Playing the Theme, Not the Stock

Includes: AGRO, ILF
by: Roger Nusbaum

Over the weekend, a reader left a comment on the Seeking Alpha version of an old post that mentioned Adecoagro (NYSE:AGRO) in passing. AGRO is the Latin American farming stock that recently went public. George Soros has been involved with the name. It is as interesting as any farming stock in terms of geography and breadth of products, but it is still a Latin American farming stock.

The reader's comment expressed frustration at the performance, noting that it started out doing okay but has since done poorly, which the reader attributes to Soros selling the stock. I was not able to find news of an actual sale, just a guess that he might sell as he gets out of the hedge fund business. As I understand it, only a small portion of the hedge fund is not his own money, so he may not in fact be a seller; we'll see.

Specifically, he said it has gone to hell since he sold at a small gain. AGRO is in a theme that I care about and so I keep some tabs on the stock (not very close but somewhat), but the comment left me thinking maybe I missed something, so I took a peek at it and in the last month (per Google Finance) it is down 14.56% compared to 13.43% for the iShares Latin American 40 ETF (NYSEARCA:ILF). For three months, there is a two basis point difference between the two.

There was a stretch in there in late May where AGRO dramatically outperformed ILF and from that high water mark, AGRO is down 21% versus 13% for ILF. I suspect that the reader is anchoring to that high water price; in that case, the stock has been a disappointment, but other than that two- or three-week stretch in late May to early June, the stock has not really stood out much either way.

It seems like there are several behavioral things going on with the reader's frustration, which is the point of this post. Anchoring to some past stock price or portfolio value is a common behavior that unfortunately is unproductive.

Based on the limited information in the comment, it actually seems like he got out at a decent price. If he is a trader, then he was successful. For someone who is an investor in something like this (applies to any other long term theme), it is crucial to realize that something like farming cannot prove out right or wrong in a few months. It is possible that these things should be traded along the way, or maybe half sold after a big move or something like that, but great companies in an important theme will not always be top performers.

If you are buying a theme, you probably need to have some sort of expectation that results from your research. If you think it will take five years for China's equity market to start doing really well again, then getting impatient after three months doesn't make much sense. This is not to say that some stock in a theme can't turn out to be a bad pick for some reason that should be sold, but if you buy a uranium stock that drops 16% when everything else in the group drops 14%, you haven't made a horrible pick even if you are frustrated by that result.

It should also be clear, and more specific to the reader's gripe, that important themes should not be expected to be immune from some sort of global freak-out. Over the last month, this space in the market is down and AGRO's drop appears to be right in line. If what is going on in the market right now turns out to be really bad, it will not change the long term prospects for certain specialized themes, but stocks in those themes will go down with the market all the same.