Commentary on current performance

Why have portfolios performed weaker so far in 2022 than in previous years?

Anyone who has followed our performance over the last two years will have noticed that the fluctuations are higher than with other robo-advisors. The main reason for this is a different investment approach, which in combination with the current uncertainty on the markets makes for higher volatility. In addition, we also have to openly admit to having misjudged a situation that has cost us returns. In this commentary, you will learn why our portfolios are exposed to greater fluctuations and what opportunities are available to long-term investors.
High concentration means higher fluctuations Compared to other Robo-advisors who invest in hundreds of companies via ETFs, our investment approach is much more concentrated. Our portfolios contain only between 20 and 25 individual stocks and are subject to correspondingly higher fluctuations. In good stock market years, this approach enables us to achieve far higher returns than an index. In weaker stock market years, on the other hand, we may underperform. However, since good years are far more common than bad ones, this concentrated approach has enabled us to outperform benchmarks over a longer period of time. For investors with a long investment horizon, however, our philosophy offers more opportunity than any other to benefit from above-average returns. A look at our return triangle shows not only that positive quarters (green) outweigh negative quarters (red), but also that performance becomes positive with longer investment horizons.
Renditedreieck Estably
(Click on the image to enlarge)
Strong businesses in fear-driven markets Our strategy is to invest our clients in outstanding business models that have the potential to generate above-average returns over the long term. We monitor potential investments for months, analyze key figures and balance sheets, talk to customers, suppliers, and ex-employees, examine the competitive environment, scrutinize management, and look for unique competitive advantages. Only when a company convinces us in every respect and is also trading below its long-term intrinsic value, do we invest. We remain convinced of the long-term earnings power of all the companies currently in our portfolios. We receive confirmation of this almost every quarter when the companies publish their quarterly reports. But why are these excellent results not (yet) reflected in the share prices? Modern value or quality investing as practiced by Estably is based on a long investment horizon. The value of a share is the result of all future free cash flows of a company, discounted to today, divided by the number of shares. However, the value and price of a company or share diverge to a greater or lesser extent over time. However, the long-term drivers of a share price will always be a company’s sales growth, earnings power (margin), and ability to allocate capital.
In the short term, however, the share price is primarily determined by the expectations of market participants, which are reflected in valuations. Market participants are currently driven by pessimism, fear, and uncertainty. They are selling out of fear of rising interest rates, without regard for the medium- to the long-term profitability of companies, and are causing valuations to adjust downward. Warren Buffet put it aptly:

"The stock market is a system that transfers money from the impatient to the patient."

Warren Buffett
In times of crisis, the focus of the capital market is on the “here and now”. The investment horizon is immediately shortened drastically and obvious risks are avoided. In a simultaneously strongly inflationary market environment and in anticipation of rising interest rates, there are currently very clear losers on the capital market – consumer-oriented technology companies in strongly growing markets, which reinvest all profits in future growth. The valuation of such companies depends purely on expected long-term sales and margins, about which only assumptions can be made at present, and is therefore particularly subject to the imagination of investors in the short to medium term. In the current environment, with lower growth following the pandemic and increasing cost pressure due to inflation, a very pessimistic picture is being painted. This can also be seen in current media coverage.  Whereas in rising stock market phases an overly optimistic picture is sometimes painted and negative topics are generously overlooked, the opposite is currently the case. People are literally looking for the fly in the ointment.
Unpredictable development of the Russian market At the beginning of March, we were in an ongoing exchange with the management of the Russian companies in our portfolios but did not expect such an escalation of the conflict and the associated suspension of stock market trading. In addition to the already mentioned price declines caused by the strongly negative market movement due to rising interest rates, this unforeseeable development “cost” us approx. 4-6% performance in the portfolios.
Attractive entry opportunity thanks to favorable valuation We continue to stand firmly behind our strategy and our companies. For investors with an investment horizon of several years, there is a favorable entry opportunity that can lead to a particular outperformance in the coming years. We are convinced that we will be able to realize an attractive and above-average increase in value for years to come – as we have done in the past years. For more detailed information on our strategies, please do not hesitate to contact us.