Thread by @travislundyasia

Year-End Comments from An Independent Analyst (Thread)

1) Buy side does not make sufficient use of external expertise.

I publish research on events, special sits, catalyst-driven situations (which will include fundamentals) on @smartkarma and I note lots of HFs and LOs

(2/n) which do "fundamental" (whether "growth" or "value" biased) ignore the alpha available from special sits. They may not "do risk arb" but when a situation shows up on a portfolio name, they should understand how to best exit/play. They tend to think proprietary info about

(3/n) how/why they got IN for fundamental reasons gives them an edge on the non-predicted special sit. That's wrong.

The entire job of special sits players is to make money because others (those who do not respect the special sit) decide to trade at the "wrong price."

(4/n): 2) Consumers of research (buy side) do not engage DEEPLY enough with external analysts.

What is written is one thing. What can be said is another. Analysts write for a broad constituency making it digestible. There is a LOT more behind if buy side wants. Look for

(5/n) expertise and engage deeply with it. If you do not, you are doing yourself and your investors a disservice.

External research costs a fraction of what it would cost to replicate internally. Period. Some is base level. Some is very specialized. Use it how you can.

(6/n) Investors would do themselves a real favor by figuring out what is available on which they themselves are not domain experts, then figure out the use case for that domain expertise as it applies to their portfolio construction.

EVERY aspect should be considered.

(7/n) Buy side needs to learn that it cannot know everything. There is symbiosis with sell side. Learn how to make best use of what is out there.

Think about the BEST non-monopoly companies you know. How do they interact with their suppliers? Do they trust them?

(8/n) Do they work together to make it work for everyone? Do they expect their suppliers to throw them under the bus? Do they throw their suppliers under the bus?

Buy side is not AMZN.

(9/n) 3) Buy side should understand sell side only wants them to be successful. Symbiosis again.

If buy side active (whether active on Active Share, factor timing, non-linear alpha strats, etc) goes internal to "save costs", it leads to active buy side ruin.

(10/n) 4) Buy side should respect flow and investor behavior more.

Price movement and relative price movement (alpha) comes from flow. Equities do not mark to model. Price change is generated by the marginal demand.

Very few own TSLA at $600+ "because fundamentals"

(11/n): 5) My nearly 25yrs experience in special sits suggests Buy Side should be less religious about holding period.

Buy side tends to buy growth/fundamentals and ignore the reflexive nature of their industry. If you and your peers all own it, who comes next?

That decision

(12/n): is not dependent on time held but on price movement.

6) Most active investors are not active enough. One does not need to write nasty public letters to the board. But one does not have to sell just because someone offers to buy.

And if someone offers to buy and you are

(13/n) willing to sell Stock X at Price Y because someone offered that price, which is above the trading price at announcement, investors should think about what that means for the rest of their portfolio.

(14/n) 7) Buy side should embrace the value of timing and the intersection of their process with the market process itself.

Just because someone looks at a stock now and likes it now does not mean it is the best timing. Someone else looked at it a year ago.

(15/n) The right timing is often due to a catalyst (see where I am going with this?) which triggers a re-assessment for everybody (everybody is reset) which then triggers flow and price change. Understanding how catalysts, timing, the evolution over time, corporate and legal

(16/n) process, market participant obligation (index effect?), etc can all provide the right liquidity/timing.

If you are not an expert at understanding these externalities, find someone who is. Engage with, trust, and learn from them. The same way your investors do with you.