Kitbag,Thanks for the alert on ARP, I'm afraid that I hadn't...

Kitbag,

Thanks for the alert on ARP, I'm afraid that I hadn't noticed that ARP is about to "break up".

I italicise "break up" not to be sarcastic or facetious, but because I sincerely don't know what the phrase really means. I assume that it means that the share price is about to go up suddenly, yes?

This provides a great segue for me to launch into one of my favourite exhortations, that of investment process.


In terms of process, my observation is that there are two broad categories of investors:

1. Those that invest in BUSINESSES
2. Those that invest in SHARE PRICES


Ninety five percent of people - including institutional investors - say they do the former, yet I’m of the view that the overwhelming majority of people really do the latter.

I don't do Share Price Investing (aka "Squiggles-on-the-Chart Investing”) very well.
I think it's very difficult to do successfully on a sustainable basis.

Examples of "investing in the share price" – as opposed to investing in a BUSINESS - include buying a stock in anticipation of some desired favourable "event", or "catalyst", such as:

- the release of exploration results,
- the announcement of biotechnology trial results,
- a takeover announcement,
- an upgrade to earnings expectations,
- broking analyst increasing his or her target price (don’t get me started on this one...)
- whether the X day moving average has crossed the Y day moving average or whether the stock is trading near the top of some or other Bollinger band, or
- topically, whether or not it looks like the stock might break out!


In other words, "Share Price Investing" can be distilled into: "the garnering of some relevant insight that should cause the share price to respond".


There are two main - and not insignificant - problems with this approach, in my experience.

First, it is not possible to know how unique the insights one garners truly are. In other words, what one might think is a proprietary insight that should constitute a share price catalyst might actually already be so-widely "known" to the broader market, that it makes no difference when that particular insight manifests itself.

In fact, one might have an insight that is not only widely-known, and thereby rendering it inconsequential to the share price, but there in fact might also be an insight that about which one does not know that, on manifesting itself, might cause the share price to do the exact opposite of what one's false insight had been foretelling.

It becomes somewhat random. ("Fooled by Randomness", written by Nassim Nicholas Taleb - which I read many years ago and then again a few months ago - articulates this phenomenon through his descriptions of "unknown alternative worlds".)

Secondly, the constant search for share price sensitive "insights" and "catalysts" requires significant time and energy and a constant state of heightened alertness.

And frankly, I'm too tired and too lazy for that. I don't want to be controlled by my investing activities. That defeats the entire purpose of the exercise.
I want to be liberated due to my investments, not trapped.

"Share Price Investing" requires constant consideration as to whether some or other event(s) - random or not - will cause the share price to go up a few percent here or there.

That's a process that is both tiring (mentally and emotionally), as well as futile in my view because of the complex and infinite matrix of known knowns, unknown knowns and unknown unknowns. (Thank you kindly for the phrase, Mr D Rumsfield, US Defense Secretary, circa 2004)

Having to be in a state of constant vigilance, stressing about what every "event" (for example, a director selling, a competitor expanding, the release of some or other economic indicator, a broker moving his or her "target price" for the stock, what the "bots" are doing (whoever or whatever they are), how the buy side or the sell side are lining up on any given minute of any given day, how the stock price is being "manipulated by the big guys" (again, whoever they are)) means for the share price, is not for me.

[Have a look at the forums for some stocks where I see “Share Price Investing” being pervasive, such as MSB, PRR, PXS, SLR, LYC, PDN, AWE, BRU and ROC (note the prevalence of biotech, mining and oil companies in that list...it’s not coincidental), and where “activity” is frenetic and where the anxiety levels sometimes reach stratospheric levels.

For the sake of both my health and my lifestyle, I prefer to invest in a calm, relaxed fashion.

"Investing in businesses" is also a lot easier to do successfully.

It is far more mechanistic and formulaic and does not require any special "nous", or “inside knowledge” or "street-smarts".

It simply requires the application of a few basic and intuitive rules of finance theory and valuation theory.

(And, as an added bonus, invariably it tells you when you have made a mistake before any serious damage is done, but that’s a discussion for another time).

“Investing in Businesses” involves buying stakes companies that are able – largely irrespective of what happens in the world (i.e., all the possible “knowns” and all the “unknowns” coming to pass) – increase their intrinsic value over time.

Of course, the trick is to identify those companies, but once that identification process has occurred successfully, in my experience the “work” and the “stress” disappear and it becomes a relatively serene, calm pathway forward, invariably requiring only scrutiny twice a year of financial results.

And in most cases the physical manifestation of this process is the receipt twice a year of dividends that are somewhat higher - in real terms - than what they were last year. (A very colourful investor I once met described it as “getting paid for having a poo”!)

So that's why I "invest in businesses", as opposed to trying to jag the squiggles on a chart.

It's because I am fundamentally lazy. I happily admit it.

So back to ARP (or SDI or MMS or AUB or WES or any stock for that matter), I have no idea what their share prices might do today, next week, over the next 6 months, or even over the next twelve months.

But what I do think I know is what will happen to their INTRINSIC VALUE over the next year or two.

And if intrinsic value increases, the share price will follow.

Not maybe, or possibly; it will.
It’s a valuation theory axiom.

The two events might not take place in perfectly concurrent manner, but the share price will definitely align itself with intrinsic value at some stage.
It might take 6 months or 12 months, or even two years, but the relationship will always ultimately re-establish itself.

Note: sometimes the share price at a given point in time may reflect a valuation level that in fact EXCEEDS the intrinsic value of the enterprise. In that case the share price will either fall to meet the intrinsic value level, or it will do nothing until the passage of time causes the company’s intrinsic value to catch up with the share price.

Of course, for companies that are unable to grow their intrinsic value, or whose intrinsic value DECREASES over time (and this is the case for most companies) the only way that the share price will equal the intrinsic value is for the share price to fall without any chance of ever recovering, i.e., a case of permanent capital destruction.

Which is why it is so important to buy “intrinsic value growth” companies: because if one does end up paying a bit too much for the stock, in time the growing intrinsic value will justify one’s purchase price.

But if one overpays for bad businesses, the scope and/or prospects for merely recouping one’s capital is negligible, let alone increase it.

So, to answer your question: will ARP’s get to $15?

I’m convinced it will.

Because its intrinsic value will continue to rise over time.

I just can’t tell you when exactly.


Cam