Sunday, June 5, 2022
HomeValue InvestingRussia invasion of Ukraine – Worst investing day ever -c25-30% ytd –...

Russia invasion of Ukraine – Worst investing day ever -c25-30% ytd – Deep Value Investments Blog

Just done my best estimates of my portfolio value today. It isn’t looking pretty, down 25%. My worst ever day by a country mile.

Firstly, it should be noted I am not a supporter of this invasion. I would prefer it if Russia hadn’t invaded. I think they have legitimate concerns regarding NATO membership. It isn’t purely a defensive alliance but a full takeover was not the way to get those concerns taken seriously. I hope both the Russian and Ukrainian people thrive and prosper. Ultimately I invest in stocks to make money and try to do so dispassionately and rationally. Some people find this cold / challenging / upsetting, particularly once lives are lost. I try to remove any moral grounds from anything I do in investing. I didn’t cause this crisis, where my money is has nothing to do with who/what I support. I’m just a guy making the best of the world I find myself in…

I correctly judged the Ukraine/ Russian invasion, up until the tanks crossed the border I was flat. I had been whipsawed in and out, following news that they were withdrawing troops / had agreed with Macron not to invade. I finally withdrew all my money once Russia withdrew diplomats – if it wasnt safe for them, it certainly wasn’t safe for my money.

Where it all went wrong was once the invasion started. I thought it would be a repeat of the Georgian invasion. There was substantial precedent and logic to back this up. Non great power vs great power conflicts usually go one way. Soldiers fighting against (what I thought) were insurmountable odds often surrender. I certainly would have – this is they key point to where my though process went wrong. Often I assume everyone thinks like me, this is not correct and is something I look for. I am aware of the flaw and try to work round it – avoiding (say) consumer / fashion stocks as I have no idea what Joe Publc likes. As I assumed the Ukranians had no chance and thought they wouldnt fight I thought the war would be over by the weekend with a decisive Russian victory. Putin seems to have thought much the same. This evidently wasn’t how it went… I didnt put sufficient weight on the possibility that having experienced years of Russian domination the population wasnt keen for a repeat and would fight. I also underestimated their effectiveness, I have heard that many men have been rotated into the Donbass so have at least some military experience vs the Russian conscripts with none. Having spent time in Eastern Europe I should have remembered how fiercely nationalistic the people were over there, it really is a different mindset.

So I got in about 18% of my portfolio at or close to the lows on Thursday (the day of the invasion). This was OK as I had a good entry price – stocks on double digit yields, fractions of book value, 50% down from the prior day. I was thinking calmly and rationally, Russia would still need appartments building, still need banks, still mine and sell resources.

Friday I thought my anticipated outcome was coming true, talks had/ were going to start. SWIFT wasnt going to be impacted, sanctions were mild. Most things I held were up about 18%, so I decided to do what all good traders / investors do and add to my winning positions. I have some leverage available to do things like this / for special occassions so did. I ended up about 15-20% geared as at close Friday (roughly depends what I include when calculating this. I expected the weekend to bring peace negotiations and Monday all would be well. I was at a 33% weight. (Leverage is now cut by trimming elsewhere).

That didn’t happen. The war intensified, Ukranians fought, SWIFT was turned off (mostly). To manage risk I shorted half the rouble value of my Russian assets via Futures, somewhat nervous of what Monday would bring. I only shorted half as the other half (roughly) were resource exporters so a fall in the rouble, in many ways, shouldn’t affect them negatively. I have cut some Russian stock exposure at losses today. Very keen not to be whipsawed if good news comes out on this. Its hard to value but I expect I have about 28% of my assets in Russia – based on Friday’s closing prices (as MOEX didn’t trade today)…

Situation I am now in is Russia that has basically anounced capital controls, my money is stuck for the forseeable. It was mostly on MOEX as I was trying to avoid being forced to sell by Western authorities. It also is looking like I couldn’t buy more even if I wanted to due to sanctions. Possible that one day I will look back on this as a blessing in disguise. I am unable to panic-sell and may well be in on near a multi-decade low. This of course, could be the same delusion which got me into this situation in the first place.

This actually isn’t my biggest concern. I studied international relations, various wars and know (to some degree) how these things go. The current trajectory is not good. NATO/US/EU are using the Ukranians to fight the Russians. Russia will still eventually win, unfortunately as the Ukranians are fighting hard the Russians will have to too. This means bombing cities, starving people into submission. If civilians are making molotov cocktails / taking shots they will soon be perceived as a target with predictable results. It’s very difficult for a ‘strongman’ leader such as Putin to give up and admit defeat. Equally hard for NATO/US/EU/Ukraine to back down. Worse still is that Russian doctrine envisages a possible nuclear first strike with a view to intimidating an opponent to surrender. The EU is already heavily resupplying the Ukranians. There is talk of a no-fly zone being imposed. This can easily lead to Russia striking the bases of those planes, leading to retaliation, and off we go to WW3. No-one wants this but it could happen.

Russia may also restrict oil/gas sales, I think it’s now a likely next step. Ukraine may not want to compromise with the EU at it’s back and after a better than expected performance.

Hopefully cease-fire talks can lead to some mutually agreeable compromise and a de-escalation. If it doesnt, I plan to leave the UK for South America once the first nuke is dropped, need to think about how I will fund this trip to avoid the apocalypse, it actually makes crypto look pretty atttractive. Lots of you will think ‘this will never happen’, quite frankly, good, I am betting on this as it will make it possible for me to leave whilst you think war is far away from you.

I’m also a bit concerned about the effects of yet another economic collapse on Russia. If you believe (as I do) that economics drives the psyche of a people – two major collapses in 30 years in a heavily armed power can’t be a good thing and if this doesn’t directly start a major war it may well shape the mindset of someone who will in the future.

This is reminding me of the Suez crisis military victory followed by a rapid economic / diplomatic defeat and withdrawal – a fading power, humbled.

For those that are interested these are the Russian stocks I ‘own’. Weights are very rough – and as per Friday – so I expect to be 40-50% down now.

Not going to sell now, history shows that the best time to buy is often when you feel like puking and right now I feel like puking. I make it a rule to not sell at market lows without buying something else (though I have bent this to reduce leverage). I was going to reallocate between ideas – looking like that won’t now be possible so I am stuck with my allocation.

Not sure what the lesson is from all this is. Have had quite a few harsh comments on twitter along the lines of – don’t do business with dictators / you’re immoral/Putin will take your money. Not convinced. Putin really was quite a mild dictator of a major power before this. Valuations were to low to ignore – if I had been around in the 90’s I would have done the same thing and made a fortune, I may yet, Putin could easily be removed – what PE would Russia trade at with a modern forward-looking leader ?

I shouldn’t have added so much on Friday. I thought I understood the risks I was taking but didn’t – as the saying goes – it isn’t what you don’t know that kills you, it’s what you know that just ain’t so. I usually have a 20% country/stock/idea limit but this is hazy – I have had over 50% in resources for quite a while and have at times put c30% in one stock. I have to push a bit where I see opportunity, particularly as I have found value opportunities that I like increasingly hard to find.

Assuming the worst case of a near 100% Russia write-off it will take me 2 years to get back to where I was at my typical/usual 20% growth rate… Not going to rush into anything else, will let this settle in my mind and see how the next week plays out.

As ever, comments welcomed.



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