Say you want to make an investment.
Where do you begin?
Marathon Partners Equity Management, the equity long/short hedge fund founded in 1997, added 8.03% in the second quarter of 2021. Q2 2021 hedge fund letters, conferences and more According to a copy of the hedge fund's second-quarter investor update, which ValueWalk has been able to review, the firm returned 3.24% net in April, 0.12% in Read More
After all, there are seemingly countless different possible investment options available for you to choose from. Each will present a different level of exposure to risk and different potential for generating future returns. The investment timeline, industry, and corresponding taxes and regulations will all need to be considered. The investment that makes the most sense for one individual (or firm) may not necessarily be the one that makes the most sense for another.
Christian Ryther's Filtering Process
In other words, finding the right investment opportunity for you—especially when you are coming into things with no frame of reference—can be extremely difficult. As Curreen Capital’s Christian Ryther might describe it, it can be very much like finding a needle in a haystack.
Christian recently had a fascinating discussion with Peter Lynch, in which he discusses his “approach to portfolio management, how he finds ideas, what he’s finding, and how he looks at management of the companies he invests in.”
To start, Christian explains “I want to find these very good, very capable businesses run by very capable people.” He often looks for companies that have been overlooked by others, usually those that are overly reliant on financial statements, and believes that finding a company with the right people is often much more effective than finding a company with more cash on the balance sheet.
Christian wants to find “the ugly ducklings” of the market. After all, if all you do is invest in companies that have already made it—blue-chip stocks like Apple, Microsoft, etc.—you will be buying in after the company has experienced its greatest growth rate. The market tends to underprice companies whose value is derived from intangibles, such as the qualifications and goodwill of the founders, creating plenty of opportunities to be rewarded for taking risks.
“Lately, I’ve been doing a lot of looking at different stock exchange or financial regulator pages, looking for director and executive share purchases, just to see if I can find a place where the CEO or the executive chairman made a significant purchase and maybe some other people are buying, too.” However, contrary to what you might initially assume, executive purchasing—especially CEO and CFO purchasing—often indicates there is not enough money going through the equity flow. In 1987, a year with a notable stock market crash, executives were buying like crazy until the apparent bubble, eventually, popped.
One of the questions Christian encourages everyone to ask is, “What are the people who actually know these businesses doing right now?” Though using this information alone cannot possibly guarantee any future returns, it can be extremely helpful for helping you get oriented. Executive purchases are not a “red” flag, but a “yellow” flag that ought to inspire some degree of caution.
Creating an investment strategy is something that is often done piecemeal. In light of new information, Christian will not “change my whole strategy completely. Instead, I fell like I’m trying to add on to it and understand existing things further.”
He also believes it is important to not get too tied down or obsessed with any one variable. Big developing stories, like an announcement from the Federal Reserve, can have rippling effects throughout the economy. But attaching too much value to any particular event can be distracting. When this is the case, Christian says, “I need to get my head back in like an annual report or a 10k or something like that, like focus on something enough for me to understand and act on, because otherwise I’m just going to be all in on gold or something like that.”
Using personal alerts, looking for stocks outside the mainstream, and being will to accept relatively short positions can also be very helpful. Getting too obsessed with a single stock, on the other hand, can be problematic.
The Tradeoffs And Opportunity Costs
It is also crucial to think about the tradeoffs and opportunity costs that—structurally and necessarily—come with every investment decision you could possibly make. As Christian says, “You compare what you own versus what you’d like to own, and that’s the litmus test of whether or not it is time to sell—you’ll realize that one decision is likely better than the other and adjust your positions accordingly.”
There are also plenty of other unique, potentially overlooked ways to get a deeper insight into how a company’s stock will likely be moving in the near future. Looking at Glassdoor, an employment review website, can be an indirect way to understand current employee sentiment. At scale, these insights can be extremely beneficial, even though employee attitudes are not a number you are ever likely to find on a company’s balance sheet or income statement. Even looking at the cars in the parking lot of the company’s headquarters might also provide some additional insights.
Regardless, it is important for every investment being made to have a defining metric of success. In some cases, this will be the activities being done by the C-suite executives and essential decision makers (are they buying, selling, holding?). In other cases, that might be the stock’s current price momentum, operational outcomes, or various other metrics.
Finding the needle in the haystack isn’t easy. Oftentimes, you will just continue to find more hay. But with a deeper, tested, and personalized approach to investing, there are still plenty of great opportunities that will emerge over time.
Article by Investor Summit Group