Investing in undervalued securities worldwide

Weekly Update 23 September 2024

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Once a year, Morningstar calculates how much money investors make from mutual funds and exchange-traded funds in the long run.
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Over the past 10 years, US fund investors made 6.3% a year.

That is not bad, but investors could have done better had they not tried to time their fund purchases and sales. The average fund investor has a tendency to buy in the good times and sell in the bad, the opposite of what the best investors do. This behaviour cost the average investor 1.1% per year.

“Investors particularly struggled to navigate 2020’s turbulence, adding monies in late 2019 and early 2020, then withdrawing nearly half a trillion dollars as markets fell, only to miss a portion of the subsequent rally,” the Morningstar report notes.

The report makes an important point about volatility. The more volatile a strategy, the more difficult it is for investors to capture its full returns. The average dollar invested in the most volatile funds underperformed the buy-and-hold return by more than 4 percentage points a year – a very substantial gap indeed.

What can the investor who wants to invest in volatile strategies do? The report recommends dollar cost averaging. It is not so difficult to keep adding small sums even in the face of losses; big lump sums are more prone to generate emotions.

The report does not answer who takes the other side of the average fund investor’s trades. Who makes money off investors’ mistakes? Who buys when others are selling? The answer seems to be market professionals. Hedge funds, in particular, exhibit market timing ability.
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The Morningstar report is a yearly reminder to try to avoid the mistakes the average investor makes, and to behave more like hedge funds, buying when others are selling.

2024 performance
@triangulacapital +39.9%
SWDA.L +17.4%

Portfolio changes
Gecina, Vodafone, Vonovia, Cellnex, Enel and British Land were sold. Barclays, ASR Nederland, Siemens, Azimut and Host Hotels were bought.

Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.

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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. 51% 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.

Cheap Stocks in Cheap Sectors

The strategy invests in geographies 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.

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

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.