Session 15: Value Investing - The Activists

In this session, we look at activist value investing, where you not only buy cheap companies, but also provide the catalysts for prices to adjust to value. In particular, we examine the strategy of investing in poorly managed companies and changing their asset mix, capital structure, dividend policy and corporate governance with the intent of increasing value (and price) over time. We classify activist investors into three groups, lone wolves (individual investors), activist mutual funds and activist hedge funds/private equity investors and examine differences in how they approach investing.

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Summary of this video
Value investing has three strands: passive screening, contrarian value investing, and activist value investing, which requires more capital and involves changing companies.
[00:00](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Value investing can be done through activist investing
[03:03](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Activist investors buy undervalued stocks and try to close the gap between status quo and optimal value.
[05:59](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) To enhance company value, focus on competitive advantages, lengthening growth period, and lowering cost of capital.
[08:48](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) When dealing with bad businesses, choose the option that makes the most financial sense.
[11:29](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Optimal mix of debt and equity can minimize cost of capital.
[14:09](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Mixing financing to achieve optimal debt ratio
[16:45](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Corporate governance is key to maximizing company value.
[19:23](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Activist investing requires capital, clear plan, and persistence.
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Detailed Summary for [Session 15: Value Investing - The Activists](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) by [Merlin](merlin.foyer.work/)
[00:00](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Value investing can be done through activist investing
- Activist investors try to change the value of a company to make it more profitable
- Activist investors can be individual, institutional, or hedge funds/private equity funds
[03:03](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Activist investors buy undervalued stocks and try to close the gap between status quo and optimal value.
- Activist investors create noise to move the price towards optimal value.
- Optimal value is the value of the company if it were run perfectly.
- Status quo value is the value of the company as it is currently run.
- Activist investors try to make the company better run to increase its value.
[05:59](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) To enhance company value, focus on competitive advantages, lengthening growth period, and lowering cost of capital.
- Assess existing competitive advantages and consider new barriers to entry.
- Examine cost of capital and adjust debt and equity mix, product and service offerings, and fixed costs.
- Approach value enhancement on a case-by-case basis, considering the company's lifecycle and unique circumstances.
[08:48](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) When dealing with bad businesses, choose the option that makes the most financial sense.
- Shut down the business if liquidation value is high.
- Sell the business if it's worth more to someone else, or spin it off if it's part of a conglomerate.
- Consider the costs and benefits of debt, including tax advantages, bankruptcy costs, and agency costs.
[11:29](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Optimal mix of debt and equity can minimize cost of capital.
- Cost of equity increases as debt increases due to higher risk perception.
- Cost of debt increases as default risk increases.
- Weighted average cost of capital is minimized at a certain mix of debt and equity.
[14:09](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Mixing financing to achieve optimal debt ratio
- Marginal recapitalization involves using new projects to fund a disproportionate amount of debt
- Total recapitalization involves borrowing money to increase debt ratio and returning it to stockholders
[16:45](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Corporate governance is key to maximizing company value.
- Companies with excess cash should return it to shareholders through dividends or buybacks.
- Investors' preferences for dividends or buybacks depend on the company's history and their own tax situation.
[19:23](th-cam.com/video/rpItkmNa2YE/w-d-xo.html) Activist investing requires capital, clear plan, and persistence.
- Capital of few hundred million dollars is required to be an activist investor.
- Clear plan and understanding of corporate finance and the company's business is necessary. Persistence is key to success.