Fear & Greed (II)

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charting, diversification, Expected Value, falling knives, fear and greed, intrinsic value, investment checklists, momentum, portfolio allocation, position limits, stop losses, sunk costs, technical analysis, trading, value investing, value-trap

Continued from here.

I labelled as tricks some of the techniques I’m writing about here – which might have put off some readers. But surely you’ll try anything that might help combat the impact of fear & greed in your investing? Reconsidering, I’d now argue the five techniques I’ve already documented are actually essential tool-kit for any serious investor. Have another look, and I hope you’ll agree – to put it another way, it would be hard to argue your investing would actually improve if you omitted any of the following:

Learn To Love The Black Box:  Document all your investments, and analyze & learn from your mistakes.

Checklist It:  Develop checklist(s) for every stage of your investment process.

Valuation Orgy:  Value your investments using as many different valuation techniques & metrics as possible.

Watch What They Do, Not What They Say:  Focus on facts, figures & performance, not just the ‘story’.

Well, Are You The Right Size?:  Set pre-defined position limits within your portfolio.

However, a majority of my remaining techniques do perhaps deserve to be called tricks. Which means they may, or may not, suit your investing style & personality. Trouble is, how will you ever know if they’d work for you, unless you give ’em a whirl..?! Or figure out how they’re best adapted to your particular circumstances? Right, let’s soldier on:

vi) Learn Some Bloody Voodoo

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Argo Group – Awaiting Results

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% of AUM, alternative assets, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, asset managers, distressed assets, distressed investing, emerging markets, European sovereign debt crisis, Expected Value, intrinsic value, Kyriakos Rialas, Price/Cash, share buyback, shareholder activism, tender offer, The Argo Fund

Argo Group’s (ARGO:LN) Final Results should be released shortly (I’ll try confirm the exact date). In my most recent Argo posts, I published two letters I’ve sent to Kyriakos & Andreas Rialas (CEO & CIO, respectively). I encourage you to review both letters before continuing:

Here’s the first letter (from Nov-2012)

Argo’s share price rallied +6.2% in the following week.

And the second letter (from Dec-2012)

This was sent on behalf of myself, Guy Thomas & some other (smaller) shareholders, representing an aggregate 5% shareholding in Argo. The letter focused on a single specific shareholder distribution proposal. ARGO subsequently rallied +6.5% (in the following week). [In fact, the share price is now up an impressive +36% since my November letter. Despite the rally, I believe Argo remains just as compelling an investment proposition – I currently have a 5.4% portfolio stake].

My recommendations & proposal require little (further) explanation, and I expect shareholders will enthusiastically support all efforts to realize & enhance Argo’s intrinsic value. But I will revisit them in the context of an upcoming results preview – plenty of current & prospective shareholders have emailed me about Argo, so I hope you’ll find this useful. Let’s first consider Argo’s existing funds:

Catalysts – A Summary (Part II of II)

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activist investors, Argo Group, Avangardco, binary outcomes, Carl Icahn, catalyst, Daniel Loeb, Expected Value, government regulation, Herbalife, IRR, junk bonds, litigation, major sale, NAV discount, Risk Arbitrage, Robert Chapman, share buyback, shareholder activism

Continued from here.

iv) Activist Investors are my next catalyst. Obviously, there’s no specific timetable here, but since most activists are performance-driven hedge funds, a 6 mth to 2 yr timeline is reasonable. Activists in the UK usually target asset discounts & realizations (so investment trusts/companies are ideal), while European/US activists are perhaps more biased towards operational change (which may require a longer investment horizon).

Most activists prefer to agitate for change behind the scenes, but some prefer to be more public: Carl Icahn (I read King Icahn at least once a year) is the king of the activists – he’s 77 now, but is more of top of his game today than he was 30 yrs ago! Other notorious activists (& 13D filers) are Dan Loeb of Third Point (and here, though he claims he’s mellowed now!) & Robert Chapman, who (presumably!?) introduced the first ‘fuck‘ in an SEC filing. More in-depth reading material includes ‘Risk Arbitrage‘ by Wyser-Pratte, ‘Extreme Value Hedging‘ by Orol, and certain chapters of ‘Free Capital‘ by Guy Thomas.

Catalysts – A Summary (Part I of II)

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Alternative Asset Opportunities, asset allocation, catalyst, correlation, dividend tax treatment, Event Driven, Expected Value, fighting the Fed, Investegate, IRR, Liquidations, Margin of Safety, offer premium, portfolio allocation, QE, Recommended Cash Offer, Risk Arbitrage, risk-on risk-off, takeover offers, Takeover Panel, VIX, volatility, wind-down

My 10-part series on catalysts last year (stretching from Jan to Dec!) was well received, judging by the readership & links. I vaguely promised a summary to wrap up the series – as we’re well into the new year (already?!), it now seems appropriate to deliver that post (& hopefully it proves useful).

By the end of last summer, I concluded there’s little point fighting the Fed… A fortunate decision, as the market’s been decidedly risk-on since then! Though I must say, the power of central bank liquidity still surprises me. If you recall, last summer, we appeared to face a pretty bleak outlook both sides of the Atlantic: The fiscal cliff in the US & the sovereign debt crisis in Europe. [Hmmph, different stories…same destination!] Personally, I considered the cliff to be just like those periodic kerfuffles over the US debt ceiling – no genuine threat, but divisive political rhetoric could certainly roil the markets (& perhaps prompt a rating-agency response). On the other hand, the European crisis…er, what happened, where the hell did that go..?!

This risk-on attitude’s left my portfolio light on investments with shorter-term/lower-risk catalysts (i.e. event-driven investments). However, I still strive to pick new investments which (ideally) possess at least one longer-term/higher-risk catalyst. That type of catalyst doesn’t necessarily mean you avoid downside risk, but hopefully it stacks the deck in your favour vs. what the average value investment (complete with margin of safety) might offer. It may also accelerate the time-line for a stock’s realization of its intrinsic value/upside potential. Anyway, much of my event-driven exposure was ultimately re-invested in Alternative Asset Opportunities (TLI:LN) – so I simply exchanged a low return/relatively uncorrelated risk for a cheap/high return/totally uncorrelated risk! Go on, you might want to give it a try..! 🙂

How About Another Catalyst? (Part X)

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Adrian Williams, Alphameric, alternative assets, Argo Group, asset managers, Avangardco, Bear Stearns, binary outcomes, capital expenditure, catalyst, delisting risk, DM plc, Dresden, emerging markets, Expected Value, Fair Value, Fortress Investment Group, Gagfah, government regulation, intrinsic value, IRR, Joe Lewis, litigation, major sale, Net LTV, P/E ratio, P/S Ratio, risk aversion, risk management, share buyback, share repurchase, takeover offers, Timeweave

Continued from here, & here’s the first post in the series.

vi) Litigation/Regulation is the final catalyst on my list. It’s also, without a doubt, the most difficult to exploit & to write about (note I’ve tackled this series in reverse order)! In fact, if it doesn’t (immediately) appeal to you, I might perhaps discourage you from ever bothering with this catalyst? To some extent it suffers from the same issues/perceptions I highlighted with v) the Major Sale catalyst.

First, most litigation/regulation risk/events are simply part & parcel of normal corporate operating activity. For example, certain sectors are almost permanently marked down due to their increased risk level (perhaps something politicians like to mouth off about?!). These risks usually aren’t of any fresh/major significance to a company’s business model or valuation, and/or they’re routinely priced in anyway – they are not catalysts.

But occasionally a real game changer comes along… A lawsuit, or a regulatory change/threat/action/approval, that could prompt a major change in a company’s future intrinsic value. It may also cause a rapid/significant adjustment in the company’s current market cap. So how exactly do we separate out & identify such a catalyst vs. the merely hum-drum? A similar approach, like v), seems sensible – something like:

AGI Therapeutics – Anatomy of a Takeover (IV)

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AGI Therapeutics, AIM stocks, compulsory acquisition, delisting risk, EUR/USD, Event Driven, Expected Value, Gross IRR, Irish shares, market-makers, Recommended Cash Offer, Risk Arbitrage, takeover offers, technical analysis

Continued from here.

OK, to recap the latter part of my previous article, I put forward 2 (hopefully strong) arguments why you should embrace (unhedged) FX risk in your event-driven investing (and, of course, elsewhere in your portfolio). With AGI Therapeutics (AGI:ID/LN), however, I essentially faced no FX risk on the deal in the end.

Remember, AGI traded in EUR (or GBP) but the takeover price was $0.1171 per share (and holders could opt for equiv. EUR proceeds). My solution was to round-trip surplus USD I had available. Yes, I’d incur a small FX spread to convert USD for my EUR share purchases, but by opting to receive USD takeover proceeds I’d eliminate subsequent FX risk, and end up back in USD cash.

AGI Therapeutics – Anatomy of a Takeover (III)

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AGI Therapeutics, currency allocation, denarii, Event Driven, Expected Value, FX rates, Gross IRR, Gross Return, home bias investing, probabilities, Recommended Cash Offer, takeover offers

Continued from here.

Expected Return‘s probably the most important, and most difficult, return to calculate & focus on. In its simplest form, it’s binary (deal success or failure), but by all means incorporate multiple outcomes into your analysis, if appropriate. In fact, if you’re contemplating other types of Event Driven investing, this multiple outcome approach will prove essential. However many outcomes, you calculate a Gross Return and a likely probability (which must sum to 1.00, of course) for each, and then combine these to arrive at an Expected Return. This will give you a much more accurate (and lower) deal return. Of course, you won’t actually see this return on any single deal – but over time, this is the best risk/reward measure to employ to evaluate deals & your potential average return. Of course, you can calculate an Expected IRR also, if you wish, but let’s not go crazy here..!

How About Another Catalyst? (Part IV)

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Expected Value, Greencore, IFG Group, IRR, Margin of Safety, offer premium, preliminary approach, recommended offer, Risk Arbitrage, takeover offers, Takeover Panel

Continued from here:

iii) Takeover Offers are a catalyst with a much shorter duration than Liquidations or Wind-downs, usually within 2 to 8 months. In the UK, for example, Takeover Panel rules keep things on a fairly strict timetable. In terms of risk, they probably fall somewhere between the two: Your Gross Return is reasonably stable/well-defined, but price volatility and the chances of failure are a lot higher.

It’s not so prudent to give examples of current takeover offers, as price volatility and news flow can change things all too quickly. But I’ll give a brief update on a current Risk Arb situation in which I’m investing, and share my own observations and approach to this type of catalyst:

Seduction…and Neglect?! How About a Catalyst? (Part II)

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dividend coverage, dividend yield, Event Driven, Expected Value, Interior Services Group, IRR, Joe Lewis, Leo Fund Managers, Magnier & McManus, Margin of Safety, Risk Arbitrage, Timeweave

Continued from here:     OK, so we’ve defined what a stock catalyst is, and also recommended you evaluate catalysts from an IRR perspective.  This is the best way to highlight how they can deliver a dramatically improved return, due to the (potential) acceleration of value realization.

If you really want to complicate your life, you could also layer in an EV approach…the analysis that is, not the blog! Let’s not dig into the math/mechanics here, but it spotlights another attractive feature: A catalyst may prompt you to attach higher probabilities to positive/specific/increased return scenario(s), thereby increasing the Expected Value of your investment return. For example, Risk Arb (and many Event Driven) opportunities offer a specific price ‘target’ and timeline, with a high probability attached to this outcome, so EVs (and, of course, IRRs) can be pretty tasty!