1. VALUEx-Konferenz Februar 2011


Vorstandsmitglied Dr. Olaf Hein nahm am 2-4. Februar 2011 an der 1. VAULEx Investoren-Konferenz in Zürich/Klosters teil. Persönlich eingeladen waren rund 70 internationale Investoren und Portfolio-Manager, die sich mit dem „Value“-Investmentstil im Sinne von Warren Buffett und Benjamin Graham identifizieren. Die Teilnehmer wurden vorab gebeten u.a. ihren beruflichen Einstieg und ihren Ansatz im Portfolio-Management darzulegen. Die individuellen Antworten der Teilnehmer wurden in der monatlichen Publikation „The Manual of Ideas“, Year IV, Volume I, 31. Januar 2011, veröffentlicht. Nachstehend der für die Publikation von Herrn Dr. Hein verfasste Beitrag .

Q: Please provide some background on your path as an investor. How did you get started and who has influenced your learning process most significantly over time?

I am certainly a latecomer in the field of investing. While I had my first exposure to the German stock market at Deutsche Bank Capital Markets between 1986 and 1990, I didn’t re-enter the stock market again before 1996. That year I became CEO of a newly founded investment boutique called SPARTA AG. The investment focus was mainly German small caps. In 1998 the company had a tremendously successful IPO and within 18 months reached a mind boggling market cap.

This was however not due to our small cap expertise, but because SPARTA used the IPO-proceeds to invest opportunistically in all sorts of internet start up’s. For a while investors perceived the SPARTA portfolio as a potential goldmine. When the internet bubble burst, SPARTA went from boom to (almost) bust. This rather unnerving experience led to the realization of what I call the “Little Red Riding Hood – advice“: Don’t go astray while you are on your way!

Within the last 10 years I have bought some 70 books on the financial markets and read about 40 of them from cover to cover. All in all the books have put my view of the financial world into a far better perspective: A lasting impression made – among many others – Jack Schwager’s “Interviews with Americas Top Traders”, “Reminiscences of a stock operator” by Edwin Lefevere, “Fooled by Randomness” by Nassim N. Taleb and especially “Poor Charlie’s Almanck”, the wonderful book about the wisdom of Charly Munger. I have also read of course various books about Warren Buffett. Several years ago I even put a 20 dollar bill in an envelope and in return received a collections “Letters to the Shareholders 1977-2002” from Berkshire Hathaway.

Q: Value investing comes in many different stripes, ranging loosely from the Ben Graham-style “deep value” approach to the Joel Greenblatt-style focus on “good” companies at “cheap” prices, to event-driven and activist investing. How would you describe the evolution of your investment approach? In what aspects does your style depart from what you may have observed among your peers?

Unfortunately early on I did not have the luck to be introduced to some sort of mentor who provided me with the “10 secrets of successful investing“. So I did not start on a very sound footing, but as mentioned, with an egregious misconception about solid portfolio management.

I was also relative easy to impress by the verdict of apparently experienced investors. I remember a private equity deal suggested many years ago for a new Pan European trading platform, I was highly skeptical about it. Finally the winning argument for my consent was: “Why do you thing Goldman Sachs is a co-investor too?” As it turned out, the platform never drew enough participants and the money was completely lost.

In light of these costly experiences I have become comparatively risk adverse, think in terms of absolute return and as a general concept don’t want to lose money. So I am pretty much concerned about the downside risk of a stock before worrying about the upside. Over time I have written down a set of “a danger foreseen is a danger avoided” constellations, which as a general rule put you in a disadvantageous position as an investor. Many are pretty obvious such as “don’t buy an IPO out of the portfolio of a Private Equity Group, if none of the proceeds go to the company itself”, or “don’t invest in companies with a questionable record of the main shareholders”. Others are a little more subtle like :”don’t buy a stock with a large listed peer group in the same market segment”, or “don’t invest in companies which claim to be the next “Apple” or Google”.

What distinguishes my investment style from others is understandably hard to tell. I believe you should not try to seek consent or support for a certain investment idea as long as you are convinced the stock is the right thing to buy and you stick to your own knitting. Once you became an idea’s defender it is hard to change your mind about it.

Q: Please share an investment idea you consider particularly compelling today. (Alternatively, discuss a past investment, your rationale at the time, the outcome, and the lessons learned.)

Given the limited shelf life of many new investment ideas I prefer to stick to a company I picked in late 2009 and we still own. The company is Eckert & Ziegler Strahlen- und Medizintechnik AG (EZAG) It is a German small cap with an enterprise value of about Euro 145 min and a turnover of about Euro 105 min in 2010. EZAG could earn Euro11 min. in 2011.

EZAG produces and markets a wide range of medical equipment, especially for cancer therapy, featuring radioactive isotopes including prostate seed implants as well as products for medical nuclear imaging, and industrial metrology.

For many years I had the company on my short list but did not invest in it, given a somewhat unstable business development at that time. In 2009 the company was forced by the Belgian financial regulator CBFA and subsequently by the Court of Appeal in Brussels to make a mandatory take-over bid for its Belgian minority holding IBt Bebig SA. In the aftermath of the global financial crises, the takeover-bid came for EZAG in terms of liquidity at a difficult time. Only two right issues, burdening the share price, provided the necessary funds in 2009. With hindsight participating in the (second) right issue was well timed, as the acquisition turn out to be very profitable.

The rational for the EZAG-investment is as follows :

  • Complete trust in the management capabilities of the CEO and major shareholder Dr. Eckert Ziegler. This is very important given that very few investors can claim to sufficiently understand the business mechanics of radioactive isotopes.
  • The company operates in a niche market, difficult to enter by any of the large meditech companies. Conversely, in the long run EZAG might also be an attractive acquisition target.
  • EZAG business has compelling demographics, servicing the needs of a steadily increasing number of prostate cancer patients.
  • EZAG is attractively positioned as one of the few consolidators in a mature and highly regulated radioactive isotope market.

Q: What recent book(s) have impressed you or influenced your way of thinking, either about investing or the world at large?

I can’t pin point a single book that has made the big difference to me. Books that certainly educated my somewhat naïve view of the financial world were “The smartest guys in the room” about the scandalous rise and fall of ENRON and more recently “The big short” by Michael Lewis. Being German I was particularly embarrassed by the part “It’s (i.e. CDO’s) zero –sum. Who is  on the other side? Who is the idiot?” “Düsseldorf. Stupid Germans. They take rating agencies seriously. They believe in the rules.”

With great interest I follow the biweekly column of Alfons Cortes in the Swiss Business Newspaper FINANZ und WIRTSCHAFT: Mr. Cortes is an excellent technical analyst, extremely well-read and an expert in the field of Behavioral Finance. I believe a sound understanding of behavioral Finance is a key element of successful portfolio management. Most recently Mr. Cortes recommended the book “Behavioral Finance – Investors, Corporations and Markets” by H. Kent Baker and R. Nofsinger. Comprising chapters contributed by distinguished experts from some of the most influential firms and universities, the book (720 pages, published in 2010) provides a very comprehensive cross section about all essential elements of behavioral finance.

Founded in 1995, SPARTA AG is a publicly traded investment company with a long term investment horizon that invests primarily in German and Swiss securities. The basic objectives are wealth creation and wealth preservation for its shareholders even in difficult market phases. Contrary to popular wisdom the degree of portfolio diversification is rather limited with the goal to benefit over-proportionally from a limited choice of attractive investment opportunities.