My Global Approach To Investing in Undervalued Stocks

Swen Lorenz

Sark
Long-Term Investor

Who are you and what’s your story?

I am Swen Lorenz, a passionate public equity investor and founder of Undervalued-Shares.com. My website does what it says on the tin, i.e. I search for undervalued investments.

I started investing at age 15 and have been in the game for 30 years, so most people would describe me as a “professional” investor. However, there are so many things about investing that I still have to learn about, and my writing is an important part of teaching myself about new subjects. Writing and publishing forces you to thoroughly research a subject, and I love putting my thoughts in front of my readers to get their feedback.

This never-ending journey of learning has also taken me around geographically. Born and bred in Germany, I moved to London in 1998 and subsequently spent a lot of time in New York, Hong Kong and Macau, the Galapagos Islands, and Switzerland.

For the past years, I have lived on a small island in the English Channel – Sark, the smallest independent state in the British Commonwealth with just 500 residents. Being on an island with few distractions enables me to churn out research reports that are 20 – 100 pages in length.

These in-depth reports are what I am probably known for best.

My interest in investing was sparked by an early obsession with Ferraris. When I was a teenager, Ferrari was owned by Fiat so I bought two Fiat shares worth 30 Deutschmarks. Just to be clear, that was about 15 dollars at the time. I kept them for quite a few years for emotional reasons; never mind the fact that trading commissions were going to eat up almost the entire amount when selling. But it got me started!

Watching their price fluctuating piqued my interest: what made shares move up and down? I started reading books about the stock market and things developed from there. By age 19, I had managed to live off my writing about the stock market and built my portfolio using my income.

I have been into public equities ever since and largely ignored other asset classes. There are over 100,000 publicly-listed companies in the world, a fact that few people seem to appreciate.

You will find plenty of opportunities among publicly-listed equities at any time, which is why I’ve never felt a need to stray further afield.

Walk us through your process of identifying and executing on investment opportunities?

My number one priority is to find opportunities that combine a significant upside with a limited downside. Limiting your downside should always be the first consideration.

So much can go wrong and – all too often – will go wrong. What happens if your investment thesis doesn’t work out?

Protecting your investments against dramatic losses has to be at the forefront of your mind at all times.

I don’t limit myself to any particular sector, simply because there are too many changes happening all the time.

When I started in the 1990s, amazing amounts of money could be made with old economy companies. These often had low or zero growth, but they kept hidden assets on their balance sheet, such as land reserves that had appreciated in value and were no longer required for the business. Selling these non-core assets sometimes made shareholders several times their money.

Nowadays, you’d starve if you tried to focus on such opportunities. As the world moved from an industrial economy to one that is driven by tech, I had to teach myself new skills and insights to avoid falling behind.

In spring 2020, I pointed out the incredible potential of Fiverr (NYSE:FVRR) before any of the tech gurus (or Goldman Sachs) did. The stock rose nearly ten-fold in a year. I got it at a ten times cheaper price than the folks at Goldman – showing an old dog can still learn new tricks! (If you’d like to read my Fiverr report, it is available as a free download.)

In terms of metrics, there is only one thing that matters to me. How much cash will a company produce over its lifetime?

I find any differentiation between “value” and growth” spurious. Both investment approaches are, ultimately, about the amount of cash that a business produces. The only difference is where on the time axis does the cash come your way?

A value investment throws off cash today, a growth-based business does so at some point in the future. Growth is not an end in itself, it’s just a different path to generating cash for investors.

Besides having a good grip on a company’s fundamentals, there is one soft factor that I find exceedingly important.

Once you have been in the markets for a few years or decades, you get a sixth sense of what might work out as an investment and how a stock is likely to move in the short term. Younger investors should aspire to get a real feeling for markets and individual stocks.

“Gut feeling” is probably the best term to describe it. However, you will only develop this skill if you have your own money on the frontline and constantly (constantly!) watch stock prices and markets. Gaining this skill does come at a price of having to invest a lot of time in obsessively following developments, all the more in this new world of (almost) 24/7 trading.

Socialising is probably one of my most useful habits. I frequently mingle with other people to hear their perspective about what is going on in the world. Often enough, that yields clues and inspiration that my brain somehow converts into good investment ideas. Take the example of Fiverr. I already had the company on my radar, not the least because I had used its services myself. However, it wasn’t until lunch with one of my readers in New York that I realised I should urgently look at the company in more detail.

So, go out there, meet people and hear out their views and insights. That’s a lot more useful than trying to run a filter through a Bloomberg terminal. Anything that’s in Bloomberg will already be known to everyone.

Since you first started, what have you learned that has had the biggest impact on your success and the growth of your portfolio?

One of my key lessons over the past three decades has been that I am not holding investments long enough. My investment career would have been a lot easier had I simply held on to investments for longer than I did.

Just the other day, I was discussing the example of Hypoport (ISIN DE0005493365) with a colleague in Germany. We all had Hypoport, a software platform for mortgages, in our portfolio around 2010 when the stock was trading at EUR 6. It’s now trading at EUR 600. That’s a 100-bagger in ten years. We actually did think at the time that such a development was possible, but not a single one of us had the stamina to stick to it and ride it all the way up. With all modesty, I often enough have the right long-term ideas. However, I tend to have them too early, or things simply take a long time to grow sufficiently and we humans are naturally impatient.

In the end, the stocks of successful companies go parabolic and the wait is more than compensated. That’s the key reason why nowadays, I focus my research on companies that could have the potential to become long-term winners, without the need for daily check-ups.

Allowing yourself to get distracted by other shiny objects is more exciting and entertaining, but a boring buy-and-hold strategy can yield amazingly good results for private investors.

Among my poorest decisions was a rather large stake in a small German asset management company, PEH Wertpapier (ISIN DE0006201403). The company didn’t develop as expected and I ended up – somewhat inadvertently – as a shareholder activist pushing for the sale of the company. The resulting situation sucked in a lot of my time for two years and ran up legal fees in the six digits.

Lesson learned: unless you turn yourself into a full-time activist, never put yourself into a situation where you cannot easily sell a stake because it’s too big relative to the market’s liquidity. Ideally, never show your stake publicly if you can avoid it by staying below the disclosure thresholds. This lesson also affects my current research: Undervalued-Shares.com primarily looks into relatively liquid stocks. Refer back to the rule mentioned above about limiting your downside and too many unexpected things happening all too often. You want to remain agile and be able to run out the emergency door at the drop of a hat!

What books, platforms or resources have you found useful?

I have recently come to like TIKR, a website that tries to do what Bloomberg does but in a way that is accessible for private investors. They offer a lot of data and are user-friendly. Besides that, I am quite old-fashioned. I don’t use any apps on my phone and do everything on my laptop instead.

The single most influential book for me has been The Art of Execution: How the world’s best investors get it wrong and still make millions” by Lee Freeman-Shor. It’s become a bit of a niche bestseller, and I do believe that it will be reprinted for decades to come. It’s the only book that I recommend on my website.

I generally read very widely and there are too many sources to mention. Let me tell you what my three favourite blogs are – in no particular order!

  1. LT3000 by Lyall Taylor, because his writing is the most thoughtful and original among finance bloggers.
  2. Lyn Alden, because her analysis of stocks, markets, and economies is the best-written that’s out there.
  3. Chris Mayer, a fund manager whose original background as a globetrotting investor and author is quite similar to my own.

What advice would you give to someone who’s just starting out in investing?

I regret not having invested more time earlier in my life in building a thorough knowledge of accounting across a broad selection of industries. E.g., I still can’t make much sense of a bank’s balance sheet. These are skills you will need over and over again.

I recently stumbled across the writing of Stephen Clapham at Behind the Balance Sheet. Having read Stephen’s latest book and after a collegial chat with him recently, I am tempted to sign up for one of his courses sometime, probably starting with the one about analysing financial companies. Don’t repeat my own mistake and wait until your mid-40s to build a rock-solid knowledge of technical skills such as these.

By the way, I feel strongly that the same holds true for learning languages. Probably the single best use of your time when you are young is to learn languages. Ideally, aim to get fluent in four or five of them. You’ll get a lifetime’s worth of extra success and enjoyment out of this skill.

What I wouldn’t do is spend USD 200,000 on going through a conventional college or university education. Different things work for different people, and these diplomas and degrees will have value for some.

I myself am a university dropout because I found this type of education to deliver too little and not fast enough. I got a lot of flak from my parents for not finishing university, and while the overall perception has started to change, there is still this underlying current that having gone through university is really important (and of course, you can’t be a medical doctor or a lawyer without a degree). I’d just like all young people to know that if your gut feeling tells you that it’s not for you, then that’s perfectly fine. Many roads lead to Rome.

It’s not very original advice, but I see the greatest value in reading voraciously. I want to give a special mentioning to older books – some even decades old and out of print. Most things we are witnessing today are some kind of a repeat of what earlier generations have already experienced.

I am currently having fun reading very obscure books from the 1920s and 1930s about technocracy, i.e. government carried out by a small elite that views itself as superior to the uneducated masses because of its “expert” status. Sounds familiar? We have seen it all before. Reading old books often gets a better sense of what lies ahead of us.

What investment opportunities are you excited about at the moment?

Two sectors that I am excited about are tech in emerging markets, and crisis investing.

In emerging markets, the tech revolution has only just begun, but its effects will be even more powerful than what we have seen in the Western world. My favourite example is that of agriculture in Africa.

The African continent has vast swathes of arable land, but it also has the lowest productivity of any agricultural region in the world. Enter farmers getting smartphones and suddenly being able to survey their land and their crop using a cheap drone. I am exaggerating a little bit now, but this is like taking African agriculture from the Middle Ages to the 21st century in one fell swoop.

When you introduce technology to emerging markets, you are looking at productivity gains that are not 10% to 20%, but a doubling or tripling. Tech stocks in emerging markets have also rallied already, but there are still undervalued opportunities out there.

One such opportunity is Helios Towers (ISIN GB00BJVQC708), a London-listed company that operates independent mobile phone masts across Africa and could be a great proxy for benefitting from Africa’s fast-growing use of the Internet. New companies will pop to the surface, and this includes old economy companies transforming them into tech companies.

Just look at what Reliance Industries (ISIN US7594701077) has done with Jio in India. Or check out FEMSA (ISIN MXP320321310), a brewery and retail operation in Mexico. It could become the country’s equivalent of Tencent because of the super app that it offers through its retail outlets.

Besides that, I have always been a big fan of crisis investing (my three-part series on this subject is an evergreen on my website). Crisis investing refers to countries that are going through a deep crisis, such as a civil war or an economic collapse of some kind.

These countries tend to drop off the radar altogether, which is why most investors miss out when the first signs of a recovery appear. Opportunities for playing the subsequent recovery often come in surprising shapes and forms. My favourite story is that of an Irish company that had positioned itself as the first in line for producing oil in Iraq after the second Gulf War.

No one paid attention to it, and even if it had been known of by the public, most people would have been too afraid to invest. It subsequently rose 100-fold – which is the sort of explosive return you can earn after an extreme crisis.

Current examples of crisis investing that I would look at include Venezuela, which may be undergoing the first signs of market reform right now; Ukraine, because investors think the entire country is at war when it’s not; and Argentina, one of the most reliable countries when it comes to descending into and eventually re-emerging from incredible crises

Can you share a story about an investment opportunity that you passed on and went on to grow beyond your expectations?

I first came across Bitcoin when it was USD 29. My gut instinct told me that this was going to be huge. I did get some Bitcoin at the time, but I was too busy with other stuff going on in my life to properly research and pursue it as a serious investment. I didn’t entirely miss out on it, but it’s painful to look back and realise that I kind of saw this one coming, but didn’t act properly on it because I was busy with seemingly more important stuff.

The lesson from this is an important one. Thinking about money for one day per month can be more lucrative than to work for money for 30 days a month. Seriously, hold this thought in your head! Turning yourself into a full-time investor when you don’t have much capital yet is daunting and challenging, but it may well be the only way forward. If you can’t dedicate research time and quality thinking time to investing, you have a higher risk of missing out on the best ideas.

Where can readers go to learn more about you?

I don’t use social media. In 2015, I sensed that big tech was going to bring censorship to the West, which was one of the reasons why I started to delete my social profiles. I fully expect censorship for writing critically about central banks, offshore havens, and universal basic income at some point in the future. By staying clear of large tech platforms, I can continue to publish my thoughts in the shape and form that is authentic to my opinion.

You can find my investment-related writing on www.undervalued-shares.com.

I also keep a personal website for other eclectic writing, mostly around entrepreneurship, fundraising, and optimising other aspects of your life. You can find that on www.swen-lorenz.com – I think it’s a bit of an undiscovered gem.

What do you wish I had asked you and how would you have answered this question?

You could have asked me about the best articles on my websites that I would like to refer my readers to. There are a bunch of articles that readers tell me over and over again had a profound influence on their lives. This makes me think that others would appreciate if I pointed them towards the articles that have had this kind of effect on readers.

The following are worth highlighting:

How I work – three-part series
Part 1: 10 methods to my madness
Part 2: The 10 worst mistakes of my investing career
Part 3: 10 pieces of advice to younger investors
Self-explanatory why this is a good addition to this interview!

Understanding your “Lifetime Tax Bill” – three-part series
These articles can have a profound impact on your financial future!

44 things I know because I am now 44
People keep telling me over and over again how much they enjoyed this one!

Anyone who found this interview useful will probably find these particular articles to be of real use to themselves. Also, I really recommend the series on crisis investing that I mentioned above. I felt this was among my best articles in 2020.

Thanks to
Swen Lorenz

 for doing this interview.

If you have any questions or comments, leave a reply below.

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