Murray Stahl of Horizon Kinetics LLC describes why he often puts more emphasis on the jockey than the horse in targeting investments, why the opportunity in spinoffs hasn’t at all abated, why the distortions caused by indexation benefit value investors, and why he sees big upside in DreamWorks, Ascent Capital, Oaktree Capital, Dundee Corp. and Onex.
Value investing strategies have many flavors. How would you describe yours?
Murray Stahl: There are two primary dimensions to it. The first is that I believe stocks have a yield curve like that of bonds, but decidedly steeper. What that means is that investors require a much higher rate of return from a security that may be unlikely to gain in the short term, even if there’s a high probability it will gain significantly over a longer time period. That longer-term potential is of little interest to most professional investors, who manifest their expertise by how good their return is over the next three months, six months or one year. They therefore often ascribe little value to any potential outside that time horizon, which theoretically can create great opportunity.
The second dimension is that I believe there are predictive characteristics of investment outperformance that the market systematically pays little attention to. That a company is run by an owneroperator, for example, in my experience is associated with incremental return, while the market often ascribes negative value to it. Or there may be dormant assets in which the market sees little value – because they at the moment produce little return – but I might see considerable value in what they’ll produce in the future. Or the company may recently have been spun off, with a future markedly different than its recent past, but with a shareholder base at the outset that by definition probably doesn’t want to own it.