Top 50 Microcap Investor List: Chip Maloney
For this week’s Top 50 Investor we present Chip Maloney. Chip has been an author on the MicroCapClub forum for a number of years now. He published his first blog post in 2014 titled, “The Art of Interviewing Management,” and has continued to contribute original content to date.
Read our feature on Chip Maloney
Bear Market or the Return of the Bull?
After a volatile week, markets staged a rally into the weekend late on Friday. Concerns about interest rate hikes and inflation leading to fear and a potential bear market took a temporary back seat that made the week—if you just look at index beginning and ending prices—look uneventful. But is this a reason for hope or concern?
In a bull market, the narrative is all that matters. The Fed put. Disruptive innovation. Cheap money. You can pick which narrative makes you feel good, and then spend your money buying each long and continuous rally.
But in a bear market, the narrative takes a back seat to fundamentals. Balance sheets, business models, profits, and valuations start to matter. And a market rally is best used to sell and re-allocate, not add more to one’s high-valued equity positions.
We don’t know if recent volatility is the beginning of what is probably a long overdue bear market. No one does, at least not with certainty. But we do think it’s worth thinking about how you should behave and how you’re positioned if it is. As Maggie Mahar described in her excellent book Bull!, history isn’t always kind to those who ignore fundamentals at any sign of hope:
An investor who had the misfortune to invest $10,000 in the S&P 500 in January of 1973, at the peak of a bear market rally, would have to wait 12 years and 11 months to catch up with a neighbor who kept his money in T-bills—if the equity investor reinvested dividends. If he did not, the “catch-up” period would be 23 years and 1 month. The hypothetical example assumes that he bought at the zenith of the rally, but unfortunately, that is about when individual investors are inclined to join a bear market rally—after prices have been rising for many months and they feel secure. This is what many did during the bear market rally that followed the crash of ’29, and again in 1990, when Japanese stocks rallied following that market’s first leg down.
In each case, investors were following the rule that they learned in a bull market: “The trend is your friend.” But in a bear market, “you have a whole different rule book,” Ralph Wanger observed. “In a straight-up growth market, your rule is to be 100 percent in equities all the time. Buy strength. Disregard risk. Only look at the income statement. And all stories are true, because we want them to be true. It’s like the nice guy you met in the bar telling you he loves you truly—and he does.
“In the volatile bear market that tends to follow an exponential growth market, many of these rules invert,” said Wanger, speaking from experience. “You don’t buy strength; you sell strength. You don’t look at the income statement, you look at the balance sheet [which shows a company’s debts]. All stories are false. It turns out that the guy in the bar is a married orthodontist from Connecticut.”
And “selling strength” means viewing a bear market rally, not as a buying opportunity, but as a selling opportunity—a chance to realize losses and put the money to work someplace else.
There are always cheap stocks somewhere, and the volatility of recent weeks has created plenty of opportunities, especially in the land of small and micro-cap stocks. If you buy what’s out-of-favor, on sale, and undervalued, you can make it through a potential bear market with profits on the other side. If you buy what’s been popular and still highly valued—even if less highly than it used to be—you risk permanent loss of capital. Choose wisely.
2nd Annual Winter Wonderland Best Ideas Conference - Feb 8th-11th, 2022
On February 8th, the 2nd annual Winter Wonderland “Best Ideas” conference commences with the top 36 ideas presenting to investors. The “Best Ideas” are submitted by investors and colleagues of the buy side organizers as a way to try to generate alpha for their investor network. All are welcome to attend the presentations on February 8th & 9th.
Conference details:
Location: Virtual Conference
Dates: February 8th -11th
25-minute virtual presentations on February 8th & 9th
For qualified institutional investors ONLY - 1x1's will be available Feb 10th & 11th
Sponsors include Lake Street Capital Markets and Northland Securities
Registration and more info:
Tweet of the Week
In Case You Missed It…
Farnam Street Investments’ January 2022 Letter
The Boyar Value Group’s 4th Quarter Client Letter
Business Breakdowns Podcast: ViacomCBS: A Content King in the Streaming War
Yet Another Value Podcast: Keith Smith thinks TIGO is a cheap special situation
If you have not already upgraded your membership…
Avenel Financial Group, a merchant banking and advisory firm located in Charlotte, NC, launched a new business venture called the Co/Investor Club. The Co/Investor Club is a community of value-oriented investors that collaborate on investment opportunities and ideas. You are receiving this newsletter because you are a Free or Premium Member of the Co/Investor Club!
Chat with Mike
Whether you’re an executive with investment opportunities or a college student looking to network, we would love to chat with you!
Email our Founder, Mike Pruitt, at mp@coinvestorclub.com with questions and ideas or schedule a meeting.
Don’t forget to follow us on social media too!
Twitter:
LinkedIn:
For our disclaimer, please visit our website
Have friends that want to join? The Co/Report is public, so feel free to share!
Thank you for reading. Co/Report grows through word of mouth. Please consider sharing this post with someone who might appreciate it.