Ideas with Catalysts

[mcliu]

I agree with Palantir, I think if your strategy is to buy extremely undervalued companies without a catalyst, you're better off buying a portfolio of them, rather than taking concentrated positions.

[oddballstocks]

I agree with Palantir, I think if your strategy is to buy extremely undervalued companies without a catalyst, you're better off buying a portfolio of them, rather than taking concentrated positions.

 

Agreed, this is my strategy, a portfolio not a few good picks. Where I am concentrated (building my own business) I am my own catalyst.

 

I'd love to see how many "known" catalysts fail to bring value or materialize. It seems every pitch now has a catalyst section.

[Kraven]

I agree with Palantir, I think if your strategy is to buy extremely undervalued companies without a catalyst, you're better off buying a portfolio of them, rather than taking concentrated positions.

 

Agreed, this is my strategy, a portfolio not a few good picks. Where I am concentrated (building my own business) I am my own catalyst.

 

I'd love to see how many "known" catalysts fail to bring value or materialize. It seems every pitch now has a catalyst section.

 

Completely agree.  A portfolio not just a few stocks. 

[writser]

Sure, something might eventually happen, but how long are you going to wait? As I have stated, a stock can remain undervalued, misunderstood, and unloved for years on end. One day, it can suddenly triple, but you don't know when that will happen, and the longer you wait, the more opportunities you miss out on, and if it's a significant portion of your portfolio, you will hurt. And that's assuming that it will work out in the end, the firm can still get sold for a poor price, management can still try to take it private at a lowball valuation (Dell) etc.

 

From what I read from you so far, it seems that your ideal portfolio contains a number of well-run companies with moats, good capital allocation and a nice, steadily growing share price. I want that too. Everybody wants that. Problem: you will always have to pay up. And at some point there could be a corporate scandal, a stupid manager, a shift in the industry and the share price plummets. You have to be pretty sure about your stock analysis.

 

Some people here, like Kraven, take a different approach. They figured that they are no superior business analysts like Buffett, have never talked to management and don't have unique insights about specific industries. So they only focus on the knowable: assets, cashflow and earnings. They just buy stuff that's extremely cheap based on these metrics. And wait. This is boring. It will also be painful. And it is difficult to admit to yourself that you basically don't know anything about anything. So hardly anybody does this. For exactly the reasons you give. But maybe, and I think that is the part you don't consider, that is the very reason these stocks outperform in the long run.

 

The quote below was from Hielko, I think it's insightful and you could ponder it for a while. Investing is for the patient - the way you describe: "the longer you wait, the more opportunities you miss" doesn't really sound like a patient man, it sounds more like a gambler :) According to your quote, you are mostly worried about the shareprice performance of your holdings, as opposed to the business performance. But if the stock goes nowhere and the business is doing good: great! You can buy more stock (or the company can do it for you). Finally, if my stocks "only triple" once in a few years I would be very happy. Like WEB said: "I prefer a lumpy 15% to a steady 12%".

It wouldn't surprise me if investments without an obvious catalyst outperform in the long run because everybody wants to own something with a catalyst these days.

 

[Palantir]

I have not stated that there is no merit in "buy cheap and pray", I'm thinking about doing it with a section of my portfolio, once it gets bigger (lots of transaction costs!). But my point is that you cannot take a concentrated position, and from what I understood, the OP was intending this thread to be more of a "best ideas" thread. I mean, if you're investing in 10-ish names, does the "Value is its own catalyst" philosophy work? In my opinion, this principle has a context.

 

 

 

 

[oddballstocks]

Sure, something might eventually happen, but how long are you going to wait? As I have stated, a stock can remain undervalued, misunderstood, and unloved for years on end. One day, it can suddenly triple, but you don't know when that will happen, and the longer you wait, the more opportunities you miss out on, and if it's a significant portion of your portfolio, you will hurt. And that's assuming that it will work out in the end, the firm can still get sold for a poor price, management can still try to take it private at a lowball valuation (Dell) etc.

 

From what I read from you so far, it seems that your ideal portfolio contains a number of well-run companies with moats, good capital allocation and a nice, steadily growing share price. I want that too. Everybody wants that. Problem: you will always have to pay up. And at some point there could be a corporate scandal, a stupid manager, a shift in the industry and the share price plummets. You have to be pretty sure about your stock analysis.

 

Some people here, like Kraven, take a different approach. They figured that they are no superior business analysts like Buffett, have never talked to management and don't have unique insights about specific industries. So they only focus on the knowable: assets, cashflow and earnings. They just buy stuff that's extremely cheap based on these metrics. And wait. This is boring. It will also be painful. And it is difficult to admit to yourself that you basically don't know anything about anything. So hardly anybody does this. For exactly the reasons you give. But maybe, and I think that is the part you don't consider, that is the very reason these stocks outperform in the long run.

 

The quote below was from Hielko, I think it's insightful and you could ponder it for a while. Investing is for the patient - the way you describe: "the longer you wait, the more opportunities you miss" doesn't really sound like a patient man, it sounds more like a gambler :) According to your quote, you are mostly worried about the shareprice performance of your holdings, as opposed to the business performance. But if the stock goes nowhere and the business is doing good: great! You can buy more stock (or the company can do it for you). Finally, if my stocks "only triple" once in a few years I would be very happy. Like WEB said: "I prefer a lumpy 15% to a steady 12%".

It wouldn't surprise me if investments without an obvious catalyst outperform in the long run because everybody wants to own something with a catalyst these days.

 

Awesome post, you're dead on!

 

There are many investors who are famous & wealthy for buying cheap and waiting, there is only one Buffett...

[writser]

I have not stated that there is no merit in "buy cheap and pray", I'm thinking about doing it with a section of my portfolio, once it gets bigger (lots of transaction costs!). But my point is that you cannot take a concentrated position, and from what I understood, the OP was intending this thread to be more of a "best ideas" thread. I mean, if you're investing in 10-ish names, does the "Value is its own catalyst" philosophy work? In my opinion, this principle has a context.

 

The implicit assumption you make is: I know quality companies are going to perform well in the future (that's why you don't mind concentration right?) . But speaking for myself,  I'm not sure I can predict how quality companies are going to perform in the future. I'm also not good in defining quality companies (and if I find one it is usually expensive).

 

My portfolio is not extremely concentrated but if I would ever initiate a huge position I would rather have something that is significantly undervalued now than something that should earn more money later. That way I hopefully don't lose all my money if my thesis was wrong. And I am (just) humble enough to accept that my theses are shit in a lot of cases anyway. In my opinion that's the core idea behind the "margin of safety" approach.

 

I see that you have FB in your portfolio, that's a nice example of something that I would never own at this point. It trades at high P/B, P/E ratios, it has no physical assets and it has hardly earned money in the past. So the only way you can justify owning this is if you think they will earn a lot of money later (and more subtly: more than is currently priced in). If that thesis doesn't work out you will probably lose your entire investment. Now I see a lot of opportunities for FB to earn money. Selling movie tickets, printing photo's, charging users, targetted advertising, dating, whatever. But at the same time they could go bust in three years, like MySpace. And I don't think I am the most qualified market participant to weigh these scenarios.

 

Basically I think that with such a position you're taking a bet on your own ability to predict the future. I'd rather take a bet on my ability to read thousands of obscure 10K's and figure out what obscure companies are trading at very generous valuations (even better if Oddball does all the hard work for me ;) ). It's a boring bet, takes a lot of work but that's exactly the reason why I think it will pay off.

[Ross812]

I have not stated that there is no merit in "buy cheap and pray", I'm thinking about doing it with a section of my portfolio, once it gets bigger (lots of transaction costs!). But my point is that you cannot take a concentrated position, and from what I understood, the OP was intending this thread to be more of a "best ideas" thread. I mean, if you're investing in 10-ish names, does the "Value is its own catalyst" philosophy work? In my opinion, this principle has a context.

 

You should invest wherever you can find your margin of safety and adapt to what is happening in the market. When the market is going higher and higher its hard to find well known quality companies offering a factor of safety. Thus, you start to look for hard to find small caps that present opportunities. I'm sure oddball wasn't buying small obscure companies in 2008 when amazing bargains on large caps could be had. It's not "buy and pray" though. If you are buying a dollar for 50 cents and the company still has a viable means to keep on making money, then eventually, the value will be realized. If you hold something for 10 years then it finally triples you still made 12% annualized over the ten years.

 

Looking at your signature, it appears you like to concentrate in a few big GAARP type investments. I like GAARP investments too. The trick with GAARP though is it has to either be really stable with huge growth potential, or you have to be compensated by a low P/E so when growth slows and the P/E is cut to 10, you still make a respectable return on your investment. That is where your margin of safety for a GAARP investment in a good stable company comes from. 

[ERICOPOLY]

Guys, regarding the catalysts that can go on for years and years....

 

You are right.  You just have to be highly selective about what a "catalyst" is.

 

The Fairfax at $90 in 2006 was a situation where about 25% of the shares were shorted and the shorts were paying north of 20% annualized for borrowing the shares.  It was a highly compressed spring.

 

Now, that's not going to go on if they are a fully healthy company.  It was going on because of the runoff mess that lasted for years and years -- but you had a letter to shareholders in your hand from Prem stating that the 7 lean years were over and that 2006 was the year that it would breakeven or turn a profit in runoff.  And it did, and it's been profitable every year since.  And the shorts covered soon after.

 

Of course you can't trust everything a CEO promises, but Prem had a very trustworthy reputation.

[infinitee00]

Great discussion, but I never quite understood the "value is its own catalyst" argument. Maybe I am thick or something, but to me the statement seems to be either redundant, rhetorical or both. It reminds me of the strange adventures of Baron Münchausen lifting himself up from the swamp by his own hair ( an impossibility due to physical laws that governs our planet) :)

 

As far as my understanding goes, catalysts are events or agents that help accelerate and narrow the gap between price and value. If that's true, how can a condition or state ( 'undervaluation' in this case) be its own agent (catalyst). It's like saying a stone thrown from the top of a cliff can somehow magically conjure up an external force or agent - just by virtue of it being down - and lift itself back up onto the cliff. I don't get it !

 

So, to me, saying that undervaluation will induce or engender its own catalyst - in the form of a buyout, merger, dividend, spinoff etc - seems redundant. Catalysts are only necessary when there is a discrepancy between price and value, otherwise why would we need it anyway. In fact, I have never seen a catalyst that is trying to get a fully-valued equity become more fully-valued.

 

I think the point of contention as being discussed here is the *time* horizon for value realization that can be accelerated by catalysts and whether those catalysts can be reasonably projected - a spinoff of an under-performing division, involvement of an activist investor, management announcing buyback - or not

 

I maybe generalizing here but I see two camps here. One group consisting of investors who have a diversified portfolio and the other group with concentrated portfolios.

 

For investors with diversified portfolios, the time frame for catalysts to appear doesn't matter that much. They have diversified their risks away by investing in 50 or 100 stocks (or so goes the prevailing wisdom) and if 5 out of 50 are still in the dumps after 5 years, that won't affect their returns by much. There will be plenty of others ,in the meantime,to pick up the slack for those 5.

 

However, the situation is not the same for investors with concentrated or moderately concentrated portfolios. For them time is a very important consideration and consequently they seek out catalysts ( by which I mean ones that can be reasonable estimated) that can narrow the gap quickly. The reasons for this, as I see them, are higher rates of return and risk mitigation. The longer the time one has to wait for value realization, the lower will be the rate of return and the higher is the chance of the business deteriorating or management doing foolish things like empire building, overpaying for acquisitions or diluting the stock. Since they only hold a few stocks, the shorter the time frame of the investment, the lower is the probability of foolish or overconfident actions of management affecting the business and consequently the stock and the investor's returns.

 

I know that we as a group love to discuss various possibilities at hand and like to think about subjects broadly and explore all angles. That is great and that is what makes this board so valuable. However, I think that when OP started this thread, he probably was trying to encourage investment ideas with catalysts that can be reasonably projected and which may lead to value realization within shorter time-frames ( 1-2 yr would be my guess..correct me if I am wrong) as opposed to a 5-10 year or an unknown time horizon.

[ExpectedValue]

I disagree with the idea that value is it's own catalyst.

 

Value can be a source of attraction which brings about catalysts, but it's not a catalyst itself. Like others have noted, if the shareholder structure prevents the value from being unlocked, then it becomes potentially a trap.

 

I've seen this in nano-cap land where you'll have negative EV companies that are FCF positive trade sideways for years, because a family controls the shares and are not interested in maximizing shareholder value.

 

Catalysts are useful because they provide you with benchmarks to test your thesis against. Stocks are usually cheap because they have problems associated with them. I think the best catalysts to look for relate to balance sheet events or litigation.

[Hielko]

@infinitee00 About the value can be it's own catalyst idea. I think you should differentiate between a few cases:

 

1. The undervalued investment where some future event that the thoughtful investor can already anticipate will unlock value: this is what I would describe as the 'classic' investment with a catalyst. For example: activists are pushing for change, and you think they will be successful.

 

2. The undervalued investment where there is no event on the visible horizon that will realize the value that's locked up in the company. These are the investments that a lot people don't want to make, and the main worry here is that it will stay cheap forever. Two things can happen here to realize value:

 

* The disconnect between price and value creates an opportunity for someone to make money. For example activist investors getting involved that push for some kind of corporate action and this will be the catalyst to realize value.

 

* "the value will be its own catalyst" case. If something is selling below intrinsic value there doesn't have to be some kind of event that will close the gap between price and IV. If a sufficient amount of people recognize that a stock worth $100/share is selling for $50/share it will start moving in the right direction.

[ERICOPOLY]

I feel like a big part of the "cheap forever" puzzle is that people are often just wrong about what constitutes great value.

 

A risky business model trading for an earnings yield in the teens.  (no, I'm not referring to the high priced teen model character from Risky Business).

 

Instead you have something like when Buffett purchased Wells Fargo in early 1990s -- a great business, great business model, but normalized earnings yield in the teens.  A great business like that is undeserving of a high-teens earnings yield.  The catalyst was for the earnings to shine through the elevated loan loss reserving.  It's a clear catalyst -- it's not dependent on the kindness of an activist to come along.  You can just bet on it (and he did). 

 

There are catalysts, and then there are catalysts.  Buffett selected a high quality businesses with relative certainty of long term excellence -- thus the catalyst could be depended on because a high quality business isn't going to trade at high teens earnings yield levels for long after the uncertainty is lifted.

 

 

 

 

 

 

[oddballstocks]

I feel like a big part of the "cheap forever" puzzle is that people are often just wrong about what constitutes great value.

 

A risky business model trading for an earnings yield in the teens.  (no, I'm not referring to the high priced teen model character from Risky Business).

 

Instead you have something like when Buffett purchased Wells Fargo in early 1990s -- a great business, great business model, but normalized earnings yield in the teens.  A great business like that is undeserving of a high-teens earnings yield.  The catalyst was for the earnings to shine through the elevated loan loss reserving.  It's a clear catalyst -- it's not dependent on the kindness of an activist to come along.  You can just bet on it (and he did). 

 

There are catalysts, and then there are catalysts.  Buffett selected a high quality businesses with relative certainty of long term excellence -- thus the catalyst could be depended on because a high quality business isn't going to trade at high teens earnings yield levels for long after the uncertainty is lifted.

 

Interesting comment, I think you point out something really key, it's that people understand risk incorrectly.  In your example earlier FFH was perceived as risky by the market, short sellers etc.  Yet the fundamental business was sound.  This is similar to some of the deep value stuff I look at, the controlled family owned companies are usually extremely stable, they have the ability to continue business as usual for years and decades.  The risk is misplaced, buying something stable at an extremely low price isn't risky.

 

What is risky to me is buying a turnaround or something where there is a known catalyst who is supposedly going to change the trajectory of the company.  For example JCP (I know nothing except from the thread here, just an example), a declining company that isn't stable at all, yes the price is low, and there is a catalyst.  What's risky is if the catalyst fails then the business could fall apart.

 

So in the first example there is no catalyst, but being so inexpensive and mis-pricing risk provides opportunity.  In the second example people see a catalyst and mis-price risk assuming the catalyst will improve whatever is wrong.

[Palantir]

 

The implicit assumption you make is: I know quality companies are going to perform well in the future (that's why you don't mind concentration right?) . But speaking for myself,  I'm not sure I can predict how quality companies are going to perform in the future. I'm also not good in defining quality companies (and if I find one it is usually expensive).

 

I respect your opinion, I find it very difficult to determine a business's worth based primarily on looking at its assets and liabilities. I feel it needs a certain "mindset", and I don't believe I have the ability to do it. Hence I decided to focus on owning large stakes in quality businesses.

 

 

You should invest wherever you can find your margin of safety and adapt to what is happening in the market. When the market is going higher and higher its hard to find well known quality companies offering a factor of safety. Thus, you start to look for hard to find small caps that present opportunities.

 

Makes sense, I have indeed started to do that drip by drip.

 

 

 

[Palantir]

 

* The disconnect between price and value creates an opportunity for someone to make money. For example activist investors getting involved that push for some kind of corporate action and this will be the catalyst to realize value.

 

* "the value will be its own catalyst" case. If something is selling below intrinsic value there doesn't have to be some kind of event that will close the gap between price and IV. If a sufficient amount of people recognize that a stock worth $100/share is selling for $50/share it will start moving in the right direction.

 

Indeed, but how do you know that this catalyst will appear? You're saying that, "it's so cheap, somebody will pounce". But let's take the example of Loews (L). The management thinks its cheap (they say it all over their website, and they even drew up a comic), its shareholders think its cheap, many posters on the board think it's cheap....I hope I am making sense here...

[ERICOPOLY]

I've been parsing Buffett's comments over and over again.

 

He is basically telling us to:

 

Only place IV estimates on businesses that are highly dependable to continue to spit out the earnings they've achieved in the past.  Otherwise, it's too hard!

 

This means high quality businesses.

This means low financial leverage risk.

This means moats.

 

So just go ahead and throw out all of the high risk businesses that are vulnerable to rapid technological changes, deep cyclical downturns, financial panics, whiz-kid managers doing turnarounds, etc... etc...

 

This means you won't get too many pitches.  They rarely come along at massive discounts such as he had with WFC.  That's why he concentrates his investments in few ideas and crushes them when they come along.

 

That's how I interpret Buffett&Munger, anyhow.  It's why they won the game.

[hyten1]

palantir

 

everyone could be wrong :)

 

time will tell

 

hy

[Tim Eriksen]

I've been parsing Buffett's comments over and over again.

 

He is basically telling us to:

 

Only place IV estimates on businesses that are highly dependable to continue to spit out the earnings they've achieved in the past.  Otherwise, it's too hard!

 

This means high quality businesses.

This means low financial leverage risk.

This means moats.

 

So just go ahead and throw out all of the high risk businesses that are vulnerable to rapid technological changes, deep cyclical downturns, financial panics, whiz-kid managers doing turnarounds, etc... etc...

 

This means you won't get too many pitches.  They rarely come along at massive discounts such as he had with WFC.  That's why he concentrates his investments in few ideas and crushes them when they come along.

 

That's how I interpret Buffett&Munger, anyhow.  It's why they won the game.

 

I would disagree with your characterization of Buffett's approach.  That is how Berkshire operates due to size.  A few years back in his personal account he reportedly bought a number of profitable low P/B Korean stocks.  I would not characterize the stocks he bought as high quality businesses with moats.  Yet Buffett could estimate a conservative IV on those companies.  When Buffett describes how he would manage a one million dollar portfolio it is very different than what you described.   

[jay21]

I've been parsing Buffett's comments over and over again.

 

He is basically telling us to:

 

Only place IV estimates on businesses that are highly dependable to continue to spit out the earnings they've achieved in the past.  Otherwise, it's too hard!

 

This means high quality businesses.

This means low financial leverage risk.

This means moats.

 

So just go ahead and throw out all of the high risk businesses that are vulnerable to rapid technological changes, deep cyclical downturns, financial panics, whiz-kid managers doing turnarounds, etc... etc...

 

This means you won't get too many pitches.  They rarely come along at massive discounts such as he had with WFC.  That's why he concentrates his investments in few ideas and crushes them when they come along.

 

That's how I interpret Buffett&Munger, anyhow.  It's why they won the game.

 

I would disagree with your characterization of Buffett's approach.  That is how Berkshire operates due to size.  A few years back in his personal account he reportedly bought a number of profitable low P/B Korean stocks.  I would not characterize the stocks he bought as high quality businesses with moats.  Yet Buffett could estimate a conservative IV on those companies.  When Buffett describes how he would manage a one million dollar portfolio it is very different than what you described. 

 

He also bought JPM in his personal account. 

[ItsAValueTrap]

CMEDQ is a Chinese reverse merger that defaulted on its debt.  So a lot of shorts thought that it was a good short idea since the catalyst already happened (the bond default... the equity will get wiped out pretty soon).

 

In practice, it didn't work out that way.  There was a massive short squeeze.  I actually shorted a small amount of CMEDQ and didn't cover... but I still didn't make much because I got bought in on my shares.  So in general, I'm skeptical about ideas with catalysts.  The real world is messy and catalysts are unreliable most of the time.

[ERICOPOLY]

I've been parsing Buffett's comments over and over again.

 

He is basically telling us to:

 

Only place IV estimates on businesses that are highly dependable to continue to spit out the earnings they've achieved in the past.  Otherwise, it's too hard!

 

This means high quality businesses.

This means low financial leverage risk.

This means moats.

 

So just go ahead and throw out all of the high risk businesses that are vulnerable to rapid technological changes, deep cyclical downturns, financial panics, whiz-kid managers doing turnarounds, etc... etc...

 

This means you won't get too many pitches.  They rarely come along at massive discounts such as he had with WFC.  That's why he concentrates his investments in few ideas and crushes them when they come along.

 

That's how I interpret Buffett&Munger, anyhow.  It's why they won the game.

 

I would disagree with your characterization of Buffett's approach.  That is how Berkshire operates due to size.  A few years back in his personal account he reportedly bought a number of profitable low P/B Korean stocks.  I would not characterize the stocks he bought as high quality businesses with moats.  Yet Buffett could estimate a conservative IV on those companies.  When Buffett describes how he would manage a one million dollar portfolio it is very different than what you described. 

 

I know about that trade (heard about it before).

 

Effectively, he was not terribly familiar with Korean stocks but was aware that their stock market was priced out of whack to their economy.  He asked some guy from Goldman to hand him a book of Korean financials (like ValueLine) and used some old-school methods of selecting companies he thought were survivors.  Perhaps he used just common sense like picking a steel company, a cement company, a utility, I don't know what method.  But he likely was less familiar with what name brands were the strongest in Korea because he isn't experienced in that culture.  Just guessing!  He's good at looking at financials and knows a cement company when he sees one.  Thus he can look at the durability by just looking at how leveraged they are, how stable has their cash flow been, will cement be needed in the future....

 

I mean, are you certain that he hand-selected the more volatile sectors?  Did he go for the highest P/Es that had lots of short term financing?  Did he go for tech startups?  I don't know how your example at all suggests that Buffett put away the risk metrics.  I'm pretty damn certain he looked for enough details to ensure that these businesses would still be dull and boring for a decade.  Thus he only had to worry about the entire stock market getting a mean reversion as a catalyst.  But define "worry" -- he made a great earnings yield while he waited.

 

Anyways, I would say that when everything is getting thrown out with the bathwater you can do well just buying an index on that market.  Thus, the catalyst becomes reversion to the mean.  But I bet Buffett tried to do even better by going through the stable and boring businesses that are lower risk.

 

Nothing specific to any one company, just that the market itself will mean revert (foreign investors eventually realize Korea is really not that risky, or whatever).

 

Or he might not have been looking at risk characteristics, but I highly doubt it.

 

[infinitee00]

@infinitee00 About the value can be it's own catalyst idea. I think you should differentiate between a few cases:

 

1. The undervalued investment where some future event that the thoughtful investor can already anticipate will unlock value: this is what I would describe as the 'classic' investment with a catalyst. For example: activists are pushing for change, and you think they will be successful.

 

2. The undervalued investment where there is no event on the visible horizon that will realize the value that's locked up in the company. These are the investments that a lot people don't want to make, and the main worry here is that it will stay cheap forever. Two things can happen here to realize value:

 

* The disconnect between price and value creates an opportunity for someone to make money. For example activist investors getting involved that push for some kind of corporate action and this will be the catalyst to realize value.

 

* "the value will be its own catalyst" case. If something is selling below intrinsic value there doesn't have to be some kind of event that will close the gap between price and IV. If a sufficient amount of people recognize that a stock worth $100/share is selling for $50/share it will start moving in the right direction.

 

If I understand you correctly what you are saying is that there are 3 types of catalysts

 

1. Undervalued investments with catalysts that can be reasonably projected (relatively shorter-term)

2. Undervalued investments

a) Where catalysts are unknown but may appear in the future (relatively longer term)

b) Where market forces or change in market perception act as the catalyst ("value is its own catalyst" case)

 

Is my understanding correct?

 

I am not saying that one type of value realization is inferior to the other, but isn’t 2b above just stating the obvious? Doesn’t 2b encompass every other type of value realization strategy and isn’t 1 and 2a special cases of 2b?

 

Every catalyst is a manifestation of change in market perception towards the true value of a business. Every event of value realization is some sort of market agent (or catalyst) - whether management, a single activist investor or numerous small investors - acting to narrow the gap between price and intrinsic value. The only difference between catalysts 1, 2a/2b is the time horizon of value realization.

 

So, saying “value is it’s own catalyst” is just a cool and fancy way of saying that “there are no near term catalysts and we hope someday a catalyst will appear and value will be realized”. Anyone less diplomatic would call this the “hope and pray” strategy.

 

Again, I am not saying that one is better than other (I myself have almost 60-70% of my portfolio in the so-called “hope and pray” category). I know that even though this statement is mostly used for NCAV/net-net type stocks,  anyone buying a low P/E, low P/B or low EV/EBITDA stock is doing exactly the same. So to clarify the point of my original comment - 1) “value is it’s own catalyst” is an obvious or redundant statement since it is the default investment approach of any *value* investor and encompasses  all intelligent investments in undervalued stocks 2) for investors with concentrated portfolios, investments with near-term catalysts (i.e. type 1 catalyst above and not 2a/2b) help in reducing certain types of risks due to the shorter holding period.

 

 

 

 

 

[Hielko]

I would not view case 1 and case 2a as a subset of 2b. In the first two cases you have a tangible event that changes something fundamentally, and the difference between the first two cases is the time-frame and predictability. Fundamental changes are for example corporate actions, news from the company, reported earnings and stuff like that. In case 2b absolutely nothing has to change fundamentally, but the price might be going up every day because of more intangible changes. Call it market perception, sentiment or something along those lines.

 

But hey, that's just how I see it. There are obviously no formal definitions, and also not a single right answer.

 

PS. you can call it "hope and pray”, but you could put that label on every single investment. You also don't have a guarantee that if BRK would grow IV by 10% every year the next decade that you can see the share price grow at the same rate. Who knows, maybe it will be selling at 0.5x book value. You NEVER know at what price you can sell. The only thing you can do is buy cheap.

[GrizzlyRock]

Merriam Webster defines catalyst as follows: "an agent that provokes or speeds significant change or action"

 

IMHO many of the divergent POVs articulated on this thread are based on guys using various definitions of catalysts. From my point of view, the current infatuation with catalysts started with the true event driven guys doing risk arb, rights offerings, LBOs, spinoffs, etc (que Greenblatt's "Little Book that Beats the Market").

 

Then the concept sounded good in pitchbooks and on idea boards so the Graham and Dodd value guys began incorporating the word into their lexicon. Now most guys use it.  Catalyst scope creep. For example, I write a catalyst section in every write-up to force myself to think through the catalyst-driven event path or lack thereof.

 

As a HY guy, my thought is that valuation can be a catalyst in credit much more readily than equity. Loan or bond maturity or covenant breach are events that can be anticipated and drive action as opposed to an equity situation in which an investor hopes people will see (and close) the valuation gap.

 

My take - if there isn't a highly probably event occurring during the next 12 months the investment by definition doesn't have a "catalyst".