I had the pleasure of talking to Cory Fleck of Kereport.com today and prior to the talk I prepared some notes regarding my thought process for making an investment decision. Just in case my points did not come across as clear as I had hoped, I thought I would share said notes:


General comments on how I breakdown/look at stocks:


  • Core position must have: Good people involved
    • Past successes and relevant experience. Have they done this before, knows what success looks like and how to get there?
    • Are they working for a salary or hunting for success?
      • Do they actually WANT results or just want to stay alive and delay?
      • I want them to see them take the risk of spending some of that money that would otherwise just support their salaries.
    • High insider ownership (preferably recent insider buying as well)
  • What is the ceiling for success relative to the company’s valuation
    • As Brent Cook likes to say: Is success worth it?
    • ROI differs between drilling a big target and a small target, but costs might be the same.
    • Example: Spending 5M to drill off a project with a blue sky case of 100 M vs 500 M. Big difference in implied EV and ROI for each case.
  • Looks undervalued: Try to find out the reason(s) WHY the company might really be undervalued
    • Is it boredome?
      • Impatient investors cant stomach to wait 3+ months for the next catalyst?
      • Company being in the “boring phase” on the Lassonde Curve?
      • Opportunity: Superior patience
    • Is it an unknown story?
      • Examples:
      • A spin out
      • A new company
      • An old company but with a new project.
      • Opportunity: First mover advantage.
    • Is it because the market does not understand the case/projects?
      • Unconventional case or and/or a complex case
        • Example: Novo Resources (unconventionally large land package and geology)
      • Opportunity: Superior understanding
    • Is it because they have multiple projects/value propositions? (market only tends to focus on one asset)
      • Spin outs can solve that
      • Selling of projects can solve that
      • Bringing the projects to production can solve that (Will need good backers and access to capital!)
      • Opportunity: Superior understanding & patience
    • Is it because the market is so risk averse that upside is not really discounted and the risks are over-discounted?
      • Opportunity: Superior discipline and objectivity
  • If I don’t find a simple reason(s) why it is undervalued, that can be traced back to human psychology (listed above) then I will probably stay out.
  • If you can find a case that has more than one human factors in play that can be taken advantage of then great!
  • I don’t expect to be smarter than the market, but I can try to be more disciplined and rational than the market on any given day. Bob Moriarty talks a lot about this in his new book, which I read last week.
  • Fitting poker saying: “If you can’t spot the fish at the table, then you are the fish!”

… Then it comes down to internal hierarchy between the different stocks. A stock being undervalued does not suffice. It must provide a good enough value proposition (risk/reward) that is superior to an existing holding.

I don’t really think much about diversification and often have a concentrated portfolio, so it will take a lot for a stock to become a core holding, because it must be better than 99% of the stocks out there in my mind.

Important tip: Don’t let share price act as substitution for Due Diligence.


Best regards,

The Hedgeless Horseman

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