Tim McElvaine's Dive of Despair Framework

[Packer16]

I have noticed that most of my stocks typically have something wrong with them.  Using Tim's framework has helped be determine where my investment are in the dive and hopeful recovery they are.  The framework is described in Tim's 2010 AM minutes on page 17.  Most of mine are in the restructuring/cash generation area.  As Tim points out small caps most likely have a lag between cash generation and discovery and with some larger stocks cash generation and discovery can occur at the same time.  The provides me with a "where are we now" with my investments so I can determine if I want to sell some to buy some stocks earlier in the dive/recovery cycle. 

 

Here is where my top holdings and sells are by category

 

Restructuring - ALSK, LNC, LICT, Fiat, ATSG and BAC

 

Cash Generation - AIQ, AIG, GM, GNCMA

 

Discovery - TVL, GTN, NXST, MGAM 

 

Has anyone else used this framework?

 

Packer

[twacowfca]

I have noticed that most of my stocks typically have something wrong with them.  Using Tim's framework has helped be determine where my investment are in the dive and hopeful recovery they are.  The framework is described in Tim's 2010 AM minutes on page 17.  Most of mine are in the restructuring/cash generation area.  As Tim points out small caps most likely have a lag between cash generation and discovery and with some larger stocks cash generation and discovery can occur at the same time.  The provides me with a "where are we now" with my investments so I can determine if I want to sell some to buy some stocks earlier in the dive/recovery cycle. 

 

Here is where my top holdings and sells are by category

 

Restructuring - ALSK, LNC, LICT, Fiat, ATSG and BAC

 

Cash Generation - AIQ, AIG, GM, GNCMA

 

Discovery - TVL, GTN, NXST, MGAM 

 

Has anyone else used this framework?

 

Packer

 

That's a great framework. I haven't used it formally, but when a company I like starts to pile up cash/earnings, and the market is slow to react, I have backed up the truck and doubled or tripled the size of our interest on a number of these, all with great success.  :)

 

Is there one of these that you like the very best?

[Packer16]

AIQ and GM I suppose because they have a long runways.  AIQ is tied to hospital radiology and oncology medicine practices and hospitals are where most of the Obamacare funds are going and GM because there is probably 12 million annual units of pent up demand from the US and China is growing nicely and on top of that you can get cheap leverage with warrants.  What else could you ask for.

 

Packer

[JEast]

You bring up an interesting point that the Berkshire educated core has to deal with.  Warren and company has taught a legion of ‘value’ investors to buy owner operators and better business.  In general and for the most part, this is the right course of action.  However and for the ones that want to outperform, do you really just want to buy the one-trick pony owner operators and better business?  I suggest the answer is probably not.  I do recognize that this is to be considered heresy for some.

 

For example, just buying a better business with operating earnings pushing incremental capital, improving margins, reducing costs, organically growing the company is the least tax efficient form of investing for starters.  The value investor reply is usually that you are missing out on the compounding effect.  My counter is look at Wal-mart as just one example.  No one could deny that this was a better business 10 years ego, but the equity owner captured little over the next 10 years by being a better business.  You make money on better business when you catch them early before others know it is a better business, not afterwards on the compounding.

 

Therefore, to outperform in the value space and managing under $1B, one must focus on resource conversion.  This comes in many forms from corporate refinancing/restructure, management change, appreciation in hidden asset values, setting up for a take over, proxy fights, acquisitions, and deal making/financier.  I own a few better businesses, but spend most of my time looking for deeply unloved equities with a hint of the above resource conversion attributes.

 

Cheers

JEast

 

[finetrader]

Very interesting tread so far guys!

That's the best input I could find to match the quality of theses posts!

 

For myself I'm starting to like Altius(ALS) considering low stock price combined with catalyst with the Kami project.

[onyx1]

The framework is described in Tim's 2010 AM minutes on page 17. 

 

Has anyone else used this framework?

 

Packer

 

Packer -  Can you please provide a link or source for the minutes?

 

[Packer16]

Here is the link:

 

http://mcelvaine.com/wp-content/uploads/2010/03/2010-Partner-conference-transcript-w-slides1.pdf

 

Along with this framework Tim has his ABBA selection technique to chose resturcturing plays.

 

Packer

[ItsAValueTrap]

Warren and company has taught a legion of ‘value’ investors to buy owner operators and better business.

 

I don't think that he has taught a legion of "value" investors to buy owner operators.  Warren looks for business with great economics and great management teams.  The management team doesn't necessarily need to own a lot of the business.  Warren prefers to own the whole business (for tax and control reasons) and he will set the manager's compensation in a way that incentivizes them for their operational performance.

 

I think that most value-oriented money managers don't buy stocks in the same style as Buffett.  Buffett will only buy the best financial companies- Goldman, WFC, etc.  Many money managers will muck around with the financial companies that aren't as good- AIG, C, etc.  In retail, Buffett owns the "best"- Walmart and Costco.  (Though I don't think that Walmart is the best anymore.)  Other managers will own struggling retailers like SHLD, JCP, etc.

[Packer16]

I think what is being described is 2 approaches to value investing. First, the high quality wait until a panic approach and the second opportunistically finding lesser quality firms that have less pricing risk that more than offsets the lack of business quality.  The first is applicable for large amounts of money as many of the opportunities in are clustered in time (when a panic occurs about every 5 to 10 years), however, this is not an absolute rule.  The second is more based upon industry recessions and  a larger group of firms are available. 

 

The key to both of these types of investments is estimating pricing risk.  In the first approach business risk is low so you have to wait for the price to be right.  There are 2 issues with this however, many times the price will not be right and what to do?  Cash has a very high opportunity cost associated with it, especially if held in large quantities over long periods of time.  Second what is the right price?  This is where valuation comes in. 

 

In the second approach, business risk is higher and there a few imperfections with these firms.  You need to determine which ones you can live with and which ones you can not.  I personally have a hard time living with less than honest management teams.  Primarily, this is due to their capital allocation function and their ability to divide up who gets what rewards if the firm does well.  In addition, you need to determine how these imperfections should and do effect pricing.  It requires more thought and thus fewer folks are your potential competitors.

 

I think Marks coming from the bond world has some unique insights as both of these approaches are also practiced but more easily recognized.  As a high yield manager one of his key tasks is to estimate the amount of additional yield he requires to invest in a less than perfect situations.  This is also applicable to stocks and is described in the Dive of Despair Framework.

 

Packer