This picture is not from Iceland but adequately captures how my exposure as worked out over the last few months.A reader asked me about Iceland and on first thought I wanted to wait until the story was further developed but on second thought I decided to post this update.
As investments go the result was poor but it was not devastating nor does it mean I have to work longer or save more than I planned to.
There are a couple of components to this. First is the Stockholm listing of Kaupthing stock (KAUP.ST). I have traded this several times over the last few years.
The first trade it went up a little, the second trade it went up a lot and this last trade which I exited a little while ago it almost, but not quite, cut in half. Netting out the three it was close to a push. The last sale was clearly very late but the stock went down a bunch more, has been working back up and after a huge Wednesday is at about where I sold it.
My often disclosed account at Kaupthing was not as bad. In two years I lost about 15% on my ICEX 15 ETF which was about half of the account, made a little over 10% annualized for two years in interest on the money market portion but lost a little over 20% on the currency. So the money market was about a push and so overall I lost about 7.5%.
The max allocation between the two was 4%.
Clearly I got something wrong--and for all I know unwinding the exposure may turn out to be the biggest mistake. That I got something wrong is not necessarily the most instructive part of this because if you go narrower than SPY, EFA, TLT for your portfolio you will get certain things wrong.
I am still fully on board with everything I wrote before about the country and its prospects for the future in terms of being more economically relevant on a global scale (and in a way maybe it that has already happened), the potential for geothermal to become a bonanza for things like data centers and the very capitalistic nature of the country. Still, I got it wrong.
Despite how favorably disposed I was to the investment I never got too heavy. People find themes that resonate with them all the time and then commit capital. Some of the work out and some do not and Iceland was no different.
In the future when you find themes that appeal to you, hopefully this point of moderation will have an impact on how heavy you go in. If Kaupthing had failed with my money still there that would have been a bummer but for some perspective; my 2009 SEP contribution will be much more than my total investment there.
One thing that makes the blog format useful is that anyone interested can do a search of the blog to see the various posts on Iceland (I also wrote about it for TSCM too) and so you can see the evolution of the idea and the caution about the the entire theme and some of the financial sector issues that I may have not assessed correctly (I say may because what's to say from here it doesn't go straight up 50% in six months and the threats work themselves out).
Being wrong doesn't matter as much as managing the risk you take. This could have been better and it could have been worse but it was never going to be ruinous. A while back I remember one reader sharing that he had 25% of his portfolio in a lottery ticket biotech that blew up. That is ruinous. I think that 20-30% in commodities or emerging markets, while not ruinous, could set a portfolio back for a year or two in the face of a nasty correction (not a prediction, just a rule of thumb statement).
11 comments:
Thanks for the write-up! FWIW, I decided to hold my ISK currency cd. I have less than 3% of our assets invested, but still consider the decision to be one of my more risky.
However, I have a hard time thinking Iceland will go down permanently and can't see that it is in that much worse shape, financially, than the US. (Which I also think will bounce back eventually, although I don't trust the recent market rally.)
The difference is that Iceland is very far from too big to fail, so world central bankers have little to gain by coordinating efforts for them. Which is a big difference, granted.
However, since I am not speculating on a short term basis, and I don't need the money any time soon, I forged an investing perspective. That is, that since the currency has fallen so far the upside potential seems to equal greater than the downside, and my costs for trading and the above average interest rate sway the balance.
The FT made it seem like the comments from the ratings agencies are about perception not reality meaning they are reacting to perception and that the reality is not that bad--it is a strange one.
Roger-
Where/what is that "hole in the water"? You made me bite on this one!
that is the Glory Hole at the Monticello Dam in California.
I know the term glory hole as a mining term but according to the email with this picture a glory hole is used when a dam is at full capacity and water needs to be drained from the reservoir.
Roger, before using a term like 'glory hole', please google it first to see what other meanings it might have :-))
well i always thought of this site as being PG rated--PG 13 anyway!
The UK daily Telegraph recently ran a very negative article on the Icelandic banks. In the context of a discussion on positive carry trade, it seems like the thematic point is to also monitor old fashioned debt fundamentals of the currency.
there is also an issue with how much of the banks' business is off shore. the economy is so small that the banks must have a lot of assets and liabilities off shore which i have seen spun both ways. also the economy is so small that the debt must be very large compared to GDP and while that can be spun both ways my hunch is that at time these two factors at times are a plus and at other times are a negative.
one other point about this little experiment of mine was that is was not simple. I talk about preferring simple and this was not. If at some point I said it was simple, then I was wrong/have since changed my mind.
My "bottom up" take on banks is that for banks that are losing money on loans and CDOs, it's a terrible time to be highly leveraged. But for banks that are making money on the spread between LIBOR and what they pay out in deposits (especially if they are getting cash hoards from scared clients), it's a great time to be leveraged. Since, most banks have a foot in each of those pots, investors do a lot of head scratching to figure out how things will wind up for any particular bank. My recent pick in the banking sector is RBS, based on a combination of valuation and positive words/actions for mgmt. (either things are going well for them or they are great bluffers). I haven't really followed KAUP, so I don't know the prognosis, but I wouldn't assume it will end badly just because the shares are down.
Roger,
Kudos for sharing this invesment experience with others.
Many can learn from it, and while everyone talks about their latest "10-bagger" its nice to see someone honestly and fully discuss an investment that went wrong.
May others follow your lead so we can all increase our knowledge together.
thank you
Post a Comment