Author: Mark Holder, Stone Fox Capital
Covestor Models: Opportunistic Arbitrage, Opportunistic Arbitrage Long-Only
In this series, we ask Covestor managers: “What is the single most important lesson you’ve learned about being a successful investor, and how do you try to apply that today?”
The lesson I’ve learned is to be opportunistic and take advantage of what the market gives you. Such a concept no longer tethers me to fitting into the boxes that the investment world wants to place investors into. Why focus on value versus growth? Or small cap versus large cap? Or domestic versus international? All of these styles, sectors, and company sizes have periods of market outperformance and conversely, underperformance. There’s no reason to stick to a weak set of the market when the market changes.
The event that taught me the current investment style was the internet bubble of 2000. At the time I knew that technology and internet companies were overvalued, but from my college classes and the investing experts at the time I was left with little indication of how to take advantage of such a market. The focus was on the efficient market theory and buy and hold. Neither concept was very helpful when such stocks reached bubble levels, hence proving that the markets were very inefficient at deriving accurate security valuations. Holding and praying isn’t a great investment philosophy.
Even today, stocks can be up 5% early in the trading day and end down 5% in the same day. This wild volatility still happens even with the quick dissemination of information and a much more even playing field for small investors. The volatility, though, has to be embraced, as it provides buying and selling opportunities for those investors paying attention – or those who just understand that some of the best investments will have periods of weakness that just needs to be ridden out.
Eventually the lesson I learned was to focus on a “go anywhere” concept. Find good companies and invest when the market provides the opportunity, instead of investing when I wanted to. Wait for high quality companies to come to you as the opportunity will come to those that are patient. The important key, though, is researching (“Buy and Research”) and investigating your stocks so that you’re prepared and ready to invest when the market panics – or conversely, sell or short when stocks get overbought.
I still do focus on the concept of being an owner of a business, and that’s what gives me the confidence to buy or sell, but when holding a stock in a standard brokerage account you’re an owner who has the option to quickly exit. Ideally, I would invest in companies for decades instead of days, but holding longer isn’t always prudent – as 2000 taught investors who held onto internet stocks.
Ultimately, take what the market gives you. Don’t look a gift horse in the mouth and watch your profits disappear.
How do you apply that lesson in your current investing? What do you find are the challenges to applying it?
Applying that lesson requires that I no longer be tied to any previous concepts of investing styles and sector focuses. All styles and sectors have their day and it’s important to invest accordingly. Enjoy the ride, but never overstay your welcome!
In order to accomplish this, you have to spend a lot of time researching companies and sectors looking for those stocks that are misunderstood and underfollowed – whether the opportunity comes from macro trends (such as emerging market stocks or the commodity boom) or from turnaround concepts or company specific events.
During the internet bubble, many internet stocks rose to outrageous valuations and many of those were hammered subsequently. In that case, assessing an individual stock vis-a-vis the sector’s overall valuation was often not particularly helpful.
This has also lead me to focus less on pure numbers and more on a general concept of valuation. The trend can be just as important as the absolute numbers. At peaks, investors are willing to pay up. At troughs, you can’t give away the farm. Knowing when the trend changes can be more important then whether you can analyze the absolute growth numbers or earnings potential.
The major challenge is waiting on an opportunity to bottom and not getting killed prior to the theme playing out. Being too early into a turnaround is just the same as being wrong.
Investors tend to feel more comfortable following the popular trends, but that’s quite often to their own detriment.
