The reason? Not enough investment opportunities for his $22 billion under management. Individual investors or money managers with less money don't have this issue. Our problem is having too little money and too many ideas.
How is it possible that Klarman, one of the best value investors, can't find many deals while you and I can within hours? Klarman answered it himself: "Today, Baupost's opportunity set is smaller than it has been in some years."
In other words, he can only invest in big companies because of the size of his portfolio. If he wanted to find enough $50 million companies so he could put the entire $22 billion to work by purchasing 10% of each of them, he would have to find 4,400 companies. Good luck! It usually it takes me about three weeks to study one company. With 4,400 of them, it would take 254 years.
However, if you only have $2.2 million or $22 million instead of $22 billion, all you need to do is find a handful of companies of this size, and you will do well beating the return of Seth Klarman or other money managers who are disadvantaged by the size of their portfolios.
Small companies are mispriced more often than bigger companies because few investors and analysts are even aware of them. Joe Ponzio, the author of F Wall Street, wrote that businesses are like boats and the stock market is like an active seaport. Small boats, which represent small businesses, come to the port more often than big boats or big businesses. When you are alone or with just a few friends, you can just board the small boat and reap the rewards. Someone like Klarman, with his army of investors, has to wait for the biggest boats to arrive while watching us make money.
Unfortunately, many investors would rather invest in big-cap companies, thus limiting themselves to fewer ideas just because the investment industry has convinced them that small-cap companies are riskier. One of the reasons given is that small companies are illiquid. I have heard this nonsense many times from private business owners who have the majority of their net worth tied up in their own businesses. So how is, say, a $2 million private company less risky than a $50 million public company? If you want to make money and are not a $22 billion gorilla, maybe you should look at companies such as KSW, Mastech Holdings and Premier Exhibitions.
furnishes and installs high-end ($3 million and up) heating, ventilation and air-conditioning ("HVAC") systems and process piping systems for institutional, industrial, commercial, high-rise residential and public works projects primarily in the New York City area. This company is dirt cheap.
provides information-technology staffing and consulting services to large and medium-sized organizations in the U.S. This company also has lots of potential.
develops and tours museum-quality exhibitions worldwide. It is an interesting investment opportunity because it trades below the value of Titanic artifacts.
Disclosure: The author owns KSW, MHH and PRXI as of the date of this article.
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Mariusz Skonieczny is the founder and president of Classic Value Investors LLC, an investment-management firm that builds and manages customized portfolios for clients. He is the author of 'Why Are We So Clueless About the Stock Market?: Learn How to Invest Your Money, How to Pick Stocks and How to Make Money in the Stock Market.' His Web page is www.classicvalueinvestors.com.