I like to take on highly contrarian positions at moments of peak angst. Throughout my career, my batting average has been unusually strong. Sometimes I get it wrong. In the case of my recent post on Russia, I got it spectacularly wrong.
While my preference is to find stocks that are inflecting with minimal risk, I’m not adverse to catching the proverbial “falling knife.” Usually, sentiment as opposed to price sets the floor. A cathartic event happens, and it just seems obvious. In the case of Russia, I simply didn’t expect Putin to invade. I figured that once he had his two provinces, he’d be done with it.
Having played this investing game for more than two decades, I have plenty of battle-scars from getting it wrong. I also have the perspective to size things appropriately when there is tail risk—as there was in the case of my position in the VanEck Russian ETF (RSX – USA). The position has thus far cost me a few percent—obnoxious, but nowhere near serious. I assume it will cost me a few percent more before it finally bottoms or gets zeroed. I somewhat reduced the pain by selling calls against RSX on the way down, though that was more than offset by me averaging down and adding a few of the London traded Russian GDRs. In summary, this hasn’t been my finest moment.
At the same time, I felt like I had the flexibility to take a free shot on goal given my much larger oil and uranium positions. Both of these are working marvelously, and have more than offset the pain from RSX. I’m actually up nicely on the week, and was up for the month of February. Given where things stand now, I thought I’d give a quick Russia update. In investing, we all make mistakes, triaging the mistake is what separates the amateurs from the pros.
LET’S GO THROUGH THE PROCESS
Think of it like a flow-chart. I ask myself the only question that matters; do I want to toss it or double down. Has the thesis changed?? Or is this an opportunity?? Remember, if you’re going to panic, make sure you panic first. The worst thing you can do is Hamlet the trade and then sell the lows for an even greater loss. If your thesis is still intact, averaging down and selling volatility are often your best defense options.
In this case, I had purchased a basket of incredibly cheap Russian assets. While I expected the odds of a full invasion to be minimal, I was also somewhat ambivalent if there was an invasion. This is because I knew that these assets would likely become far more profitable if there was an invasion, as any invasion would spike commodity prices—which it has, while reducing Ruble based costs. While the sanctions are a short-term impediment to exports, this will all get sorted eventually. It’s not like the world suddenly stopped needing commodities. As I saw Putin roll the tanks in, I stopped, thought it all through, and gave it an “aww shucks.” By then, the shares were down by a healthy clip and I sure wasn’t going to sell them in the hole as profits spiked. Once I decided that I didn’t want to sell any, the question was where to add and what to add.
Remember, if you average down repeatedly on a zero, you get zeroed. So, you have to fund it somehow. I had some Russian Rubles (don’t ask why I had them, I did). I tossed them for a loss when the invasion first started—remember that if you’re going to panic, panic first. That decision reduced my overall Russian exposure and gave me the flexibility to add to assets that I expected to be down far more in percentage terms. Then I set a percentage of my book I was willing to lose if the situation totally spun out of control, and I got to work on bargain shopping. While I added some more RSX and even wrote some more puts on it, most of my bargain shopping was in the London traded GDRs, many of which were down over 90%.
In terms of what happens now?? My biggest risk is that the US government forces my broker or VanEck to liquidate my Russian positions at the lows. This is because only the US government is stupid enough to think that selling my shares to oligarchs at pennies on the dollar is somehow hurting Russia. Hopefully, my RSX will halt and stay halted, just like my London traded GDRs. Once the risk of a forced liquidation is over, I can simply wait for this to all blow over. Eventually, there will be a resolution to this crisis and I will hopefully own a basket of cheap Russian companies with substantial retained profits. Maybe they deny me a dividend. Maybe Putin cancels my shares. I just don’t see how that helps Russia, as all Russian international trade will then get tied up in arbitration. Mugabe and Chavez let their shares keep trading. They never cancelled the foreign owned shares. I assume that Russia does the same, though that is the secondary risk here.
Given how poorly I have predicted this trade thus far, I may very well get the next sentence spectacularly wrong. However, I tend to think that I come out of this with a nice gain—though it may involve a good deal of anguish and waiting.
I have had a spectacular two-year run with hardly any large mistakes. Yet, I know that mistakes are part of this game. We all get over-confident and get them wrong. I don’t think I have ever seen a diversified basket of stocks collapse this rapidly. It’s the sort of thing that keeps you humble. It keeps you from ever ramping the leverage too hard. Hopefully, it helps me avoid much larger land-mines, because I expect extreme volatility in the coming weeks. Then again, I guess I was simply over-due to get kicked in the nuts…
Disclosure: Funds that I control are long RSX, short various puts and calls on RSX and have other Russian positions.
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