Long ago in a place far, far away (well actually just Germany), my roommates and I agreed to speak only German, despite all being native English speakers. The adult figure among us, Page, was a big soccer fan. If someone spoke in English, Page would approach that person and pull out a notecard-sized red card. There were no actual punishments, but we all got a good laugh. Most importantly, when he handed out the red cards, he reminded us to stay focused on speaking and learning German.
Q4 2019 hedge fund letters, conferences and more
Likewise, when investing, we need to focus on what leads to success. The most basic idea in investing is to focus on the underlying business. Be a business analyst first. And last. Yet, people often stray from this core principle. Language is the best indicator that the analysis has turned from business analysis to security, market or macroeconomic analysis.
Each time I hear security or market analysis, I imagine handing that person a red card.
Let’s look at some offending examples:
- The volume in the stock is too low for an appropriate valuation. Once this is resolved, larger institutional ownership will drive the stock higher.
- Once the coverage universe is expanded, the informational asymmetry will be resolved.
- For the last few years, technical overhangs have increased the volatility of company X’s stock and generally harmed the shares.
- The significantly high short interest relative to its stock float and daily liquidity should provide additional optionality for outsized returns.
- A spin-off will reveal the value of the overall company.
- We believe company X is a takeover target based on its relative valuation to its peers.
- We think Company X should swap its buyback program for dividends. Company X generally buys back $500-600mm a year (about 60% of net income). The market cap is $7.7b. So a ‘buyback yield’ of ~7%+ at current value…We believe the stock will rerate to a 4% dividend yield.
Just start handing out the Red Cards.
This morning I came across a conference call that had multiple questions about the impact on the stock price since the company will be excluded from a popular index/ETF. (You can read the transcript here). The CEO even stated at the beginning that the conference call had been moved up in schedule to account for the exclusion from the index. Immediate Red Card.
Be a business analyst. Not a stock analyst.
I can see many eyes gloss over when Buffett repeats this phrase for the umpteenth time. This idea is simplistic, if not obvious. But, I am reminded of Munger’s wisdom when it comes to simplicity:
“We try more to profit from always remembering the obvious than from grasping the esoteric.”
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
One investor I admire (Chuck Akre) uses the following investment approach. You will notice that his “three stools” mindset is clearly focused on the underlying business.
Business analysis will be the most important factor in determining the success of an investment.
Article by Matt Brice – The Sova Group
Munger’s Meeting: Come for Charlie (stay and meet with me)
Charlie Munger’s Annual Meeting is February 12. It’s much smaller than Berkshire and Munger is much more candid. Click on Munger’s image for a series of short videos he did after the meeting in 2017.
I am scheduling meetings for Tuesday and Wednesday, feel free to email me to schedule a convenient time.
