Stock Picking…Art, or Science (Part IV)?!

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art vs. science, asset allocation, diversification, Event Driven, GARP investing, growth vs. value, IRR, Margin of Safety, Return on Market Equity, stock picking, stock selection, stock valuation

Continued from here.

Value vs. Growth:

In my last Stock Picking post, I highlighted a common value investor failing – namely, a preference for over-leveraged & illiquid small/micro-cap stocks. All too often, it seems like this kind of preference (& others like it) are simply hard-wired in…maybe you’re born to be a value or growth investor! Now, we could get all touchy-feely here & try to personality-map this out – cautious vs. aggressive, quantitative vs. qualitative, thinker vs. dreamer, and so on – but does it really matter? Far better to recognise & accept what you are – if you haven’t already, just stop reading right now & come out to your wife:

‘Um, darling, it’s time you know…I’m a value investor!’

You may even find out she knew already…

Acceptance is the first & most important step in recognising inherent investing biases, and maybe trying to curb some of the worst excesses of hard-core value investing. [Of course, the same is equally true of growth investing]. This might take years…it definitely took me years! And pride often gets in the way – sometimes it’s nice to feel different, one of a select breed of smart investors who can boast of finding hidden gems in the rubble. But this is just an illusion – true growth investors are equally select. [Yes, most people seem biased towards growth stocks (if they ever mention stocks at all!?) – but in reality, they’re fairly clueless about money & investing. At best, they’re TALT* investors…] For them, genuine growth stocks are equally difficult & just as precious to find. And let’s face it – on average, in the real world, nobody can reliably claim value investing is superior to growth investing, or vice versa.

But accepting your value investing biases, curbing your excesses, and exploiting your natural advantages, is surely the best way to maximise your comfort & your returns as an investor. Except this can ultimately prove a double-edged sword…the world you end up living in may just be a value ghetto. Sure, it may feel large enough, it may even feel comfortable enough, but if that’s as far as your horizons stretch, you’re missing out on a whole other world of opportunity out there. Forget about investment ideology – again, this is about diversification, and it’s about becoming a better investor.

If you choose to ignore growth stocks & investing, you’re voluntarily cutting yourself off from vast swathes of the available investment universe – that’s countless companies, entire sectors, new/disruptive business models & secular trends, even geographies, etc. you’re missing out on, maybe forever…how does that make any sense? And even if you heed everything else I’ve written about diversification, how meaningful will the impact be if your portfolio remains blighted by the absence of growth stocks?

Of course, the classic value objection to growth stocks is that they’re invariably over-valued. But this, my friends, amounts to nothing more than a red herring… A true growth stock always seems to be over-valued, yet its share price can subsequently look astonishingly & ridiculously cheap after the business/stock somehow manages to scale up by hundreds or even thousands of percent. The real complaint here, I suspect, is that growth investing is just too hard!?! And if you’re a value investor, there should be no shame in admitting this – because that’s exactly how it feels: You naturally take a primarily quantitative approach to investing & you always require an adequate margin of safety, but identifying true growth stocks demands a far more qualitative approach & appears to offer little in the way of safety…

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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..! 🙂

An Investment To Die For..!

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Alternative Asset Opportunities, catalyst, CDC, correlation, credit risk, Event Driven, Grim Reaper, intrinsic value, IRR, Leverage, life expectancy, life settlements, mortality tables, NAV discount, policy premiums, SL Investment Management, TLI, Traded Endowment Policies, Traded Life Interests, viatical settlements

Cash/bonds just bore me… Event-driven investing is a far better alternative. It’s low risk, low correlation, and it offers attractive annualized returns. But the safest short term event-driven investing is time & research intensive, and low absolute returns present a risk (‘picking up pennies…‘). Longer term event-driven/catalyst investing usually offers far better absolute returns, but at a price: i) increased market/economic correlation, and ii) no assurance your returns will be positive. I’ve written about this here. My solution: All I want is a low risk & uncorrelated investment which guarantees significant increases in intrinsic value over time. That’s like asking for the sun, moon & stars…but here’s a snap-shot of the ultimate in event-driven investments:

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:

How About Another Catalyst? (Part VIII)

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acquisitions, catalyst, intrinsic value, IRR, Leverage, major sale, principal-agent problem

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

Well, what the hell have I been up to..? Yes, I know I’ve owed a couple more posts on catalysts for some time now. But that’s the luxury of being a blogger, I’m master of my domain! Oh, er…I mean I can write about whatever I fancy each day/week. But damnit, Carstairs, a gentleman always finishes what he starts..! OK, OK, here we go: btw While I believe my final two catalysts are genuine catalysts, note they’re harder to spot/evaluate, riskier and may require a longer time frame to crystallize. [You may have noticed I’ve broadly laid out this series in terms of increasing risk & timelines].

TGISVP VII (More Disco!)

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Black Earth region, catalyst, German property, home bias investing, Ireland, Irish shares, Irish Stock Exchange, Irish value investing, IRR, Jim Rogers, market mastery, portfolio allocation, Prem Watsa, teenage dating, TGISVP, Warren Buffett, Wilbur Ross

Continued from here. In my last post, I reflected on how pernicious the effects of ‘home bias‘ are, and asked:

So why on earth did I launch something like The Great Irish Share Valuation Project..?!?

What am I trying to do, even inadvertently? Encourage readers to abandon their current portfolio, and go all-in on Ireland and a Top 10 of high potential Irish stocks? Good grief, no…not at all! Actually, my first (and perhaps primary) motivation has been to share with you more of an investing idea, rather than any investing recommendations:

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 III)

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Avanti Capital, delisting risk, Dhir India, Eurovestech, GPG, Gresham House, IRR, JSM Indochina, Liquidations, LMS Capital, Mazars, Ottoman Fund, Private Equity Investor, Siteserv, South African Property Opps, Spark Ventures, Trading Emissions, Trinity Capital, Veris plc, wind-down

Continued from here:

i) Liquidations are top of the heap for catalysts! They’re usually only announced after a company has sold all/the majority of its assets (or occasionally its business(es)). They offer the best prospect of a highly certain final asset value, to be realized within a reasonably short/well-defined timeline. They’re usually concluded within 6 months to 2 years, and any decent BoD/management will provide an estimated total distribution amount (net of all expected liquidation expenses) and schedule.

Of course, if they’ve an ounce of sense, they’ll be as conservative/pessimistic as possible with their forecasts, so any surprises should hopefully be positive… (In fact, they should recast the B/S with all future expected liquidation expenses included as a provision – i.e. accounting on a liquidation basis, not a going concern basis). In aggregate, these features mean that liquidations have v attractive IRRs and Expected Value Returns!

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!