Based on the positive feedback that I received about the educational content that I presented at the October 2016 Traders4aCause investor conference in Las Vegas, I thought it to be a good idea to make the presentation available here at my blog. Below is a good representation of the transcript of my talk (largely presented as notes), accompanied by references of slide numbers that I used to drive my themes on information arbitrage and microcaps home. The slides can be viewed at the bottom of this post.
Great to be at Traders4ACause Vegas
- My Name is Maj Soueidan and it’s a pleasure to be here at Traders4ACause.
- I have technically been a full-time investor since I left The Vanguard Group in February of 1994.
- But for all intents a purposes I was investing “balls to the wall” since 1990, midway through college at Temple University.
- I co-founded GeoInvesting in 2007 to help bring awareness to the advantages of investing in microcaps to other investors.
- I was already doing the research, so I figured why not share it with others and along the way. I hoped to come across great investors to share ideas with.
- A major theme of our mission was and still is to bring institutional type ideas to everyday investors (most of which do not have access to the ideas), helping to give them a competitive advantage in an increasingly challenging investing environment.
For Example: Microcap Dilemma/Challenge
- Investors have shorter time horizons and more investors are choosing pooled investments over individual stock ownership. Furthermore, microcap investors have left the building. So less people = less money chasing individual stocks in general.
- Some would say that lack of investor participation in microcaps is a reason to stay away from the space. But smart investors know that less eyes means more opportunity when you are right.
- A combined “Microcap+Special Situations” approach can give you an investing advantage. Information arbitrage increases your chances to be right.
- Now, my research is generally fundamental driven. In particular, I really believe that traders could consider one fundamental strategy to enhance portfolio returns.
My first lesson in investing introduced me to the value of good research and doing your own research.
- 11th grade economic class with Mr. Knight and investment challenge contest.
- I put all my monopoly money in Columbia Seligman Premium Tech (NYSE:STK) that was undergoing chapter 11 (but I did not know this)
- A couple years later I got my revenge! STK was first stock I ever bought with real money in college after it emerged from chapter 11, +60%!
- INFO ARB
- It’s from this experience that I began to mold part of my investing strategy into what I call information arbitrage, or taking advantage of and profiting from readily available information not found by others, or that is simply misdiagnosed by the market.
- Using this technique, I started with $3k in college and grew to about 30K by investing and working multiple jobs. In 1994 I left VanGuard and made a whole year’s salary in one month. Needless to say I was hooked. (millionaire by 1998)
- The info arb appealed to me as a beginner investor because of its simplicity.
- I didn’t have to be a genius to make money.
- I’d like to recall an anecdote from my third year in college. After the first few days of attendance in my portfolio management class I strutted over to my teacher’s office with a few questions concerning some concepts I was having a hard time fully grasping. He looked at me for about 10 seconds, then said “just drop out”, “you are going to fail.” Needless to say I scored in the top 5 on the first test.
- Unfortunately, I still was not making money by applying the principals of the theory being taught in school. It could be argued that I was probably turning into an average investor. So, I decided to keep it simple stupid (“KISS”) and approach investing from a practical/simplistic point of view.
- I figured I just had to know where to find info, understand how others would interpret it and have a basic understanding of valuation.
FMA (First Mover Advantage)
- In a nutshell, I am looking for inflection points before others process them to get what I like to call a first mover advantage.
- Along my investing journey, that naturally led me to microcaps.
- For example, information goes undiscovered for longer periods of time, may be omitted from press releases, and can often exist in SEC filings or CC transcripts.
- Now there is this misconception that microcaps are all microCraps. But there are plenty of real companies with real revenues contributing to the growth of our economy.
- However, I am not naïve.
- We all hear microcap investors talk about examples of what I like to call mega-baggers, like making 10x, 20x, or 100x your money over the long-term.
- Sure, I could kick myself for not hanging on to some stocks that ended up being mega-baggers.
- But for every mega-bagger you could have had, there are probably more that neared or attained multi-bagger status and burned out.
For example, here a few eventual mega-baggers I touched at one point, but sold early based on near-term valuation rules I set, or changing inflection points.
When it comes to value investing, one strategy that's often used is seeking out companies which have sizeable moats against competition. In a presentation for the Value Investing Club at Google earlier this year, Connor Leonard of the Investors Management Corporation explained two ways of looking at moats and how value investors can benefit from Read More
Slide 6 – multi-baggers I sold too early
- Monster Bev. (NMS:MNST)– Beverage (Inflection point = new energy product line)
- Charter Comm (NMS:CHTR)– is the second-largest cable operator in the United States by subscribers, just behind Comcast (inflection point = emerging from chapter 11)
- Patrick Ind. (NMS:PATK)– manufacturer/supplier build products for manufactured housing/RV industry (inflection point = acquisition strategy).
Refer to Slide 7 for multi-bagger round-trip busts
- Wireless Telecom (AMEX:WTT) – network solutions, and test and measurement equip serving communication industry. (technology changed and margins nosedived)
- TransLata Corp (NYSE:TAC) – country western apparel (country western fad did not strengthen)
- American Locker Group (OOTC:ALGI) – mailboxes you see in the U.S. Post Office. (Lost USPS contract)
- Pacific Health Care (OOTC:PFHO) – Outsourcing workman’s comp services for companies in CA (lost major customer)
- All of these companies were great companies at some point. But not all stayed great.
- So, it’s easier said than done to pick which stock will be the next mega-bagger.
- And even if you did, the volatility might drive you crazy over years.
- There is nothing wrong with consistent doubles and triples.
- That is why I love inflection point investing. Find great companies at the right time to capture a meaningful initial multi-bagger move. And that is what our team focuses on.
- Some might say this type of investing is shortsighted.
- I just believe in exploring ways to increase alpha in a portfolio while building long-term wealth.
- I try to determine the arrival of inflection points and when they evolve. Sometimes that is a few days or weeks to even years.
- With the right research, any investor at any level can catch a multi-bagger.
- It really just becomes a matter of how much time you can allot to research.
- By the way, part of that research includes interacting with other investors. I have really enjoyed interacting with our members. It is unbelievable what the power of one can do for the flow of information. I think as traders, many of you can relate.
So why did I pick the topic of information arbitrage for Traders4ACause?
- InfoArb strategy seeks out hidden inflection points. When Chris Irons and I went over with Nate Tonik about what we ought to talk about, we kind of hit a wall.
- Many of you might be pure traders looking primarily at technical indicators.
- A lot of what we do would be considered fundamental-driven strategies. In fact, I think it’s unfair that some people don’t consider traders as investors.
- As I contemplated what to speak about I thought more about why some of you may choose to focus your investing strategy on trading rather than longer term “fundamental” strategies.
- There is less market exposure risk in much more volatile times
- There is less business risk that longer term investing can expose you to
- I like the certainty of rule based technical analysis.
Then I thought, what better way to relate to traders than inflection point investing based on information arbitrage strategies?
At times you are dealing with an over 90% chance of success, and the moves in prices can be swift, giving you less time exposure than other types of fundamental investment strategies.
Illustrating By Example
Refer to Slides 9, 10 and 11 for two examples
You rarely get this flow of misinformation in larger caps. I presume traders could use their expertise to define entry and exit decisions, as well as position size. Take care, and I’ll definitely have more soon. If you have any questions or just want to trade ideas, contact me any time!
Article by Maj Soueidan, co-founder GeoInvesting