mixed feelings, page-6

Persistentone,

Far be for me to assume the mantle of valuation theory tutor, but I'm afraid your articulation of the equity capital position of the enterprise - and its composition and determinants - reflects a flawed understanding.

Put simply, a reduction of the equity base for the same quantum of profitability is not only desirable, but is the holy grail for equity investors.

The trivial case of this is the PUREST creator of Economic Value Add (EVA), namely the hypothetical company that can do all of the following three things without any recourse to shareholders:

1. distribute all of its earnings in a given year,
2. grow those earnings,
3. continuously return capital to shareholders by purchasing from willing shareholders, and at accretive valaution levels, some of the outstanding share capital of the company.


Point 3 you might recognise as "shrinking equity".


Needless to say, not all companies can do all 3.

Most struggle to do just one of them well, and a few do all three to some degree.

But the fact remains, that reducing the capital base of the enterprise - i.e., lowering the amount of equity required to run the business, is highly desirable.

That this notion rankles with you as an investor is incomprehensible to me.

It implies you prefer the alternative...companies that expand their equity bases.

Why you would prefer a given share of a pie that is increasing, as opposed to decreasing, is beyond me.


As for the subject of "catalysts", here it is me that fails to derive any comfort.

Frankly, I am stridently cynical of it.

"Investing-by-Catalyst in my experience is something of a stockbroker construct, part of the financial services parlance whose overriding objective is to galvanise investors into some form of brokerage-generating action, either in the form of BUY Catalysts or SELL Catalysts.

I defer to your view that WHG might very well have none of these catalyst thingies.

But then I have no way of knowing if "catalysts" in fact, do or don't exist, because I do not make it my business to actively look for them.

Some of my best performing investments over the past 20 years presented to me no cataylsts...they were just good surplus capital generating businesses that - without increasing, but frequently even shrinking their capital bases - increased their intrinsic value over time.

And their share prices followed the intrisnic value trend, sometimes in a leading, and sometimes in a lagging, fashion.


As for who buys WHG or why or when and at what premium: that is really not something with which I concern myself with too much.

I have absolutely edge in my ability to "occasionally get a warning in advance" (My sense is that the ratio of "advance warnings" relative to actual resulting takeover offers is an inordinately high one, certainly too high for me to design an investment process around.)

I buy shares in companies that I want to own, and for them to create wealth for me, over extended periods of time.

The last thing I want is for someone to come along half-way through that process and to take them off me.


Cam