Hanseatic Championship
- HanseaticHunter
- Apr 30, 2021
- 4 min read
Updated: May 25, 2021
Quest for top equity investments
Following up on our 2020 Hanseatic Champions, you are now invited to participate in the 2021 Hanseatic Championship.
Ground rules
Which stocks are eligible for this competition? We define “Hanseatic” in the historical sense. In the 12th -15th century, the Hanse dominated trade in Northern Europe, all the countries around the Baltic, but also reaching far south into Germany, north into Norway and west into Netherlands/Belgium.
Besides the regional definition, the history of the Hanse emphasizes the tradition of the “Ehrbare Kaufmann”. Translations such as respectable or reputable merchant are correct, but do not capture the wider concept of responsibility. The Hanse merchant lived the edginess between traditionalism and openness towards the new. He embraced responsibility, but eschewed collective liability such as we have in the EU now.
It is intriguing that the hottest trend in investing is “ESG” – environmental/social/governance. Maybe not the acceptance, but certainly the awareness of what is called “ESG” is close to 100% among investors. There now is a whole industry providing ESG research to investors, most of which is some sort of scoring or rating system (based on historical data). While these ratings are usually helpful in assessing the quality of a company, they are not forward looking and therefore less useful for actual investment decisions, which need to be forward looking. Efforts by regulators and large institutional fund managers to exclude certain investments by law are counterproductive. They should take a page from Sir John Templeton and Mark Mobius’ book who have done more for creating wealth in emerging markets than most Supranational or NGOs can ever dream of.
“Ere unde love” was the maxim of the Hanse: honor and trust. Unlike the more Mediterranean tradition of appeal to the individual to behave ethically before god (in order to enter his realm), the Hanse asked its members to follow what we would now call institutional guidelines without ever having written down these principals in law or constitution. All the ethic classes aspiring business leaders learn in business school cannot replace the centuries of of practiced dealings of the Hanse.
Therefore, our second ground rule requires management of our stocks taking responsibility in this Hanseatic tradition. Many large corporations will fail at this rule because their governance incentivises management asymmetrically. A good manager has to think like an owner. Innovative start-ups can also fail if their management is loaded with the wrong incentives upon going public. We actively punish companies that fail our responsibility test by shorting their stock. Shorting is an investing art of itself and will be the topic of future blogs, but not part of this competition. Here, we will act “in dubio pro eo”.
Competition format
We chose to use a classic format used in major sport competitions:
a qualification round,
a group phase
and finally several knock-out phases.
But instead of one single champion, we will have a number of select champions for 2021 (more than 2, but less than 10). Competition will be very tight since we start with a universe of ca. 400 stocks.
We will group the stocks into categories. These will not be the typical sector or theme based grouping, but will be reflective of the risk profile of the business and the stock. There may be more than one winner per category.
What does it take to win?
Stock picking is a very challenging undertaking due to the complexity of factors that need to be considered. This is the reason that many investors work with some sort of scoring system that attempts to capture all facets of their analysis. As a consequence, say on a scale of 0 to 100, they will prefer a stock that scores 90 over one that scores 80. However, this gives you a false sense of security. We would prefer to take both stocks as ones with good potential and then attempt to pinpoint the key one, two or max. three success factors that will move the stock.
Our approach is called “Fusion Investing”, a simple, clear and concise framework for stock selection that avoids the risk of getting lost in irrelevant details, or of falling in love with the “story”. It has a built in discipline to step away from a prospective investment if we are not able to gauge certain aspects (either lack of knowledge of certain areas or lack of information -> stay within circle of competence).
It is essentially the combination of fundamental factors with the sentiment on the stock. Please review
for essential elements.
On the fundamental side, the stock needs to have an attractive profile of growth (structural or turnaround) versus risks to growth. We view value not as a selection criterium, but as a risk factor. In the tradition of Benjamin Graham, you have a lower risk when buying cheap stocks.
But the best risk assessment comes from the sentiment side. We assess ownership of the stock, insiders, short sellers, analysts’ recommendations, earnings estimates and price momentum. We view a stock that is universally held and touted as a safe, structural grower as a high risk stock. On the other hand, we view a stock with a riskier growth profile where those risks are well flagged and analysts sceptical as lower risk. This does not mean that we are contrarian per se, we actually like the trend with momentum. However, we also try to find reversals which is a more challenging process.
We will expand on the methodology, selection criteria and stock categories with the start of the qualification next time. Now, it’s your chance to participate. Please send us stock ideas that:
meet the “Hanseatic” ground rules
fit with our investing philosophy
Happy hunting!
The HanseaticHunter
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