Stocks and Shares

Mostly big winners, no losers (my past stock recommendations)

Although the OfWealth Briefing is a free service, from time to time I make specific investment recommendations. Today I look at how they’ve performed. On the whole the results have been strong so far.

Long time readers will know that I place an emphasis on investing in bargains. If you buy things when they’re cheap, and then apply time and patience, you’ll mostly come out on top. This approach is usually referred to as value investing.

I’m convinced that value investing is one of the most profitable and lowest risk ways to invest. But it’s not without its challenges.

For a start, when something’s cheap it means the vast bulk of investors must be looking elsewhere. Value investors have to be “contrarians”, which means they do something different to most other investors at that point in time.

It can be hard having the patience and willpower to see through this kind of investment. Prices don’t necessarily go up straight away, and, in fact, can fall before they start to rise. And not every position will work out.

But, done correctly, the greater number and high profitability of the winners will more than offset any losers. Given the size of the profits, it’s well worth the wait.

In the past three years I’ve made nine specific recommendations. As of today, none of them have lost money. In fact, six have been highly profitable, two have made modest returns, and one has basically broken even. The average return has been very strong.

The recommendations are shown in the following table, including the dates when they were recommended. (I’ve put the two that have already been sold at the top.) Note that they’re widely diversified by geographical exposure, which is an added benefit.

A diverse range of investments

Seven of these are country ETFs, one covers a region, and one is an individual stock. Here’s how they’ve performed so far, all measured in US dollars.

The mean (“average”) return is nearly 25%. The median return, which is the statistical midpoint, is above 24%. Around 85% of the total profit comes from price gains.

This makes sense. If you buy things because they are cheap, and you expect the price to go up, then you should also expect most of your profits to come from price gains.

That said, there was decent dividend income too. Especially since ETFs charge their fees against the gross dividends paid by underlying stocks.

It’s also worth noting that dividend yields tend to be higher on value investments. If dividend per share (DPS) is $1 then that’s a dividend yield of 2.5% if the share price if $40. If the price is $20, or half as much, then the dividend yield doubles to 5%. (For some reason, this aspect of the likely future profits from stocks is often overlooked.)

There are six recommendations that returned more than 20%, three above 30%, two above 40% and one above 50%. The lowest return is 0.9%, which is basically break even.

Earlier this year I recommended selling two earlier recommendations, EWY and DXJ, for a substantial profit (see here for more). Today I’ll recommend selling another position (see below). But I believe the others remain attractive for now.

A quick note on Deutsche Bank (Xetra:DBK / NYSE:DB). The purchase price shown is US$13.40. Earlier in the year the bank raised new capital via a rights issue. Shareholders could buy one new share for every two they already owned. The price shown is the blended price for three shares: two at the original price of US$13.89 and one new share at US$12.41.

By the way, calculated in euros the profit on Deutsche Bank works out at 22.1% so far. But whether you’re investing in dollars or euros, the upside is still massive. I have a price target, under my realistic middle scenario of around US$40 (34 euros) by the end of 2020, once the turnaround is complete. That’s another 138% above today’s price, plus any future dividends.

Also, you may have noticed in the table that I now slightly prefer ERUS to RSX when it comes to how to invest in Russia. This is because ERUS appears to be doing a slightly better job of passing through the high dividend yield expected on Russian stocks.

If you own RSX already then you can stick with it. But if you’re starting a new position in Russia, or adding to it, I recommend you use ERUS.

Annual equivalent returns

The time periods between initial recommendation dates and today vary widely. They’re between three years and less than eight months.

In my experience, most value investments usually take two or three years before they pay off. Of course they can perform much more quickly. For example, I only recommended AAXJ in February and it’s already made 23%. And often it’s worth owning them for much longer, over many years.

In order that we’re comparing apples with apples, I’ve converted the total returns to their annual equivalents, assuming profit compounding. By the way, such rates of return are often referred to as “compound annual growth rates” or CAGRs (“caggers”) for short.

On this annualised basis, AAXJ has been the best performer. Its return is equivalent to 39% a year. But, bearing in mind that the historical performance of US stocks since 1871 is around 9.5% a year, most have performed very well. The mean (“average”) of 15.7% is extremely strong.

In particular, let me highlight Russia. RSX has made 42% overall, equivalent to 15% a year (in US dollars, remember). That’s from the market that everyone loves to hate.

Why? Because it was dirt cheap when I recommended it. Easily cheap enough to make up for any perceived or real risks. It’s also been an excellent performer in the past, over the long run. In fact, as counterintuitive as this may sound to many, Russian stocks have beaten the US market over the long run (see here for more).

In reckoned all of these investments were extremely cheap when I recommended them. But although the average result is very strong, not every single one has worked out brilliantly. That’s to be expected. No one – not even the world’s best investors – ever get it right 100% of the time.

NORW and GXG, the Norway and Colombia country ETFs, have only made modest returns so far. I was a little early with Norway, which suffered further in the latter part of 2015 as oil prices carried on falling. But it’s since recovered nicely. Colombia hasn’t done too much yet. But it was only recommended a year and a half ago, so it’s still fairly early days. Both are worth holding on to.

You’ll notice that none of these recommendations involves the US, which has moved into a bigger and bigger bubble over time. This shows a couple of things.

First, you can make plenty of money anywhere in the world, if you invest in the right places at the right time (by which I mean the right price). Second, you don’t have to chase the bubble crowd to make big gains.

The following chart compares the MSCI USA index with its Europe and Emerging Market equivalents, since the first of my recommendations in October 2014. All are in US dollars and include dividend income.

Over that period, profits on these indices were: USA 44.9%, Europe 23.1%, Emerging Markets 23.1%. (It’s pure coincidence that Europe and the Emerging Markets returned the same amount in the period.)

The compound annual equivalents (“CAGRs” – see above) were: 13.1% a year for the USA, and 7.1% a year for both Europe and Emerging Markets. Those are all well below the average of 15.7% annual return for my recommendations

Obviously, my buy recommendations were at various points along the way. But it’s still clearly an outperformance, on average, over the period.

By the way, the S&P 500 was up 36% over that three year period, and 43% if you include dividends. Over the same period the P/E was up 38%, from 18.5 to 25.5 (using data from multpl.com). In other words, all the gain in the US index is from multiple expansion (and it’s a similar story using other valuation multiples).

Although my recommendations haven’t taken in the booming US market, that’s been for the right reasons. US stock fundamentals have been poor in aggregate. It’s quite staggering that, despite vast quantities of stock buybacks, which are supposed to boost earnings-per-share (EPS), the market has only gone up because of ever more frothy valuation multiples.

US stocks have gone from pricey to bubbly. But I’m still happy to have stayed away and found profits elsewhere, in ways that make more sense. I’ve never liked trying to second guess what the market mob will do next, or which side of bed Janet Yellen will roll out of, or what mood the US president is in. I’d rather just buy good stuff at a cheap price.

That said, there’s one position which has done very little: FCA. It’s a way to invest in something called Chinese H-shares.

At the time it was recommended, in April 2015, Chinese A-shares were entering a full blown bubble. A-shares are the ones that trade on the mainland exchanges in Shanghai and Shenzhen. On the other hand, H-shares are shares of mainland Chinese companies that trade on the exchange in Hong Kong. (For more background about Chinese stock markets see here.)

Since H-shares were severely lagging behind A-shares, even though they were often shares of the same companies, I reckoned H-shares were a low risk way of taking a position. It looked like there was masses of scope for H-shares to play catch up, not least since they weren’t expensive in the first place. So I recommended the FCA ETF.

Unfortunately, the prices of Chinese shares soon collapsed, and FCA wasn’t immune. This chart shows FCA and also an A-share ETF, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSE:ASHR), in the run up to the bubble and the subsequent bust.

As a result, FCA has taken a long time to get back to break even. But I was right about one thing. It was much lower risk than buying A-shares. If you’d bought ASHR instead of FCA, you’d still be down 36% today.

Actually, H-shares remain quite cheap, and FCA still has a P/E below 10. But there’s another issue which means you should sell it if you own it.

The size of the ETF is now tiny, and much smaller than before. The total market capitalisation of all the ETF shares is only US$13.7 million. More recently I’ve written about the risks of tiny ETFs (see here).

Given its poor performance and small size, I recommend you sell FCA if you own it. In the meantime, I’ll look for better ways to invest in China.

Overall, the performance of my recommendations has been very strong. That’s despite them being, for the most part, country (or one region) index ETFs. Only Deutsche Bank was an individual stock recommendation, but I included it as it was just too good to pass up (a turnaround stock that was ultra cheap in the face of excessive market pessimism).

Usually the best profit opportunities come from carefully selected individual stocks. They’re more targeted than ETFs, so offer even more upside.

On that note – not least following requests from an increasing number of readers – I’m about to launch a monthly investment report. It will make just those kinds of individual stock recommendations.

The selections will be based on much deeper analysis than can be covered in the OfWealth Briefing’s relatively short articles. But I’ll still make sure everything’s explained in a way that’s relatively easy to understand.

Make sure you look out for more information about the new report in the very near future. It will involve a modest payment from those that wish to receive it. That’s because producing such reports involves a lot of painstaking work. But I hope my track record so far – averaging 15.7% a year – helps to convince you that it will be worth it.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com


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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.

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