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Fisconsult Fund Newsletter - Jan 2021

January 2021

At the end of the first month of the year, the stock markets posted a negative performance (S&P 500 - 1.11%, Euro Stoxx 50 -2.52%, CAC 40 -2.74%). Behind this sluggish performance was a series of events that created significant volatility, particularly on the US market, where the volatility index (VIX) almost doubled at the end of the month, from 21 to 37.

An index of about 20 ndicates a very calm market, while a volatility of more than 35 corresponds to a particularly buoyant market. So, this peak at 37 signifies a very jittery market, albeit still a long way from the highs of March 2020, when the VIX index surpassed 80, which was an all-time record.

Why so much volatility? We have not yet moved too far away from the event, so all the details are probably not yet known, but in essence, and to simplify things, a group of small traders, grouped together in a Reddit social network community called r/wallstreetbets, coordinated to buy, at the same time, a specific stock, Gamestop (an American chain of video game shops close to bankruptcy), to drive its price up. Why Gamestop? Well, because several major hedge funds were short-selling this stock, betting on the company's bankruptcy and thus a share price going to zero.

Modern finance makes it possible, even for a relatively small group of traders, to push a stock, with a small market capitalisation (Gamestop had a capitalisation of one billion dollars before the events), to rise substantially via a combination of share purchases and call options (a derivative product allowing to bet on the rise of a stock).

Once the machine was launched, Gamestop went from USD 18.84 on 31 December to USD 483 at the highest price recorded on 28 January. Meanwhile, a prominent hedge fund, managing more than $15 billion, lost 51% during the month just because of the stock it was betting on. Once the other big funds sensed something was going down, they all attacked at the same time, combining their firepower with that of the smaller traders, accentuating further the stock's movement and volatility in the markets.

These phenomena deserve more than just three paragraphs in our newsletter and we will look more in depth at them in a forthcoming webinar. However, it is important to note that, paradoxically, these events have had a negative impact on our investments, since several securities in which we have invested were massively liquidated by the funds involved in the "Gamestop affair" in order to meet their margin calls, i.e. by covering their losses with profit-taking on safe havens.

Thus, FFM European Selection recorded a performance of -0.3% while FFM American Growth lost -3.8% over the month. However, we were not overly concerned by these fluctuations, and we remain confident in the management strategy we have put in place.

Modern finance is a strange universe where few people still carry out a genuine fundamental analysis of companies. Many analysts follow the latest market trends, carry out multiple buy and sell operations on a very short-term basis and have no real convictions.

In a world where a fast-growing number of investors are making their living on increasingly faster transactions, often in a matter of seconds, we are convinced that having the role of the turtle adds immense value. At a time when hares are running amok but without clear direction, an explicit strategy, long-term analysis and strong convictions crossing normal market swings, being the turtle that does not deviate from its path and that moves little by little in the right direction seems to us to be the most sound approach.

Once again, the "Gamestop affair" has taught us that on the stock market, everyone can become rich but no one wants to take the time to do so.Translated with (free version)


Fisconsult Fund Management

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