When it comes to value investing, it’s always important to consider your circle of competence, but one manager says that’s not enough.
At the Ben Graham Centre’s 2025 Value Investing Conference in Toronto, Tim McElvaine of McElvaine Investment Management explained why he tries to avoid “getting into the ring” with Mike Tyson every time he makes a trade.
Beyond the circle of competence
Referencing the concept of a circle of competence, he said he thinks it’s a necessary condition but probably not sufficient. McElvaine also advised listeners to think about something every time they place an order for a stock.
He said it’s like getting into the ring with someone like boxer Mike Tyson; it requires thinking about where you have a competitive advantage on the purchase.
McElvaine spends his life trying to avoid getting into the ring with a Mike Tyson. Instead, he looks for accidents or dislocations, a disruption of the established order. McElvaine advised investors to look for situations where they have both a source for their circle of confidence and also where the seller doesn’t care about the price.
When sellers don’t care
According to him, this type of situation in which sellers don’t care about the price happens more than one might expect. One example McElvaine used was when large companies spin off smaller ones, especially ugly ducklings.
The other time sellers might not care about the price is when bad news happens, like dividend cuts or the elimination of the dividend. In this scenario, McElvaine said a large shareholder base suddenly has to turn over its position. Income-type funds suddenly have to exit the stock with little regard over what price they’re getting.
McElvaine said value investors may be able to take advantage of such situations. He noted that in such situations, people simply don’t want to invest, resulting in maximum pessimism.
However, McElvaine added that it’s far more difficult for everyone today, between Twitter, Substack and Google and people’s desire to have some kind of feedback or social proof on every post they make.
Looking for an accident and alignment of interest
McElvaine’s investing process starts with the concept of an accident and a competitive advantage. Recalling the store of the three little pigs, he noted that it contained a straw hut, a stick hut and a brick house. McElvaine explained that investors need to make sure they’re in a brick house because there will always be a wolf that comes to their door.
Additionally, he seeks alignment of interest. McElvaine advised investors to look at what management has done and read the company’s proxy statement, thinking about whether it’s in the “same boat” as them.
He feels this is especially important during periods like today. Looking at his portfolio, he sees significant management alignment with their companies. Because they have so much skin in the game, McElvaine is comfortable with letting them figure out how to navigate troubled waters instead of trying to think about what he should do based on what tweets have come out today.
This is particularly important with small caps because investors may not have the luxury of changing their mind about a company overnight. Thus, they must ensure they’re comfortable with the management.
Anti-fragility
McElvaine also said some of his best investments have been those situations which have the concept of anti-fragility. For example, during the oil and gas crisis, his best-performing stock was a company named Tourmaline Oil, the CEO Mike Rose had lots of skin in the game.
The company had a “fabulous” balance sheet going into the crisis and came out of it a much better company than when it went into it. According to McElvaine, this happened because the company had alignment of interest and the ability to take advantage of things that may not normally come up.
He buys companies based on assets and sells on earnings, recalling when he was involved in real estate years ago and was working with someone who was very focused on whether he had an irreplaceable asset. McElvaine feels having an irreplaceable asset provides a margin of safety.
What types of situations to seek
In terms of what types of bad situations value investors may be able to take advantage of, he said he doesn’t mean complex situations involving litigation or other such scenarios. While he said investors could become involved with some of that, he emphasized the need to focus on situations that may seem confusing on the surface, but where he knows he has a competitive advantage.
According to McElvaine, if emotion is negative, the margin of safety is likely to be positive, and vice versa, although he clarified that this doesn’t always hold true. He added that investors need to be confident enough in their analysis of a company that when the emotion pendulum swings one way, they can wait until it swings the other.
McElvaine said value investors don’t run. He believes they talk, slide and sometimes hop or do nothing. However, he also said this type of strategy will often double after three years. Thus, McElvaine noted that there’s a massive advantage to being patient and avoiding situations where sellers actually care.
