One of the most interesting things about investing is the range of opinions even in apparently narrow groupings. Even among the blogs in my blogroll, predominantly European based value investors, we all have our own ideas and different views about what will generate the best returns over the next few years (or longer - remember to quantify your timescale!). It's in that vein, then, that there was a little back and forth between myself and Wexboy in the comments of my twelve for 2012 posts; and, true to word, he posted two articles on a topic that's always slightly baffled me - catalysts. Here's Wexboy's succintly described 'bull case' on catalysts from the comments, then:
The issue I’ve had however with a lot of small/neglected stocks is the lack of a clear catalyst. This is something I’ve been trying to focus on a lot more – I try to prioritize stocks with a clear catalyst (even if they have lower relative upside) to improve my IRR, to be more aggressive/defensive (which?) and to be more stock selective.
I’m a rabid value investor, but catalyst(s) hopefully offer or help me avoid the following: i) realizing a potential 75% upside is not that exciting if it takes 7 years to do it, or ii) I want to add an extra edge to my (hoped for) value edge, or iii) being taken out by a takeover bid if it is only prompted by a further slide in the share price, etc.
In his first post, he basically describes his use of catalysts - as a way of further narrowing down shares from those which are cheap to those which are cheap and likely to realise some of that value in the near future. Neatly, there's a quick arithemtical example of the perils of buying stocks which won't realise any of their value in the near future:
Take your average value investment: You’ve found a neglected jewel, and based on your value investing acumen (and a decent Margin of Safety) you confidently expect that will ultimately capture an upside of, say, 75%. But when will that happen? In 3 yrs, 5 yrs, 7 yrs..?! Those periods equate to IRRs of 20.5%, 11.8% and 8.3% pa respectively. Now assume…
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