PART 10: INVESTING FRAMEWORKS
Over time, we’ve identified several types of “investment frameworks” that have worked for us. Some investments fit multiple categories. All tend to involve a clear reason for dislocation / value. Some may be familiar, others not. A 🧵
Over time, we’ve identified several types of “investment frameworks” that have worked for us. Some investments fit multiple categories. All tend to involve a clear reason for dislocation / value. Some may be familiar, others not. A 🧵
1) traditional value with variant view or catalyst - this is probably the most common and least unique. Stock is cheap, we have a variant view on the reason why it’s cheap, or have identified a catalyst that others haven’t yet.
An obvious catalyst is often in the stock. Which is why I highlight the variant view. Example: biz has two segments, we think value can be creating by splitting co and that co will do that, but it’s not in the stock. They then announce it. When special sits guys bid up we exit.
2) beaten down quality / no catalyst - sometimes a stock is just really cheap on normalized or vs itself historically and there is no obvious path to that changing in the next 2 quarters. Because stock is “dead money”, no one wants to buy it. But we will.
Businesses can turn around in unexpected ways, especially good ones. As soon as there are greenshoots, people will view as a recovery play. We are okay buying with nothing good on the horizon provided the discount is big enough and biz is high quality.
3) accounting confusion - my personal favorite. Some businesses - software, percentage of completion, block accounting, etc can create disconnect between economics of biz, businesses momentum, and what investors perceive as results.
In rare instances, a business can be getting better but results look worse. This is a particularly true when companies win large new business but have to invest ahead of revenue. Or perhaps the company gives bad non-gaap metrics that investors misinterpret.
4) private / public disconnect - sometimes stocks trade at big discounts to private takeouts (PE, strategic, not vc). Provided those valuations paid weren’t unreasonable, biz is comparable, and governance is okay, takeout tends to happen if disconnect persists.
5) unprofitable but structurally profitable - sticky software, medtec with high consumables %, and other high gross margin / mostly fixed costs biz can be run much more probable than they are as standalone in public markets.
If these get cheap enough on ev/ gross profit basis, and governance is good, they will usually get taken out. This only works if you pay the right price, however - 3-5x gross profit depending on stickiness, margin, synergy, and growth.
6) Baby with the bathwater - another favorite. In times of panic all companies with perceived risk to macro issue tend to trade off in tandem. But often macro issue does not impact all companies equally (or at all), and sometimes “babies get thrown out with the bathwater”.
7) technical selling pressure - most common example is spin-offs, but these tend to be too crowded / well telegraphed. Ipo selling, large holder liquidating, vc distributions, and forced liquidations that are hard to identify create great (though often fleeting) opportunities.
8) hidden assets - for this to work asset has to be truly hidden (not obvious to everyone) and usually there’s a path to monetizing it. This could be shutting down money losing biz, selling breakeven biz at big multiple, sometimes land, etc.
9) short term pain / long term gain - sometimes companies make choices that hurt the short term but can improve the long term. This can be taking margins down by investing in new area, fixing up aggressive sales practices to reduce discounting (software), etc.
10) liquidations / strategic alternatives - we usually don’t seek these out but sometimes they happen with existing investments, and when we get wind of them stocks don’t sometimes react as much as they should, allowing for some opportunistic buys.
I’m sure there are others I’m missing, but these probably capture 80-90 percent of what I do. What are some of your favorites?
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