One of the funny things about public markets is that experience doesn’t really carry over from instrument to instrument. I mentioned in the previous newsletter (regarding Ted Weschler’s investment in W.R. Grace) that public markets are a pattern recognition game where one can take advantage of idiosyncratic circumstances. This is true in a theoretical sense; practically speaking, nothing really replicates and every circumstance is always different each time. The human element so totally overrides this that it’s not even worth explaining most of the time: actual investment managers have whole careers and seven-figure incomes based on incorrect lessons learned, improperly applied pattern recognition, and other maladaptations learned from selective memory or bad analysis gone unpunished. It’s never more important to check facts and apply conservative scenario analysis to securities than when you find yourself using kitschy aphorisms (“don’t fight the Fed” or “don’t buy X into a slowing/growing economy”) or studying “market psychology” and “investor bias”.
Contrarian indicators fall into this bucket of bullshit phenomena that sound-smart investors are wont to invoke. No one person is ever right or wrong 100% of the time and those that don’t learn this within 30 seconds of hearing it will never learn it. Nevertheless, some investors are prone to flawed analysis and bad math; funnily enough these are often the loudest investors (at least on Twitter or other platforms).
Bad math and pearl-clutching/panic-mongering go hand-in-hand. This is what led to finding RILY as a long idea, incidentally. It’s the least useful skill I’ve developed, but nevertheless I’m left with an abundance of useless judgements I pass on bad investors. Some of the bad investor archetypes:
1.) I’m bad at math and make a rudimentary mistake in modeling out a business or assigning uninformed probabilities to badly laid out outcomes.
2.) I really want the market to like my stock as much as I do. I know the ins-and-outs, I have a great model but my stock keeps going down and I’m upset about it.
3.) I’m convinced a given security could categorically never become mispriced, no matter what.
4.) I can easily cut through “Wall Street B.S.” and I find mispriced opportunities incredibly easily. I love talking down promotional management teams or Wall Street darlings.
5.) I pretend like this is all an easy exercise and I wake up and push the money-printing button every day. I don’t make mistakes!
6.) I’m going to selectively extrapolate some pithy observation I made to everything I see across all markets.
7.) Now that markets are volatile, I’m going to become a macro trader and sling my book around based on volatility and price action.
I enjoy Twitter now for these loud, bad investors. I don’t anticipate making money off of knowing bad investors, but it’s something to do in between looking for new ideas. Opportunities are thinner these days. Cash yields 5%!
One Idea
The best new idea I’ve come around today is Liberty SiriusXM (LSXMA/K/B). It’s a big NAV discount without a catalyst with a control problem and a tax problem. Similar to Irenic’s approach to NWS/NWSA, this name needs an activist come in and bully the Liberty team to do something with SiriusXM. SiriusXM has a brilliant model (a vertically integrated content creation and distribution network) with a growing library of unique content. The math shows you can buy the Liberty Sirius stub at a roughly 13% FCF yield if you back out the securities and net debt at the LSXM level. If only it were that simple!
will baupost address the activist needed for siriusxm ?