ABOUT LONGVUE

Longvue is a private family investment company. The primary aim is to achieve superior returns over the medium to long term by adhering to a robust selection process and maintaining a diversified and balanced approach across asset classes and strategies. The core strategy is to buy quality companies and to use derivatives and precious metals to enhance income returns and for hedging purposes. 

For diversification and to supplement returns opportunities are also pursued in emerging companies, special situations, specialist funds and private investments that present themselves and subject to market conditions and the macro backdrop.

                                                                                                                                      (Disclosure: Longvue Pty Ltd does not offer professional services or financial products to the general public. This site serves primarily for illustration purposes to internal and external stakeholders. Information contained herein is historic and should not be taken as investment advice. If the reader feels any of the content may be of value then they should seek tailored financial advice from their licensed professional advisors and evaluate whether it may be useful to their own individual circumstances)

CASE STUDIES

LISTED EMERGING COMPANIES:

The Good, The Bad, and the Ugly...

The great.....

The good.....

Aside from the exceptional successes outlined above there a number of investments which have produced a tidy return over recent years. On balance we aim to get it ‘right’ more often than not and to meet an arbitrary target portfolio return of 25% p.a. That equates to a doubling of funds invested over a 3 year period. This we believe should not to demanding for a high growth emerging company with strong fundamentals providing the basis for earnings growth and operating leverage going forward.

The bad.....

Nevertheless, no study would be complete without a discussion on some of the ugly - not just dogs, but the outright failures. Fortunately, there are not too many of them but there is most definitely a lesson to be learned from each of them. Fortunately, occasional underperformers, or even outright failures, do not have a significant effect on the overall performance of an appropriately diversified portfolio.

...and the Ugly!

CASE STUDIES

PRIVATE INVESTMENTS:

CASE STUDIES

SPECIAL SITUATIONS:

These include contrarian opportunities such as: ‘unloved’ crisis markets, out-of-favour industries or sectors offering relative value with a favourable risk-reward profile. The prime objective is to achieve out-sized returns over the medium term (2-5 years and beyond) in excess of stock market benchmarks.

Examples include:

Crisis Market: Cyprus Banking Crisis 2013.  An EU-led ‘bail in’ of the leading banks that had a high exposure to defaulting Greek bonds resulted in a severe economic downturn. This developed into a classic crisis opportunity for the ‘adventurous’ contrarian investor with the local stock market down more than 95% from its all-time high. Despite the headline issues the country was facing, it was felt that it would eventually pull through – the challenge was to research solid companies that were profitable and still paying dividends that would survive. A small basket local companies were identified that were profitable and selling at well below book value. (Of the 120 or so listed stocks, only 40 were liquid in a low volume market. Of these 40, there were only 8-10 that were regarded as being worthy of investment). It proved to be a profitable trade and exited later that year. This speculation may play out over several years to become highly profitable play but was exited due to market liquidity and other opportunities of interest available elsewhere. This type of crisis investment is based primariiy on extreme valuation dislocation and business survival, as opposed to a judgement on the quality or growth prospects of an individual company. In some instances and where available, ETFs may be a suitable vehicle for this type of macro strategy, although a 'buy a basket' of individual stocks approach is the preferred option.

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'Unloved' Sector: Gold miners 2014/15. Along with the correction in the resources sector and gold went out of favour due to a strengthening US dollar and appetite for risk assets, Australian small and mid cap mining companies began to offer compelling value. The gold price fell from its 2011 high of $1,900 to around $1,100-1,200 range, down to a level of the costs of digging the metal out of ground. It became clear that this was unsustainable and the industry went through a period of consolidation. Leading up to 2015 well financed small and mid-sized gold producers began acquiring cheap assets and rationalising costs at a time the mining services sector was also in a downturn. Shares in small cap miners that were on a solid growth path and with a low cost base were purchased from 2014. Gold stocks began a solid rise in 2015 going into 2016 with the strengthening of the gold price. The resurgence in interest came in part due to the low interest rate environment with many countries at almost zero or a negative interest rate, thereby increasing the interest in gold as a store of value. This view was vindicated by some well publicised commentary from high profile investors and hedge funds in early 2016. Some were buying gold miners as an investment or trade, others saw it as an alternative currency in volatile times and insurance against a potentially faltering USD. Whatever one's view of gold - as a currency, story of value in uncertain times, catastrophe insurance, or as a contrarian play, it has been and may well continue to be a attractive long-term opportunity. Update 2018: The basket of small producing companies continued to grow and thrive into bona-fide dividend-paying ASX-listed mid-cap stocks.

SPECIAL SITUATION:

CRYPTO BOOM/BUBBLE: 1997 re-visited

October 2017

In early 2017 the Bitcoin phenomena came out of relative obscurity, reaching an inflection point with respect to broader acceptance and accessibility. The underlying Blockchain technology that it is built upon and lesser known cryptocurrency coins (aka altcoins or tokens) that use the blockchain started providing strong evidence of it’s far reaching utility and practical application beyond just being an alternative currency.

This is reminiscent to what was taking place in the late nineties technology boom which saw the rise of the internet, email, e-commerce….and the subsequent bubble. Like all bubbles it burst in 2000. There were many dot.com hopefuls that emerged with weak business plans that were difficult to value that ended up failing. There were also some highly successful internet companies (Amazon, eBay, Priceline, Yahoo et al) that still exist today. What was certain though, the internet was here to stay and the major beneficiaries were the infrastructure related companies (Cisco in networking, EMC, Netapp in data storage and many others). These companies were and still are involved in the build out and continued growth of the internet. (This ‘picks and shovels’ investment theme has long been a favoured strategy of Longvue). They survived the tech bubble that burst and were outstanding investments from the early nineties to today. Even if one missed the thousands of percent return of some of these names from the early nineties, they still were multi-baggers from 1997 -2000 and became stalwarts of the technology sector.

This same phenomena has been taking shape from 2015 leading into 2017. However, there are a few distinct differences between the internet boom/bubble and the crypto boom/bubble:

-        In late nineties it was a simple case of calling a broker or logging onto one of regulated online trading account (Charles Schwab, Etrade…) and using a dial-up connection to easily buy whatever stock you pleased. Security was not a major issue with respect to ownership and custodial services. IPOs were regulated the same as in the bricks and mortar world.

-        It’s been a very different story for cryptocurrencies! Whilst things have improved during 2017 and more ‘non’geek’ user-friendly, the crypto market is still very much un-regulated and in some aspects a bit ‘wild west’ – many small exchanges springing up around the world, each offering a limited range of crypto coins. Some have also been prone to being hacked with investors losing there coins. Crypto investors/speculators have had to be more hands on and take greater responsibility for the security of their crypto coin private keys and are generally advised to transfer them out of online exchange accounts. This involves setting up separate online wallets or the preferred option of a ‘cold’ storage, using a secure UBS-like offline device….or paper.  Governments and regulators are following it closely and trying to come to grips with how to deal with the phenomena. Read: try to control and tax it! It is apparent that cryptocurrencies will be taxed in some way or another and eventually regulated along the lines of the equity capital markets. As for frauds and scams, there are many more now than during the previous tech/internet bubble, not to mention hacks. Up to now it’s been very much a case of ‘buyer beware’. Having said that, given the explosive returns evidenced to date many small investors participating in this market are doing so with relatively small amounts of risk capital they can afford to lose.

Despite the bubble that Bitcoin and other cryptocurrencies are in pro-active investors, business owners, speculators and the like should at least take an interest in this space for a number of reasons:

-        For business owners:

To keep abreast of developments in the blockchain and in particular applications that solve real world problems  and have the potential to provide the delivery of services with greater efficiency and at reduced cost. Importantly, to monitor how developments with blockchain applications may impact their own private businesses. Prime examples include ‘smart contracts’ and their utility in middle and back office functions.

-        For pro-active investors:

i) To monitor how their share investments may be impacted, either disrupted or possibly benefited by the blockchain technology and if so, what are the companies doing response to it. Examples include the use of ‘smart contracts’ in areas such as share registry and (the ASX invested in blockchain fintech in 2015/16 and will be starting trials in 2018); select global banks have been running trials in use of a particular blockchain technology in the area of payments. Other areas that are ripe for disruption include conveyancing, banking fulfillment and other back office functions and areas of service delivery.

ii) As part of a diversified portfolio, cryptos could sit alongside higher risk early stage venture capital style investments or speculative stocks. In addition, established cryptos, like precious metals, are a way of diversifying away fiat currencies such as the US dollar and Euro which a likely to face challenges on the back of rising debt money printing.

-        For speculators or high growth investors:

For small company investors who have a ‘healthy’ risk appetite investing in Nano caps (stocks with market caps less than $50Mn) represented by companies often pre-earnings/revenue in the early stage technology, resource exploration and biotech spaces. The crypto market has started to develop sufficient scale and liquidity which is suited to active traders.

-        Other developments:

As of December 2017, the global market cap of cryptocurrencies is over US$500 billion with Bitcoin making around half that value. The CME exchange in the US in December launched the first Bitcoin options and futures contracts. Now with the ability to hedge, large institutions and hedge funds will become more active in this fledgling market. Still early days but expect increase in volumes, liquidity and demand for cryptos as an asset class.

There are a number of perspectives one can take of the Bitcoin cryptocurrency phenomena. The principles of mining Bitcoin and its eventual scarcity are similar to that of gold and therefore a potential store of value. It is an interesting debate that will continue for some time to come but don’t expect the role of precious metals to be replaced anytime soon.

While people (such as this writer) are drawing parallels to the Internet bubble, doomsayers are drawing parallels to the Tulip bubble in the 1800’s, alluding to the fact that Bitcoin has little utility, as did Dutch tulips. To the contrary, aside from some esoteric value of holding rare tulips they do eventually wither away and die.

Bitcoin and in particular the blockchain technology has utility and value, is here stay (as has the internet) and will continue to evolve well after the inevitable bubble(s) burst. At the moment, one will be hard pressed to find professional advisors or mainstream brokers that would dare advise their clients to buy Bitcoin or other cryptocurrencies. This is very much an activity that it is relegated to individuals dabbling in their own personal accounts until such time in the future when cryptocurrencies are deemed safe and ‘institutionised’!

For now the momentum and volume of money flowing into cryptos is moving from individuals to large institutions and investment funds. The question is will the crypto market crash, or how many times will it correct, before the next GFC, or for that matter any other over-valued asset market on earth right now!

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UPDATE 2021:  History Never Repeats but it Certainly Rhymes

Much of the observations made in 2017 have played out in the crypto market. The Bitcoin price did fall down to its cost of mining each coin to around $4-6,000 which became a support level. More recently in 2019 the cost of mining each coin re-set to around $12,000, which was the time that the next phase of interest and growth commenced. Interest rose not just from professional investors HNW family offices seeking a decentralised diversification and store of value away from fiat currency and financial markets, but also financial institutions, payment providers such Paypal, Square and corporations like Tesla and Micro Strategy. The discussion around bitcoin as an alternative store of value to gold came to the forefront.

The security concerns around purchase and storage of coins still exist although much improved. Regulations related KYC/AML have ramped up and the way trading exchanges operate. The threat of loss or being hacked has been greatly reduced and is not likely to be any greater than what is the case with large banking and financial institutions going forward. Funds investing in bitcoin and cryptos exist and more consumer friendly ETFs backed by bitcoin are imminent and we are likely to see the likes of Botcoin, Ethereum et al readily available in online brokerage accounts in the not too distant future.

As noted in 2017 like the internet boom there was likely to be only a few crypto survivors which seems to have come to pass (although many would disagree) – Bitcoin (BTC) as a decentralised store of value, Ethereum (ETH) as a building blocks platform for use of smart contracts, creation of coins and tokens and a few others of interest including Ripple (XRP) payments platform and Cardano (ADA) a competitor to ETH.

Use of the blockchain technology is not only the foundation of cryptocurrencies it has entered the mainstream and being adopted as part of broader enterprise solutions by corporations and consulting firms.

Of particular note two emerging trends in recent times we have been looking at in this space include:

-       Stablecoins, which is a digital coin designed to minimise the volatility of the coin relative to a ‘stable’ asset or basket of assets. This includes the tokenisation of shareholder equity of real world businesses and assets where all corporate actions related to ownership, dividends and transfer is store on a blockchain and traded on a digital exchange.

-       Non-Fungable Tokens (or NFT’s) a relatively new area that has been burgeoning in the sport collectables and the gaming industry. Simply put NFTs are a special type of cryptographic token which represents something unique, unlike bitcoin and other crypto currencies which are fungible and not interchangeable.  Digital art, collectables, in-game assets, multi-universe games are the start. With acceptance expected to become widespread there applications for digital ownership of all forms of assets and interoperability between platforms.

As with cryptocurrencies in recent years not sure where it will all end up. As usual we believe in the tried and tested ‘Picks & Shovels’ approach to participating in these trends.

One final thing to consider and constant discussion point is the threat of regulation of bitcoin and cryptocurrencies in general. Bitcoin could be seen as a threat to authorities and central banks who may attempt to ban it and/or ‘centralise’ digital currencies by issuing their own. There is already talk of China issuing a digital yuan which it will centrally control.

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