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My Business is Cheap and No One Cares - Part 2


Once upon a time, stock prices responded (sooner or later) to the fundamental performance of the companies those stocks represent. Cash flows grow + management does not do dumb things with those cash flows = stock price goes up. That's been less and less the case over the last 15-20 years, likely due to many factors, chief among them government policy distortion and the tidal wave of money that poured into valuation-indifferent index products.

 

In October 2023 we shared some thoughts (https://www.bfa-llc.com/single-post/my-business-is-cheap-and-no-one-cares) on this topic, piggybacking on comments from famous investor David Einhorn.

 

David was in the news again recently with a similar theme: it's hard to make money when the stock price doesn't respond to company performance.

 

The answer is:

 

  1. stop relying on mean reversion (aka stop hoping that other investors will wake up and "get it")

  2. long time horizon / deferred gratification / really patient capital ALL MATTER A LOT

  3. take matters into your own hands (which was the takeaway from our 10/2023 piece)

 

"There are not terribly complicated tools that public companies can use to narrow a valuation gap if you are producing the fundamental goods but are not getting the love: good capital allocation, intelligent compensation plans, a good corporate governance structure and proper investor relations that speaks to investors like business partners rather than a group of quarterly stock jockeys jacked-up on Adderall."(1)

 

There are opportunities available in the valuation gaps that have been created by indexation. But you will not find those opportunities in the index.

 

We are partnering with investors who are patient and highly engaged (not activist per se but engaged) and who are investing in businesses with management and boards that clearly understand these tools and how to use them effectively to create value for shareholders. Even (especially!) when investors don't give them the love.


 

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