Sunday 2017-01-22

Bronte Capital is a team of just two guys -- Hempton and Maher -- who leverage their blog to discuss issues that they're facing. Hempton has a new post on averaging down the cost of acquiring shares, presumably prompted by the negative outcome of their multiple investments in Sun Edison.

If I could improve our formal stock notes in any way I would like an ex-ante description of what circumstances we are allowed to average down a particular stock, and how much.

One way to read this is that while Hempton has stock notes, they haven't yet been translated into execution plans: one for entering a position, and one that details the multiple exit conditions. This means we also don't have Hempton's probability and confidence estimates for the various outcomes, so there's no way to evaluate Bronte's decision process.

The last post explained why I think a full valuation is not a necessary part of the investment process. A decent stock note is 15 pages on the business, one page on the management, one paragraph or even one sentence on valuation.
I would love it if I had an encyclopaedic knowledge of every mid-cap in Europe and could buy the odd startlingly good business when tiny and cheap. But the task is too large. The world is complicated and I can't cover everything.
We have a default at Bronte - and the default at Bronte is that we have a maximum percentage for a stock (typically say 9 percent but often as low as 3 percent depending on how we assess the risk of the stock)

Hempton's possibly hinting at workload issues: doesn't want to write more on valuation, revisits previous work-already-done investments, pushes against maximums... Or maybe it's just dissatisfaction of some kind.

The iconic bad situation to average down is a levered business model involving fraud. It is surprisingly common because people who run highly levered business models have very strong incentives to lie or to cover it up when things turn to custard. I can think of two recent examples: Valeant and Sun Edison.

Hempton has just disected the corpse of an investment, and written up the pathology report. While the fact that he's voluntarily writing post-mortems has risk managers silently cheering, notice that the solution going forward is to exclude companies with certain characteristics from reinvestment, i.e. re-use previously gathered information, i.e. not run any new tests on the patient who is still alive at that point.

This could be philosophical -- ignore the market until it turns into a weighing machine -- or it could be related to the above possible lack-of-time issues. In either case, both are definitely worth reviewing and re-evaluating.

And since Bronte's blog goes back to 2008, a further review and eval of their old posts might yield some more good material.

#brontecapital #firstpost