Fortress Investment Group; Buying Breakouts; Set Sizing; Together With Perpetual Self-Loathing
February 17, 2017
Edit
I woke upward to a pleasant but likewise slightly bittersweet surprise today over my morning time java – overnight (I reside inward Asia) Softbank had announced a bid to purchase out Fortress Investment Group (FIG US) Class A shareholders @ US$8.08 a share. This was an gauge 40% premium to the stock’s previous price, together with 66% inward a higher house the levels prevailing at the start out of 2017.
FIG was a 1% seat inward the principal portfolio I grapple (larger inward some others), together with was acquired inward stages over the past times half dozen months at a US$5.21 average. I bought my base of operations seat (about half) at to a greater extent than or less US$5.00, together with I therefore bought the break-out inward January, doubling my seat inward the US$5.30-5.50 range. A 50-60% gain inward less than half dozen months is nice. But it's much nicer on a 5-10% seat than a 1% position. I didn't know whether to celebrate or musical rhythm out myself upward for non buying more. More on that later.
The fundamentals
The commutation investment thesis on FIG was pretty at nowadays forwards (I similar elementary theses). The companionship has US$4.25 a portion inward cash, investments, together with accrued but yet to locomote realized incentive fees (net of associated taxes together with employee turn a profit share, together with internet of all debt). You weren’t paying a lot (about US$1 share, or US$400m) for the centre business, which manages US$70bn. Indeed, you lot were paying less than 1% of FUM. The centre biz generates close 35c a portion inward base of operations fees internet of all costs, alongside whatever performance fees on altitude of that beingness cream. The hereafter menses of performance fees is of course of report uncertain, but you lot weren’t paying anything for them.
Furthermore, the companionship pays out all base of operations fee earnings via regular dividend, together with has returned 100% of realized performance fees over fourth dimension via particular dividends together with buybacks. The companionship had likewise of late committed to paying out one-half of its cash together with investment hoard (about US$2.75/share) inward the side past times side few years every bit well. Consequently, cash flows over the side past times side iii years were probable to locomote close $1.00 from base of operations dividends, US$1.30 from working capital missive of the alphabet returns, together with upward to US$1.50 from the distribution of accrued incentive fees every bit they were steadily realized (assuming no major intervening marketplace drawdown) – every bit much every bit US$3.50-4.00 a share. Not bad for a stock that was trading at $5.00. Insider ownership was likewise high (45%), increasing alignment.
There were things that could acquire wrong. The marketplace could swoon, reducing both the value of their accrued incentive fees, investments, together with FUM. And the stock would probable acquire downward alongside the marketplace together with therefore correlate alongside your other positions. And on the upside, prior to distribution, the US$4.25 inward cash, investments, together with incentive fees wouldn't brand you lot much, reducing the stock's upside leverage somewhat. Nevertheless, the stock seemed similar a company value long on a risk/reward basis.
There were things that could acquire wrong. The marketplace could swoon, reducing both the value of their accrued incentive fees, investments, together with FUM. And the stock would probable acquire downward alongside the marketplace together with therefore correlate alongside your other positions. And on the upside, prior to distribution, the US$4.25 inward cash, investments, together with incentive fees wouldn't brand you lot much, reducing the stock's upside leverage somewhat. Nevertheless, the stock seemed similar a company value long on a risk/reward basis.
Buying the break-out
After buying a base of operations seat inward 2H16, I likewise bought the break-out inward Jan (but non plenty evidently), roughly doubling my seat size. This determination - or at to the lowest degree the footing for it - volition no uncertainty brand many value investor purists puke. Value investors are supposed to ignore the marketplace activity together with focus on commutation value considerations alone.
I’m non a purist; I’m a realist together with a pragmatist. The centre thesis was based on the fundamentals – I would never purchase a breakout inward a stock I didn’t already similar fundamentally. However, quite often, breakouts hateful something, together with are relevant information. What they hateful is that other smart investors conduct keep begun to bid the stock upward aggressively to acquire filled quickly, instead of accumulating slow alongside express marketplace impact, together with at that spot could good locomote a skillful argue why.
As an outsider, it’s commonly hard to know what that argue is, together with inward the instance of FIG, I had no idea. It could conduct keep happened for a diverseness of reasons - maybe something every bit elementary every bit a large investor capable of moving the marketplace seeing the same affair I saw above. Breakouts frequently fail, every bit well. But I knew at that spot was value inward FIG, together with the breakout signaled 2 things: (1) that the probability that at that spot was skillful intelligence inward the offing that was withal unbeknownst to the bulk of the marketplace had risen; together with (2) that the probability of swift value realization had increased. It likewise meant that the chance to accumulate to a greater extent than stock over fourth dimension at levels closed to US$5 may non introduce itself again. That justified a larger seat together with paying a 5-10% higher price.
As an outsider, it’s commonly hard to know what that argue is, together with inward the instance of FIG, I had no idea. It could conduct keep happened for a diverseness of reasons - maybe something every bit elementary every bit a large investor capable of moving the marketplace seeing the same affair I saw above. Breakouts frequently fail, every bit well. But I knew at that spot was value inward FIG, together with the breakout signaled 2 things: (1) that the probability that at that spot was skillful intelligence inward the offing that was withal unbeknownst to the bulk of the marketplace had risen; together with (2) that the probability of swift value realization had increased. It likewise meant that the chance to accumulate to a greater extent than stock over fourth dimension at levels closed to US$5 may non introduce itself again. That justified a larger seat together with paying a 5-10% higher price.
We acquire today why the stock was breaking out – a takeover bid was inward the offing, together with intelligence had clearly started to leak. Sadly, this kind of affair is far from uncommon inward markets, despite the putative outlawing of insider trading. I didn’t conduct keep within data or the faintest inkling that a takeover offering was looming. But I suspected that some kind of skillful intelligence may conduct keep been afoot, because the marketplace activity was telling me that.
In my view, investing is ameliorate played similar a game of poker than a game of chess. In a game of chess, you lot tin meet all the pieces, but inward a game of poker you lot cannot meet all the cards. Sure, you lot postulate to create audio analysis based on the cards (information) you lot tin see. But you lot likewise postulate to pay attending to the actions of other players at the tabular array (e.g. pricing action; directors buying together with selling, etc). Indeed, you lot would locomote a fool to ignore such 'tells', together with the inferences that tin locomote drawn from other players' behaviour. Buying the breakout is doing simply that.
Position sizing
Too bad it wasn’t a larger seat (this was the 'bittersweet' purpose of this morning's skillful news). A 60bp portfolio performance kicker off an master 90bp seat (by cost) is nice, but the payoff could together with mayhap should conduct keep been higher. I tin hear many investors hither taking the chance to wed the conventional wisdom of the benefits of portfolio concentration.
The work alongside that conventional wisdom is this. FIG was a skillful idea, but it was non inward my altitude 15-20 ideas. If I had insisted on portfolio concentration, I would non conduct keep owned whatever of it. But none of my altitude 15-20 ideas are upward 60% calendar year-to-date. The same tin locomote said for Macmahon (MAH AU), where I held a 70bp seat until recently. Late final calendar month CIMIC announced a takeover bid at 14.5c, which sent the stock upward 50%. It made 30bp for the fund inward Jan together with I sold on marketplace at 15c. MAH was likewise good exterior my altitude xx ideas, but I withal made to a greater extent than than 100% inward 12 months of ownership, outperforming my overall portfolio (which on a gross footing was upward 55% inward 2016, together with is upward 12% inward calendar 2017 YTD, inward USD).
Of course of report alongside the total create goodness of hindsight, both of these stocks should conduct keep been inward my altitude 15-20 ideas based on their ex postal service outcomes. But it was much harder to create upward one's hear that ex anti. They sure enough were non cheaper than my altitude 15-20 ideas, together with spell I volition pay some attending to breakouts, I volition only usage it at the margin, non every bit a principal footing for seat sizing decisions.
It is hard to predict inward advance which value ideas volition play out rapidly together with which volition require a much longer work-out time. The cheapest stocks don't necessarily re-rate the quickest. Sometimes they do, sometimes they don't. This is i payoff of having to a greater extent than positions alongside smaller seat sizes. I tin at nowadays conduct keep my FIG together with MAH profits together with recycle them.
It is hard to predict inward advance which value ideas volition play out rapidly together with which volition require a much longer work-out time. The cheapest stocks don't necessarily re-rate the quickest. Sometimes they do, sometimes they don't. This is i payoff of having to a greater extent than positions alongside smaller seat sizes. I tin at nowadays conduct keep my FIG together with MAH profits together with recycle them.
Nevertheless, it is hard to non experience at to the lowest degree a pang of regret for having non bought more.
This is i of the problems alongside beingness an investor – the inevitability of perpetual self-loathing. Your actions volition ever seem sub-optimal inward hindsight to at to the lowest degree some degree. You tin discovery a skillful stock together with brand a 60% furnish inward 6 months, but therefore withal destination upward beating yourself upward for non buying to a greater extent than rather than feeling whatever sense of jubilation.
Jeremy Grantham likes to tell that investing is a game of regret minimization. I similar that framework. We volition ever locomote revealed to conduct keep made a tonne of mistakes inward the harsh low-cal of 20/20 hindsight. The best nosotros tin promise for inward this game is to attempt to minimize the grade of regret when the forever-uncertain hereafter arrives together with the die conduct keep fallen. Some regret is inevitable.
Jeremy Grantham likes to tell that investing is a game of regret minimization. I similar that framework. We volition ever locomote revealed to conduct keep made a tonne of mistakes inward the harsh low-cal of 20/20 hindsight. The best nosotros tin promise for inward this game is to attempt to minimize the grade of regret when the forever-uncertain hereafter arrives together with the die conduct keep fallen. Some regret is inevitable.
So I'm trying to await on the brilliant side alongside FIG.
LT3000