First off I want to apologize on the delay in this post and the lack of a post last week. I generally pride myself on the consistency of producing something every week. The only excuse I can use for the most recent delay is that I have been quarantining with c*vid since Saturday. This means I have had the opportunity to absorb a lot of content. So in a bit of a change of pace just for this week, I am going to talk about how two TV shows are examples of value investing.
Back in November 2020 Rob McElhenney and Ryan Reynolds bought a low-level Welsh football club for $2.5m. The club had rights to a stadium that would cost $4.4m to build. The physical assets alone are worth more than the purchase price this doesn’t include brand goodwill or anything else the club has. The club is valued lowly because the business operates at a significant loss every year. However, with some “restart up capital” the pair may get the club promoted meaning more revenue from sponsors, broadcasting/streaming, and more. This is a constant cycle as the cost to perform in higher leagues is significantly more expensive. This means you need a shrewd finance department and/or you have to keep getting promoted.
Let’s get back to the initial acquisition, however, the club cost less than the assets on the balance sheet. For those in private equity or alternative investments, this is exciting because that means that you can just liquidate the business and turn a profit, much less risky and time-consuming. However, if the celebrity duo are able to simply make the club breakeven the valuation should rise quickly. Generally breakeven is not a very ambitious goal meaning that a goal of profitability is more likely and would be an even better outcome. This is exactly like value investing.
Value investing originally was based on the “cigar butt” strategy where the goal was to squeeze the last bit of value out of a company. As value investing orbit switched from Graham to Buffett and Munger there became an increased focus on quality, but the core was the same. Value investing is all about bang for buck and it is a balance sheet-based art. There’s something beautiful about seeing a good or great company that is dirt cheap. Sometimes it makes you feel like Chicken Little, the only person in the world who believes in the company, but when a truly quality company is undervalued there's a high chance of it resetting the valuation back to what it should be. There is always a chance that a stock may be indefinitely undervalued but no investment strategy is perfect or has a perfect success rate.
I was raised a value investor and I think most would describe me as that, however, like value investing as a discipline my investing style has evolved. I now search for more quality than the average value investor and I have little to no problem with paying for quality if there is enough clear evidence backing the future performance of the business. That said I still think twice every time I see a high multiple and I am not willing to pay for some of the exorbitant multiples we’ve seen over the past 3 years.
Watchlist Update:
Portfolio Update:
Until Sunday,
Soren
wales would be a bugbite. even deadpool couldn't survive owning Luton.