Here I go again with my investment strategy, and with a live account of what is happening in a tiny little, Central European stock market, namely in Poland. This is a crazy rush on biotech and medical companies, with their market value growing like hell. I joined the fun, like 2 weeks ago, and this is madness, like really. In this update, I am trying to find some method to that madness, and more specifically, I am going to investigate the kind of business, and the kind of assets I have invested in.
Before I develop further, a few words about my stance on the current situation. As I go on any medium, social or general mainstream, everybody is taking a position regarding the COVID-19 pandemic. I am a strong partisan of getting my s**t together in the presence of danger, rather than moaning and complaining. I guess the way I can get my s**t together is to be a good person to the people whom I am close to – my son, my wife, my elderly aunt – then to be a good teacher to my students, and, on the top of that, to be an inspirational scientific blogger for whomever wants to read my blog ( https://discoversocialsciences.com/ ) and follow my You Tube channel ( https://www.youtube.com/channel/UC_jdCg5y7OuyQr_5bijNxvw?view_as=subscriber ). When I see a lot of people freaking out about things which they don’t have any leverage on or which are really secondary in the present situation, I say to myself: ‘This is the right moment to remain calm and be the glue which holds at least some things together’.
Yes, things are rough now, and they are going to stay this way for quite some time, and they are likely to drift into even stormier waters. Life is brutal, as we used to say in Poland, back in the times of communism. Yes, it is, and whatever kind of coziness we develop, it is just a soap bubble. Thus, however rough things are going to be, there is always a tomorrow, and it is a good idea to work (work, not moan) to make that tomorrow a better place.
Now, a tough question comes: do I really think that investment in the stock market, even successful, can make tomorrow a better place for anyone else than me? I am honest: there is egoistic pursuit of gain in what I do, yet there is more. I deeply believe that the Beasty (you know, THAT virus) is already changing our civilization. We will have to be tougher and more resilient, and healthcare is one of the fields which the Beasty has really exposed as f**king feeble. We will need better healthcare, and more of it, and we will need a lot of good, new science in the game, properly developed into something workable in real life. I hope that massive investment in biotech stocks, currently taking place in Poland, means a deeper, fundamental drift of resources towards that industry as a whole. I hope that by investing in this sector via the stock market, I am taking part in something socially valuable, which will pay off in the future at many levels of economic utility. I want to find my bearings in that social change.
Moral stance taken on the virus and its corollaries, I pass to the substance of my update: my investment strategy and its scientific development, peppered with some educational content addressed to students of economics and management, my students as well as students in general.
Here are the positions open in my portfolio (hyperlinked names send you to investor-relations’ sites of those companies): 11Bit (IT), Asseco Business Solutions (IT), Bioton (biotech), Biomed Lublin (Biotech), Biomaxima (Biotech), Airway Medix (medical equipment), Mercator Medical (medical equipment). 11Bit and Asseco Business solutions are pre-COVID-crisis acquisitions (beginning of February 2020), and I bought all the rest over the last 2 weeks. As for April 7th, 2020, in the morning, thus ahead of the trading day, my weighted rate of return on investment with that portfolio is 188,4%. Yes, you have seen right. The thing almost tripled in value, and still, I have some positions with negative returns. I start the detailed analysis of that stuff with specifying the individual rates of return I have on each position. Here comes the table with a snapshot of my portfolio.
|Company (position)||Number of shares held||Price per share||Value in portfolio||Rate of return on investment, net of brokerage fee|
|11Bit||4||469,50 PLN||1 878,00 PLN||-16,39%|
|Asseco Business Solutions||25||31,40 PLN||785,00 PLN||-5,88%|
|Bioton||200||5,30 PLN||1 060,00 PLN||-15,87%|
|Biomed Lublin||1000||5,00 PLN||5 000,00 PLN||410,20%|
|Biomaxima||20||26,80 PLN||536,00 PLN||21,82%|
|Airway Medix||2300||0,95 PLN||2 194,20 PLN||116,82%|
|Mercator Med.||20||32,10 PLN||642,00 PLN||19,33%|
As I am writing these words, I am lurking on how the market is doing, in real time. Bioton falls by 14%. Biomed Lublin falls too. There is visibly a market correction. Do I cut my losses short and sell, or is it just some trading game, and I should hold? Example of emotions vs intellect. As I observe these two, since the beginning of the trading day, i.e. since 9:00 Central European time, there have been a few spikes in volume traded. Some people have either decided to consume their profits from the past days, or to punch the market a bit so as to make the price go down, and they buy back in. Still, both stocks climb back. The morning loss folds onto itself.
Right now, I am experiencing that discrepancy between the long-range view, proper to investment strategy, and the immediate shot of adrenaline on the moment of trading and seeing the market change in front of my eyes (literally, I see it on the screen of my MacBook).
Good. I detach myself a bit from the immediate experience, and I give my mind a kick, so as it takes flight, back into the high registers of prudent, long-seeing strategy. I am going to develop on two points. The method of calculating the weighted rate of return on the whole portfolio, in the first place. That’s educational, skip it if you know it. Then comes the market-to-book analysis, just to see the size of financial bubbles on each of those positions, as well as on the whole thing together.
I go educational. The first step is to estimate the structure of the portfolio: I calculate the percentage share or the percentage contribution of this specific position to the whole portfolio.
In the next step I take the individual rate of return that comes with any individual investment position, and I multiply it by the share of the corresponding stock in my portfolio. I go like: ‘how important is that thing multiplied by what pay-off that thing brings me’. Once that individual multiplication done, I get the weighted individual rate of return. I do the same for each company, whose shares I hold. Next, I sum up all the thus-calculated, weighted rates of return. The sum total is my WEIGHTED AVERAGE RATE OF RETURN.
Good, having delivered the parcel of basic teaching, I go into strategizing, i.e. into trying to predict things which are essentially impossible for a human to predict 100% accurately. Doing things we don’t quite know how to do well is what we, humans, do all the time. This is probably how we do so well, at the end of the day.
I walk down a classical financial analysis called ‘market to book’. I take the market capitalization of each company (data from market closure on April 6th, 2020), and I divide it by the book value of its equity. The table below summarizes the results. You see? I like weighted averages. I did it again with the ‘market-to-book’ ratio.
|Company (position)||Total market capitalization (PLN mln)||The coefficient ‘market-to-book’ (to book equity)|
|Asseco Business Solutions||1094,33||3,46|
By the look of it, the whole thing looks pretty swollen. Only Bioton keeps a low profile, and there is visibly some potential for long term growth. As I am writing these precise words, it is 1:30 p.m., April 7th, 2020, and I keep lurking at the stock price graphs in real time, and what I see is a downwards revision. Not much, yet prices go down a bit. Minds calm down, gambling yields to strategizing. That’s good, on the whole. Yes, I lose some money from my portfolio, as the day grows older, but I have a comfortable cushion under my ass, anyway, and too much of a speculative bubble is never good for any market. Besides, as I look at those intraday quotes, it was a nosedive in the morning, followed by a gentle growth, yet too gentle to compensate the dive. I will see tomorrow. If it is the same, I will sell, just to keep my gains and see what happens next. By the way, this is a good example of balance between the perceived value of financial stock, and the perceived value of money.
Now, I want to walk a bit down the avenue I hinted at in my previous update, the one entitled ‘Which table do I want to play my game on?’: to what extent that rush on the stock of biotech companies will reflect in a fundamental change as regards their business? I want to focus on one specific question: ‘What if these companies reacted to that push from the stock market, by accumulating capital in assets at the same pace as their market capitalization grows?’. From now on, I will focus on the biotech and medical companies in my portfolio. I assume that right now, those from the IT sector follow slightly different a trajectory. I summarize that hypothetical change in the table below.
|Company (position)||% change in market capitalization over the COVID crisis, since January 1st 2020||Assets now (PLN mln)||Hypothetical assets, if following the market push (PLN mln)|
|Mercator Med.||206,3%||386,71||1 184,52|
|Sum Total||1 468,42||3 182,01|
I quickly check the active side of those companies’ balance sheets, so as to nail down the distinction between fixed assets and current assets. I translate the simulation from the table above into a hypothetical investment in fixed assets. Here are the results, i.e. the hypothetical amounts of capital, to be possibly invested in the productive base of those five biotech and medical players: Bioton +PLN 254,39 mln (+ €56,03 mln), Biomed Lublin + PLN 249,62 mln (+ €54,98 mln), Biomaxima + PLN 167,68 mln (+ €36,93), Airway Medix + PLN 24,96 mln (+ €5,50 mln), Mercator Medical + PLN 403,64 mln (+ €88,91).
Now, I have a stupid question. If I were the CEO of Biomaxima (which I am pretty sure I am not likely to be in the predictable future), and I were offered €36,93 of capital to invest in the fixed assets of my business, would I know at all what to invest that money into? I mean, that would mean making my business more than seven times bigger, like in one go. Interesting.