Henderson: its the jockey, stupid
Hi, Everyone,
This has been the hardest doggone post to write, largely because I've written about seven distinct versions as my thinking about Valence has evolved along over the week and a half since Henderson. I think I have the conclusions right now, though. The following is the product of a lot more than is laid out here -- all the other versions have contributed to its final shape, and back it up with much more detail than can be presented now. My thinking about Valence has undergone some tectonic shifts since Henderson, but the new results are more than gratifying. I am now far more confidently bullish than before.
I think quite properly Darkgreen has always challenged us Valence longs to come up with a strong analysis of why, as time goes by, we think it remains true that Valence is a sensible investment. After all, he points to what ought to be a fatal defect in the investment, all else the same. We see now in the 10Q for 12/31 that the balance sheets once again tell us that the company is almost out of money, just like last summer. Financial common sense tells us that we should never buy stock in a company steering straight at the iceberg of bankruptcy -- certainly doing so is usually a case of a special investment strategy only a few will ever pursue successfully. For most of us, companies with terrible finances would be screened out on the first pass over the data set of all stocks, including speculative, hi-tech, R&D or newly-producing common stocks. Common sense applied to Valence would say to wait for production and improved finances -- so what if you pay more; your risk is so much less. I find this hard to argue with, and it is my advice to my friends. So why am I invested in Valence now? What is it that makes Valence special such that such a seemingly fatal defect can be overcome, even dismissed, in the investment calculus? We need an analysis of Valence explaining why Valence looks good as an investment now despite its difficulties. Henderson gave me the materials I needed to construct such an analysis for myself.
(I hope others will offer other ideas of whatever form about why, or why they don't, hold Valence. What I write here could be quite wrong. Others, especially those at Henderson, may have different data and different interpretations. I am not endorsing Valence for everyone, for it remains headed toward the iceberg no matter what the spin. It is highly speculative.)
S what, of the "all else the same," is actually different to my way of thinking, and different enough positively to outweigh the huge negative of the finances? I think there is a clear answer to the "fatal defect" argument. The easiest way to get what is different about the way I'm seeing Valence is through the old racing saw about it being shrewder to bet on the jockey than on the horse. My analysis suggests that Valence's financial defect is a defect of the horse -- but not of the jockeys. The old saw makes me reconsider what I am buying when I buy Valence stock. I know now I am not buying Valence stock based on the rather amazing fundamentals of Valence the company, the horse. (The fundamentals are quite impressive in both positive and negative directions: good market, good product, large patent portfolio, and highly evolved production technology, and just dismal finances. They don't get much more dramatic than this.) In the terms of the old saw, I am buying Valence stock because I'm betting on the jockeys. The tectonic shifts in my thinking over the past 10 days has shifted me from thinking about Valence the horse to Valence the jockeys, from Valence the company to Valence the people.
The briefest way to get why I am more confidently bullish now is to think of who "Valence the people" are. They are the board: Lev, Shugart, Berg, and Roberts. They have all been associated from Valence from the beginning. Shugart and Berg, I believe, have been working to build the company continuously, and the company is just weeks away from its 10th birthday. Now the four seem intent on bringing forth their baby, and their demeanors suggest they aren't going to be deterred. They are walking off the last mile of this long, expensive ordeal with the look of determination and impending triumph. But not only are they determined, they are all highly experienced, accomplished men with ways and means of their own. They are more likely than most to succeed at what they have undertaken. And Lev, one of their own, seems the perfect choice to operate the company: he's got the Valence background, the right sense of direction for the times, and the driving personality. I think the board will make sure he has the resources he needs. The Valence people seem to be on a roll, and that makes me confident.
The upshot of seeing Henderson and all the subsequent puzzling was that I can now, suddenly, "let go" of Valence in a way I couldn't before. Seeing and thinking about these people, the people who really are Valence and hence are the really smart money, made me realize that Valence the company is in good hands. I realized my Valence investment was really in a "team" of excellent people who are close to their goal. I realized I can be confident that they are doing their thing as they see best because they are the best for the Valence job. I realized I don't need to track every detail and analyze every move. I could relax (sorta, despite the finances) because the horse had about as good a set of jockeys as you could ask for, and the finish line is getting close.
From this perspective, I think the answer to the Darkgreen challenge lies in building an analysis showing why it is reasonable to expect (but not feel guaranteed) that the board of directors will succeed relatively soon in its Valence project despite the obstacles laid out in its balance sheets and disclaimers. Such an analysis would support the decision to invest now, despite the reservations of the market, because it would point up things about the people running Valence which the market has missed. If this is indeed the case, investing now exploits the opportunity to get shares for half or a third of what people will pay for them later. Whether this saving/leverage is worth the heightened risk is a personal decision; for most, it is not, but I am just crazy enough to think it is for me. I think now may actually be the last great buying opportunity because I think the Valence jockeys are just about to pull this off. It's risky, but it looks surprisingly good! We may have been lucky enough to stumble onto an unusual opportunity to participate in a fruitful venture which some very competent people are close to pulling off.
In subsequent posts, I will try to build an analysis to support this. I will try to flesh out my reasoning for shifting my attentions from the horse to the jockeys, for why the jockeys look so good, and for why it seems late in the race. Henderson was not only great fun, but it was also a great learning experience. It provided far more grist for the ole mental mill than I had expected. It has become an interesting case study in investing in small, speculative stocks.
Regards, lws |
