IC Market Espresso 11 Oct 2021

It’s Okay to be Boring

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros

The investing world is full of opportunities, some of which end up being left on the sideline – well, because they are boring. There is no doubt that talks about investing in crypto, drones, tech or social media will spark more engagement at a dinner party than talks about investing in a food company, insurance, index funds etc. However, that does not mean that the latter will necessarily result in worse performance, but could actually be a solid investment opportunity. In today’s blog, we will touch upon the opportunities within investing in boring companies.

By boring, I mean companies that operate in relatively unexciting industries and because of that usually do not end up in the headlines. One could argue that this is the reason why an average retail investor does not spend much time looking at opportunities in boring industries and focuses much more on companies/investments which are deemed “sexy”. There is no doubt that there are many investment opportunities within the interesting industries. However, one could argue that for every Tesla or Netflix, there is a boring “substitute” that might have generated the similar/same or even higher investment return. Here are a few examples from 2021 which might have gone under the radar for those not closely following the regional markets.

On a YTD basis:

  • 7SLO ETF (SBITOP based ETF) outperformed ARK Innovation ETF by c. 44 p.p.
  • Sava Re (insurance) outperformed Tesla by c.32 p.p.
  • Podravka (food & pharma) outperformed Virgin Galactic by c. 37 p.p.
  • NLB Group (bank) outperformed Pfizer by c. 47 p.p.
  • Nuclearelectrica (Romanian nuclear energy company) outperformed Bitcoin by c. 27 p.p.

The point of the aforementioned is not to imply that one is a better investment than the other, but that there is more than enough room for outperformance within the “less interesting” stocks. Of course, taking a different time period might give us a significantly different outcome, but it still proves the above-stated point. Put simply, one could argue that for every “hyped” return of a certain stock, there was another equivalent (boring) return, which might have gone unnoticed by the public.

Despite this, typically only the companies in exciting industries draw the attention of large crowds. Boring companies, no matter how profitable they might be, don’t tend to make the headlines all that much. The same logic could be applied to markets. Even the more attentive market participants might have not noticed that Slovenia’s SBITOP is one of the best performing equity indices in the world, once again, because Slovenia is, in relative terms, boring. The same idea could be said for Croatia, where the market increased by 17% so far in 2021.

There are a couple of reasons why investing in boring companies makes at least as much sense as in interesting companies. To start with, history has shown that investors were burned many times by “hyped” companies – Nikola, Theranos, Wework – just to name a few. This does not necessarily mean that boring companies do not come at a risk. However, one could reason that you are more likely to invest in a boring company based on the perception of its intrinsic value, whereas it’s easy to get caught up with a “promised story” of an interesting investment.

Furthermore, boring companies are more likely to have a strong moat, meaning an unrivaled competitive advantage in their particular industry. This comes from a simple fact that they might be doing something that nobody else wants to do.

Lastly, investing in boring companies coincides with value investing to some extent, so Buffet’s idea of finding a wonderful company at a fair price is the first obvious answer. Afterall, valuations, not stories ultimately determine investment returns.

In short, its is okay to seek for returns within interesting stories, but it is also okay to be boring.

Trading Activity on BVB – September 2021

In September BET increased by 3.84% YoY, closing at 12,645.1 points.

The Bucharest Stock Exchange continued its positive sentiment in September, with BET noting a MoM increase of 3.84% (closing at 12,645.1 points). The average daily turnover in September amounted to EUR 10.8m.

OMV Petrom noted the highest turnover in September of EUR 58.4m, followed by Banca Transilvania with a total turnover of EUR 33.5m and Teraplast with a total turnover of EUR 31.2m

When observing the index constituents, 12 of 17 ended the month in green, with Teraplast leading the list with +38.2%. Nuclearelectrica and Medlife follow with +27.9% and +10.6%, respectively. On the flip side, Sphera Franchise Group leads the losers with a decrease of 11.1%.

Performance of BET Constituents in September (%)

Time Needed to Sell 1% Market Cap on Regional Stock Exchanges

In order to sell 1% of the free float market cap of ZSE, one would need 78 days.

It is a known fact that relatively low liquidity is an ongoing challenge for not just Croatia and Slovenia, but also other regional markets. Some of the reasons behind this could be a relatively low free float of market capitalization, a small investment universe, lack of a large retail investor base, etc.

For today, we decided to calculate how many days one would need, to sell 1% of the total market capitalization of regional stock exchange markets.  The stock exchanges we observed were ZSE, LJSE, BELEX and BVB.

It does not come as a surprise that Romanian stock exchange market is the most liquid, having in mind that average daily turnover was EUR 8.33m (YTD) and market cap EUR 44.14bn. To sell 1% of market cap on Bucharest Stock Exchange, one would need 53 days, which is the lowest of all observed stock exchanges.

Slovenia comes next with a significantly lower average daily turnover of EUR 1.43 in 2021. However, the market cap of the exchange is significantly lower, so one would need 63 days to sell 1% of the market cap.

Meanwhile for ZSE, one would need 178 days to sell the same. However, if we were to take into account the free-float market cap, the figure would amount to 78 days.

Time Needed to Sell 1% Market Cap

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