Catastrophe & Unfair Advantages Fund

Founding principles:

“If you can’t beat em’, join em’”


“When bad things happen to bad people, we take advantage… they won’t be down for long!”

The goal of this strategy is to make money by buying stocks of necessity companies with “unfair advantages” in their markets at moments when the value of the stocks are unusually low.
Some definitions:1. Necessity companies: companies that provide goods or services that everyone is going to need as long as civilization as we know it continues to exist.  examples of necessities: beer, cigarettes, drugs, water, food, oil, money lending/banking, insurance, basic consumer products.

2. Unfair advantages: an “unfair advantage” doesn’t necessarily mean an advantage that was illegally obtained or acquired through any unscrupulous means (though neither of those means of acquisition are a problem for us).  a company has an unfair advantage if there is something about its business that makes it extremely difficult for competitors to hurt their profits or for new competitors to get into the business.  examples of unfair advantages: Waste Management has contracts with municipalities that go back a hundred years and owns landfills in places that would never be allowed to be made landfills today.  it would be very hard for another company to steal their businesses simply because WM has been around so long and has built up hard assets and unassailable relationships.  another company with an unfair advantage is Altria, as its tobacco products are insanely addictive and widely popular due to 100 years of marketing.  Finally, Union Pacific is a company with the unfair advantage of massive tracts of track ownership.  The point is that no competitor is going to come along and blow them out of the water tomorrow with an unbelievable new product.  If the company declines, it’ll happen slowly.

3. moments when the value of the stocks are unusually low: the best time to buy is when something really bad happens that makes people panic and sell their shares of these good companies.  natural disasters, political unrest, financial panics, wars, etc.  these are all good things for us.

More explanation:
bad ideas: companies that are the opposite of what we want to buy will be dubbed “showbusinesses” or “price takers.”  showbusinesses are companies whose fortunes are made or broken by big bets on products.  great example is the aircraft industry: if Boeing bets big on a new plane and it flops, the company is fucked for a while.  pharmaceuticals also seem to rise and fall based on the quality of their drug pipelines.  technology companies like Apple and RIM are also in the business of showbusiness.  as an investor, the worst part is that you’ll never know if the flop is coming until its too late, since it’s up to the market to decide on the product’s fate.“price takers” are companies whose fortunes rise and fall depending on the price of something over which they have absolutely no control.  examples are shipbuilders, shipping companies (freight rates), mines, commoditiy suppliers, etc.  stay away from them.  while it will probably be easy to avoid showbusinesses, my fear is that price takers will be tempting given their tendency to provide “basic needs” products.  in generally, however, we want to stick to branded basic needs rather than commodity basic needs.  consider this thought experiment: would you rather own Anheuser Busch, or the company that supplies them with hops for their beers?  answer: you want AB, as AB has insane brand loyalty, expertise, and a network of manufacturing and distribution infrastructure that has been built up over the course of 1.5 centuries.  but wait, this choice may become difficult…  consider Waste Management and AP Moller Maersk.  WM hauls trash away from your house and stashes it in a landfill.  Maersk picks companies’ stuff up from one port and hauls it to another port.  relationships are big in both businesses, and both companies own assets which make it tough for competitors to enter, so which should we choose??  i argue that the answer is WM on grounds that it is not a “price taker” like Maersk.  Maersk’s businesses is subject to global freight rates that are actually determined by traders on the Baltic Exchange.  WM’s rates depend on who knows who at the local county chamber of commerce or whatever.  in general, if there is a public exchange of any kind involved with a company’s finished product or service, we absolutely do not want to be involved.

Strategy: The way this will work is that we will spend our free time accumulating a list of all of our “favorite companies” in the world, wherever they may be.  the nature of the companies we want dictates that most of them will be from the developed world (unfair advantages take time to accumulate), but that is OK since we need liquid markets anyway.  also, we want places where catastrophes will have a substantial effect on stock prices, and we won’t get this effect in places where crazy stuff happens every day.  this list will be very basic, and will only include company name, location, and industry.  with this list building in the background, we will be on the lookout for events around the world that make news and cause people to sell stock.  examples: earthquakes, hurricanes, nuclear reactor meltdowns, war!, terrorist attacks, liquidity crises.  when these disasters happen, we will go to our list of companies and find some whose stocks got hit especially hard.  we will then look to see if any of those companies were fundamentally affected by the disaster (e.g. factory burned down, customers all died).  if we find any companies that take a hit on stock but not on their business, we will buy stock in those companies after subjecting them to the gut check.

Gut check: whenever an opportunity arises, a purchase must pass a gut check before it can be made.  the test is: if you woke up tomorrow and found out you had inherited 100% of the shares of this company, would you hold onto it?  if the answer is yes, it’s OK to buy.  passing the gut check means that a company is sound from a financial standpoint and that there is nothing freaky about the decision it that isn’t caught by the 3 primary filters.
questions that should be raised by the gut check:
– is the company profitable?
– is anything about to happen that will hurt profitability?
– does the company have crushing amounts of debt?
– need to read some more stuff and think of more gut check questions

Entry point: the moment of truth comes when the it’s time to decide when to buy.  when a disaster occurs and a company’s stock dives, there will be great temptation to try to “time the market.”  we will not try to time anything.  to combat this urge, it may be helpful to come up with a set of rules that determine when to buy in.  right now, the only rule i can think of is that we buy as soon as a stock loses X percent of its pre-catastrophe value.  alternatively, we could buy as soon as trading volume reaches 200% of its usual level.  the latter idea is a way of waiting until the market has “made its decision” about how the catastrophe as it relates to the company.  iit may fall farther past that point, however that’s ok.  if we have extra money, we’ll buy more.

How much to spend: another important decision to make is how much money to spend on any one stock.  theoretically, we’d keep buying the more a stock falls, however that’s not practical since we have a limited amount of money to work with. therefore, we’ll have to think about limits for each purchase.  i’ll need to check out what flat trade fees Ameritrade uses and we’ll decide minimums and maximums based on those.

Exit: theoretically, there should not be a need for an exit if all of the procedures are followed in choosing the investment.  we buy after a stock takes a big fall, but if it doesn’t correct as we predict, then we did something wrong in our analysis because something fundamental must have changed if the price is staying low.  the idea is that this scenario never happens, and we never lose money.


I am concerned that very few buying opportunities will arise.  missed the opportunity of the century 2 years ago, obviously.
I still don’t understand how to appraise the “true value” of any company at any given time.  I know a lot of writing has been devoted to how to value companies and by consequence value stocks, but I still don’t get it.

Post a Comment

Required fields are marked *


%d bloggers like this: