The private equity model is one that is much more suited for individual investors than the rapid fire in and out trading that most of us seem to find attractive.
Rather than looking for chart points, pivot points and breakouts that might lead to short-term moves in the market, private equity investors take a much longer view. These astute investors tend to want to buy assets at bargain prices, hold them for an extended period of time and sell them when more attractive prices can be obtained.
They want to earn multiples of their original investment, not just small percentages.
This more patient approach to investing has led private equity to be the highest performing asset class for decades now. The Cambridge Associates private equity index has returned 13.49 percent annually over the last 20 years ended Sept. 30, 2013. No other index comes close to this type of long-term performance. It seems that buying out-of-favor assets and industries and holding them until they are popular again actually does work in practice as well as theory.
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- ABX 15-Year Financial Data
- The intrinsic value of ABX
- Peter Lynch Chart of ABX
In addition to adopting the "buy low, sell high,” long term mindset of private equity investors, investors should be paying close attention to what private equity investors are doing with their money. These guys are looking for undervalued assets on a daily basis and aggressively selling stuff that is overly popular and can be easily and profitably sold for large gains. It makes much more sense to track these value-conscious long term investors than trying to track the flashy short-traders that parade through the financial media every day.
If you look at what is going on in private equity right now the most important takeaway is that they have been selling almost continuously since early 2013.
2013 saw more money raised by private equity firms in the IPO market that any year in history except the banner year of 2007.
Valuations have risen to a point that the private equity firms can take big profits in companies like Sea World (SEAS) and Hilton (HLT) that they had owned for several years. One PE executive said in the fall that his shop was selling everything that was not nailed down. Assets are not broadly cheap, and it is a better time to be a seller than a buyer in most sectors of the economy right now.
There are some areas that are out of favor and cheap enough that they are starting to attract some attention. In recent weeks we have seen some private equity firms express an interest in the mining sector. Warburg Pincus introduced a new fund aimed at the mining sector last week and two former JPMorgan (JPM) bankers formed a $375 million dollar fund to invest in mining assets.
In addition, the former CEO of Barrick Gold (ABX), Aaron Regent, started a new company backed by private equity to invest in mining assets. Mining assets are very cheap and unloved by the investing public, and this usually indicates that it's a great time for those with a private equity mindset to take a look at a particular sector.
If you run a screen of mining-related companies it is clear that many of them sell well below their asset value and are indeed candidates for a long term asset-based deep-value portfolio. It doesn't seem to matter what you dig up out of the ground — if you are a mining company your stock is very cheap at this level.
Silver miner Pan American Silver (PAAS) is trading at 77 percent of book value and Couer Mining (CDE) is at 50 percent of book value right now. Iron ore miner Cliffs Natural Resources (CLF) trades at just 60 percent of book value in spite of a recent statement by an activist investor that the shares could be worth more than twice the current stock price. Coal miner Alpha Natural (ANR) is trading for less than 50 percent of tangible book value at the current quote.
The struggling global recovery and excess capacity that built up during the boom times has pushed mining shares to deeply discounted valuations right now. The long term private equity investors are starting to notice and commit funds to buying assets in the sector.
They are looking five to seven years down the road and expect to sell these assets for many times what they pay for them in today's depressed markets.
Patient and disciplined individual investors should consider doing the same.
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpeculation.Com as well as several print publication including Active Trader and the Wall Street Digest. Learn which 3 low risk, high yield stocks Tim owns for the trade of the decade.