BIO: Ben Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016.
STORY: Benjamin has made the biggest mistakes and lost the most money by buying cheap companies that get less valuable over time.
LEARNING: Know what kind of investor you are and let your portfolio reflects that. Just because it’s cheap doesn’t mean you have to buy it. Invest in a business you can own for years.
“It’s hard to establish a true margin of safety when the intrinsic value is falling over time. It’s like catching a falling knife.”
Benjamin Claremon
Guest profile
Ben Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016. His background includes positions on the long and short side of hedge funds as well as commercial real estate finance and management. Ben is the proprietor of the value investing blog The Inoculated Investor, the founder of the 10-K Club of Southern California, and the host of the podcast Compounders: The Anatomy of a Mutlibagger.
Worst investment ever
The place where Benjamin has made the biggest mistakes and lost the most money is with companies that get less valuable over time. These are businesses facing secular headwinds or outright secular decline. Every day, the businesses become worth a little bit less. They seem lucrative to buy when they’re cheap and sell when the valuation goes from highly depressed to merely depressed. However, businesses that don’t get more valuable, over time, tend to throw curveballs at you that you might not be expecting. Whether it’s a balance sheet issue, a capital allocation issue, or a management change, trouble just breeds more trouble.
There was such a company that Benjamin was relatively public on. When investing in this company, Benjamin thought there was a distinctive margin of safety. He believed the management team understood how to create value for shareholders. The company had valuable assets that could be sold at higher prices in the current valuation. And that capital allocation changes could have increased the company’s value relative to the current stock price.
For this reason, Benjamin thought that the business connectivity and the business services sides were worth a certain fair amount more than the stock was trading for. He was looking at a situation where the value was much higher if they could just unlock it via divestitures. Amazingly, that’s precisely what the management did. They sold three businesses, all of which were at multiples higher than the stock price. But, to date, the stock is still down.
Lessons learned
- Before you invest in a company, ask yourself, does this business look like it is getting more valuable over time and has a chance to compound? If the answer is no, don’t waste your time on it.
- Know what kind of investor you are, what fits your temperament, and what allows you to sleep well at night. Then let your portfolio reflects that.
- You’re better off investing in a business you can own for years instead of one meant to be sold.
- When investing, consider the moat trajectory and determine if the company is stable, expanding, or contracting. If it’s contracting, don’t assume that a cheap valuation will protect you from what will happen over the next couple of years.
Andrew’s takeaways
- Grow and learn from mistakes, and don’t let them scar you.
- Companies go through upcycles and downcycles all the time. Understand which cycle you want to invest in, then find your investing style.
- Whether it’s in your personal, investing, or business life, remember the impact of taxes can be enormous.
- Just because it’s cheap doesn’t mean you have to buy it.
- During a mergers and acquisition deal, buy the company being acquired, don’t buy the acquirer.
No.1 goal for the next 12 months
Benjamin’s number one goal for the next 12 months is to be a better investor than he is today. So everything he does on the investment side is focused on being consistent, repeatable, thoughtful, reflective when he’s wrong, and willing to learn from others.
Parting words
“The cool thing about this industry is that people share so much of what’s made them successful. You can just pick, choose and steal very liberally, and create your own frame and understand what kind of investor you are.”
Benjamin Claremon
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