Sins of Omission: Covid Edition
Mistakes of commission are often the most apparent to an investor. They rub your nose in it every time you open your brokerage account. But due to the skewed outcomes of equity investing (with unlimited possible upside vs 100% possible downside), often the investments you passed on were truly the most costly.
We are now in an environment were most stocks have recovered somewhat and, I believe, very few bargains are left. While an active stock-picker can still choose their spots, I wanted to take a look at the Covid period and highlight my greatest sins of omission, hopefully burning them into my memory for the next market meltdown.
I am a knowing victim of anchoring bias, where I find it very hard to bite the bullet and buy something once I've missed the lows. Often, I will end up watching a price run substantially, knowing the whole time that I should have been in and never correcting my mistake. I am only partially optimistic this article will help me avoid this fate again in the future, but I will try.
These are not neccessarily the companies that have gone up the most, but many are situations I knew very well and were right in my wheelhouse. They were mostly safe and were all devastatingly cheap, but I held off for a better price that never came.
Tidewater (TDW)
Tidewater is a Texan-headquartered services company, supplying Offshore Support Vessels to the oil and gas industry, and will haunt me as long as this energy cycle runs. The company has the safest balance sheet in the industry and is exceptionally well capitalised, courtesy of its own bankruptcy and relisting in 2017 (brutal industry obviously!).
Due to fresh start accounting rules, in 2017 Tidewater's fleet was marked down to $900m (from $2.7b) on its books- at roughly a third of what it would actually cost to replace them. At its nadir last year, the whole company traded for $250m- around 10% of this more accurate replacement value with negligible debt and its competitors scrapping ships, ensuring a tighter market post recovery.
I went to buy Tidewater several times through-out the year at prices under $6, each time baulking greedily, hoping for a lower entry. Like much of the energy sector, the Biden win, followed closely by the Pfizer vaccine proved the decisive moment and the stock ripped over a couple of months to roughly $15 today.
The worst thing is that Tidewater is a significant holding of three deep value firms I respect immensely- Third Avenue, Moerus and Robotti. It really couldn't have slapped me in the face any harder.
ING Bank (ING)
The Dutch powerhouse traded as low as 30% of its book value last April on fears of North Sea oil exposure (what a difference 12 months makes). In reality it is extremely well diversified by geography and industry, spanning insurance, wealth management and, of course, retail and commercial banking.
I bank with ING in Australia and had followed the company since well before the pandemic. I knew it was a steal at around 5x earnings, but I sucked my thumb. The stock has run from $5-14 and the dividend yield on last March's price will likely be enormous once operations have fully normalised.
I knew ING stock was already historically cheap and then fell off the cliff during the pandemic. I knew it was safe, I just didn't act. At some point, waiting for a lower price just isn't good enough.
This was yet another example of Dan Rasmussen's crisis investing framework at play. The whole global banking sector was brutalised on vague economic fears, but a fairly simple analysis showed ING in a well capitalised position, despite being priced as if bankruptcy was inevitable. Luckily, I didn't miss this situation entirely, buying a large position in Lloyds Bank very close to its lows.
Fairfax India (FIH.U:TSE)
I am a huge proponent of gaining exposure to growing economies through fairly boring steady-as-she goes-type companies. If successful investing was all about picking the fastest growers in the fastest growing countries, it would be much easier than it is.
Prem Watsa's Fairfax India seemed to fit the bill and I had been following it pre-pandemic. The stock had the bonus of adding a discount to NAV, although Fairfax can be fairly creative with how they value the private holdings when it comes to calculating their fees.
FI has a strong portfolio of old-economy companies that should benefit enormously from the surging Indian middle class, including financial powerhouse IIFL, India's National Stock Exchange (NSE), along with other industrial, banking and logistics businesses.
The company entered 2020 with a NAV of $17/share and traded as low as $5 on fears around its largest investment- a stake in Bangalore Airport. I saw analysis that FI was expensive on a PE basis, even at its lows, but my own work pointed to one troubled investment (Sanmar Chemical Group) dragging down the whole group's earnings.
Sanmar's Eygptian acquisition TCI was struggling with higher input costs to their PVC products and leading to large losses, despite revenue growth. Removing these losses from the income statement, FI was selling for a single digit multiple. I figured that Sanmar would eventualy have to earn an 8% ROE to justify its place in the portfolio or risk being sold and making this adjustment placed FI on a 5x PE- incredible value for a diversified, well-managed and growing company in one of the more expensive emerging markets.
Occidental Petroleum Warrants (OXY.WS)
Oxy warrants were further out of my usual hunting grounds than the other securities in this post, but their appreciation has been stellar and all the pieces were clearly in place for a classic Joel Greenblatt "You Can Be a Stockmarket Genius" situation.
Carl Icahn was dirty on Occidental management for giving Warren Buffett a preferential stock deal to finance the Anadarko acquisition, which would see him continue to recieve income payments while the shareholders were hollowed out.
As an apparent middle finger to Buffett and a characteristic self-enrichment exercise. Icahn encouraged the company to gift warrants to OXY shareholders, giving them the right to buy the company's stock at $22 with a seven-year expiry. The information provided to shareholders specifically mentioned that preferred shareholders would be snubbed:
12. Were Occidental's Series A preferred stock entitled to recieve the warrants? No—only holders of Occidental’s common stock were entitled to receive the warrants.
Sigh... vintage Icahn.
As the warrants began trading, they were predictably dumped by long-suffering shareholders who treated them as a special dividend and had little appetite for the instrument. Of course, Icahn began hoovering them up in size at prices under $5 and as low as $2.50.
Occidental common was trading around $10 at the time, but exploring asset sales and a recovering oil price have since seen it rally to $30 today. Within six months the warrants were in the money, with 7 years of leveraged upside to a potential energy recovery. They trade at $12.50 today. Once again, Uncle Carl has proven himself one of the shrewdest investors out there.
I knew all this because I was given all the info on a platter by another investor I was collaborating with and who placed a huge chunk of their portfolio accordingly. I told myself that derivatives weren't for me and that Oxy's survival wasn't a given, going for safer energy companies at the time. With the benefit of hindsight, I wish I had been more open minded.
Vertu Motors (VTU.LN)
After hearing about Vertu as a concentrated holding of Geoff Gannon (from Focused Compounding), who I have immense respect for and have learnt a lot from, I quickly assertained that the company fit my ideal template. At around a third of book and 12% FCF yield, the similarities to many of my other holdings was fairly obvious.
Vertu is an UK auto dealer, so also featured exposure to a cyclical industry, while possessing the balance sheet to ensure survival. Unfortunately, I did nothing with the prime set-up and watched it slowly climb away from me. It'll pull back...nope, it didn't.
The business was able to sell down its inventory, effectively turning its cars into cash, ensuring it wouldn't have any liquidity pressure for some time. The CEO, Robert Forrester, did an interview in the depths of the UK lockdowns and impressed me greatly, as someone compassionate to his staff and thoughtful about his business. He bought shares during the crisis- why didn't I?
As I have commented before, UK value businesses and the pound both seem extremely cheap, with Rob Arnott's Research Affiliates recently referring to UK value as their Trade of the Decade. Fortunately, I have significant exposure to this theme elsewhere, but Vertu is one I clearly should have pounced on.
Conclusion
I don't want to sound too pessimistic. I didn't have enough cashto squeeze all these into my portfolio in size and in some cases I chose other companies that have also done well. But last year was not a market that rewarded sitting and waiting. As we all know, the recovery was incredibly swift and rewarded the most fearless, who didn't pause to contemplate the macro disaster unfolding and bought outstanding value as they saw it.
Ironically Warren Buffett, the man most associated with this advice, was slow to act himself, partly due to the size of Berkshire and partly due to his admitted uncertainty.
I am left wondering whether bear market lows will ever be as deep again, as they were last century? Social networking and the plethora of investment commentary may have played a part in value investors rallying courage and buying earlier than they may have in the comparative isolation of previous eras.
My best guess is that we will see sickening lows again, human nature being what it is. But as it played out this time, these were the ones that got away from me in the 2020 bear market.
I have a position in Lloyds Bank.
Guy
Please don’t take this as financial advice. Do your own due diligence and consult a professional advisor, if unsure about your finances.