Information requests:
e-mail: kluskin@bloomberg.net
Intrinsic Value Asset
Management, Inc.
P.O. Box 2415
Malibu, CA 90265
Below you will find a detailed description
of our investment strategy.
Following questions often refer to the answers
above them. Click on a question to see the answer.
Q: Why micro-capital stocks?
Q: Your focus is on medical/bio/technology companies,
can you explain why?
Q: That brings us to the question of how you pick your
investments?
Q: What is the importance of net working capital?
Q: So you just plug the criteria into your Bloomberg
and it's off to the bank?
Q: Can you explain the importance of barriers to entry?
Q: What other qualitative criteria can you tell us
about?
Q: What about the upside? Don't you care about making
money?
Q: How do you decide when to sell?
Q: Does it bother you to sell early and leave profits
on the table?
Q: Can you discuss IVAM’s performance incentive?
Q: Are you looking for values in the foreign markets?
Q: Do you hedge your portfolios in any way?
Q: You seem to have found an interesting niche for
yourself, can you explain why there isn't more competition.
Q: Why micro-capital stocks?
A: They tend to be the least efficiently priced for the following
reasons:
1) Liquidity (average daily volume of trading) is generally too low
for most portfolio managers to be interested, 2) research coverage -- small
companies have less research coverage than large companies. Those that
have disappointed Wall Street are often dropped by all analysts, even by
their own investment bankers. This lack of information further reduces
demand, lowering stock prices, which creates opportunities for independent
research organizations such as IVAM. The companies that we pursue were
usually brought public at prices up to10 times greater than what we pay for
them, and many of these were “hot” issues by respected Investment Banks.
Q: Your focus is on medical/bio/technology companies,
can you explain why?
A: The U.S. is the world’s technology leader, and not coincidentally
also the world's richest country. Major technological breakthroughs and
innovations as well as continual advances in life sciences have produced
great wealth for the creators and owners of these successful ventures.
When the marketplace recognizes the hidden value of our medical/bio/technology
companies, the returns can be extraordinary.
Q: That brings us to the question of how you pick
your investments?
A: The search is defined into two parts; the quantitative and
the qualitative. We begin the quantitative process with a computerized
search for those companies that have the most pristine and liquid balance
sheets in the micro-cap medical/bio/technology universe. We are extremely
price conscious. Only those companies that are trading close to net working
capital per share and have a reasonable burn rate (cash loss) are considered
for purchase. Many of our companies are in the process of, or have recently
completed, a restructuring, which greatly reduces their burn rate per quarter.
Q: What is the importance of net working capital?
A: A company's working capital (current assets minus current
liabilities), less all other debts, is net working capital. If stated inventories
and receivables are close to market value, then a company's net working
capital approximates its short-term cash value. This value per share gives
us a cash cushion, or "margin of safety", by which to gauge downside risk.
The "margin of safety" concept, was identified by Warren Buffet's mentor,
Benjamin Graham, as the cornerstone of intelligent investing. The
stronger a company’s balance sheet, the greater the flexibility and time
it has to deal with adversity. The very nature of buying depressed
stocks imply there are perceived problems, and a large net working capital
position is our way of decreasing the inherent risks of investing.
Q: So you just plug the criteria into your Bloomberg
and it's off to the bank?
A: We have only discussed the quantitative aspects of the screening
process. The qualitative criteria are infinitely more complicated and numerous.
This is much more of an art than a science, with many generalizations to
which there are always exceptions. For instance, we rarely ever look
at a company that was not taken public by a reputable investment banker.
We try to understand whether its technology is proprietary or not.
If not, we rarely look further. If it is proprietary, then we want
to know about barriers to entry.
Q: Can you explain the importance of barriers to
entry?
A: We try to gauge a company’s worth by the value of its technology,
even though it may not be presently earning them any money. Since
technology is constantly changing, we want to understand the lead times
and patent strengths, which are short-term barriers to entry. These
difficult-to-quantify intangibles are key to a company's future profitability,
or value to a competitor. In other words, we are generally not interested
in any companies that have become commodity producers.
Q: What other qualitative criteria can you tell us
about?
A: We are also interested in whether the company has a strategic
partner or the potential for being acquired by an industry giant.
We try to understand who is in control of the board of directors.
We ask questions concerning how they plan to increase shareholder value.
We look at insider transactions for hard evidence of optimism or pessimism.
We try to understand whether the company's business model makes sense.
We analyze the impact of a restructuring and/or a change in management.
We contact analysts to understand how well a company is being followed.
The closer it is being followed, the lesser the chance we will obtain exclusive
information. Where no analysts are actively researching, there is an information
vacuum, which can produce substantial pricing inefficiencies. In
these situations, we can gather specific information from management that
is extremely valuable because no one else is even asking questions. By
independently compiling first-hand data we can find the diamond in the
rough. Along the way we weed out quite a number of candidates.
Q: What about the upside? Don't you care about making
money?
A: Of course we do, but our first rule of investing is: Don't
Lose Money. Our second rule is: Don't Forget the First Rule. We believe
that by carefully reducing our downside risk, we are improving our overall
risk/reward ratio. Companies that do not meet Wall Street expectations
produce disappointments and losses for investors. Most of our investments
have the potential for terrific growth, but are presently not expected
to achieve any results by Wall Street. Our strict buying disciplines
allow us to pay very little for the technology owned by these companies.
Their core competencies are still worthy of development, and strategically
valuable to industry competitors. Timely investments in these
situations produce venture capital type rewards with less risk.
Q: How do you decide when to sell?
A: Knowing when to sell is our greatest challenge. Each situation
is different which necessitates constant appraisal of changing fundamentals.
We tend to provide liquidity to the momentum investors. When they tire
with a stock, and dump it at cash value or below, we buy. Likewise, when
a stock starts to really move on the upside, we usually start selling as
the momentum investors begin moving in.
Q: Does it bother you to sell early and leave profits
on the table?
A: Legendary stock trader, Bernard Baruch, is famous for saying
that he usually sold too early, but that it was okay because he also bought
early. We would like to think we do the same.
Q: Can you discuss IVAM’s performance incentive?
A: We can only work with stocks that presently match our quantitative
criteria. We will not alter our standards and sacrifice our performance
for the lure of controlling more assets. Most managers adjust their
purchase criteria in relation to the current environment. They believe
a stock is cheap if it's trading at a lower multiple of earnings relative
to that of its peers or to the market overall. They are looking for relative
value. In contrast, we do not change our criteria to suit the environment;
we are only looking for absolute value. Unlike most managers, we are confined
by our absolute value discipline. Our motivation is the back-end
performance fee.
Q: Are you looking for values in the foreign markets?
A: No. We rely on public filings that domestic companies are
required to make with the SEC. Foreign markets don't offer nearly as much
information as our market does. The transparency of US based medical/bio/technology
companies provides better investor protections than offshore companies.
Additionally, the U.S. is the world’s technology leader. These factors
make the domestic marketplace much more attractive.
Q: Do you hedge your portfolios in any way?
A: Yes, we started our hedging/insurance program on October 5, 2004.
Although our strict purchase criteria has insulated us from the large declines
in the Tech/Bio/Med area since 2000, our performance could have been at least
20% better per annum if we had hedged thru the purchase of put options on the
Nasdaq 100 index. In
2003 my concern to protect our gains sent us into a heavy cash position early in
the year. We were only up 35% at year end rather than around 100%, if we had
stayed fully invested. Our hedge would have subtracted 10-15% from the 100%
resulting in a 85% - 90% net appreciation for the year. While hindsight is
20/20, we feel the recently employed hedge will help produce superior
results going forward.
Q: You seem to have found an interesting niche for
yourself, can you explain why there isn't more competition.
A: Our willingness to work for a percentage of the profits permits
us to manage less money and invest in very small capitalization companies.
Most investment managers do not have the confidence in themselves to embrace
this type of challenge. Most value investors do not feel comfortable
with small medical/bio/technology companies, while most technology investors
are only interested in the latest and greatest momentum stories. Many investors
have suffered large losses in overvalued technology behemoths. Meanwhile,
in comparison to virtually all the indexes, IVAM has preserved our clients’
capital and shown far superior performance.
Our niche exists in a gray area between the
two traditionally dominant investment styles. Because independent
research is time consuming and complex, most analysts and portfolio managers
desire "visibility" of future revenues and earnings to justify making an
investment. When future projections are virtually unattainable, most Wall
Street players tend toward the sidelines. Less competition equals
greater opportunities for us.
The concepts and methodologies covered here are
the exclusive intellectual property of INTRINSIC VALUE ASSET MANAGEMENT,
Inc.
No part of this information may be reproduced or
transmitted in any form or by any means without permission of IVAM.