The black swan

It did not take long to dub the Covid shock a “black swan”, an expression made famous in an excellent book by Nassim Taleb that was published in the aftermath of the Lehman Brothers1) crisis. A black swan is a shock that is so rare and violent it defies the human mind’s ability to grasp it, despite clear and present signs of risk. For example, the first defaults in the subprime crisis came as early as February 2007, 18 months before the incredible, overnight collapse of Lehman Brothers bank raised fears of a systemic and planetary shock, not to mention the loss of customers deposits.

Flash forward to 23 January 2020, when Western news channels couldn’t stop showing pictures of the building of Huoshenshan Hospital in just 10 days in Wuhan, a Chinese city with 11 million inhabitants that was soon placed under quarantine. 34,000 square meters and 1400 medical workers! This was a bit more than a symbol. In fact, it was a huge warning but one that was surrealistic and far away – so far away, in fact, that Western financial markets continued to set record highs for another 30 days in one of those denials of reality that will go down in the history of financial markets.

And yet, a virus is born to spread and to spread without any real geographical, political or cultural obstacles. When Italy went into lockdown, that was the wake-up call to the West, which had felt it was invulnerable to the “Chinese virus”! Nassim Taleb himself pointed out that the pandemic was not, strictly speaking, a black swan, as governments could long have prepared for it, as seen in Bill Gates’ viral prophetic video (2) released in 2015. In it he described clearly the occurrence of a global pandemic as a risk that was highly likely in the medium term. However, for the financial markets in March 2020, it was the pandemic-engendered lockdown that was the real black swan, meaning an event that can’t be classified by our minds as it is absent from our collective living memory. A deserted Champs-Elysées, commercial aircraft grounded, supermarkets sold out of toilet paper – on the markets that triggered a dislocation, an extremely severe plunge, and a shock as intense as the denial that preceded it.

The trading floors were astonished, with their usual human reactions, when fear of the future overshadows everything else. For investors, it was the time for portfolio shuffling, for anticipation, for contrarianism – and for trying to understand short-term challenges and anticipate longer-term ones in a volatile and anxious environment where past benchmarks are not much use for predicting the future.Back in 2019 , we were having to explain historically unprecedented negative interest rates. This was not easy to do, given the lack of references. No, it was not easy to explain – even to economics majors – that it is normal to deposit 100 euros at the bank and get back just 99 euros one year later. And, now, someone will have to explain to us why, after dropping by as much as 40% in one month, equity indices were back into positive territory by yearend. US equity markets took off just as the US economy was experiencing its worst year since Pearl Harbor, with GDP shrinking by 5%. The same goes for Europe. Not since 1709 had there been a comparable swoon in the UK (which has the best historical database). No, there is no rational explanation, but there does exists a historical and philosophical explanation. After all, this is not 1914, but 2020, when our societies no longer tolerate death when it can be avoided. Nor is this 1969, when the Hong Kong flu killed 1 million people worldwide, including 30,000 in France. Today, the 1969 flu mostly causes a shrugging of the shoulders, if any remembers it at all

« The lockdown is a black swan, meaning an event that our minds cannot classify, as it is absent from living memory. »

Like Covid, that 1969 bout of flu mostly hit the elderly. Society was younger after the baby-boom and the death of persons older than 65 was considered natural. General de Gaulle was president of France and felt that he had encountered enemies that were more formidable in other ways. And BFM-TV (the French business news channel) and social media did not yet exist, just ORTF, the sole French national broadcaster. That’s why nobody remembers. In 2020, governments decided to run their economies into the ground to save the lives of their many senior citizens. To keep a systemic economic disaster from turning into a global depression, everyone got together to offset as much as possible the fallout from public health decisions – basically, “whatever it takes” rolled out rather identically in all developed countries. The US budget deficit hit 3100 billion dollars in 2020. To bring that figure down to earth, it amounts to USD 10,000 in new debt created per American in 2020, which is huge. So, governments opened up their cheque books, but not just them. Central banks also continued, and even revved up their monetary support, with measures that economists have delicately termed “non-conventional”, as in non-conventional (i.e., nuclear) weapons. (In finance we have another picturesque metaphor – helicopter money or handing money out directly to citizens.)

One thing is certain, money flowed into the system. In fact, it flowed massively into it and, like any liquid, it flowed into every corner – into benefits for those left behind, into companies shaken to their core. This was worth doing, but remember that it also flowed into citizens’ bank accounts. Some of that – 200 billion euros, in fact – found its way into French Livret A passbook accounts. And, in the United States, millions of young novices, locked down but still brimming with confidence, invested their unemployment benefits in Tesla or bitcoin. And that’s another thing that sets 2020 apart – retail investors returned massively to the stock markets. Usually, when markets are in panic mode, retail investors tend to rush for the exits while swearing they will never be back. They’re human, after all. They don’t like to lose. They’re scared and they sell. After the 2008 crisis, for example, France lost more than 1 million stock investors.

But, for once, in March 2020, and to universal wonder, the number of new accounts exploded in France, and the average age of investors fell by a few years. The newcomers are younger and accustomed to digital services and bought shares “on the sound of cannons”, i.e., at the onset of the crisis but at the right time and in a long-term view, as if the prevailing uncertainty had caused them to come to grips with their future prospects (imminent recession, retirement, etc.) and start to set aside savings. The successful IPO of La Française des Jeux in 2019 had already revived some interest in direct investment. The market swoon and lockdown kept this going, and online brokers were rapidly swamped. In the US, as well, retail investors returned massively, even overdoing it, with a counterintuitive correlation between the number of new day-traders and… the increase in the unemployment rate. In the land of excess, government cheques, which were meant for consumption, were actually invested directly on the Nasdaq, triggering a bubble in the sexiest stocks. Day traders took over and pushed shares like Tesla, Zoom and Moderna “to the moon”. This reminded us of the Internet bubble of 2000, but this time the hysteria was being driven by social media.

« In March 2020, to universal wonder, the number of new accounts exploded. The newcomers are younger and accustomed to digital services. »

A Lynchian year

This comeback by retail investors and of the market reflexes that any good investor must have to do well made 2020 a year that we might call “Lynchian”. Peter Lynch was the star manager of the Magellan fund in the 1980s. He popularised common-sense investment in his book One Up on Wall Street. (This was translated into French as Et si vous in saviez assez pour gagner en bourse (What if You Knew Enough to Invest Successfully(3)).) Among the book’s many lessons and some rather basic principles, there is this one: look around you at those products that people like to buy. Lynch’s core intuition is that the investor on the street can outperform the finance professional, as he is a consumer, on the front lines of the real world. Lynch brought together retail and professional investors, the economy, consumption and the equity market. You might call him an investor in the real world. And his philosophy has inspired Amiral Gestion for many years. We like to walk around town, and through supermarkets, boutiques, pharmacies and websites on the lookout for trends.

One of Lynch’s most famous illustrations was his investment in L’eggs stockings after his wife praised them and bought up batches of them. The company’s market value rose more than 10-fold. “I have developed the reflex to take an interest in products that people like and buy. This is a criteria for a company to work well”. Lynch is a fascinating figure. Before eventually growing the investments of holders of his Magellan fund by an annual average of 29% for the 13 years when he managed the fund, the teenaged Peter was a golf caddie. This gave him the opportunity for insight from the big names in finance (including the boss of Fidelity), before he went on to study history, psychology and philosophy.

With the Lynch method, you could have easily bought Puma in 2001, when, after a long spell in purgatory, it became fashionable again with marketing tricks such as selling 510 pairs of numbered sneakers made with used fabric, for 250 euros at Colette à Paris! The shoe became a fashion accessory and marked the take-off of the Puma brand.

The “from the stadium to the street” strategy worked for us consumers. And for the “stock-trading consumer”, it was a jackpot, with the share price rising from €2 in 2002 to €20 euros in 2004, and then to €30 in 2006. Those of us who don’t pay attention to the sneakers young people are wearing in the street could always have seen magazine articles, such as the one in the French weekly L’Express on 1 March 2003 titled “The secrets of the Puma fad” (4). More recently, and even more visible, and based on the same reasoning, we might ask ourselves why we didn’t buy Apple at $6 when the iPhone hit Paris in late 2007 or at $7 when the iPad arrived on 3 April 2010 (it’s now at $127).

« Lynch’s core intuition is that the investor on the street can outperform the financial professionals as he is a consumer, on the front lines of the real world. »

The Covid versions of Peter Lynch’s philosophy are Zoom, Moderna or Amazon, for example. After your 10th virtual cocktail with friends, you might have bought Zoom early in the lockdown at $100 (it rose to $500 five months later). Locked down Americans might have bought Peloton, the online exercise bike maker, or Moderna, which quickly announced a successful vaccine. Or we could have simply bought the GAFAMs(5), which for the past 20 years have allowed us to communicate, interact and to buy almost anything and at any time without human contact – in short the big winners of a locked down world.

Of course, all that looks easy in the rear-view mirror, but in reality it isn’t often as easy as that. There are no sure bets, and disruption and comebacks are not easy to predict. Something could just as easily be a fad as a real underlying trend. First of all, there is the context. Acting during a shock of uncertainty requires courage and uncommon foresight. And, of course, mistakes can happen. Knee-jerk decisions at the worst point of the crisis often lead to big mistakes. For example, we could have sold our Trigano shares. This great company managed masterfully by François Feuillet is the European recreational vehicle leader and sells most of its products at trade shows open to the public. No need to draw a picture – the trade fairs were cancelled and recreational vehicles are not exactly a staple product. Trigano’s customers didn’t feel like making large investments or planning their next vacations, and so on. Trigano’s shares halved in value in a few weeks, to €42. They are now above €165! What happened? You might say that consumers pushed the concept of lockdown to its extreme by planning to lock down in a recreational vehicle. As early as last summer an article in the French financial daily Les Echos hit the nail on the head: “The pandemic has created new excitement for recreational vehicles due to restrictions on travelling abroad.” So, the lockdown made us long for open spaces, and recreational vehicles gave us that, along with autonomy and the freedom to travel, while being ideally compatible with social distancing restrictions. But this was not at all obvious at first. Feuillet himself was cautious and even pessimistic on how customers might react when the economy reopened on 11 May. How’s that for a surprise?

There are many such examples. That’s why the first decision that we made in March 2020 was to make as few decisions as possible. When you are invested in listed small caps, there’s not much you can do when the ground is being pulled out under your feet, apart from selling companies at half their value with no time to think twice about it. Everything happened so fast – both the swoon of spring and the rally of summer. It was only then, when looking at the rankings, that we saw the mistakes. Why did I sell my shares in Brødrene Hartmann, the world leader in moulded-fibre egg packaging, just as my daughter was on her 12th cake in one week? (Egg consumption rose by 45% during the lockdown). Why didn’t I buy Zoom when the entire planet was meeting each evening for online cocktails, “Brady Bunch” style? It is often said that the stock market is both the temple of regrets and the school of humility, and that’s true.

Some people thought they were being clever when they cynically bought shares in Dignity, a UK funeral services company. At first glance, this might have looked like an excellent “Lynchian” moment. But it didn’t work. Mortality did indeed soar, but missing from funerals were mourners, flowers and other high-margin services. We did use our horse sense on solid companies that we had known for several years and that were hit hard as soon as the lockdowns were announced. For example, we had the opportunity to rebuild a position in FNAC Darty, which carried off its digital transformation and proved that it had a role to play even with Amazon lurking nearby. Although March 2020 was like the proverbial falling knife, we did pick up some shares at the bottom, under €18 in the case of FNAC Darty (vs. €100 in 2018). True, the context was not promising. Shops are closed; revenues have dried up; and suppliers and rent still had to be paid. Investors panicked and FNAC Darty’s market value fell as low as €500 million against €7 billion in revenues. A few weeks later, the French government introduced its state-guaranteed (PGE) loan scheme, and the company focused on online sales, which exploded. Consumers rushed to buy computers to work from home or watch Netflix, while Darty rode the home appliance wave. FNAC Darty is now trading at almost €60. The stock held up well during the second and third lockdowns, which, incidentally, validates the Black Swan thesis, to wit: it is not necessarily the event itself that is dramatic but, rather, its sudden occurrence and the uncertainties that it causes.

« The first decision we made in March 2020 was to make as few decisions as possible. »

Now, in 2021, we are confident that FNAC Darty will live on and will emerge from the pandemic one day. Shock-induced changes are the most interesting aspects of the business we’re in. “Stay at home” – there’s a story that shows that there are opportunities in every crisis. In 2020, the main positive contributors to our funds’ performances were e-commerce companies, which took advantage of the lockdown to shore up their fundamentals. Westwing and Home24, two online home decoration and furnishing companies, are the most spectacular examples of this, with gains of more than 500%. Selling home appliances when consumers are locked down at home, in front of their screens, with time to do DIY work or remodel, while brick-and-mortar stores are closed – that’s an explosive cocktail. E-commerce companies were quickly dubbed “stay-at-home” companies. We hold some of them and added to our exposure, straddling the border between luck, courage and vision. Along with Westwing and Home24, there are HelloFresh, the world leader in meals delivered for at-home preparation; Focus Interactive, a fast-growing video game company; Mr Bricolage, which rode the DIY wave; and Bourse Direct, which, as we have seen, benefited from the taste that the French acquired for online trading. On the other hand, holding shares in airlines, travel agencies and trade fair organisers when Italy was announcing its lockdown was not very pleasant for our fund managers. There was no need to have read Lynch to think of selling. For example, in 2020 we had heavy exposure to EasyJet, Voyageurs du Monde and Hyve and, when the shock came, there was a rush to the exits. On 20 February EasyJet traded at £1400. One day later, the WHO reported 1000 cases outside of China and seven deaths. EasyJet fell to £1200 and then to £900 when Italy locked down, on 9 March. We hoped for a rally to get out, but there was no rally and 10 days later, when all of Europe closed down, we saw… £430 on our screens, a 70% in one month. We sold (unfortunately) into the first rally at around £600, as we were unable to value the company in a post-Covid world. In the same sector, Voyageurs du Monde – an outstanding company in many ways, including its environmental and social record, which is especially important to us – suffered severe losses, but losses that its balance sheet was able to absorb. The share price has recovered well, but the pandemic has shaken the entire travelling ecosystem, and we don’t yet know what long-term impact it will have on its business models. This time, we decided to hold on to the position, as well felt that this solid company will have retained its strengths through the crisis and will be able to meet its well-off customers’ need to get away.

We also took a hit from the 80% plunge of Hyve, a trade-fair organiser (-80%) working in one of the hardest-hit sectors, with little help in the form of government aid. The pandemic will probably leave long-lasting marks on this sector, but we have held on to Hyve, feeling that its plunge was overdone and as we expect it to recover somewhat. Other companies that are hard to sell despite the certainty of headwinds to come include Unibail, the global shopping centre leader. This sector is normally a safe haven, with good visibility on the constant rise in its customer numbers. Crises come and go, and weak tenants vanish and are replaced by new ones. The shopping centre business is well suited to debt financing and has the wherewithal to pay out good dividends. Unibail management thought they would be saved by the quality of its assets and that premium shopping centres would be the last to be hit by online competition. Amidst the lockdown, Unibail fell in one month from €120 to €40, raising the discount to its latest NAV to 80%. We had a small position and took advantage of the crisis to invest aggressively last autumn, when Xavier Niel came onboard as a shareholder as the “last of the Mohicans”. The pandemic will have brought big changes, but premium shopping centres will prove to be resilient.

Valuation, the foundation of our approach

Here we address the main limit of a purely intitutive approach to the equity markets, an approach based on life experience. That limit is valuation, which is a bedrock of Amiral Gestion’s investment strategy. Grasping present trends and future realities is useless if these are already priced in. Buying Unibail at €30, i.e., at 20% of its NAV, doesn’t necessarily mean that we are very bullish on shopping centres,but, simply, that we expect Unibail to survive. Investment decisions must constantly be analysed through the prise of market valuations. Ultimately, crises come and go and have consequences that are more or less serious. We always get through them, while gaining some experience and maturity. They are also rich in good lessons and opportunities. Amiral Gestion was born during the 2000 crisis. We were hit head-on by the global shock of 2008. We lived through the 2011 euro crisis and the 2016 Brexit crisis. We have navigated rather well during the Covid crisis, and our team has, as a group, experienced these crises and added to its expertise each time. Our main assurance is to invest mainly in well-managed companies with solid balance sheets, strong corporate cultures, good management, and the best ethical qualities possible.

The €200 billion question: what will happen to the savings that French people socked away in 2020? »

So, what will happen now? What promising companies have you spotted yourself that you want to buy? What “stay at home” companies will capitalise on their success of last year and hold onto customers who emerged as if by magic in 2020? And what companies will come back down to earth? And the EUR 200 billion question: what will happen to the savings that French people socked away in 2020? The next crisis is impossible to predict but will probably emerge from the aftermath of the previous crisis, which, as we have seen, triggered a massive inflow of liquidity. Inflation had completely vanished, but could now trigger a rate hike sooner than expected. The bubble in the most fashionable Nasdaq stocks is another risk, but the market has put on its rose-coloured glasses and, for the moment, is listening only to the good news of the post-lockdown recovery.

• (1) (1) The Black Swan; the Impact of the Highly Improbable
• (2) https://www.ted.com/talks/billgatesthenextoutbreaOne
• (3) One up on Wall Street,Simon & Schuster editions
• (4) https://lexpansion.lexpress.fr/actualite-economique/les-secretsde-la-vogue-puma_1421041.html
• (5) Google, Apple, Facebook, Amazon, Microsoft