Value investors are busy reading company filings or value investing blogs every day, that they rarely find time to reflect on their own value investing process. This is akin to missing the forest for the trees. While the knowledge and experience acquired with understanding individual stocks and sectors are important, the value investing process represents an over-arching framework to organize one's value investing process.
I will attempt to give a draft framework for organizing your value investing process through the various stages of private equity investing.
Fund Raising
Investing on borrowed money is a strict no. The amount of cash you hold in your portfolio is a strategic decision. Having excess cash in your portfolio allows you a certain level of flexibility in making investor decisions and the ability to make opportunistic investments. There is another school of thought that being fully invested is the way to go, as market studies have shown most of the gains in stock markets happen in a single day. More importantly, supporters of the fully invested approach have argued that holding cash amounts to market timing.
Deal Screening
Some prefer the quantitative screening approach, others like to start with the As. Gurus' trades, investing blogs and trade journals are also sources of investment ideas.
Due Diligence
The due diligence process varies from investor to investor. Some insist on reading ten years of 10-K reports from start to finish, while others are satisfied with picking stocks from a quantitative screen and managing them as part of a fully diversified portfolio. Unlike private companies, listed companies operate under the purview of SEC and fair disclosure requirements, as outside passive minority investors, we can't expect to have any form of an informational edge.
Deal Structuring
Private equity firms can choose to invest in a variety of deal structures. They could invest in convertible loans, preferred shares or common stock. While this is not too common, investors may have the choice to either invest in convertible bond/preferred stock or the common stock of a company at times. That requires an in-depth analysis of the risk and return characteristics of the various investment instruments and the interplay between creditors, shareholders and stakeholders at the company.
Portfolio Monitoring
There are two parts to this. The first is the management of news flows and financial results of your portfolio companies. The second is the individual buy and sell decisions as you rebalance your portfolio.
Value Realization
Private equity firms sell when their private investment gets listed on a stock exchange or bought out by peers in a trade sale. For value investors, this is the classic 'when to sell' question. Some prefer to buy and hold, others manage their portfolio like a position trader.
I will attempt to give a draft framework for organizing your value investing process through the various stages of private equity investing.
Fund Raising
Investing on borrowed money is a strict no. The amount of cash you hold in your portfolio is a strategic decision. Having excess cash in your portfolio allows you a certain level of flexibility in making investor decisions and the ability to make opportunistic investments. There is another school of thought that being fully invested is the way to go, as market studies have shown most of the gains in stock markets happen in a single day. More importantly, supporters of the fully invested approach have argued that holding cash amounts to market timing.
Deal Screening
Some prefer the quantitative screening approach, others like to start with the As. Gurus' trades, investing blogs and trade journals are also sources of investment ideas.
Due Diligence
The due diligence process varies from investor to investor. Some insist on reading ten years of 10-K reports from start to finish, while others are satisfied with picking stocks from a quantitative screen and managing them as part of a fully diversified portfolio. Unlike private companies, listed companies operate under the purview of SEC and fair disclosure requirements, as outside passive minority investors, we can't expect to have any form of an informational edge.
Deal Structuring
Private equity firms can choose to invest in a variety of deal structures. They could invest in convertible loans, preferred shares or common stock. While this is not too common, investors may have the choice to either invest in convertible bond/preferred stock or the common stock of a company at times. That requires an in-depth analysis of the risk and return characteristics of the various investment instruments and the interplay between creditors, shareholders and stakeholders at the company.
Portfolio Monitoring
There are two parts to this. The first is the management of news flows and financial results of your portfolio companies. The second is the individual buy and sell decisions as you rebalance your portfolio.
Value Realization
Private equity firms sell when their private investment gets listed on a stock exchange or bought out by peers in a trade sale. For value investors, this is the classic 'when to sell' question. Some prefer to buy and hold, others manage their portfolio like a position trader.
