ICAHNEXITS,BUFFETTENTERS,WHITHERAPPLE?BIGNAMEINVESTINGANDYOU
Learningfromsmartmoney
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Settingthetable
¨ Inmostinvestmentclasses,youaretaughtthattoinvestinacompany,youassessitsvaluetoyou,comparethatvaluetothepriceandmakeapricingjudgment.
¨ Thatmaybetrue,butwhatifrightafteryoumakethatjudgment,a“bigname”investormakesajudgmentonthesamestockthatisdiametricallyopposedtoyours.Shouldyoureassessorchangeyourjudgment?
¨ Inaninvestmentworld,wherebignameinvestorsarenotonlyfarmorepublicintheirinvestmentjudgmentsthantheyusedtobeandhavetheforums(TV,Newspapers,Socialmediaetc.)togopublicwiththem,thisisaquestionthatweincreasinglyface.
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ThePriceValueSetup
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Howabignameinvestorcanchangeyourperspectives..
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TheBigNameInsider
¨ Whenaninsider(amanager,aninsidestockholder,someoneclosetomanagement)buysorsellsstock,itisnaturaltoassumethattheyaredoingsobecausetheyknowsomethingthattherestofusedonot.
¨ Withinsidertradinglaws,thequestionofcourseisoneoflegality,sinceinsidersarespecificallyprohibitedfromtradingaheadofmaterialinformation.However,theyarenotprecludedfromtradingondiffuseinformationthatisstillofvaluetotherestofthemarket.
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TheBigNameActivist
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TheBigNameTrader
¨ Insomecases,thebignameenteringorexitingthestockisatrader,i.e.,someonewhoisperceivedasverygoodatplayingthepricinggame,whereyouskillsetisdetectingmomentum(anditsshifts).
¨ Therearetworeasonswhythattradingcanaffectprices:¤ Thevolumeeffect: Ifthebignametraderhasenoughmoney tobackhisorhertrade,therewillbealiquidity effect,whereabuywillpushthepriceuphigherandasellwillpushitlower.
¤ Thebandwagoneffect:Totheextentthattherearesomeinthemarketwhoperceive thebignametraderasbetteratperceivingmomentum swings thantherestofus,theywill followtheinvestorinbuyingorselling thestock.
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TheBigNameValueInvestor
¨ Ifyouareasmallvalueinvestor,thenameofthegameisfindingcompanieswherethereisagap(oratleastaperceivedgap)betweenpriceandvalueandinvestinginthosecompanies.
¨ Tomakemoney,youhaveto¤ Berightinyourassessmentsofvalue¤ Hopethatthepricinggapwillclose
¨ Whenabignamevalueinvestorstepsintothefray,youarehopingthathisorherveryappearancewillbethecatalystforthegaptoclose.
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Apple:TheBigNameEffect?
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Icahn,ActivistTrader?
¨ Heisanactivist,albeitonewhoismoreactiveonthefinancing/dividenddimensionsthanontheoperatingrestructuringdimension.
¨ Heisatrader,morethananinvestor.Hisinvestmentrationaleiscouchedintradingterms(lookscheap,relativeto..)andthewayheattachesnumberstocompaniesisbasedontradingtools(pershareearningsandmultiples).
¨ Hehasarecordofsuccess,suggestingthatheisverygoodinhistargetingofcompanies(forhisdebt/cashpush)andtrading.
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Buffett,ValueInvestor?
¨ Ofcourse,buthisvaluationnicheiscompaniesthatarematureorbeyondmature,withstrongearningsandhighmoats.
¨ WhenBuffettinvests,itisreasonabletoextrapolatethat¤ Thecompanylookscheaptohim(i.e.,thatheperceivesapricinggap)
¤ Thecompany’sbestdaysarebehindit,i.e.,thatyourreturnsarelikelytocomefromthecashcowpartratherthanthegrowthpartofthebusiness.
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TheBottomLine
¨ Itisimpracticalandunrealistictoarguethatyourinvestmentdecisionsareyoursandyoursaloneandthatyouwillbeunmovedbytheinvestmentdecisionsofothers,especiallywhenyourespectandvaluethejudgmentofthese“others”.
¨ Thatsaid,ifyouareconstantlysecondguessingandchangingyourinvestmentdecisionsbaseduponwhatIcahn,Buffettoranyoneelseisdoing,yourinvestmentphilosophyhasnogrounding.
¨ Makeyourbestinvestmentjudgmentsandkeepthefeedbackloopopen.