AReviewOrTwo

Personal thoughts only, not advice. Like investing, turnarounds, capital allocation, biz model, industry & competitive analysis. Here to share and learn.

[AReviewOrTwo @AReviewOrTwo1]

Good analysts don’t just consume a lot of detail in an academic fashion. They build knowledge in a purposeful, strategic way... some of the things they do include:

[AReviewOrTwo @AReviewOrTwo1]

@pmje73 Great way to articulate it.

Valuation gives you evidence of what the market is discounting, but it doesn’t tell you what the answer is (on a balance of probabilities).

[AReviewOrTwo @AReviewOrTwo1]

Quarterly important because (and I’ll be missing loads of stuff):

- You might want to analyse something at a particular point in time

- Companies certainly manage cash to year end targets, probably quarterly too but at least you have more data points

- Can convert quarterly into LTM so you always have a fresh 12m period

- Change happens at the margin, can try to pick things up faster with quarterly - eg if the thesis is about capex coming down and FCF going up, you’ll need to look quarterly

- For some companies analysing balance sheet / cash flow data quarterly is critical: things like working capital key to understand (eg retail, brands, anything where inventory important), or deferred revenue

[AReviewOrTwo @AReviewOrTwo1]

@FundamentEdge Cash flow statement is the first statement I look at. Tells the real story.

All mgmt teams seek to present their numbers in the best light but proper analysis of cash can help an analyst judge what to tolerate as normal promotional stuff vs what is misleading.

[AReviewOrTwo @AReviewOrTwo1]

@paulswaney3 Would love to try it out. Thank you.

[AReviewOrTwo @AReviewOrTwo1]

Bruce MacDonald - CEO and CIO of the Virginia Commonwealth University Investment Management Company - on two broad types of mistake he has learned from.

Being too clever / excessive complexity: “There's times when we've been too clever in trying to manage overall portfolio risk through hedging. We had great insight in 2021-2022 that rates were going to go up. We put on an overlay and the way we expressed it was all wrong. It was too complicated. It would have been simpler to have no position at all and not have lost money on the hedge or just taking a short interest rate bet.”

Buying what you know well when it’s down vs buying something that is down but new to the fund: “One of the things that we're known for is running into burning buildings. We'd like to be counter cyclical. That's both in the market. When there's opportunities, sometimes that's with managers. There have been a couple times where we saw opportunities and managers who were down. They had had great track records up until that point. We thought they've just made a mistake. We were too quick to enter into a new relationship on a short time fuse without doing the normal amount of research that we would do. One thing we've learned is if we're going to step into a burning building, it's helpful to have lived in the neighborhood before. We've had great experiences stepping into burning buildings in our portfolio, less good experiences stepping into new burning buildings.”

Always very grateful when experienced investors share lessons from their mistakes.

Source: Capital Allocators Podcast

[AReviewOrTwo @AReviewOrTwo1]

@ContrarianCurse A structural bull case for many of these names also used to be their EM market positions. Might be recency bias, but seems like this never really worked.

[AReviewOrTwo @AReviewOrTwo1]

@buccocapital There is no valuation floor for companies with reasonable terminal value questions.

[AReviewOrTwo @AReviewOrTwo1]

@hfreflection Your last sentence is critical and takes a lot of effort to build. If you don’t have those characteristics of the investment team it rarely works (unless somehow it works in silos)

[AReviewOrTwo @AReviewOrTwo1]

Looks like a very good idea generation process to me.

Obviously, key is to institutionalise it as team gets bigger - have clarity of process but not kill creativity. A few general thoughts (which I am sure you are aware of / implement already):

- Analysts need to be clear on the philosophy, idea patterns and process of the firm and then source ideas within the framework.

- The framework needs to be simple and easy to understand, otherwise it’s hard to apply (especially at speed).

- Important for analysts to have a chance to feed into the process within the right constraints, means easier to get buy-in which in turn helps with application of the framework.

- Tracking the process and triage decisions is also useful - what were errors of omission and why, do we waste time on particular ideas, could errors of commission been avoided at an earlier stage in the research process, are particular sources of ideas better than others.

[AReviewOrTwo @AReviewOrTwo1]

One of the biggest mistakes investors make on competitive advantage:

“…mischaracterizing a great product or service as a moat… people use a product, they experience a service and they say, wow, that's awesome, this must be a great business… you have to think through how sustainable is that demand? How much pricing power is it going to have over time? How easy would it be to replicate it? …those are really kind of the key questions in determining whether it's a sustainable advantage or just kind of a flash in the pan.”

Pat Dorsey on the Long View

[AReviewOrTwo @AReviewOrTwo1]

Agree. Management will tell you what they have agreed the narrative needs to be in that moment. Not just for you, but employees and customers, the press etc. They will generally be bullish - CEOs do not get hired by being miserable and pessimistic (unless bad things have already happened and it’s a turnaround). In many bad and uncertain situations, the investor’s judgment as to what will happen is often better.

[AReviewOrTwo @AReviewOrTwo1]

Overly focusing on / discussing research that does not relate to the key drivers of the thesis.

It’s not bad per se, but just takes up time.

There is a lot that even insiders don’t know about a company.

Linked but slightly different are also 100 page book reports for a write up.

[AReviewOrTwo @AReviewOrTwo1]

“The best equity research analysts don’t just fish… they have a strategy that brings them to the target-rich area in order to reel in the biggest alpha-generating stock ideas. This may sound like common sense, but many analysts try to be an “industry” or “company” expert rather than a stock analyst, which prevents them from discovering alpha-generating insights.”

James Valentine

[AReviewOrTwo @AReviewOrTwo1]

I've learned that to meet my return goals I can't have big losers. So regardless of how cheap something is or how much potential upside there is, that means avoiding companies that can wipe out—with too much debt, unproven business models, secularly challenged end markets or no durable competitive advantages.

Zeke Ashton, Centaur Capital [quoted in The Art of Value Investing]

[AReviewOrTwo @AReviewOrTwo1]

Zweig’s investing rules:

[Ian Cassel @iancassel]

🔥

When pitching a stock to experienced investors…

“You should be able to write the thesis in three pages and if I read the first page I should get 85% of it. If you are going to an 8th page you are insulting the reader.” - @WinMurray

@JRogrow show
https://t.co/1r9qbLRAdE

[AReviewOrTwo @AReviewOrTwo1]

Soros:

“The prevailing wisdom is that markets are always right. I take the opposite position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis. It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend. This line of reasoning leads me to look for the flaw in every investment thesis. My sense of insecurity is satisfied when I know what the flaw is. It doesn't make me discard the thesis. Rather, I can play it with greater confidence because I know what is wrong with it while the market does not. I am ahead of the curve. I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.”

[AReviewOrTwo @AReviewOrTwo1]

Facts haven’t provided edge for a while (unless perhaps you have big budgets) - but what still applies today is:

facts + judgment = insight

[AReviewOrTwo @AReviewOrTwo1]

Great interview.

“...I don’t believe in edge... The world is too competitive... To me, all alpha comes from insights. An insight is kind of a differentiated long-term viewpoint about a stock. It’s a differentiated view about the long-term state of the world.”

[AReviewOrTwo @AReviewOrTwo1]

Good point. It is what it is. Make the market work for you - crazy, nuts, broken should all provide opportunity in some form or another.

In the words of Mr Graham:

“…price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”

[AReviewOrTwo @AReviewOrTwo1]

Couldn’t agree more. The amount of times someone else’s thoughts have provoked a new thought. Also when other people say something it is easier to assess objectively as opposed to when you share your thoughts - eg sometimes I share a thought and someone else says ‘wrong’ because of xyz or ‘right’ because of xyz, that either makes me try to logically defend the thought prompting further discussion or gain conviction we might be onto something. AI can make meeting notes / actions easier, help produce agendas/ discussion points, surface questions etc, but it doesn’t replace the core activity.