5 CHARTS DEMONSTRATING A MARKET THAT IS GETTING READY TO RIP DURING THE SECOND HALF OF THE YEAR
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MAY CLIENT LETTER: ACKMAN IS BRILLIANT & LEVERAGING YEAR TO DATE PERFORMANCE
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Ackman Is Brilliant Research on Wall Street has effectively become commoditized. Analysts and portfolio managers bring very little in the way of originality. In fact, a majority of hedge funds are simply platforms built to emulate one another through strategies that employ capital on a copycat basis. The research that is performed at the institutional level uses the same information, derived from the same sources to build the same models that are taught in the same business schools. And when investors in these funds do not receive the returns represented by this menagerie of mediocrity, they blame everyone but themselves. Never have investors stopped to think about how a group as a whole can outperform the markets when their methods, analysis and employees are all linear thinkers, schooled in linear thinking, operating within a completely nonlinear environment. That is why when an idea comes up from a well established fund manager that is both original and thought provoking in nature, it should be discussed. Bill Ackman at the Sohn Conference in May gave a presentation regarding platform companies. Platform companies are essentially shell companies that act as a platform for future acquisitions. Ackman argues that Wall Street cannot accurately value these companies. In fact, Wall Street undervalues these platforms on a consistent basis. When the intangible nature of future acquisitions takes precedent over current earnings, then Wall Street simply ignores the opportunity because it cannot be modeled or simplified through a traditional multiple of earnings approach. Instead, as Bill Ackman points out in his presentation," investors must value the company based on both the earnings potential of the company's current asset base, as well as the potential to generate additional earnings through future, value enhancing investments. " This line of thinking delves into the non-linear realm of securities analysis that isn't taught at business school. It involves abstract concepts and probability that are more entrepreneurial in nature. In other words, it's the type of concept that causes smoke to begin funneling out of your typical analysts ears, with the eventual outcome being a complete cessation of brain activity. When a corporation cannot be easily analyzed then inherently there will be inefficiencies in pricing that asset. Whenever an investment is dominated by abstract, non-linear business concepts, then the markets have no choice but to either a) ignore or b) sell. There is rarely, if ever, a premium given to such a situation. The inefficiencies become all the more pronounced once an investor decides to move into subsets of the market, such...