Investing in undervalued securities worldwide

Weekly Update 17 October 2022

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Stocks fell 2% last week in volatile trading.
www.ft.com/content/7b10acc0-1b88-4006-92fd-0e1a7310722a

The market may squeeze higher into the year end because investors are currently extremely pessimistic.
uk.news.yahoo.com/stocks-further-fall-markets-bear-162204552.htmlwww.yardeni.com/pub/peacockbullbear.pdf

However, fundamentally nothing has changed. Stocks remain overvalued in light of the massive increases in interest rates this year.
twitter.com/AndreasSteno/status/1580097020333010944twitter.com/BobEUnlimited/status/1579637026345058304

“Most traders today don’t have good perspective about how long can take to find an equity bottom in a downturn”, writes Bob Elliott on Twitter. Historically, it has taken 1.5-2 years for a bear market to end, which would put the bottom around mid-to-late 2023. “It feels each day that many are desperate to market the turning point. I feel its in large part from normalizing the idea that cycles bottom really quickly. And that’s just not the case,” continues Elliott.
twitter.com/BobEUnlimited/status/1581053562540687360

Elliott notes that it may take larger than expected interest rate increases to slow down the US economy, and thus the US central bank still has work left to do.
twitter.com/BobEUnlimited/status/1580906241991528448

The interest rate increases that are happening this year should, if the historical pattern holds, slow the economy down dramatically by late 2023.
twitter.com/MichaelKantro/status/1575589313446023168

But analyst earnings estimates are still elevated and inconsistent with a recession.
twitter.com/BobEUnlimited/status/1579637038495956995

It also turns out that despite record pessimism, investors keep more of their assets in stocks than at previous market bottoms.
ycharts.com/indicators/reports/aaii_asset_allocation_survey

Thus, we judge that there are still investors in the market who hope that things will not get worse, or that they will quickly get better, leading to repeated bear market rallies.

These hopes may be dashed if we are undergoing a regime shift, as Jens Nordvig argues in his new piece “Asset Ownership vs Asset Management”.
moneyinsideout.exantedata.com/p/asset-ownership-vs-asset-management

The past few decades have been exceedingly easy for investors, writes Nordvig. During this period, mantras such as “always stay invested” and “cash is trash” became popular because they worked. But, contends Nordvig, “The investment lessons that may have been correct in a world of stimulative central bank policy (and ‘centra[l] bank puts’ protecting asset markets), are no longer valid.”

We tend to agree. We believe that in the coming decade, passive investing will produce mediocre results. “Just stay invested”, “stocks always come back”, “be patient”, etc., will turn out to be the wrong pieces of advice. Instead, active security selection, a tilt towards Value stocks, flexibly varying allocations between cash, commodities, and equities, and success at macro forecasting will be required. The winners of this decade will look very different from those of the past, in our view.

𝟮𝟬𝟮𝟮 𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲 𝗬𝗧𝗗
@triangulacapital -6.4%
$SWDA.L -25.4%

𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 𝗰𝗵𝗮𝗻𝗴𝗲𝘀
A position was initiated in $D (Dominion Energy Inc), an oversold stock from the US Utilities ($XLU) sector. The stock has fallen 20% in the last month and a half and now trades at 5-year lows, while its valuation has fallen to a 10-year low. We hold the stock in the expectation that stocks may rally into the year end if interest rates stabilise.

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Disclosures

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

eToro (Europe) Ltd., a Financial Services Company authorised and regulated by the Cyprus Securities Exchange Commission (CySEC) under the license # 109/10.

eToro (UK) Ltd. is authorised and regulated by the Financial Conduct Authority (FCA) under the license FRN 583263.

Your capital is at risk. Other fees may apply. For more information, visit etoro.com/trading/fees.

Pietari Laurila is not a registered investment advisor and does not offer investment advisory, fund management or wealth management services.

Triangula Capital is a brand name, not an incorporated entity.

This page is provided for information purposes only. It is not a recommendation to copy the Triangula Capital strategy or to invest in any fund or security.

2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS).

From 2021, performance is calculated by eToro.

Past performance is not indicative of future results.

Track Record

It is often said that past performance is not a guarantee of future performance.

That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.

“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees” Source

Risk warning: That is only one study. In general, past performance is not indicative of future results.

Aligned Incentives

Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.

“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source

Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.

Unconstrained Investments

The strategy has fewer constraints on its investments than traditional mutual funds.

The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.

Compared to traditional mutual funds, the strategy also:

  • holds fewer securities
  • trades more
  • avoids following the index

Each of these points has been shown to be an important predictor of portfolio performance.

“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source

“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source

“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source

Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.

Higher Risks for Higher Returns

The aim of the strategy is to maximize returns, even if this means taking more risks than usual.

The strategy invests in countries and sectors where values have collapsed due to macroeconomic problems.

Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.

Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.

Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.