Post by oldman on Oct 19, 2013 8:16:50 GMT 7
Over the past few years, I have been tweaking my investment strategy such that I am investing less in companies with undervalued assets to investing more in companies which have recently been taken over by top entrepreneurs.
My definition of top entrepreneurs are those with a track record of building solid businesses and whose wealth are in excess of hundreds of millions or billions of dollars. They are wealthy enough not to have to work another day in their lives but they still continue working because they are having so much fun building up these new companies.
These folks are unlikely to be in the stock market to take advantage of minority shareholders as their reputations are much more important. They are there to build businesses and have the financial might to inject the necessary capital and attract top talent to work with them. Some are even able to attract other top entrepreneurs to become substantial and active shareholders.
The downside is that these top entrepreneurs have time on their hands. They are in no rush to excite the market and are smart enough to keep collecting shares in their companies while their share prices languish.
To ride these shares, investors have to be very patient and need to have an investment time-frame of many years. Investors should take their time to collect such shares and ideally, they should buy the shares at around the same price at which these top entrepreneurs have bought theirs. The logic is that these top entrepreneurs would have done their homework on the right entry price. Of course, as investors, we too have to do our own homework on our entry prices but more than likely, it would not be far off from the entry prices of these top entrepreneurs.
In some cases, these are the same stocks that I have invested in earlier when they were undervalued stocks... stocks in which their market capitalisation are much lower than the sum of all its assets. These stocks then become attractive shell companies to these top entrepreneurs. When that happens, I will reassess the situation and decide whether the transformation is for real or whether I should take my profits early. Every situation is different and investors must analyse each and every situation and then make their decisions accordingly.
If I am interested in the future potential of the transformed company, I am more likely to buy even more shares after such announcements. I know that if they do succeed in building up these companies, the ride will be a very profitable one. Best of all, if one has bought the bulk of his shares at basement level, it is much easier to hold on to these shares and ride them all the way to the top. However, one needs lots of patience as businesses are not built overnight. In the initial stages of building companies, there will be periods of red ink in the Profit & Loss statements and investors must be able to stomach these initial teething years.
Every business has to go through the growing up period when capital is needed to start off the business. These top entrepreneurs are not fly-by-night operators. Instead, they will take their time to build up these businesses properly and they will not rush. Neither will they want to excite the marketplace as they have no desire to cash out of the business at this early stage. They are also unlikely to hire any public relations company to bang the gong. They would rather lie low key until the businesses are on solid foundation. This may take years and investors have to be very patient and needs lots of faith to hold on to these shares.
More than likely, these top entrepreneurs will also have significant experience in capital allocation and they may take on larger loans to move the company forward much quicker. Investors will then have to trust the business logic of these entrepreneurs as they try to accelerate the growth of the company through loans and borrowings.
At the end of the day, investors who invest in top entrepreneurs have to trust not only the business acumen of these entrepreneurs but they also have to trust that these entrepreneurs will look after their minority interests. This situation is very different from investing in undervalued stocks where there is a clear margin of safety. With increased borrowings, the margin of safety will be compromised and investors have to learn to live with this uncertainty.
The upside is that such companies may become blue chip companies of the future. In other words, if you have selected the right entrepreneur, the company should grow significantly in the years ahead and you should be well rewarded by holding on tightly and enjoying the ride to its blue chip status.
The stock market values companies on multiples of its earnings and if a company reports significant earnings growth year after year, the share price can easily multiply in the years ahead.
When one invests based primarily on undervalued assets, the best scenario is when the assets are fully appreciated by the market and one's gain is the difference between full valuation and its current valuation. Usually however, one cannot aim for full valuation and one tends to sell the shares between the current and its full valuation. Also, the full valuation may just be two or three times the current valuation. The risk of course to investing based on undervalued assets is that the management or major shareholder rather takes care of himself first and in the end, the minority shareholder is left with less and less.
Saying all that, it is still much less risky investing in undervalued assets than investing in top entrepreneurs. For me, I try to look for situations where I am buying at around the same level at which the top entrepreneur invested in the company. Usually, these guys will buy at a discount to market value and this should give a decent margin of safety. However, as they expand their businesses with debt and borrowings, one has to trust their business acumen and instincts as the margin of safety will naturally be reduced with time.
At the end of the day, regardless of whether we invest based on undervalued assets or its future growth potential, we have to trust the management. But, how does one size up management in order to know if one can trust them? I don't have the answers to this and hence, I rather invest in top entrepreneurs who are already financially wealthy as I think that their self esteem will be more important to them than just adding a few more millions into their bank accounts.
When you are very wealthy, money will mean less and less to you. What will be more meaningful is your ability to grow & transform businesses and make them prosper. These folks will get a high when they successfully build up other businesses. One just have to believe in them and ride the journey with them.
My definition of top entrepreneurs are those with a track record of building solid businesses and whose wealth are in excess of hundreds of millions or billions of dollars. They are wealthy enough not to have to work another day in their lives but they still continue working because they are having so much fun building up these new companies.
These folks are unlikely to be in the stock market to take advantage of minority shareholders as their reputations are much more important. They are there to build businesses and have the financial might to inject the necessary capital and attract top talent to work with them. Some are even able to attract other top entrepreneurs to become substantial and active shareholders.
The downside is that these top entrepreneurs have time on their hands. They are in no rush to excite the market and are smart enough to keep collecting shares in their companies while their share prices languish.
To ride these shares, investors have to be very patient and need to have an investment time-frame of many years. Investors should take their time to collect such shares and ideally, they should buy the shares at around the same price at which these top entrepreneurs have bought theirs. The logic is that these top entrepreneurs would have done their homework on the right entry price. Of course, as investors, we too have to do our own homework on our entry prices but more than likely, it would not be far off from the entry prices of these top entrepreneurs.
In some cases, these are the same stocks that I have invested in earlier when they were undervalued stocks... stocks in which their market capitalisation are much lower than the sum of all its assets. These stocks then become attractive shell companies to these top entrepreneurs. When that happens, I will reassess the situation and decide whether the transformation is for real or whether I should take my profits early. Every situation is different and investors must analyse each and every situation and then make their decisions accordingly.
If I am interested in the future potential of the transformed company, I am more likely to buy even more shares after such announcements. I know that if they do succeed in building up these companies, the ride will be a very profitable one. Best of all, if one has bought the bulk of his shares at basement level, it is much easier to hold on to these shares and ride them all the way to the top. However, one needs lots of patience as businesses are not built overnight. In the initial stages of building companies, there will be periods of red ink in the Profit & Loss statements and investors must be able to stomach these initial teething years.
Every business has to go through the growing up period when capital is needed to start off the business. These top entrepreneurs are not fly-by-night operators. Instead, they will take their time to build up these businesses properly and they will not rush. Neither will they want to excite the marketplace as they have no desire to cash out of the business at this early stage. They are also unlikely to hire any public relations company to bang the gong. They would rather lie low key until the businesses are on solid foundation. This may take years and investors have to be very patient and needs lots of faith to hold on to these shares.
More than likely, these top entrepreneurs will also have significant experience in capital allocation and they may take on larger loans to move the company forward much quicker. Investors will then have to trust the business logic of these entrepreneurs as they try to accelerate the growth of the company through loans and borrowings.
At the end of the day, investors who invest in top entrepreneurs have to trust not only the business acumen of these entrepreneurs but they also have to trust that these entrepreneurs will look after their minority interests. This situation is very different from investing in undervalued stocks where there is a clear margin of safety. With increased borrowings, the margin of safety will be compromised and investors have to learn to live with this uncertainty.
The upside is that such companies may become blue chip companies of the future. In other words, if you have selected the right entrepreneur, the company should grow significantly in the years ahead and you should be well rewarded by holding on tightly and enjoying the ride to its blue chip status.
The stock market values companies on multiples of its earnings and if a company reports significant earnings growth year after year, the share price can easily multiply in the years ahead.
When one invests based primarily on undervalued assets, the best scenario is when the assets are fully appreciated by the market and one's gain is the difference between full valuation and its current valuation. Usually however, one cannot aim for full valuation and one tends to sell the shares between the current and its full valuation. Also, the full valuation may just be two or three times the current valuation. The risk of course to investing based on undervalued assets is that the management or major shareholder rather takes care of himself first and in the end, the minority shareholder is left with less and less.
Saying all that, it is still much less risky investing in undervalued assets than investing in top entrepreneurs. For me, I try to look for situations where I am buying at around the same level at which the top entrepreneur invested in the company. Usually, these guys will buy at a discount to market value and this should give a decent margin of safety. However, as they expand their businesses with debt and borrowings, one has to trust their business acumen and instincts as the margin of safety will naturally be reduced with time.
At the end of the day, regardless of whether we invest based on undervalued assets or its future growth potential, we have to trust the management. But, how does one size up management in order to know if one can trust them? I don't have the answers to this and hence, I rather invest in top entrepreneurs who are already financially wealthy as I think that their self esteem will be more important to them than just adding a few more millions into their bank accounts.
When you are very wealthy, money will mean less and less to you. What will be more meaningful is your ability to grow & transform businesses and make them prosper. These folks will get a high when they successfully build up other businesses. One just have to believe in them and ride the journey with them.
