valuation/concept (ii)

I think successful professional investors, whether they want to admit it or not, use both valuation and concept in making their investment decisions.

People who identify themselves as value investors are thereby linking–some closely, some more loosely–their investment styles to the Great Depression-era insights of Graham and Dodd, the fathers of modern equity securities analysis. This lends a certain gravitas to what they do. On the other hand, Graham and Dodd were writing and teaching during a major train wreck of a world economy.

My summary of their advice is: assume all the assets of a company, except cash, are worthless. If the company can repay all liabilities and still have 2x the current stock price in cash left, then buy it and sit back and wait.

Sage advice. The issue is finding a company like this in today’s world where it’s possible to obtain control and force liquidation.

Still, even if there are no Great Depression-style bargains around, the general idea is valid. Find a company that looks broken, and is already priced for being broken, but that is fixable. Sooner or later, either a professional fixer will come along or the economic winds will change and the world will discover that the company isn’t really broken after all, just very sensitive to changes in the business cycle.

It seems to me the best place to look right now for bargains of the type value investors prize is in the junk pile of failed pandemic-era IPOs.

The biggest caveat, I think, is that we have to take very seriously the possibility for change of control. The means dual-share class companies are highly suspect (SEC filings should reveal conditions where insiders can lose their voting control [although I was involved in one case like this where these conditions were practically impossible to find]), as are companies listed in foreign countries where US attempts at change of control are frowned on (just about anywhere, I think).

more tomorrow

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