Aloha to the World of Activist and Catalyst Investing

     This is my first entry for what should be an interesting trip. I have been an active investor in Stocks, Bonds, Options, and Futures for over 20 years. I have had enormous ups and downs. At times, I was convinced I knew it all. But, alas, the market reminded me of just how foolish that was. So for years, I have been up and down. Down and up. It is the very roller coaster you hear talked about. About 7 years ago, I decided to finally give in and learn more about technical analysis and active trading. Want to really loose money? Become a day trader! It's not that you can't make money as an

active trader. You certainly can. It's just that the percentage of people who are successful at this is very very small. There are all sorts of figures out there showing how impossible it is. Yet despite that, there are those who consistently, year after year, make money with short term trading strategies. Some make a lot of money. So in 2008, I decided to try my hand at this. My timing could not have been better. Market volatility was at 30 year highs. The market plummeted then finally rebounded from decade lows. I must have made millions! Well I did not. I made some money along the way. But one thing kept stopping me. Time. The time investment to successfully day trade is enormous. To be successful, really successful, you have to spend a large part of your day glued to your screens. No matter how I battled with this fact, it always remained the one factor I could not conquer. I simply did not have the time to spend as a day trader. I own a physical therapy business. I home school my kids. I live in Hawaii, which is 5-6 hours off from the major exchanges. I just couldn't do this the right way.

But I kept trying! I went for months at a time on 4 hours of sleep a night. I felt I was just not trying hard enough. I learned so much! I talked to some very successful investors. I was driven by an ambition to succeed. There were times when I thought I had finally found it. Then, whatever edge I thought I had was suddenly gone. The golden ring was always just out of reach.

Then a strange thing happened. I realized I was very very successful at investing without even realizing it. How? Well, it's a bit of a long story. Like many investors, I had divided my money. Most of my money was held in retirement accounts and investment accounts. This was not the money I was trading with. This money was for my future. So, I knew I could not risk this with day trading. But, I also knew I could not take the time to actively manage this. So I invested it in the do-it-yourself hedge fund style. Also known as Coffee-house investing. I chose a basket of ETF (Exchange Traded Funds) and bought and held. With each month, I would place my 401K contributions in these ETF's. At the end of each year, I would use my companies profit sharing to add to the ETF's  a little more. For the most part, it was very hands off. I would divide each contribution equally among the 8 ETF's I held. Somewhere in 2008, I got the idea of adding a few stocks to this mix. Stocks that I would never sell, and simply add to each month. I chose stocks that buffet would love Wells Fargo (WFC), Campbell Soup (CPB), Bank of New York (Now BK), and a few others.  I used Valueline and AAII Stock investor pro to screen for undervalued stocks. Often I went for months without screening. Then I would remember to run the search again, and purchase one or two stocks that appeared on the top of multiple screens. I figured if three screens all said a company was a good buy. I added to these quite religiously. But it was very little work! Most months, I never even looked at the balances. Why? I was focusing all my effort and energy to the 20% of my portfolio I was day trading with. I was paying attention, but not to 80% of my portfolio. Crazy huh? 

So here is where this all changed. Last year, I was looking at my gains and losses from day trading. After hours of calculating, I saw the harsh reality. I was a net loser at day trading. On the positive side, I never lost a lot of money. Probably due more to luck, I had not made the mistake of most newbie day traders and pissed away my assets. But I had never really had a good year. At what point do you admit defeat? Well I was about to give in and raise the white flag. But as I stared at my trading account, I noticed something. I mistakingly pressed the button that allowed me to view all my accounts together on one screen. By fortune, this screen allowed me to see the pure gain for each account. The best part was, this went back to the beginning. For most of my accounts, this meant 15 or 20 years. I was floored. While my active trading had a 2-3% annual loss, my passive investing had a 19% average annual gain. What? That could not be!

I ignored the news with 80% of my money

But the statements did not lie. I had made 19% through one of the worst investment environments in the history of the market. And I did it with a passive investment style that barely took 2 hours a month. All those hours spent day trading had cost me money. Those two hours a month made me a small fortune. I had more than double my investment over those years.

I couldn't believe it. All that time, I had been focusing on the wrong thing! But I really needed to know where that 19% had come from. I am sure you are curious too. Partly, it was due to investing a large amount in 3 ETF's at the absolute bottom of the 2008 - 2009  bear market. In early 2009, I had invested a huge amount of cash into my retirement accounts. This was mainly put into VWO (Vanguard Emerging Market), VB (Vanguard Small Cap), and VNQ (Vanguard real-estate) These three were by far the most down in my account and I was simply balancing my investments back to their original percents. Also, I bought a fairly large amount of WFC, JNJ, and a tiny energy company called CVI.

Most all of my outsized gain was in these 6 investments. 3 ETF's and 3 stocks. If you want to know the truth, it was mainly due to one stock: CVI. CVR Energy Inc. (CVI) is a rather small company that owned gas transmission lines, oil fields and a refinery in Kentucky. That's right, one stock gave me most of my gain. So I was just lucky, right? Without CVI, my gain would have been 14.2%. That is a huge difference over 7 years. 14% is hardly a bad return, but really not the same as 17%. While I admit, there was a lot of luck involved, there were two other factors that played a huge role. One is, I bought it and forgot it. Just like the old Ronco jingle (Set and forget) I had purchased a fairly large position in this micro cap at around $6 a share and never again touched it. But the second reason is a man named Carl Ichan. This man, if you don't recognize the name, is a famous activist investor and corporate raider from the 80's and 90's who is still going strong. Unbeknownst to me, Carl had been acquiring CVI stock since 2012 and had forced the board to make two spin-offs and set the company on a path to improve it's bottom line and increase shareholder value. I won't bore you with all the details now, but the fact is, CVI hit $60 a share today. Ican's shares are up almost 100% since the day he purchased them.

Aloha!

Activist Investing defined: An activist shareholder uses an equity stake in a corporation to put public pressure on its management The goals of activist shareholder range from financial (increase of shareholder value through changes in corporate policy, financing structure, cost cutting, etc.) to non-financial (disinvestmentfrom particular countries, adoption of environmentally friendly policies, etc.). The attraction of shareholder activism lies in its comparative cheapness; a fairly small stake (less than 10% of outstanding shares) may be enough to launch a successful campaign. In comparison, a full takeover bid is a much more costly and difficult undertaking.

It was in the middle of 2012 that it hit me. This one revelation forever altered the course of my investing and hopefully will change yours. As I delved further into the subject of activist investing, I saw that one of the simple things I had been doing on autopilot, only purchasing individual stocks that were being bought by "smart" money (hedge funds and successful value investors) was actually a very successful way of investing. Over the past 10 months, I focused solely on this investment style and it really paid off. I am not going to bore you with the details, but my returns have been substantially better since I quit trading and started focusing on both value and catalysts. The catalyst being purchases by the smart money - the kind of investor who will force a change in the company. 

Here are my words of foolish wisdom: You can be a successful day trader if you want to spend as many hours as you normally work at your job trading. You can also be successful at buy-and-hold value investing if you don't mind waiting years and decades for the market to decide what your stocks should be priced at. Or, you can do what I did for years without realizing it; you can invest in stocks that do have intrinsic value AND are being bought by notable investors. And that is the goal of this blog. 

Doug