Supported by Greenhaven Road Capital, finding value off the beaten path.
I was reading an investor’s letter to his stakeholders and saw a new ticker: ‘undisclosed position A’. Hmm, curious. Then I read the next line: ‘undisclosed position B’.
This isn’t abnormal as someone builds a position and it’s important to understand why. The simple answer is competition but stepping back we can see that competition only exists when there is a market mechanism. If price influences risk then buyers must tiptoe about, cautious about releasing the herd. As Jerry Neumann explained, “how do you make money if the dumbest guy in the room is the one setting the price?”
The greatest recent market mechanism has been the internet. Crashing transaction costs (and the answer is always transaction costs) led to markets for Beannie Babies, homes, and ride-sharing. How much you benefit is influenced by which side you’re on.
Bargain buyers need to work to find situations without other bidders (‘undisclosed position A’). For investors, this might mean sectors and companies with limited coverage or things that are difficult to understand or too small to warrant the effort. The inverse will be true too: that stocks du jour will have the dumbest guy in the room setting the price.
The best bargain buyers will avoid markets all-together. This idea was articulated in one of Zach Lowe’s NBA preview podcasts where he said:
“Someone asked me what I’d pay for DeMar DeRozan’s contract extension and that’s not a fair question for me because he will immediately reach a market value that I would never pay.”
If DeRozan was restricted to only his current team that’s an advantage for them. Buyers of one get good deals. However, that’s not the case.
Jason Blum runs one of the most successful movie studios in Hollywood and part-of-the-reason he succeeds is by avoiding a market mechanism in making his films. “We’re like the anti-heat production company…the director’s everyone is chasing we’re not chasing.”
Instead, Blum looks for directors who have a history of good movies–just not too recent a history. He pays less not because someone is unproven, but because they’re unloved. He also has an offer the market can’t compete with: final cut.
Sellers want more buyers or fewer sellers. That means raising the perceived value of their product.
Buyers want fewer buyers or more sellers. This might mean working with things that are difficult to understand, unloved for emotional but not material reasons, or signing players before free agency.
However a business goes about it, the more power a market mechanism has the harder you’ll have to work for the same results. Thanks for reading.