Weekly thoughts #16
Errors of commission.
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I have previously told you about my errors of omission. These types of errors can erode future returns, but there is a type of error that is more hazardous to portfolio performance: commission errors.
Errors of commission refers to shares that underperformed and were included in the portfolio,
As Jerry told to Osgood in Some Like It Hot: “Well, nobody's perfect!”.
Some errors of commission:
Burford Capital Limited (BUR)
Burford provides legal finance products and services worldwide. The company operates through two segments, Capital Provision, and Asset Management and Other Provision. The Capital Provision segment provides capital to the legal industry or in connection with legal matters directly and through investment in private funds; legal risk management services; lower risk legal finance business focusing on pre-settlement litigation matters with lower risk and lower expected returns; post-settlement finance; and complex strategies in which it acts as a principal and acquires assets that are mispriced. The Asset Management and Other Services segment provides services to the legal industry, including litigation insurance. Burford Capital Limited was incorporated in 2009 and is based in Saint Peter Port, Guernsey. [TIKR]
Buy date: 2018.
Thesis basis: excellent business with a strong growth, competitive advantages, barriers of entry and well managed by the key person (Christopher Bogart).
What ended up happening?
In August 2019, Muddy Waters published a short thesis accusing Burford of fraud. According to Muddy Waters, the company would be financing itself inadequately and manipulating the financial statements.
Burford accused to Muddy Waters of misleading and falsity. However, stocks dropped strongly.
Loss: -25%
What did I learn from that mistake?
Burford is basically a financial business, and as such requires an exhaustive study of its accounts (The accounting matters). If you do not want to do the work, it is better not to invest.
In addition, the CEO and CFO were married. That is a yellow flag to keep in mind.
Keck Seng Investments (0184.HK)
Keck Seng Investments (Hong Kong) Limited is an investment holding company, engages in hotel and club operations, and property investment and development activities in Macau, Vietnam, the People's Republic of China, Japan, Canada, the United States, and Hong Kong. The company operates through three segments: Hotel, Property, and Investment and Corporate. The Hotel segment offers hotel room accommodation services; and food and beverages at hotel restaurant outlets, as well as operates slot machines. The Property segment leases investment properties, which primarily consist of retail, commercial, and office properties; and develops, markets, and sells trading properties. The Investment and Corporate segment involved in the non-trading and trading securities; financial instruments; and other treasury operations. It also provides management services. Keck Seng Investments (Hong Kong) Limited was incorporated in 1973 and is based in Central, Hong Kong. [TIKR]
Buy date: 2018
Thesis basis: the book value of assets, such as hotels, apartments and parking lots, were not valued at fair value. Therefore, the market is not adequately valuing the true value of the company. Strong driver of growth through casino and residential properties in Macau.
What ended up happening?
Keck Seng became very popular in the Spanish value investing community since a famous small caps fund manager included it in his portfolio.
Assuming that the company is trading below its value based on its book value and without analyzing the assets individually is a serious mistake. In this type of business, it is very easy to hide very deteriorated assets.
“Retail and commercial leasing markets are deteriorating, and the investment market is under pressure due to high interest rates, resulting in falling rents and prices,” JLL Macau said.
In my opinion, the market was correctly valuing that uncertainty, the risk, and the type of company it was.
Loss: -47%
What did I learn from that mistake?
Keck Seng is a Hong Kong based company, and so there is some risk that must be mitigated by examining the assets in detail (The importance of accounting again), or reject to invest in it.
Never trust the fact that a fund manager is long in a stock.
Naturhouse Health, S.A. (NTH)
Naturhouse operates in the nutrition and dietetics industry in Spain, Italy, France, Poland, and internationally. The company sells food supplements that are made from natural extracts to facilitate the consumption of various nutrients; and foods and drinks, such as diet products for breakfast, snacks, and meal substitutes. It offers cosmetics and body care products, including beauty products related to skincare during the slimming process comprising cellulite, firming products, etc.; and anti-ageing products. In addition, the company engages in marketing, production, and preparation of dietary products; and marketing of herbal remedies, and natural cosmetics. It sells its products through directly operated stores and franchised Naturhouse centers. The company was formerly known as Housediet, S.L.U. and changed its name to Naturhouse Health, S.A. Naturhouse Health, S.A. was incorporated in 1991 and is based in Madrid, Spain. Naturhouse Health, S.A. operates as a subsidiary of Kiluva S.A. [TIKR]
Buy date: 2016
Thesis basis: Easy to understand business model, competitive advantages, growing demand with and growth plans in the USA and France. CEO with skin in the game.
What ended up happening?
There were no competitive advantages. Demand fell sharply in Spain and growth plans did not materialize.
Loss: -25%
What did I learn from that mistake?
Never overvalue a competitive advantage that is not real. Do not overvalue the skin in the game or the figure of the key person (Sometimes the disaster comes from a bad business model or incompetence, not from a lack of incentives).
The Naturhouse product did not withstand the culture shock. An internationalization plan must be consistent with the countries where you want to grow. International expansion is not an easy process.
I really knew the Naturhouse stores and never believed in their product or understood it, but rather got carried away by the company's narrative. Never do that. Think for yourself!
Now I look back, and I am a little ashamed of the investor I was. Probably in the future I will not be the investor that I am now. That’s life!
How did you learn to ride a bike? Personally, I learned by falling to the ground.
It is not possible to go back to the past. Therefore, the most important thing about an investment mistake is what it can teach us so as not to repeat it again.
Perfectionism is a false friend. In investments, you do not have to be perfect but efficient.
Something that helps me a lot is writing an investment journal where I can record all my operations, why I bought the shares, why I sold them and what happened in between.
And remember:
“There are two types of bikers: those who have fallen and those who are going to fall”.
Greetings and have a good week.
Eloy.
