Maximize Returns and Avoid Risk Through Inflection Point Investing

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Maximize Returns and Avoid Risk Through Inflection Point Investing

By Maj Soueidan, Co-Founder GeoInvesting

I recently wrote about how identifying inflection points in a business’ operations can help you gain alpha when it comes to your investments. I focused on how GeoInvesting’s success with our investment in Micronetics (Old Symbol NOIZ) was a product of a unique kind of research that, if executed properly, can be reproduced time and time again.

I often get asked if I’m a long-term or short-term investor.  My answer is always the same – I like to think of myself as an opportunistic investor, or at least I try to be.  At times, I’m looking at what opportunities can make me the most money right now in the context of what my overall fundamental strategies are to help me create long-term wealth.  That is not to say that I am arguing against long-term investing. I do own core longs in the quest for the 100-baggers that I am willing to hold through fits and starts related to growing a business over time.

But that does not mean I won’t stop looking for fundamentally strong short reversion to mean or deviation away from the mean stories where a stock can experience explosive expansions in valuations multiples.

When I started investing around 30 years ago, I did not make the conscious effort to say I’m going to hold stocks for the short-term, mid-term or long-term midterm .  I just naturally evolved into an investor that tried to find inflection points in growth strategies or improvements in risk profiles – stories being mispriced by the market that ended up leading to multi-bagger returns, often unforeseen by me.  But, through this process I realized that I could get multi-bagger returns in the short term as opposed to waiting years and potentially suffering through market volatility and changes in business environments.  This mispricing opportunity is most prevalent in the micro-cap space which is why I love it.

Easier Said Than Done

Morgan Housel wrote an article for the Motley Fools discussing the “easier said than done” paradox associated with long-term investing. It illustrates the type of nerves you would have needed to hang on to Monster Beverage (MNST:NASDAQ), the best-performing stock from 1995 to 2015. The stock increased 105,000%, turning $10,000 into more than $10 million.

Here are some quotes from the article:

The truth is that Monster has been a gut-wrenching nightmare to own over the last 20 years.

  1. It traded below its previous all-time high on 94% of days during that period.
  2. On average, its stock was 26% below its high of the previous two years. It suffered four separate drops of 50% or more.
  3. It lost more than two-thirds of its value twice, and more than three-quarters once.

He goes on to say:

“That’s how the stock market works. It’s easy to think that the single-best investment to own is one that would make us smile every morning we woke up owning it. But it wasn’t. It never is. And it never will be. That’s the nature of the stock market. On the way to making serious money, you spend a lot of time losing serious money. It’s a reality anyone investing in stocks, no matter what you own, has to face.”

Keeping It Real

I try to be realistic in the context of my emotions.  Lots of investors, including myself, love to throw around examples of multi-baggers in the microcap space that we could have had.  We like to reference what I like to call mega-baggers, making 10x or 100x your money over the long-term.   But for every mega-bagger you could have had or may have had, there are those that attained multi or mega-bagger status that eventually burned out.

For example, slides 11 and 12 of the attached presentation (below) show a few mega-baggers I touched at one point.  I made sell decisions based on my near-term valuation rules or the changing of inflection points.  Notice that in some names (MNST, CHTR, PATK) I sold way too early, but in others I got really lucky by not hanging around (WTT, TAC, ALGI). PFHO is an example where I got greedy after the stock increased 1800% to $73.00 in a short period of time. Although I sold half my position by the time it reached its highs I sold the rest around 11. I failed to identify a customer concentration risk.

Inflection Point Investing Has Its Place

My experience led me to pursue a strategy of finding inflection points and define how long I think they might benefit the company. I then created my price targets around this theme. So, I don’t let time define my holding period; I instead use my assessment of the beginning and end of inflection points to define my holding period. This is not market timing; it is business timing.

As an investor you have this incredible opportunity to let companies take the risk.  When you think that these risks are going to payoff, you can go along for the ride. There’s no shame in that. If my research has identified an inflection point where I think I might get a 200% return in a year and I get there, and now my analysis tells me, “okay well maybe it’ll be down 50% until next inflection point in 3 years”, I’m going to sell. This is because I am fairly confident that I can find a stock right now with an inflection point, and that’s going to make me money.

Management Still Important

Inflection point investing doesn’t mean you do not become fluid with management teams and business prospects. In fact, you may become even more in tune with them. By the way, management is more important than ever. As I discuss in slides 4 through 7 of the attached presentation, stock ownership is being met with more stock volatility. When you have shorter-term investment horizons, it’s very important to invest in management and their long-term vision. Even if you may have identified an inflection point, the market may not cooperate with you.  Or your stock could fall when unforeseen business risks occur, taking away a near-term inflection point.

In the end, long-term investing can potentially take you for a wild ride.  But it can be complimented by inflection point investing that offers shorter term returns.  I strongly believe that both have their parts in the investment selection process.

 


By | 2017-10-22T13:29:39+00:00 October 25th, 2016|Insights-Home, Maj Soueidan, Value Walk|2 Comments

About the Author:

Maj Soueidan, President & Co-founder Maj Soueidan is a full-time investor of nearly 30 years. He co-founded GeoInvesting to bring institutional quality investment research to the individual investor and help broaden the awareness of the opportunities that exist in the inefficient micro-cap universe. In addition to educating investors on winning equity strategies, Mr. Soueidan has been on a mission to protect investors from fraud and pump and dump schemes. He introduced the “China fraud” to Geoinvesting and through his research process, identified dozens of U.S. listed China stocks he concluded were frauds, so that the Geoinvesting team could perform exhaustive on-the-ground due diligence research on them, including Puda Coal and Yuhe Intl. Maj works with and manages the GeoInvesting Team on a daily basis to increase its investment opportunity pipeline and heighten GeoInvesting’s awareness in the financial markets to intensify its market influence. He stresses the concept of “information arbitrage” in an era where information overload has actually made it more difficult for investors to locate profitable information. An information arbitrage exists when a disconnect between stock prices and available public information on a company is noticeable, and monetarily worth pursuing.

2 Comments

  1. GeoTeam October 27, 2016 at 12:07 pm - Reply

    George,

    Thanks for your comment. They actually just presented at the Philly microcap conference. In case you have not taken a look at the presentation, it can be found here – https://www.sec.gov/Archives/edgar/data/317340/000143774916040060/ex99-1.htm

    We agree with you wholeheartedly. There was quite a bit of good buzz surrounding the recent large DOD contract win as well as the commercial order, which we feel spoke for themselves, got wide coverage and were clues of good things to come.

    We monitor all developments with MKRS very closely and make sure to post our updates on Geo’s portal. If there are any questions you (or anyone else reading this) would like to pose, send them along. As of right now, our questions regarding the progression of their business have been sufficiently answered through public disclosures of the company.

    GT

  2. George Hulshart October 27, 2016 at 11:29 am - Reply

    It’s time for another conference call with MIKROS’ CEO Thomas J. Meaney. One was promised within a couple weeks after the March 17, 2016, conference call. Good things have been happening and needs broader coverage.

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