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Thursday, April 11, 2013

No Need To Complicate Matters

Those of us that toil in the market and on the Street are really fond of making what we do seem more important and difficult than it really is in practice. No one is stock broker anymore. They are financial advisors and consultants. We are not looking at markets we are engaging in intermarket analysis. We do not buy options, we get long volatility. No is a corporate raider anymore. They have all become activist investors and Private Equity manager. I didn’t sell options, I got short gamma. I’m not betting on potential takeovers I am an event driven investor.  This weekend it seemed I could not turn around without hearing the newest,    and for my money ,dumbest phrase of self-importance so far. No one is a contrarian value investor anymore it seems. They are engaging in time arbitrage.

Time arbitrage is described as buying stocks that have disappointed investor and sold off and then holding until they recover. Now, I have trade a lot of arbitrage over the years. I have, and still do, engaged in risk arbitrage. I have done pairs trading to exploit discrepancies.  I used to do a and b share arbitrage on a regular basis. In arbitrage I was always trying to lock in an apparent price discrepancy by buying one thing and selling the other. In the case of so called time arbitrage I am long the asset and long time. It’s not arbitrage. I just bought something I think is cheap and plan to old it until it’s not cheap.

I am a much more plain spoken guy. I was never a financial consultant but for 25 years I was a decent stock broker. I do not engage in time arbitrage but I do like to buy out of favor cheap assets and hold them for a long time. Right now there are several candidates that contrarian investors might like as long term buying opportunities but let’s avoid the fancy terms and just be long term patient value investors.

Arcelor Mittal (MT) is a classic undervalued unpopular stock that no one loves but the long term prospects are actually fairly bright. Arcelor has two strikes against it. One it is a steel company, ad of course it is based in Europe. The steel business is bad right now and Europe is careening from fiscal disaster to banking crisis’ on an almost daily basis. The long term truth is that at some point Europe gets its act together and a t least stabilizes. The economy will eventually recover around the world and steel demand will increase again and the current excess supply will go away. The company is making all the right moves, selling some assets, closing marginal plants and expanding in emerging markets.  The stock may go lower before it goes higher but I suspect that in 10 years the stock will trade at many multiples of the current quote.

We can apply the same logic to Cliffs Natural Resources (CLF) right now. This is one of the ugliest stocks on the board for the past few months as fears of a weak economy and sliding iron ore prices have not just weighed on the stock but crushed it. Metallurgical coal is tied to steel demand so that’s not exactly a robust business at the moment either. Wall Street analysts are tripping over each other to downgrade the shares and the funds are selling shares as fast as they can hit the sell button. The company has whacked the dividend and is still losing money. However as with Arcelor, someday the world gets back on its feet, the economy grows, emerging markets expand and the business recovers. It will be a long bumpy ride but I would not be shocked to look up in six or seven years and see the stock back over $100 a share giving patient investors a spectacular return from today’s price.

I buy cheap assets and own them until they are no longer cheap. This usually takes a long time and my average holding period is somewhere around the 5 year mark. I could give it a fancy title but the truth s there is nothing that fancy about it. Although I will be the first to admit that Time Arbitrageur would look pretty cool on a business card it’s just asset based value investing and patience. 

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