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The Perversion of the Investment Catalyst

August 23, 2013 | About:
For every stock you buy, does it have a catalyst?

Yes? No?

Most stock articles you read always include some sort of upcoming catalyst that is going to propel the stock higher. Heck, even ValueInvestorsClub requires every stock pitch to have a catalyst. But to invest only in stocks with clear catalysts defeats the purpose of value investing.

Catalysts are not important, nor are they required for an investment.

Take it from the man who defined value investing, Ben Graham. He just wanted one thing and spent his days with Walter Schloss searching for it.

Cheap stocks.

Warren Buffett also wants to buy one thing.

Awesome companies.

Neither mentioned anything in any of their writings about seeking a catalyst to make a successful investment. In fact, they told you the opposite.

Sit and wait, they said.

The problem is that sitting and waiting is torture today. There has to be action. There have to be fast moves up and if something does not play out within a few months, it’s a dud and not worth keeping any longer. “Next!”

Investors today lack assiduity. That’s Charlie Munger’s technical term for sitting on your ass and doing nothing.

If you must seek a catalyst, remember that being cheap itself is a catalyst. That’s the number one catalyst which always gets ignored because it’s so simple and boring.

I hope a light bulb just went off somewhere.

Let Mr. Market do his thing and waltz around with Miss Price in his arms. You don’t have to join his dance or gaze longingly at Miss Stock Price. They are a pure vanity couple: great looking and fun to be with but horrible to live with.

Having a catalyst is good, but is it necessary?

No.
You make money by waiting.

- Mohnish Pabrai

About the author:

Jae Jun
Founder of Old School Value (http://www.oldschoolvalue.com) dedicated to offering the most complete and detailed stock valuation and analysis spreadsheet. Investing made easy by importing 10 years of financials and 5 quarterly statements directly to excel for your analysis needs. Save time, make smarter decisions and make more money.

Visit Jae Jun's Website


Rating: 4.1/5 (15 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 11 months ago
Excellent insight!

A catalyst might offer the prospect of higher returns but I'd say that one would have to then question whether an investor's expectation of a pending catalyst might also mean that that very catalyst is already priced into the stock.

haoafu
Haoafu - 11 months ago


Good point. I think catalyst is still a positive for the stock. Imagine 2 stocks with identical characteristics and are similarly undervalued, I'd put more money on the one with catalyst or I'd like to pay a little less for the one without catalyst.

batbeer2
Batbeer2 premium member - 11 months ago
I think most people will agree these are two key elements to a catalyst:

1) It's a specific future event

2) If and when it occurs, it is expected to cause the price of the stock to go up.

So.... paying more for a stock with a catalyst is betting on the occurrence of some specific future event to drive up the price of the stock.

If that is not speculation, nothing is.

I do not have a problem with speculation.

Just some thoughts.
AlbertaSunwapta
AlbertaSunwapta - 11 months ago
How about Buffett's railroads purchases. Did he see the ramping up of resource transportation as a near term kicker? (Back then he also visited Alberta and had meetings in Calgary and Ft. McMurray.)

Back then I knew Allegheny, Gates and McDuff had seen value in railroads a while before Buffett's move and so out of curiosity I had spotted rail-shale move early (and did nothing of course) and so also noted that when Buffett started to buy, many if not most analysts were generally avoiding or even trashing railroads, as well as Buffett's move into them. Of course, now everyone loves them. That said, Buffett clearly saw value ahead of most others and I'e long wondered if he hadn't seen the shale potential as a "catalyst".
batbeer2
Batbeer2 premium member - 11 months ago
In this case, Buffett probably was the catalyst ;o)

I don't have a problem with catalysts and I don't think Buffett has a problem with them either. Most of my write-ups will include a list of catalysts.

It's just that speculation causes people to pay too much for the catalyst and ignore the underlying business.

Just yesterday, one of Francis Chou's stocks (Hanfeng Evergreen) dropped below the value of its cash. A management buyout fell through. The company is Canadian, consistently profitable, and has no debt!

The catalyst was removed and a profitable company suddenly trades below net-cash.... that to me indicates investors assign greater value to the catalyst than they do to the business itself.

Back in 2010, hardly anyone was arguing USG was expensive but there was a strong argument that it was "dead money". You'd be better off putting your money to work in situations with better near-term prospects (catalysts). Things like premier exhibitions (PRXI).

It's fair to say a very large percentage of investors will pass on a stock simply because they see no clear catalyst.

I often see an argument made that "value is sometimes its own catalyst".

To me, this means the investor is hunting for catalysts, not value and in desperation (lack of true catalyst) argues that value is a form of catalyst. Absurd.
vgm
Vgm - 11 months ago
"Did he see the ramping up of resource transportation as a near term kicker?"

AS,

I don't think it's rational to suggest that Buffett looked for, or saw, a "near term kicker" in railroads. When questioned at the time, his reply was the purchase was a long term bet on America and its prosperity, and "a business which is going to be around for a hundred or two hundred years". He did confess that he had paid a relatively high price, but we can also be sure he saw a good (long term) investment in the industry and the numbers.

http://www.gurufocus.com/news/215195/warren-buffett-explains-why-he-purchased-burlington-northern-santa-fe-railroad

There are precious few certainties in investing, but one is that Buffett does not think short term. Period.
AlbertaSunwapta
AlbertaSunwapta - 11 months ago
...and they were generally perceived as dead money despite Gates making 800% on CNR (and the taxpayer losing a portion of that 800% due to total privatization).

still, the timing of his buys were curious.

Buffett must have see the loadings numbers at some point. He dumped his other railroads to focus on B.N.
vgm
Vgm - 11 months ago
AS,

We can be sure that his buys were nothing to do with "a near term kicker" or "timing", to use your terms. It was clearly a very long term strategy based on America's future. He said so in the video I supplied and it's entirely consistent with all we know of the man and his ways and his philosophy.

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