David Marcus is an instructor at this week’s fully online European Investing Summit 2016.
After a few months of relative calm in the global markets, volatility surged back at the end of the second quarter after UK citizens somewhat surprisingly voted to exit the European Union (“EU”). Much like the panic and stress during the first seven weeks of the year, the first few days following the so-called “Brexit” wreaked havoc on global markets. The range of perceptions post-Brexit vote is wide, as this is really uncharted territory. Yet there are many so called “experts” that are now speaking in absolutes about what the Brexit will mean. The fact is that the terms of the British exit from the EU have not even been negotiated yet, so the definitive perspective of what is good or bad in the long term is somewhat premature. What we do know is that each time investors are faced with a shock to the system and believe that “this time is different” and “it’s the end of the world,” their prognostications most often turn out to be flawed.
This most recent shock to the system once again provided us with opportunities to add to many of our existing positions at what we believe are very attractive prices. I recently had dinner with a legendary value investor who told me how he had recently started trading much more around his positions due to the increased volatility in the market. We have done the same over the past couple of years, and believe this has positively impacted the Fund’s performance over that time. We cannot fight the volatility – but we can take advantage of it.
I feel it is important to reemphasize how investors need to take a deep breath during periods of crisis and resulting panic. One needs to assess the crisis, determine if it is real or not, and act accordingly. Most often, we have found that investors over-react to perceived crises and sell their positions indiscriminately, which in turn can provide fantastic buying opportunities for disciplined investors. Our approach has been to “nibble” in these situations and increase our positions modestly, so that we will have “dry powder” to continue to add to our existing positions or add new positions in the event of continued weakness in the markets. And, as we did in the first quarter, we did exactly that in Q2.
It is interesting to note that we have not owned any positions in the U.K. in the last several years, as the multiples have been too high for us. The environment for special situations has been more compelling in other European markets. With uncertainty around Brexit there will likely be ideas that are attractive in the U.K. if investors really sell holdings en masse. We are seeing the beginnings of this in the real estate sector there already.
Although Europe still has many question marks, we continue to believe that by focusing on specific corporate catalysts (e.g., operational and financial restructurings, including management changes, asset sales, spin-offs, share buybacks, M&A, etc.) as a path to value creation, you are given more chances to succeed in today’s environment. Furthermore, we believe that opportunities for the types of special situations investments we make will continue to exist regardless of the Brexit, political elections, or other major macro events that will occur in the future.
While investors always believe that the crisis of the day is “different this time,” the fact is that it rarely is. Of course, each new crisis is “different,” but in the end we have found these have often turned out to be wonderful opportunities to buy when others are in panic mode.
We continue to be excited about the opportunity set in Europe, and as such my team and I plan to head to Europe at least twice prior to year-end. We will report back our observations on the first of these trips in our next letter.
[us_separator] The above post has been excerpted from a letter of Evermore Global Advisors.