A Little Fur
“My experience is that when people want to give something away at a ridiculous price because they have to, not because they want to, that’s a good time to buy.” —Seth Klarman
Stock market indices recovered much of the losses they experienced in the first week of 2024. During the second week, the S&P 500 rose 1.84%, and the Nasdaq was up 3.09%.
After a year of solid index returns in 2023, many say 2024 will be the year of the stock-picker. We tend always to think it’s a year for the stock-picker. It just depends on which stocks one picks—every year has big winners and big losers.
Sometimes, the future big winners are great companies hiding in plain sight. More often than that, though, the big winners—in both public and private markets—are hiding in niches that are not obvious and are in situations frequently described as a bit “hairy.”
Or instead of hairy, some may use the term fur, as Brent Beshore described it in Permanent Equity’s 2023 Annual Letter:
The other way to operate is to embrace situations that look complicated, risky, and weird on the surface, but upon closer inspection, are higher quality than you’d expect and can be purchased at a price that dramatically covers any “fur” on the deal. This is where Permanent Equity loves to play, and our segment of the market is ripe for these types of opportunities.
All businesses are loosely functioning disasters, especially smaller businesses, and some happen to make money. Small businesses don’t stay small on purpose.
So, if we do our homework correctly and the market is big and durable, then the only logical conclusion for why a business remains small is that there are complications. These complications require skill to properly evaluate and risk mitigate, take considerable time to investigate, and provide poor optics and resulting career risk, thereby reducing competition. This is the definition of market inefficiency — skill matters, creating opportunities to make or lose considerable sums, and quickly.
So if you’re still looking for a good New Year’s investing resolution to adopt, maybe it should be this: Emrace the hairy, the furry, and the weird. If so, you might just find some bargains and make a little money.
“Two markets are inefficient: very small ones…and ones where crazy people are doing crazy things, especially if they’re selling. From time to time, the big markets have some crazily mispriced securities in them. But there’s no question that in small markets there’s a lot of opportunity to find mispricings.” —Charlie Munger
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