Wilbur Ross and 40% returns
Ever since watching this video of Wilbur Ross speaking at the Ivey School of Business I’ve been thinking about what makes a good value investment, and I’ve come to the conclusion that:
- any true, i.e. deep, value investment has to entail the possibility of a 3x or greater return (note that I’ve jus pulled ‘3X’ out of a hat; what I really mean is that one has to think in multiples of the current market price not 2 digit percentage returns),
- in order for multiple return potential to exist, either the company, the industry or, hopefully, both have to be in some sort of stressed situation,
- the key to identifying ‘stressed situations’ is to go only where no foot is currently treading.
You can see this kind of thinking reflected, but without the rationalization, in Walter Schloss’ simple but tried and true approach to investing where his first level filter is the list of new weekly lows. Now, this approach doesn’t exactly identify stressed situations on an industry basis except indirectly, as market prices tend to reflect the level of ‘stress’, but in some sense it’s doing the same thing in an oblique, company-specific way.
Why have I been thinking about this? Well, obviously because I’m looking for the next great investment, but also because I’m trying to explain to myself why I haven’t been able to find those great investments over the past year. The short answer is NOTHING SEEMS TO FEEL LIKE A STRESSED SITUATION in this market. I think one of the reasons is that the lake of liquidity that has pumped up the market from its 2009 lows is supporting just about everything. We haven’t really been in a stock picker’s market since before 2008; simply everything, the turds as well as the cruise ships, have been floating ever higher on the increasing tide. There will necessarily come a day when the tide stops coming in, and on the ebb we may see some value opportunities as we did in 2008/2009. I’ve been wary of this market for the past couple of years on this count and my performance has really suffered; Despite my largest position being in AIG which has floated upward admirably with the tide, I have lagged the market. Part of my underperformance can be attributed to my significant cash position, but part is because my deep value investments have not really kept up. Oh, and then there is the small issue of Fortress Paper, an ill-conceived because ill-timed investment. My definition of ‘deep value’ on that one was simply wrong. However, had I waited until now when it has really become a deep value play I might have been OK. I was just dazzled by the seeming opportunity and FORGOT ONE OF THE CARDINAL RULES OF INVESTING; DON’T INVEST IN SITUATIONS THAT DEPEND ON COMMODITY PRICES. They are simply not predictable and there is almost no ‘margin of safety in such company shares.
So where does this line of reasoning lead, in terms of searching out new investments? Like Wilbur Ross I need to look only at sectors, or individual companies, where the stock market value has collapsed, when everyone is running away, dumping the shares, saying there’s no chance for this company, no future, get out now while you can still get a few cents back on the dollars you invested! Unfortunately there are few of them around at the moment. Perhaps the mining sector….. and thus the investment in Altius Minerals. Perhaps Russia with all this Ukrainian thing going on. (By the way, we have the Monroe Doctrine which let us invade a bunch of Central American and Caribbean counties over the years… did we expect that Russia wouldn’t follow the same kind of logic? but I’m getting off track)… so thus the starter position in Gazprom. But even in these two instances the valuations are not really stress valuations. So I’m turning to another of Greenblatt’s favorite areas, spinoffs. There are a number of recent and upcoming spinoffs that look somewhat promising. Now if some large pension funds would just begin to load up on AIG stock and bump the price another 10% or so, I’ll be able to begin selling down my position and free up some cash.