Posted by: JavaBeans January 2, 2013
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Your points are noted tyrannyoflogic – however, they do not necessarily apply to fundamental investors. Allow me to qualify these in a bit more detail:
Fundamentalists vs. Traders – the points you mention are clearly a trader’s dilemma – fundamental investors almost always ignore them (given the dollar allocation size is right for their portfolio). I understand that daily fluctuations in price, momentum and high volume are important for traders as volatility is part of their tools of the trade. This is not true for fundamentalists. The only time I take a peek at the market is to check the price after I’ve finished valuing a company (to see whether it is currently trading above or below the intrinsic value).
A good way to think about this is private equity (i.e. venture capital and LBOs). The world of private equity do not have traded volumes nor daily prices – yet portfolio managers make asset allocation decisions for accredited investors after a bona fide valuation exercise all day. Public equity is no different – that is, from a perspective of a fundamental investor. What ultimately matters though is the value we get for the price we pay.
Fundamentalist’s point of view – I’m a contrarian - so random walk down Wall Street and EMH do not really impressive me much. I am quite happy to take the opposite bet to the market if I am thoroughly convinced that my valuation has taken on a conservative form with conviction. Buying the market will give you market return (and I believe 99% of investors are better this way who are not professional money managers) but of course, we can’t truly beat the market until we have formulated a (winning) strategy to bet against it.
Just a few more words on illiquidity – I find stocks (sometimes with no growth) with somewhat relative illiquidity most always at discounted prices – sometimes huge. There is a reason for this. Big institutional investors with huge AUM can’t fully participate in them – this means for a small investor these neglected illiquid stocks are one of the best ways to exploit market anomalies. An important aspect lies in how we value these companies however, where we need to be able to factor in a reasonably large discount for illiquidity (the range of discount to apply comes with experience). Let’s say I manage a hedge fund or an endowment with huge amount of capital that allows me to deploy it with discretion – in this instance I would be happy to own a no growth firm (with illiquid float) outright given a reasonable valuation. As an example, if I were to invest $10m to buy this firm which returns me at least $1m a year annually (similar to a perpetuity) – I would keep it forever – no need to sell. Similarly, if I am a small retail investor and have only $10k to invest in the same firm I would just as well get my share of the 10% per annum return on capital.
So, illiquid firms shouldn’t scare investors away – but rather treat them as any other firm to seek out value and then decide whether they fit in to your investment paradigm.
-JB
Fundamentalists vs. Traders – the points you mention are clearly a trader’s dilemma – fundamental investors almost always ignore them (given the dollar allocation size is right for their portfolio). I understand that daily fluctuations in price, momentum and high volume are important for traders as volatility is part of their tools of the trade. This is not true for fundamentalists. The only time I take a peek at the market is to check the price after I’ve finished valuing a company (to see whether it is currently trading above or below the intrinsic value).
A good way to think about this is private equity (i.e. venture capital and LBOs). The world of private equity do not have traded volumes nor daily prices – yet portfolio managers make asset allocation decisions for accredited investors after a bona fide valuation exercise all day. Public equity is no different – that is, from a perspective of a fundamental investor. What ultimately matters though is the value we get for the price we pay.
Fundamentalist’s point of view – I’m a contrarian - so random walk down Wall Street and EMH do not really impressive me much. I am quite happy to take the opposite bet to the market if I am thoroughly convinced that my valuation has taken on a conservative form with conviction. Buying the market will give you market return (and I believe 99% of investors are better this way who are not professional money managers) but of course, we can’t truly beat the market until we have formulated a (winning) strategy to bet against it.
Just a few more words on illiquidity – I find stocks (sometimes with no growth) with somewhat relative illiquidity most always at discounted prices – sometimes huge. There is a reason for this. Big institutional investors with huge AUM can’t fully participate in them – this means for a small investor these neglected illiquid stocks are one of the best ways to exploit market anomalies. An important aspect lies in how we value these companies however, where we need to be able to factor in a reasonably large discount for illiquidity (the range of discount to apply comes with experience). Let’s say I manage a hedge fund or an endowment with huge amount of capital that allows me to deploy it with discretion – in this instance I would be happy to own a no growth firm (with illiquid float) outright given a reasonable valuation. As an example, if I were to invest $10m to buy this firm which returns me at least $1m a year annually (similar to a perpetuity) – I would keep it forever – no need to sell. Similarly, if I am a small retail investor and have only $10k to invest in the same firm I would just as well get my share of the 10% per annum return on capital.
So, illiquid firms shouldn’t scare investors away – but rather treat them as any other firm to seek out value and then decide whether they fit in to your investment paradigm.
-JB