In value investing, the concept is to purchase shares of a company for less than the actual value of the company net assets without considering business growth or estimating future revenues. In these situation, if a company temporarily is losing money, you may still buy it with a major discount to assets.
The main problematic with this investing type is that you may find value traps and invest in them. I’ve personally invested in two value traps in this year. Errors hurt, but if you learn from it, it hurts less.
Let’s look at those 2 value traps.
Vicon Industries (VII)
My original thesis can be found here and here. Have you clicked the links? If yes you’ve probably told your self “What thesis ?” Well it is exactly my point. I’ve invested (only a minor portion of my portfolio but still) in this stock without digging into the financials. It looked appealing enough with Frank Voisin and Barel Karsan article that I didn’t do my due diligence. I would have seen that this company had a patent lawsuit to settle, that money was burning in their hands since 2008. The margin of safety was based on assets not on revenues. The margin of safety slowly eroded until this lawsuit settlement. At that point it disappeared.
VII lesson : Do your analysis yourself.
Belzberg Technologies – Frontline technologies liquidation
My original analysis cannot be found in this site. Belzberg was purchased has a liquidation situation. They announced a purchase/merger with Frontline Technologies and would give back the excess cash after merger completion. Calculation of the amount to be given back by share was done by Frank’s in this blog post. I double checked the numbers and felt comfortable with them.
From the original calculation then to a quarter later. Belzberg (now Frontline technologies) lost a whooping 8M$ in cash from operations. The probable dividend is now reduced by 80%! The shares lost about half their values in the same time frame. In liquidation investment, you must know the time frame and/or protect yourself against asset destruction until the targeted liquidation distribution is achieved. In this one, I did not check that. Having analysed previous quarters I would have seen that the company was loosing around 6M$ a quarter and that this 12M$ planned distribution could be lost in only 6 months delay. 6 months is a short delay to complete a merger and distribute money.
FLC lesson : protect the downside!