“You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map”
– Warren Buffett
I classify myself as an unreasonable opportunist. I seek out misunderstood, messy, complex & idiosyncratic bets that are in places most investors won’t go. I love simple businesses with a bit of hair on them.
I’m not looking for a wonderful business at a fair price. I want to buy assets when they’re on sale and endeavor to avoid falling into the neo-Buffett camp who justify paying any price for perceived compounders. I’m patient and unreasonable: I want the great business at a great price. My internal hurdle is to target a minimum 2x return over a 3-5 year holding period and if I can’t find sufficient opportunities, I am happy to hold onto cash. Capital preservation is key to my strategy and I aim to never forget Buffett’s first rule – “never lose money”
Investing in great businesses at fair prices is a wonderful way to compound your money. However, I’m realistic enough to know that I’m probably not the next Warren Buffett or Peter Lynch, and identifying the next great businesses before the fact, is extremely difficult to do. Therefore, I focus on special situations where specific factors are causing a dislocation between price and value:
Business specific factors:
- Over-leveraged balance sheets (see investing in a tortoise)
- Sub-optimal profitability due to a poor performing business unit or upfront investments or an unmonetized asset etc.
- Short term/transitory issues impacting profitability or revenues
- Strategic change or restructuring creating “messy” financials
Market specific factors:
- Unnatural holders of a security or forced selling due to spin-offs, rights issues, index changes, or recent emergence from bankruptcy
- Across the board selling due to industry issues or regulatory changes (baby out with the bathwater)
- Lack of sell-side research due to small market cap, low free float, or lack of disclosure (dark companies)
Having said that, business quality still forms an important part of my investment thesis development (and is often where most of my time is devoted). Business sustainability and predictability is paramount to being able to determine a fair value and as such a focus on its ability to defend its financial position through some form of an economic moat, dominates much of my initial and ongoing research. The ideal situation is a wonderful business, being offered at a wonderful price. I like simple businesses going through complex situations.
So, what’s my edge? For starters, I think it is important to differentiate between edge & anomaly. I seek to exploit the following financial market anomalies:
- Value investments tend to outperform over time (value premium)
- Smaller companies tend to outperform over time (small cap premium)
- Illiquid investments tend to outperform over time (liquidity premium)
Therefore, I look for small, cheap companies. However, cheap can mean many things to many people, and I tend to prefer companies that do not appear cheap on a first level basis, but instead require some digging below the reported financials that most screens use to determine a securities cheapness.
My edge comes from focussing on the parts of the market that sophisticated investors either avoid or are unable to invest in. Therefore, I focus my time looking at:
- Micro-cap companies
- Esoteric stock exchanges
- Foreign markets
- Forced sellers
- Dark companies
- Highly leveraged companies
- Under performers (lower asset turn or margins than peers)
- Broken IPO’s or M&A
- Restructuring, reorganizations and strategic change
“The one who follows the crowd will usually get no further than the crowd. The one who walks alone, is likely to find himself in places no one has ever been.”
– Albert Einstein
By focussing on these ponds, I increase the probability of developing an informational, analytical or transactional advantage.
Finally, by investing in a concentrated manner (holding less than 10 investments on average), I can afford to exercise extreme patience, because I only require 1 or 2 no brainer ideas each year to generate an acceptable return.
“The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple”
– Charlie Munger