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Posted on 26 Feb 2020 by Steve JohnsonWell that post aged well. Corona no virus for global stocks? Over the past few days, global stock markets have given up all of 2020’s gains and then some.
Not quite. But that’s almost as good as my inclusion of Blackmores on a list of 3 darling stocks to sell in 2012. The placebo maker promptly jumped fourfold.
On a serious note, if you are a client of ours, you should be thankful for volatility and panic. Last week’s post was me trying to explain the market’s benign response to COVID-19, not celebrating it. An environment of markets rising steadily, high valuations and lots of investor optimism is our worst nightmare.
Forager’s main competitive advantage is the ability to not lose our heads on the way up, or the way down. The emotional wherewithal to be “fearful when others are greedy and greedy when others are fearful”. It’s a skill that has been worth two tenths of stuff-all over the past few years.
No one wants to see people dying. And we are nowhere near bargain territory. But the human emotion of fear, depressed for so long, seems to be alive and well in financial markets. Maybe, just maybe, we still have a role in the world.
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Just keep readinghttp://macroedgo.com and you will be right mate… nothing that has occuured thus far will have caught my readers wrong-footed… if you have not caught up with them yet, be sure to read comments by US health officials and CDC this morning… Cheers
Steve, agree with the post and the human impact cannot be understated. I think most analysts have underestimated the complexity of supply chains across the world. That said this is just a blip that will be fully resolved in 12 months time; now is the time to assess the strength of investments and also consider opportunities that are presented. Quite clearly this is where the value investor has the advantage in discerning companies with strong balance sheets (I still remember your post about strong hands years ago) who can survive some supply chain disruption.
Hi Travis, why will this be fully resolved in 12 months? Scientifically speaking there is absolutely no reason to believe that this statement is in any way likely to be the case. As I said above, check out the comments made in the US this morning – the underlying message was this 1) it is almost inevitable that the COVID-19 outbreak will become a global pandemic, not if but when, and 2) even though modern scientific knowledge and know-how sees rapid progress at developing a vaccine, it is unlikely to be administered en masse within 18 months. All of this is contained within my analysis at http://macroedgo.com from 3 weeks ago. Humans seem to have something in them that conditions us to believe that really scary events will not happen. I, myself, over the last 3 weeks have at times sat down and allowed self-doubt to creep in for no other reason then “surely this won’t happen because I really wish it wouldn’t”, then I snap back to my scientific training and underlying contrarian outlook on things. The most likely outcome of this outbreak is that it will become a pandemic which will be with us for several years. Consequently the “China Channel” is only the very start of the consequences to economies (and therefore the impacts on asset markets). Read my 2 most recent posts on the outbreak, my first from 3 Feb, daily updates and case study of Japan to at least begin to be able to think through the implications. I do not wish to “send” anybody “up”, and I would really like to be wrong, but lucid thought is required to position yourself through this not wishful thinking and everything that has happened this far is inline with my very first initial statements. In some ways Australians can be forgiven for being a little slower to realise the implications as the messages received have not been as clearly articulated as elsewhere… But I have faith in our scientists…
Humans adjust / accept.
Financials reflect true cost.
Supply chains will be reordered.
Trade financing / hedges / risk premiums accept the new norm.
I anticipate 12 months for all the above to flow through the systems, I’m not saying the virus will be addressed just that we will accept it an move on unless it gets worse and in that case the focus becomes more survival and no one will care what happens on the markets.
Steve, agree with the funds competitive advantage. Question is around your current cash holdings at 6-7%. How do you plan to take advantage if the market really picks up a flu, not a cough?
Best,
Agree Steve, it is still tough to watch but if you have stuck to your process of only allocating cash to deep value opportunities (rather than momentum trades), you can sleep better at night.
Interesting fact from CNBC, “the last time the S&P 500 fell more than 3% for 2 days in a row was in November of 2008 during the financial crisis,” citing Bespoke Investment Group.
Steve,
Yesterday, I read ‘Corona no virus for global stocks’, but don’t understand the point of it, or the gist of the wit within it. It came across as ambiguous, counter-productive & not reassuring to Forager investors.
Covid19 was in 25 countries by the 18th Feb & the global knock-on effects to follow were apparent. (i.e. this is worse than SARS with much higher infection rates),
I understand that the last years have been tough for active funds vs passive & it’s times like these when we look forward to Forager out-performing passive whilst trusting the funds have the cash available to pick up oversold stocks in the future months as this plays out (something that article did not make apparent).
As a founder investor & having been with you & Gareth on the ups and downs over the years, I honestly came close to selling both FASF & FISF yesterday after reading ‘Corona no virus for global stocks’.
I hope we get to look back at this in a future Forager seminar, to discuss the great stocks Forager bought during this time along with their gains.
Regards
Bryn
I must admit I’m in a similar boat to Bryn.
Looking at some of these deep value stocks that Forager owns which have now become even deeper value as of Friday, I’m interested to know at what price points this becomes an opportunity.
I appreciate that in times of mass market sell offs, smaller companies are hit with greater vengeance than the large ones, and this may (hopefully) be an indication that the last few days sell off was an irrational overreaction and/or instiutional algo’s going haywire. But I’m wondering how Forager is going to be in a position to take enough bargain opportunities to offset the impact on what is looking to be another underperforming year.
At least I’m relieved that the spare cash wasn’t used for a share buyback, as this must have been tempting given the ongoing NTA discount.
Hi Bryn,
I believe that the point of the previous post was as follows. Forager’s competitive advantage as a fund manager is in picking up value stocks at bargain prices during periods of irrational panic selling. In last week’s post, Steve was pointing out that those bargains had not eventuated despite the emerging news about coronavirus.
Within the space of one week, the former post has now become moot. We are now seeing panic selling across the board. This is an investing environment where Forager’s competitive advantage can (hopefully) come into play.
Yong Yi
Hello Steve
A side issue i saw the ASX announcement about changing the mandate off the Australian fund to also in NZ share market, will there be a blog post coming up explaining this change
Steve, neglected to say thanks for the all hard work you and the team put in for our benefit. You (and Roger M) are the only managers in Australia that I would give my hard-earned to. I note that the glamour house of the last few years – who have used the low rates forever mantra to justify feasting on growth stocks at prices long divorced from fundamentals – has taken a pummeling in the market over the last few days. Like I told you in an email late last year, you will be managing my family’s money for a “Buffett duration” (i.e. forever)… Cheers and sincere thanks
The virus is the trigger not the cause, hence the inertia. The markets have been insulated (‘coddled’ according to Padley) for a long while now. It’s as if we’ve forgotten about gravity. Are we in for a flight to counter cyclical strategies?
I wish the team better luck in the year ahead. A return to focus should reap rewards in the short to medium term. It pays not to forget “The Most Important Thing” (yes, book ref 😉
While painful to hold (lately) FOR has a place in my PF to provide an alternative strategy to passive and other holdings. I simply ask if the team looks like they’re onto it.
I’d like to clarify that last sentence… I mean that top of mind for me is the ongoing committment of the team and their ability to deliver across the cycle and that I currently believe they can and they will.
Although the losses of the last few days have been tough, as holders I think this is what we have been waiting for. I trust the forager crew. As I understand it, value investing can spend alot of time looking horribly wrong until the tide terms. Then gains can come quickly. The hard part as holders is making sure you have the right temperament for it.
Time will tell. Just a note to the forager team- i think you would be better served by giving the account value on your site after logging in as the market value and not the NAV value.
Brett E,
like the passion underpinned with critical thinking and science focus too…
excerpt – ‘Humans seem to have something in them that conditions us to believe that really scary events will not happen..’
human emotional driver is – ‘unhappiness’ with feelings of –
anxiety/fear, depression/sadness, frustration/anger/disgust, guilt…
highly recommend – although ‘heavy doc’ 5 decades work…
‘How to be Happy in Spite of Yourself” Dr Robert Dawson
Steve your comment on the previous blog post that the coronavirus is “a significant event that is unlikely to have a dramatic impact on the value of equity markets” was unfortunately timed. I note that FOR had only 6.7% in cash at the last monthly report. Will the investments in small, iliquid “poorer quality” deep value type stocks place the fund in a poor position to take advantage of the collapse in the Australian equity markets?
It’s brutal out there today, Steve… Just checked performance of Forager Vs Magellan stock (MFG) since 20 Feb – 12% outperformance in favour of Forager… still tough times ahead but this too shall pass… All the best to the team… Brett (http://MacroEdgo.com)
Hi Brett,
That is a very specific time range. And a very short one for a value investor to label “performance” (rather than volatility) 🙂 🙂
A buy-and-hold investor who purchased MFG at any point in the period 2012 to 2019 would be significantly better off than an investor who purchased FOR on the same date. And, judging by the comments in this blog thread, I bet a lot of the longer term FOR shareholders probably regret not getting into MFG instead…
Even after the carnage of this month, MFG is still up 20x from it’s 2012 prices… a $10k investment in MFG made back then is worth over $200k now… whereas a $10k investment in FOR made at the same time is only worth about $15k at market (can’t sell at NAV…)
Hi Brett – MFG is the operating company of Magellan, not a portfolio of stocks. The comparison is apples to oranges. You’d be better comparing FISF vs Magellan Global or Magellan High Conviction
FASF cash weighting:
Nov 2019 = 5.4%
Jan 2020 = 6.7%
Feb 2020 = 2.8% (!)
A $150+ million value fund enters a recession with less than $5 million in cash. That’s pretty much the definition of having been greedy when others were greedy.
The worst part is that FASF was holding huge amounts of cash over the last few years as the bull market raged (this time last year they were at 25% cash weighting), waiting for ‘the right opportunity’ as investors accepted massive underperformance. But it’s hard to stay the course when you’ve had a long stretch of red ink, and they finally lost their nerve in late 2019 and invested the lion’s share of the cash pile at the worst possible moment. And now? There’s practically nothing left to deploy with ‘emotional wherewithal’ in this depressed market. Ironically/sadly, most growth-momentum funds which have trounced FASF returns over the past few years are much better positioned to put capital to work over the coming quarters (WAM Capital closed out Feb 2020 with a 23% cash weighting…)
Exactly how I feel. Thanks Darren for taking the time to write it down.
This is the time when Forager should outperform the market. Unfortunately the fund was ill-prepared. “Selling cheap to buy cheaper” is not an option when you are invested in small, illiquid stocks.
Other value managers like Wilson’s and PM Capital were definitely better prepared.
Unfortunately in the Forager alternate universe the coronavirus is “a significant event that is unlikely to have a dramatic impact on the value of equity markets”.
“…I don’t always make macro calls. But when I do, I prefer to be wrong…”
Steve, ignoring the medical seriousness of the present issues before us all, what are you able to do without cash to deploy? Can you gear up the fund to buyback FOR units on market and or any other listed investments screaming value right now (and is credit readily available at attractive terms to do so in time like these)? Are unitholders prepared and able to chip in more cash (SPP / rights issue) for the fund to deploy to take advantage of panic and lower prices? A process that can’t be implemented is not a process.
Steve can’t even respond to a blog comment after a week, there’s no way new cash is going to materialize on the scene mate.
Would be nice to get a response to the above Steve.
Absolutely. As a fund manager, you earn the right to be sparse in your communications by generating alpha/outperforming the market. I mean, it’s not like we can just cash out at NAV and be done with the FASF… though if you look at the discount to NAV (22% as of today!) it looks like most investors would love to be able to do just that…
And on the topic of communication, blogs are not the ideal medium for you Steve – your blogs are ambiguous, often get it wrong, and sound arrogant. Instead of writing them, or spending hours making videos which nobody asked for and which get no comments on youtube, please instead spend time communicating with us directly here and responding to our questions. Communication is about answering the questions your investors are interested in, not just the topics which you feel like talking about.
It’s the least that we deserve now that you have decided to ride the FASF portfolio of basement bargains/value traps right to the bottom of a recession, and keep us all in the red for yet another year..
Hi Ben, sorry about the delay. We’re running a webinar on Monday – I’ll give as much detail as I can.
Cheers,
Steve
Monday is not soon enough. Not after another 11% drop in NAV yesterday. At the current rate there won’t be a fund by the time we get to your webinar. Why is it so hard to give some information to reassure investors?
This downturn is the chance of a lifetime. I hope we don’t miss it.
Liquidity is king. If you have it. If not, you are the jester.
So scorecard update: these are the FASF positions as of the end of Feb 2020, and how they’ve faired since:
Top Feb Holdings
10.3% ASX:RUL. Feb 28 price $1.00, currently $0.75 (25% loss)
10.0% ASX:MAH, Feb 28 price $0.28, currently $0.21 (25% loss)
6.2% ASX:EGG, Feb 28 price $1.61, current price $1.02 (37% loss)
6.0% ASX:TGA, Feb 28 price $0.17, current price $0.04 (76% loss)
5.9% ASX:ECX, Feb 28 price $1.45, current price $0.72 (50% loss)
Others (portfolio weightings unknown)
ASX:AMA, Feb 28 price $0.52, currently $0.24 (54% loss)
ASX:EXP, Feb 28 price $0.19, currently $0.07 (63% loss)
ASX:GTK, Feb 28 price $1.77, currently $1.17 (41% loss)
ASX:ISU, Feb 28 price $0.33, currently $0.22 (33% loss)
ASX:NZM, Feb 28 price $0.34, currently $0.25 (36% loss)
ASX:SIQ, Feb 28 price $6.39, currently $5.55 (13% loss)
ASX:WPP, Feb 28 price $0.61, currently $0.46 (25% loss)
For comparison, the ASX 200 (ASX:VAS) was down just 21% over the identical period ($80.55 > $63.51) – and it can’t choose to hold cash and was coming off the back of a long bull run!
Is this a joke? We’re not talking hindsight here – I’m not criticising Forager for miss-sizing the impact of the crisis (which WAS a spectacular miss on their part) – I’m asking why on Earth they thought that this portfolio made sense after the crisis was well underway?? Did they really think that these dogs were the best picks in the entire ASX as of 29 Feb – THREE DAYS after this blog post was published?!?!
That TGA position especially makes my blood boil – the sheer recklessness that they would keep 6% of their portfolio in TGA – a tiny credit company which will struggle to breathe in times of even moderate business activity decline/rise in NPL – and just 2.8% in cash is beyond words.
I sold my entire ASX:FOR position out after that terrible ‘Corona no Virus’ blog post at $1.17/unit. It’s probably the best trade I’ll make all year – since I sold, the market price is down another 41%, closing at $0.69/unit today. Looks like the FASF distribution this year will be paid in thoughts and prayers…
Plastered all over the Forager website – “We aim to maximise the Fund’s expected return without taking needless risks. Avoiding the risk of permanent capital loss is paramount.”
The decisions taken on the makeup of the fund make this nigh on fraudulent.
Steve, I noticed you’re fond of quoting Warren Buffett, and also that you say you like “Cigar Butts” in your twitter bio. I also noticed that the FASF is currently full of Cigar Butt investments and is sinking faster than the Kursk in a Russian naval exercise.
So I wanted to remind you why Warren abandoned the Cigar Butt strategy 30 years ago, with the hope that in future you might occasionally use FASF investor money to buy great companies at good prices. Beating the index is probably beyond the reach of the fund for now, but just having a year without losing money would be real nice…
From the Berkshire 1989 Annual Letter:
“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.
Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original “bargain” price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen.
Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
If I didn’t know better it would appear that the fund has been trying to commit suicide for a while now. It is hard to imagine a less compelling portfolio of stocks. If you are going to compile a funds worth of barely profitable companies with terrible management then you would want to be sure you will be able to influence management for the shareholders good. Or else the fund risks the chance of exploding. And this is what has happened. Look at the Thorn disaster as exhibit A. I see no evidence of Forager’s ability to change the behaviour of management. Surely this is the point of a deep value fund like this?
I hope there is an appreciation for how hard people work to earn their money at Forager. There is every chance of a ‘V’ shaped bounce back in this downturn, so it should be the chance of a lifetime. But the fund is finally fully invested and will be selling other stocks at a loss to buy stocks that have become cheap. It has become all so pointless. What a disaster.
My goodness there are a lot of very wise after the event investors . Where were all these posts pre crash with the pearls of wisdom ? This fund was always a addition to a index fund type investment at a small % of total funds in the market .
The next problem down the line for Forager will be preventing opportunistic takeovers of companies the fund owns.