The Beauty of Old (Investment) Ideas

One of the great draws in reading investment writing is the lure of “hot tips.”  Everyone wants an investment idea that they can put a lot of money into that will reward buyers (or shorts) with a quick and large score.  Thus most publications try to lure you in with articles like these, whether they will work or not.

We live in an era where market players scour as much fresh data as possible to make money, because there is validity to the idea that only fresh, previously unknown information can produce excess returns.  The grand majority of us will never receive that information for free, and can’t afford to pay up for services that promise to give such carefully researched ideas (whether true or not, and whether they work or not).

So what’s a humble value investor to do, professional or amateur?  I can suggest five things:

A Look At The Portfolio Of Billionaire Charlie Munger

Charlie MungerCharlie Munger is one of the world's greatest investors. Over the past six decades, he's helped his business partner and friend, Warren Buffett, turn a struggling textile business called Berkshire Hathaway into one of America's largest firms. Q3 2020 hedge fund letters, conferences and more If you’re looking for value stocks, and


  1. Take a look at old ideas that seemed promising but when the news hit the market, there was a price jump, then a fall, then nothing.  Typically, I have lists of companies that I have looked at — maybe it is time for a second look?
  2. Source your own ideas — particularly look at smaller companies that have low or no analyst coverage.  As regulations have come over Wall Street, you might be surprised at the number of companies in seemingly boring industries that have little to no real coverage.  Some of them are sizable.  (By “real coverage” I mean a human being, not an algorithm.  Don’t get me wrong, algorithms are often better than people, but the value of a human being  here is that he/she is more representative of how human investors think — and we love exciting stories.)
  3. Scan 13Fs for new positions and additions — my favorite ideas are when a number of clever investors are adding on net to their holdings (and the stock has done nothing), or two hedge funds buy a new name at the same time that none of the other bright investors hold at all.  (not a spinoff)
  4. Or, look at spinoffs.  For a little while, there will be liquidity and small or no analyst coverage.  Many large investors and indexers will toss out the smaller spinoff, often leaving a undervalued company behind.
  5. Hold onto companies in your portfolio if they stumble, but you still think management is making the right decisions.

One of the main ideas behind this is that it takes a while for business ideas to work out.  Most valid ideas will hit a couple of bumps along the way, and short-term earnings will disappoint occasionally with good companies.  Companies that never have disappointing earnings may be manipulating their accounting.

Many if not most of the companies that I hold for years run into disappointments, become an unrealized capital loss in my portfolio for a while, and come back to greater success.  The short-term disappointments sometimes allow me buy a little bit more, but the main thing to analyze is that the company’s management continues to behave rationally for the good of all shareholders.

Final Notes

This only applies to healthy companies.  Do not try this with companies that have weak balance sheets that might be forced to try to raise funds (at unattractive levels) if their plans don’t go right.  All good investing embeds a margin of safety.

Another way to phrase this is think differently.  There is a lot of money out there chasing the most liquid companies. If you can take on a little illiquidity on a quality company that is not well-known, that could be a good idea.  But remember, thinking differently is not enough if your idea isn’t smart.  It has to be smart and different.

With that, happy hunting.  Sometime in the near term, I will do a post on underfollowed companies.  Read it when it comes — it might have some good ideas.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.