How Catalysts can boost your Value Investing Returns

Friday, Jan 13 2012 by
How Catalysts can boost your Value Investing Returns

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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1 Comment on this Article show/hide all

UK Value Investor 16th Jan '12 1 of 1

Catalysts are something that I've never had any confidence in, especially my own opinions of what they might be. It's a nice idea that there's some 'hidden' trigger for a leap in the share price, but to pull it off consistently? I'm just not that smart and I don't think the typical investor is either.

Perhaps if you have some special ability to analyse the details of a business and its context it could work, but I've got zero faith in it so I don't even think about catalysts.

Robert Wiseman Dairies is a good example of returns appearing from nowhere when the shares jumped from 250p-ish to 390p on news of a takeover from Muller. I'm a shareholder but did I see that coming? Absolutely no way.

I just buy solid companies that seem to be trading cheaply relative to what else is out there. The rest is in the lap of the gods.

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About ExpectingValue


Private investor turned hedge fund analyst, looking predominantly at global small caps. Sector agnostic.


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