Avoiding stocks that may hurt portfolio is other side of winning

Moneyweb

Over the past few months there have been some positive moves in the local equity market. However, the biggest stories have been about stocks that have gone the other way: Steinhoff, Capitec and the Resilient group of REITs.

Steinhoff’s share price is still over 90% down from where it traded the week before Markus Jooste resigned and Capitec has shed 20% since the release of the first Viceroy report. Among the Resilient group, Resilient is off nearly 60% this year, Nepi Rockcastle and Greenbay over 45%, and Fortress Income Fund B over 60%.

For investors, it’s worth thinking about these ups and downs in the context of a portfolio. If at the start of December anyone had held an equally-weighted portfolio of the 12 stocks in the table they’d now be substantially worse off. The losses would have more than wiped out the gains from the good, even excluding Steinhoff.

This is an important lesson: picking stocks that benefit your portfolio is only half the battle. You must also avoid those that will hurt it. This is easier said than done. For example, while you could argue that Capitec was over-valued, nobody could have foreseen the report that caused its suddent share price drop.

Steinhoff and Resilient are slightly different. While perhaps nobody anticipated the extreme drop in their share prices, plenty was written about the warning signs that suggested things weren’t as they seemed. It’s vital to always to go back to the fundamentals. In Steinhoff’s case, where were the cash flows that should have been coming in? For Resilient, what was underpinning the large premium at which these companies were trading at to their net asset values?

Nobody will get every investment right, but a process of analysis is the only way to get the odds in your favour.

If you exclude the Resilient group of companies from the above portfolio, its performance turns positive (6%), despite the drag from Steinhoff. Consider the fundamentals of any investment, to avoid those where the odds of making money aren’t in your favour. Bitcoin investors should give that some thought.