When the year started I suggested to a number of people with a willingness to step outside of the box that a young unproven investment manager was worth considering. Not merely because he was talented or that the funds strategy was fundamentally sound, but because he had a particularly attractive opportunity set in front of him RIGHT NOW!
How did that work out? For the year to date (up to October 31), Prescience Investments managed by Eiad Asbahi is up +78.63%!
And people are now starting to take notice: http://www.businessreport.com/ article/20111114/ BUSINESSREPORT0401/311149980/
By outside the box I do not mean to say that the strategy at its core is exotic or particularly risky. His basic strategy is to buy companies at an attractive price that are uncovered or covered only superficially by Wall Street that have exceptional growth characteristics. He complements that with a highly focused strategy of shorting stocks (which allows the investor to profit when a stock goes down in price) that have dodgy or fraudulent accounting. The key is only shorting stocks where the catalyst for the market realising the trouble with the companies is known. This can include doing deep due diligence, discovering the issues and publishing the results for the world to see. This results in a highly risk controlled approach that also can result in higher returns such as this year.
What it comes down to is old fashioned research and hands on investigation and only committing capital when conviction is extremely high. It requires patience, as opportunities are not always numerous, and often can take years to materialise, especially on the long side. However, the gains can be very large as well, as this year shows. Take his short investment in A Power Energy Generation Systems (APWR.) After extensive research Eiad released this report that revealed likely fraudulent accounting and other issues at the company. Subsequently as a result of his research an SEC investigation was opened, their auditor and CFO resigned and the stocks trading was halted on the NASDAQ exchange. As a society we are better off that such issues have been uncovered, but it also was quite profitable for Eiad’s investors.
I addressed the “risk” in such investments previously:
This reminds me of two things. First, my friend Eiad Asbahi of Prescience Investment Group who is racking up money shorting fraudulent companies and buying long term growers that are small and under covered. Both are considered risky because by definition they are not what most investors are doing. Second, I think about the famous John Maynard Keynes point about herd behaviour in investing:
“It is the long term investor, he who most promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputations to fail conventionally than succeed unconventionally.”
Or as Warren Buffet once said:
“Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.”
In investing we have a habit of believing that what we are familiar with is the same as what is prudent. Eiad shorts individual stocks, so he is risky. Not investing in traditional strategies is not what we typically do, so it must be risky, even if all actual experience shows that avoiding the crowd is less risky.
This makes sense. In general we are wired to find safety in numbers. It is a great survival trait to have. However, in investing it both lowers returns and increases risk.
Being different in investing is hard to do however. It requires discipline and temperament to not listen to the crowd during those inevitable times when you are under performing, especially given Keynes’ warning above.
Lesson… don’t be the unnoticed lemming. You may never be singled out and criticised , but you are still at the bottom of a cliff.