Do you have the rarest skill in investing?

Packer & Co. is an Australian based investment firm. They received some media attention recently, thanks to a blunt assessment of the Australian economy (more on that later).

I checked out their website and was surprised to find half-yearly investor letters since 2008, with both thematic commentary and detailed portfolio breakdowns. They have also uploaded their Pre-Financial crisis (2007) and Pre-Tech Crash (1999) letters which are worth reading.

After working my way through 5 to 10 of these letters, it became clear that Packer & Co seem to have one of the rarest skills in investing. Many people think they have it, but few really do.

Packer & Co seem to have the ability to: (1) Identify a dramatically over-valued market; (2) Act on this by reducing equity exposure; and (3) Dive back into equities when fear is in the air, and blood is on the streets.

Doing (1), (2) and (3) is very difficult.

Let’s take a look at a few highlights from the letters, starting with the the dotcom bubble.

December 1999

Punchy opening remarks about what was still a roaring technology sector, not yet a “tech wreck” (my emphasis):

“If asked to predict the future of current speculation in technology stocks, we would claim that it will end in a widespread loss of wealth so severe that future generations will analyse the causes ad nauseum to avoid any reoccurrence. The panic buying by investors in the telecommunications and internet boom is a text book example of how overvalued markets manifest themselves just before they create distress for the most innocent of investors.”

…and then some more:

This is not some Poseidon boom that got out of hand, this is an index of such financial significance that if it is not supported by fundamentals it will have far reaching implications. We feel the chances of the current technological boom being supported by fundamentals are very slim. The NASDAQ currently trades at 270 times it yearly earnings, 8 times more than the record 1929 market.

Portfolio allocation at the time? 28% equities, 72% cash and bonds.

They under-performed in 1999, but massively outperformed in 2001 and 2002.

 June 2007

No value in sight:

We are contrarian investors and usually find that somewhere in the world there are some wonderfully priced assets available to invest inIn the last decade there have been many examples; Singapore shares during the Asian crisis, gold shares at their depths in 1999, Japanese shares in 2001, mining shares in 2002, telecom shares in 2003, Korean and uranium shares in 2004 and Russian shares in 2005. Almost every one of these amazing opportunities emerged as the result of a boom gone wrong. So, although at the moment there is virtually a drought of these types of opportunities, we expect the flip side of today’s boom to keep us very busy in the coming period

Portfolio allocation at the time? 29% equities, 8% gold, 52% overseas bonds and cash, 10% Australian bonds and cash. This limited equity exposure protected them from the savage 2008 stock market, where they delivered 2.6% return vs their benchmarks of -40.4% and -25.8%.

However, not only did they reduce exposure to equities at the right time, they had the gumption to jump back in. They increased their equity exposure from 37% to 72% between December 2008 and June 2009. The S&P 500 bottomed in March 2009 at 683, it is now 2,389.

Now, moving onto their views on the market today.

December 2017

Despite others fretting about valuations, the team at Packer & Co seem positive, with 99.4% of their portfolio is in equities.

In particular they are bullish on energy:

All the ducks are in line for a serious long term boom in the oil price. We have invested a quarter of your money in the extremely unpopular energy sector which we believe offers rare fundamental value.

…and very bearish on Australia, with little exposure.

We can’t help but think that Australia is losing touch with the reality of the modern world

The results

Zoom in to check them out. Not too bad at all.

The future?

I have no idea.



Note: The website doesn’t have details on their portfolio allocation after the 1999 letter. I don’t know anyone associated with Packer & Co and do not in anyway endorse investing in their fund.

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