ICAHNEXITS,BUFFETTENTERS,WHITHERAPPLE?BIGNAMEINVESTINGANDYOU

Learningfromsmartmoney

2

Settingthetable

¨ Inmostinvestmentclasses,youaretaughtthattoinvestinacompany,youassessitsvaluetoyou,comparethatvaluetothepriceandmakeapricingjudgment.

¨ Thatmaybetrue,butwhatifrightafteryoumakethatjudgment,a“bigname”investormakesajudgmentonthesamestockthatisdiametricallyopposedtoyours.Shouldyoureassessorchangeyourjudgment?

¨ Inaninvestmentworld,wherebignameinvestorsarenotonlyfarmorepublicintheirinvestmentjudgmentsthantheyusedtobeandhavetheforums(TV,Newspapers,Socialmediaetc.)togopublicwiththem,thisisaquestionthatweincreasinglyface.

3

ThePriceValueSetup

4

Howabignameinvestorcanchangeyourperspectives..

5

TheBigNameInsider

¨ Whenaninsider(amanager,aninsidestockholder,someoneclosetomanagement)buysorsellsstock,itisnaturaltoassumethattheyaredoingsobecausetheyknowsomethingthattherestofusedonot.

¨ Withinsidertradinglaws,thequestionofcourseisoneoflegality,sinceinsidersarespecificallyprohibitedfromtradingaheadofmaterialinformation.However,theyarenotprecludedfromtradingondiffuseinformationthatisstillofvaluetotherestofthemarket.

6

TheBigNameActivist

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TheBigNameTrader

¨ Insomecases,thebignameenteringorexitingthestockisatrader,i.e.,someonewhoisperceivedasverygoodatplayingthepricinggame,whereyouskillsetisdetectingmomentum(anditsshifts).

¨ Therearetworeasonswhythattradingcanaffectprices:¤ Thevolumeeffect: Ifthebignametraderhasenoughmoney tobackhisorhertrade,therewillbealiquidity effect,whereabuywillpushthepriceuphigherandasellwillpushitlower.

¤ Thebandwagoneffect:Totheextentthattherearesomeinthemarketwhoperceive thebignametraderasbetteratperceivingmomentum swings thantherestofus,theywill followtheinvestorinbuyingorselling thestock.

8

TheBigNameValueInvestor

¨ Ifyouareasmallvalueinvestor,thenameofthegameisfindingcompanieswherethereisagap(oratleastaperceivedgap)betweenpriceandvalueandinvestinginthosecompanies.

¨ Tomakemoney,youhaveto¤ Berightinyourassessmentsofvalue¤ Hopethatthepricinggapwillclose

¨ Whenabignamevalueinvestorstepsintothefray,youarehopingthathisorherveryappearancewillbethecatalystforthegaptoclose.

9

Apple:TheBigNameEffect?

10

Icahn,ActivistTrader?

¨ Heisanactivist,albeitonewhoismoreactiveonthefinancing/dividenddimensionsthanontheoperatingrestructuringdimension.

¨ Heisatrader,morethananinvestor.Hisinvestmentrationaleiscouchedintradingterms(lookscheap,relativeto..)andthewayheattachesnumberstocompaniesisbasedontradingtools(pershareearningsandmultiples).

¨ Hehasarecordofsuccess,suggestingthatheisverygoodinhistargetingofcompanies(forhisdebt/cashpush)andtrading.

11

Buffett,ValueInvestor?

¨ Ofcourse,buthisvaluationnicheiscompaniesthatarematureorbeyondmature,withstrongearningsandhighmoats.

¨ WhenBuffettinvests,itisreasonabletoextrapolatethat¤ Thecompanylookscheaptohim(i.e.,thatheperceivesapricinggap)

¤ Thecompany’sbestdaysarebehindit,i.e.,thatyourreturnsarelikelytocomefromthecashcowpartratherthanthegrowthpartofthebusiness.

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TheBottomLine

¨ Itisimpracticalandunrealistictoarguethatyourinvestmentdecisionsareyoursandyoursaloneandthatyouwillbeunmovedbytheinvestmentdecisionsofothers,especiallywhenyourespectandvaluethejudgmentofthese“others”.

¨ Thatsaid,ifyouareconstantlysecondguessingandchangingyourinvestmentdecisionsbaseduponwhatIcahn,Buffettoranyoneelseisdoing,yourinvestmentphilosophyhasnogrounding.

¨ Makeyourbestinvestmentjudgmentsandkeepthefeedbackloopopen.