Let’s immediately tackle the most common question I get: Sven, your portfolio is mostly in Russia –don’t you consider country risk? That is a great question and on that I had to dedicate a decent amount of thought to give an answer too, so here it goes! There are many points within my answer, not necessary in weighting order and definitely not something where I try to convince you of something, I DON’T EVER WANT TO BE A PERSON THAT IS THERE TO CONVINCE SOMEBODY, I just want to share my perspective, then you see how it fits you.THE KEY WHEN INVESTING IS TO SEE HOW IT FITS YOU. IF I CAN GIVE YOU JUST ONE GOOD INVESTING IDEA PER YEAR THAT FITS YOUR PORTFOLIO AND YOUR FINANCIAL GOALS,I DID A GREAT JOB! 1 idea per year, over a decade you have an amazing portfolio.
1) A portfolio is a dynamic process –not my fault Russia was cheapI bought these Russian companies when I thought there was a big margin of safety as after all risk is a function of price where you compare the price to the worst-case scenarios. When I bought, I figured that worst case scenario (sanctions, pilinguin, wars, planes hijacking, pipelines failed construction, etc.etc. etc) could be survived from an investing perspective given the value there compared to the price.
Now that the stock prices are higher, it is mathematical the return forward will be lower and the risk is higher –that is pure mathematics, nothing to be done about that, but it is also a little bit about comparing to others which we will do later in the individual stock discussion.
2) Real inherent risks –not headline mumbo jumboNow, if you ask me, Sven what about country exposure and the risks? Then you simply should not invest there –that is so easy !The world is big and you can find investments everywhere, like we did over the last 3 years (US: FDP, LUNDIN, TX).But if I must go into the risk part, I am seeing it like this:
- Without Gazprom supplying 38% of European natural gas demand, many would die, the European industry wouldn’t work properly and it would be a disaster. Also 30% of European petroleum imports comes from Russia. So, pipelines have been built, despite all American presidents being strongly against it (from Reagan onward) and that is the situation now.
- Fertilizers, you got to eat and without the supply, it would be bad.
- Aluminium, in 2018 when there were the Deripaska sanctions, aluminium prices went up and covered for the decline in sales to the US for Russian companies. Actually, sanctions have a negative short-term impact but very positive long-term impact (US prohibiting US companies to work on Russian pipeline projects –Russians developed their own technology and US companies lost big markets –just as an example–another, sanctions increase the cost for the final customer –so nothing is free in economy-no free lunch, always keep that in mind).
Plus, Asia is growing and demanding more of everything, pipelines are built and things are being diversified from Europe. This also means the influence of the US and EU is declining –that is how it is these days in the world and not much can be done about itand it is absolutely irrelevant what me or you think about it.
On country risk –Russian debt to GDP is 19.35% and given current commodity prices, debt will likely go down soon.Compare that to US or EU debt levels and you might see the weighting there but also the different perspectives on risk.
Plus, if you know how these countries work –you first have the wild west, in the 1990s and early 2000s, where crooks try to take as much as possible as fast as possible –but when they have done that, they want to create a stable system to preserve the wealth, at least some of them. (on Russian crooks and their western counterpart crooks –I don’t see a big difference –if you don’t want to deal with crooks –don’t invest and go live on a tree–don’t want to enter that discussion, but if you look you will find crookheads everywhere). Or simply don’t invest in Russia and anything that doesn’t suit you –that is why I am developing the LARGE PORTFOLIO –more about that later.
But, as I said, I don’t want to convince anybody, so yes:
ANYTHINGHAPPENING IN RUSSIA, STOCKS CAN EASILY CRASH 50% in a month – that is a given and if you can’t HANDLE IT – SIMPLY DON”T INVEST I wish it wasn’t like that but it is. I am always also thinking about low probability risks or rewards, that can happen, but are unlikely, but if I write those up about any position you would never put your money into anything.
There is market and headline risk –will Russia stop delivering gas, fertilizers and aluminium? If that happens, we will have to worry about other things than our stock portfolios!!!(plus, keep in mind US stocks can crash 50% too, but if I would have 100% US portfolio nobody would ask me about country risk-haha)Yes, anything can happen, but when I bought it seemed too much of a bargain to pass –that is MY CONCLUSION and ANSWER ON RISK QUESTIONS.
3) Your current perspective, versus a dynamic perspectiveGiven all the questions about exposure –it all boils down to character –I am always watching, looking for something better and I can change my positions tomorrow (THAT IS WHY I DON’T WANT CONVINCE YOU ABOUT ANYTHING –because then if and when I change you will be surprised) I REITEREATE MYSELF, IT IS ABOUT YOU.So, what 99% of the population can’t do, is weight the risk and reward as a process and accept changes, they read a headline and that is the truth. So, my message here is that you see, learn, get a feeling about it, and then make your own decision –and there the individual stock perspective will certainly help–will touch on that below.MY CONCLUSION IS: A DOLLAR OF INCOME IS A DOLLAR OF INCOME NO MATTER THE VOLATILITY RELATED TO IT –if the value is created for me, a dollar is a dollar –I really don’t care what you or anybody else thinks about my dollar –the key is that I know how it fits me. However, as you will see later, mistakes can be made, but it all is a dynamic process as I said a few times already.
4) Other–commodities, number of positions etc...In 2019, I would get questions about my exposure to commodities and risks there, again, it wasn’t my fault commodities were cheap and we all need them all the time. So, yes, I take risks, but I try to see the balance, be flexible and never try to mingle ego or anything else that is not totally detached. I don’t trust anybody;I just try to see whether what they do aligns with what I need etc. Risk is a function of price and comparing that price to what you are buying and that is the key. Something relatively good at a low enough price is low risk, even in Russia but something can happen all the time.More questions are related to the number of positions –yes,I know that my portfolio will be more volatile, but I am doing better if I put my eggs in less baskets and watch those carefully –every timeI would do something because I though I need to diversify as I manage a portfolio that people look at, I would do mistakes (QD, CEPU, VEDL–6th, 7th and 8th portfolio idea–more about that soon). So, I just feel much better owning less, as Buffett says you don’t want to end up with a zoo like Noah’s or Cathie’s Ark. Of course, bad things will happen and I know that a position will go bust one day and I will lose 20% of my portfolio, but if I can counter than with great returns from others, I’ll be ok.
