Looking back on our mistakes…
If you can not analyse your mistakes, you are unlikely to learn from them to avoid them in the future.
Whilst our portfolios have outperformed our peers by quite a substantial margin since Valor Private Wealth began investing for clients, we still like to look back to see if we could improve.
Our returns over the last 2 years are around 30% (every client is individually managed and has varying returns). This compares to the ASX 200 returns of only around 7% and the average super fund return of only 11%. We have achieved these returns with an average of 40% to 50% cash over their period. We are very happy with this performance and our clients are too.
Our biggest mistakes over the last few years:
1. Being slightly underinvested when we knew there were great opportunities
3. Harvey Norman
1. Slightly underinvested
At Valor, we like to invest slowly over time. If a client comes to us, our preference is to attempt to fully invest them over a period of a few years when great companies come to prices that are attractive. We believe our direct investment approach is superior to buying someone else’s capital gains in a managed fund. This conservative approach should protect clients capital in the event of a significant downturn, however if market shoot up as they have in the last few years, we may end up slightly underinvested.
Luckily many of the stocks we have picked have gone up significantly more than the market and so our returns have looked quite attractive, but our error of omission has meant we could have done slightly better. With returns that are around double the average returns of our competitors superfunds, our clients are not complaining, but we are here to attempt to continue to improve.
Our investment in some of our highest conviction stocks could have been higher. When Google was at $580 a share, we knew it was a bargain, but we held our position to 6%.
When Berkshire was trading at $69 when we bought it, we only bought 8% of our clients money.
When Walmart was trading at $52 we only invested 5% of our clients money.
These three stocks were trading at significant discounts to their worth at the time. We were quite aware of this and yet we were not greedy enough. We should have bought roughly twice the amounts in each company at the prices they were trading at. When the market offers such dominant companies in their fields at these prices again, we aim to have greater courage for our clients.
Our view that China is to slow significantly has led us to be more cautious than usual, however we should have invested more in the companies we believe to do well regardless of this impending slowdown.
Austal was a failure in conservative analysis. A ship building business that is building advanced warships is likely to have cost overruns. This is a simple fact and we did not have enough foresight to factor this into our models.
Our analysis that Austal was going to triple its earnings was correct, however it took an extra year than we forecasted and that was enough for Austal to get behind the curve.
We have talked about capital dependent and capital independent companies in this blog. Austal is a perfect example of buying a capital dependent company and paying the price. We will look to avoid this folly in the future.
Austal eventually had to raise capital at horribly low prices to sure up its debt. They cut our piece of the pie in half. This capital raising could not have come at a worse time. If they had Twiggy Forrest to do their banking negotiations, they would likely have been able to convince their bankers that in the next 6 months their cashflow would be more than sufficient to start paying down large portions of its debt.
We still believe Austal has a reasonable future as it continues to build better ships than its competitors. Unfortunately, we are unable to trust management to manage the capital in a manner that is likely to benefit shareholders over the long term.
3. Harvey Norman
Most people are unaware that Harvey Norman is basically a property company. It has over $2 billion worth of property. When we purchased Harvey Norman, we were buying as an asset play. What we did not consider was the noose that was around Harvey Norman’s neck.
Our expectation was that Harvey Norman would continue to improve its online offering to stem sales declines. We eventually realised that this was unlikely as an online store would shoot itself in the foot by killing its franchisees.
We then came to view a large part of Harvey Normans property holdings as liabilities not assets. They were not able to increase online sales for fear of destroying its franchisee model and so other online stores would continually eat away at any large scale buying advantage Harvey Norman previously had.
I think that Harvey Norman will survive beyond most of its competitors, but we are not interested in buying companies that merely survive. We are interested in buying companies that thrive and eat away at their competitors.
One thing is guaranteed – we will unfortunately make mistakes in the future. If investing was an exact science, there would be no mistakes, but yet there would also not be the ability to find underpriced wonderful businesses. Our ability to keep our mistakes to very small positions is important. Harvey Norman and Austal were very small parts of our portfolio’s so the losses were very low single digits. The companies we have large positions in such as Berkshire Hathaway, Google and Walmart have all done exceptionally well.
Looking forward, we are finding it very difficult to find reasonably priced companies. Overconfidence is the nemesis of a value investor and we prefer when there is more fear in the world so that we can buy at more rational prices.