WHAT YOU MISSED FROM GEOINVESTING LAST MONTH, AND MORE
December 2022, Volume 2, Issue 11
This week, the video component of our monthly newsletter series continues with 5 insightful video clips from Jim O’Shaughnessy, parsed from a “Talks At Google” interview moderated by Saurabh Madaan.
Jim O’Shaughnessy, investor and founder of O’Shaughnessy Asset Management LLC, discusses what it takes to be a successful active investor. He shines a light on the contrast between active and passive equity investing including the associated risks and rewards.
O’Shaughnessy covers several traits required by successful active investors, including patience and persistence, a strong mental attitude, a focus on process over outcome, and the courage to ignore forecasts and rely on one’s own research data.
O’Shaughnessy also offers guidance from his years of experience as an active investor, citing key points from his book What Works On Wall Street. He discusses the importance of momentum and earnings in putting together your portfolio. He also delves into market cap, lottery stocks, shareholder yield, and applying long-term data in one’s investment strategy.
We hope that you enjoy O’Shaughnessy’s insights into what it takes to be a successful active investor. Hint, it’s much harder than you think.
VIDEOS IN FOCUS
Clip 1: Why It’s Hard to Be An Active Investor
O’Shaughnessy shares his thoughts on the challenges of being an active investor.
- Herd mentality has moved many investors to focus on passive index funds.
- An active investor faces two points of failure:
- Panicking and selling near the bottom of a market
- Comparing returns with its benchmark, such as the Russell value index.
- Many investors base their investment strategy around a 3-year timeframe driven by a “recency bias”, a common investor behavior wherein we base our forecasts on what has happened recently.
Clip 2: Process Over Outcome
A good active investor values the process over the outcome.
- An investor that is not familiar with the process bases all their decisions on the outcome.
- An investor that values the process sees the importance of studying historical data to anticipate a stock’s performance.
- Long-term data, you will get much better information about whether the process you’re looking at makes sense.
Clip 3: Forecasts
Successful active managers don’t pay attention to forecasts because forecasts are often inaccurate and forecasters put little effort into ensuring the accuracy of their data.
- We love forecasts because we crave narrative.
- As investors we want to know the future.
- A study compiled thousands of forecasts from 42 experts that turned out to have efficacy ratings below 50%.
- O’Shaughnessy’s argument states that we would do better relying on our own research than on forecasts by supposed ‘experts’.
Clip 4: Patience and Persistence
Being a good active investor requires patience and persistence.
- We are genetically designed to want results in the here and now, we need to let our investment strategy play out over longer periods of time.
- O’Shaughnessy cites examples of notable investors like Warren Buffet, John Neff, and Peter Lynch
- Proving through their success that:
- You can achieve great levels of success by using patience and persistence in your investment strategy.
- Focus on paying zero attention to all the surrounding noise in the process.
Clip 5: Possibilities Over Probabilities
We live in a world where people choose to believe in possibilities over probabilities.
- Placing focus on possibilities can cause you to panic and have a bleak view of the economy.
- This focus can affect your investment decision-making process.
PROGRESS, YEAR TO DATE
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WHAT YOU MAY HAVE MISSED THIS MONTH
On December 6 to 8, 2022, Bobby Kraft hosted a Stock Pitch World Cup™ that featured pitches from Team USA and Team Europe. Representing USA was Maj Soueidan, co-founder of GeoInvesting, who brought with him MS Microcaps analyst Jan Svenda (@jansvenda), Quim Abril, founder of Draco Global (@abrilquim), and Scott Weis of Semco Capital (@SemcoRealEstate) to present the ideas of Paysign, Inc. (NASDAQ:PAYS), Phonex Holdings Inc (OOTC:PXHI) and Assertio Holdings, Inc. (NASDAQ:ASRT), respectively. Every member of the squad has contributed each of these ideas to the GeoInvesting community in the past, and in this case expanded on their convictions, providing insight into their current views and reasons why the stocks continue to be top selections in their portfolios.
We’re back from our meeting we had with Konatel Inc (OOTC:KTEL) over the weekend, where we were able to introduce a panel 5 of the company’s top decision makers who were able to go into great detail about their roles. After having held this event, we’re more confident than ever that we made a great decision to follow through with what we feel is a very unique way to connect shareholders with management. It gave the execs a chance to address tough questions in a more intimate and casual setting, over a round of golf.
There’s going to be certain times when you need to think twice before believing bullish commentary from management teams. You need to understand that that bullish commentary can change on a dime. I learned this lesson when considering investing in some technology stocks right before and during the dotcom bust. At that time, as risk was escalating, many technology company management teams I interviewed commented that they saw no problem with their industry. They assured me that they’d be able to navigate an economic slowdown. Well, that couldn’t have been further from the truth as many of these companies pivoted on their bullish stance just weeks after these interviews.
There was a good amount of optimism within the company’s 2021 10-K and 2021 Q1 communications about the prospects of a post-pandemic normalization, which led to our favorable take on the valuation on what we thought was a reasonably valued stock with some upside if certain things played out: “VIDE is trading at 0.7x TTM price to sales multiple which we believe is not that unreasonable if the company can reach consistent profitability, considering the positive growth outlook management has communicated for the remainder of its 2021 fiscal year. We also like management’s shift to focus on cyber security which could also be a reason to assume that shares could eventually trade at a price to sales multiple well in excess of 4x.” Long term price appreciation never materialized, but to be fair, as seen below, the company’s fiscal 2021 results did actually come in at an aggregate year over year increase, sending the stock to a brief high of $3.10. You could say, if just for a short moment, that the results supported the company’s outlook. However, investor conviction in the stock waned almost immediately, with the price settling back to its pre-financials levels.
We’d like to visit another story that could just as well have been part of our last weekly segment to prove that some management teams just get it right. We wanted to offer it up as another example of an almost perfect implementation of the use of capital, be it raised funds or cash on hand, to grow a company in an accretive manner through acquisitions. It’s basically a testimony on the fiduciary responsibility of public companies to handle the funds the way a public company should, as expected by shareholders.. The company in focus today is UFP Technologies, Inc. (NASDAQ:UFPT). The Company is a designer and custom manufacturer of components, subassemblies, products and packaging utilizing highly specialized foams, films, and plastics primarily for the medical market.