities of large bankruptcies, which is a mistake. I count 22m-odd unemployed US people out of a workforce of 150m(?) plus however many were unemployed pre-virus. That’s pure economic wreckage, 15% unemployment, Spain-level catastrophe. If you do not think that will have serious impacts over the next year you are a fool.

However, if you extrapolate this linearly to support your bear market predictions (“people are unemployed so stocks will go down a lot”), you are also a fool – and markets pretty clearly disagree!  I have 40% cash and I wouldn’t mind a bit more, so you know which side of the fence I’m sitting on. But I make no predictions.

Food for thought.

PS. if you haven’t read FEAR yet, you might enjoy it.

I hold shares in every company disclosed above, other than Entercom and “Undisclosed 2” (distressed oil producer), which I have sold. This is a disclosure and not a recommendation.

NB: I’ve taken on substantially more responsibility at work which has put a huge amount of pressure on my ability to invest and find stocks. This quarter I could do it because I stayed up til midnight almost every night between mid Feb and mid March, but that’s not sustainable. Apart from that stretch I literally have not looked at a stock in the past 2 months, whereas previously I’d look at 20-100 a day (during work). 

As a result it’s quite possible the portfolio goes into a hiatus.  Maybe I’ll return in a couple of years and see if my predictions about performance played out.

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