Catalysts Not Included

by Geoff Gannon

A blog I read, Value and Opportunity, has a post about Porsche and Volkswagen. There is also a link to a Market Folly post. They are both worth reading. I have no comment on the stock. I know nothing about cars or car makers.

I do know something about holding companies that trade at a discount to their parts. And I don’t agree with that part of the post. If the underlying assets are compounding nicely – you shouldn’t assume a holding company discount is correct just because the market applies one to the stock. You can’t both beat the market and defer to it.

When analyzing a stock that trades at a discount to net asset value – whether it is an insurer, a closed end fund, or a holding company – you need to look for reasons apart from market perceptions why the stock should be valued that way. If an insurer earns 5% on book value – it should trade at a discount to book. If it earns 10% on book value – it should not.

If the return on assets is satisfactory – the market price of those assets will one day be satisfactory.

Stock pickers should take advantage of market perceptions. Not incorporate them into their analysis. Much of the money you make in a value investment comes from a change in the market’s perception. You buy an ugly stock. And sell a pretty one.

Focus on value and ignore catalysts. Catalysts are made in the imagination. And our imaginations are too small. The future we sketch is always narrower than the future we get.

Who would have imagined Porsche’s past few years?

I made 150% on a Japanese net-net. It was taken private by management. Never once in my search for Japanese net-nets did I consider that a possible catalyst. Everybody knew Japanese companies did not go private. I knew it too.

The great thing about value investing is that you still get paid for upside scenarios you never imagined.