Where great investments come from...
I recently read an awesome interview with Jon Jacobson of Highfields Capital in the latest issue of Value Investor Insight. They asked him a question about volatility and he responded about how it creates great investment opportunities and he went on to describe the types of events to look for. They were very similar to what I watch for here on CAPS and in real life, so I figured that others would enjoy the quote:
"When we last spoke [VII, February 28, 2006], you emphasized how “volatility creates ideas.” What sources of volatility tend to attract your attention?
Jon Jacobson: There are two kinds of events that create volatility. The first revolve around individual companies, such as earnings misses, unexpected news, M&A activity, restructurings and legal issues – things that can make prices and valuations change relatively quickly. In general, prices change much faster than fundamentals of businesses change, so what we want to do is understand what made the price change and then figure out whether the facts have changed as much
as the price. To the extent they haven’t, that can be an opportunity.
The other major source of volatility is when a macro event or trend causes markets to move. These can be industry specific, but also reflect interest rate moves, currency moves, political instability and the overall economic outlook. The market reflects at any moment what investors think XYZ’s business is worth, so if macroeconomic factors force people to buy and sell its securities but we believe those factors have nothing to do with the underlying fundamentals of the company – or less to do with the fundamentals than is being reflected in the share price – that can also be an opportunity."
The interview was one of the best I have ever read in the publication (and not just because I already own two of the stocks that Jacobson recommended) so I plan on mentioning some other nuggets from it when I have the time.