Quality, price, patience, diversification and the financial position of the client

When one invests as an outside, passive, minority investor there are two prinicipal considerations the investor must make:-

1 The quality of the investment
2 The price of the investment relative to your estimate of intrinsic value

The further out you are of the company, the more concerned you are with quality.

The closer you are to the company, e.g. an inside investor or an activist investor, the more important price becomes to the equation. This is because you have more detailed or timely knowledge, or you can act as a catalyst to unravel the value that exists in that company.

Another factor, is of course, the financial position of the client. For example, this can affect how long you can wait for the investment to work out.

The emphasis must always be in using public information and clever investigation that any well respected analyst can do, but doing superior anaysis and knowing when we are out of our circle of competence. This will generally limit us to a few sectors where we build deep understanding and so we can more easily spot opportunities by analysing more companies per unit of time.

If one has a long term investment horizon, companies that dont have an immediate catalyst but are very cheap and slightly lower qualitym may be considered by the outside, minority, passive investor. However, only if plenty of data is available for many years and physical data measurements can be made in terms of volume, production capacity etc to verify the accounts, and this data can be verified by independent parties.

If one has limited time or knowledge to analysis in great depth the companies under investigation, then diversification can compensate for a lack of knowledge. Buying deep out of the money put options when interestingly priced is another means.

However, for one with deep knowledge of a company, and who by concentrating their portfolio may achieve control to the extent they can form their own catalyst, it makes sense to have a more concentrated portfolio. This investor generally has strong know-how and know-who, and large financial resources. For example, it makes more sense for the founder of a company to have a large portion of their wealth in their company, then a builder who notices the company on the pink sheets. The founder has considerably more knowledge on the company and the sector, hence is better able to make a good decision. They also have timely knowledge on competitors.

One must always examine odds, and consequences.