Where to Find Alpha? At a Rugby Game?

Date Added: July 22, 2018 | Comments Off on Where to Find Alpha? At a Rugby Game? | Filed under: Blog

Yesterday I attended my first Wolfpack rugby game at an event organized by an investor relations firm I had one of my portfolio companies engage to help promote the opportunity in that portfolio company to the brokerage community. See my blog Stock Ownership Begets Stock Promotion

First off let me say that the rugby was fast paced and violent and very enjoyable for even a novice fan to watch.

In attendance in my group were about 20 broker (advisor) types, a couple of whom I enjoyed talking to because they had been in business long enough, and had enough market sophistication to have some practical knowledge of the areas of market inefficiency that had allowed me to compound money at an approximate 20% rate for approximately 20 years while being a partner at Aquilon Capital.

We lamented the demise of those opportunities as many of these sources of “alpha” have been arbitraged out of the market over the years.

This brought up the question, “where are we at Takota finding market inefficiencies today”? My answer to that question was and is, “primarily in those things that large pools of capital cannot easily invest due to size constraints” i.e. “primarily in companies with smaller market capitalizations”. Please see my blog There’s Always Money in the Banana Stand – Part 2!

Absent a market crisis offering up opportunities across market capitalizations, if you want to generate a return incremental to the market return, as always you have to find an unoccupied fishing hole.

As far as I am concerned, all other “value strategies” that are popular today are in fact now momentum strategies and they will work until they don’t – but when they don’t it will be an unpleasant experience.

Yes, you have to endure share price volatility to invest in companies (and portfolios) with smaller market capitalizations, especially if you run (as most thinking value investors do) a concentrated portfolio but the payoff is large.

For example, we forecast our own capital accumulation portfolios to pay off between 3-5 times current equity upon maturity.

Smaller market capitalization does not mean “junk”. It simply means companies that structurally have some combination of shares outstanding and share price that make it difficult for many institutional investors to invest at this juncture in their evolution. Thus they are more likely to be mispriced.

Scott

*** This blog is a general comment on where opportunities may exist in the market to exploit pricing inefficiencies. It is not a recommendation to invest in any particular strategy or security.


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