activist investors, catalyst, Charlie Munger, growth investing, Howard Marks, intrinsic value, latticework of mental models, mosaic theory, recapitalization, second-level thinking, shareholder activism, value investing, Warren Buffett
I’m obviously not averse to some growth – well, if I can buy it bloody cheap, or free – but I don’t think anybody would dream of calling me a growth investor!? But you may be surprised to hear I don’t consider myself a classic value investor either. Ideally (at least in relation to some investments), I like to think of myself as an activist investor.
In this instance, let me hasten to re-define activist in the v broadest sense: Activist investing isn’t necessarily about public engagement with a company’s management – far from it, in many cases. I believe the essence of activist investing actually lies in the investment analysis & the investment itself – not the investor (as many would presume). An activist looks at a company and, on that rare occasion, sees a v different enterprise vs. the company (most) other investors currently see…
– Perhaps he sees a company that’s genuinely worth more dead than alive. Or one that would be far more valuable in the arms of a larger rival. Or a company that has a jewel in the crown that’s obscured by other/inferior divisions, central costs, etc.
– Maybe it’s a company that has under-utilized assets that can be sold to reduce/eliminate excessive debt. Or a company that could execute a recapitalization, and transform its financial metrics & shareholder value.
– Perhaps it’s simply misunderstood – investors may simply not grasp a company’s management/business/strategy have changed in a major way, or they under/over-estimate the potential impact (for example) of some litigation or regulatory action.
OK, if you’re a regular reader, all this may be ringing a bell… Yes, an activist investor sees a v different company to the one which currently exists (in the minds of most investors). That obviously implies a corporate transformation – and catalysts are a great way to ensure that occurs. [Last year, I posted a complete 10-part series on catalysts – beginning here, ending here. I also published a recent summary, here & here]. Of course, in the absence or failure of other catalysts, an activist investor may simply choose to be the catalyst himself..!
The problem here is that nobody’s going to identify this different company for you – and catalysts aren’t always that obvious either. In fact, you’re really looking for something that basically isn’t there… At worst, it’s like some strange version of trying to prove a negative. You won’t find it with stock screeners – it probably doesn’t reside in the data they access. And you won’t find it in the majority of articles & commentary from the financial media, or across the web – they’ll mostly focus on the latest facts & figures, news, and the current perception of the company. [I’m reminded here of Howard Marks’ concept of first-level vs. second-level thinking. His recent book ‘The Most Important Thing’ is, by far, the most useful & instructive piece of writing I’ve come across in a long time].
You probably won’t even discover it from management – in fact, their bias & perspective may provide the main guidance for most investors’ perception of the company. And, unfortunately, management may simply prefer to wilfully ignore or oppose a potential corporate transformation – regardless of the benefits in terms of shareholder value.
So, how on earth do you find these opportunities..?! Well, I’m afraid there’s no magic involved – you simply need to:
Read, read, read, and then read some more!
Fortunately, this is a wonderful endorsement of my own Luddite approach to investing… 😉 But I’m in fine company – if it’s good enough for Buffett & Munger, to name just two great investors who advocate reading, it’s damn well good enough for me! And I assure you, it’s something anybody can learn to do well – like becoming a good researcher. But honestly, I can’t guarantee you’ll necessarily enjoy what might just seem like a bloody hard grind to some. [Unless you’re one of those odd people who thinks relaxing with a couple of annual reports is just as normal as putting your feet up to read a thriller!] But if you aspire (like me) to become a great investor, I have some (v succinct) good & bad news for you:
Investing is simple, but never easy.
And I don’t have any guidance on what you should read…I really do mean read everything! [But in terms of annual reports, here’s a tip: I find the divisional/segment reporting section(s) of financial statement notes to be fascinating!]. Frankly the more random your reading the better, because that may be the only way you’ll ever assemble a genuinely broad & diverse latticework of mental models (as Munger would say). Some would also describe this as the mosaic theory of investing – in the broadest sense, mind you, not the Galleon version! [I have my own analogy for this approach – I expect to write more about that at a later date, hopefully a companion piece to ‘Why I Write…’].
In the fullness of time, this approach naturally merges with your own cumulative investing knowledge & experience. And that can be an incredibly powerful combination – one which I believe offers you, on occasion, the best chance of imagining & recognizing a v different company & valuation than the one you might see in the market today. Of course, that also offers some potentially wonderful investing opportunities…
Activist investing is clearly not for everyone – it’s a full-time activity, or at least one that will severely encroach upon your leisure time. But if it seems like your cup of tea, I consider it to be a far superior approach to investing:
– Classic value investors rely predominantly on the past in their search for value, while growth investors are just as dependent on their projections of the future. Both have obvious & sometimes fatal weaknesses… Activist investors, on the other hand, are firmly anchored in the present. Sure, a potential corporate transformation takes time, but the underlying business & intrinsic valuation one can see is buried deep within today’s business & results.
– Value investors often under-perform a rising market, and out-perform in a set-back. Growth investors suffer the opposite fate. Their respective success will wax & wane with the moods & valuation of the market, sometimes for years… Each adopts certain sectors & stocks as their perennial favourites. But activist investors can afford to be far more agnostic – no matter the mood or valuation of the market, the chances of finding that v different company remain much the same. And opportunities are often found in the most mundane of stocks & sectors – by definition, activist investing doesn’t need to focus on what the market currently thinks is dirt cheap, or high growth.
– Most of all, I believe the activist investor can access (even create) a superior risk:reward proposition for his investment portfolio. Basically, we’re talking about investing in misunderstood companies, ideally assisted by the presence of one or more catalysts. Those companies are often low risk, or at least lower risk than they first appear to be. They can also offer better diversification & lower correlation in your portfolio – the possible opportunity & upside you see may be much less dependent on the economy & the market (but far more dependent on that potential transformation & value being realized). Most of all, misunderstood companies are often terribly mispriced – so, on occasion, they really do offer (low-risk) multi-bagger potential..!
Well, hopefully you’ve seen more than a glimpse or two of this approach in some of my previous investments! In my next (new & upcoming) write-up, I hope to provide an interesting example of this type of activist investment…