BIO: Ben Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016.
STORY: Benjamin has made the biggest mistakes and lost the most money by buying cheap companies that get less valuable over time.
LEARNING: Know what kind of investor you are and let your portfolio reflects that. Just because it’s cheap doesn’t mean you have to buy it. Invest in a business you can own for years.
“It’s hard to establish a true margin of safety when the intrinsic value is falling over time. It’s like catching a falling knife.”
Benjamin Claremon
Ben Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016. His background includes positions on the long and short side of hedge funds as well as commercial real estate finance and management. Ben is the proprietor of the value investing blog The Inoculated Investor, the founder of the 10-K Club of Southern California, and the host of the podcast Compounders: The Anatomy of a Mutlibagger.
The place where Benjamin has made the biggest mistakes and lost the most money is with companies that get less valuable over time. These are businesses facing secular headwinds or outright secular decline. Every day, the businesses become worth a little bit less. They seem lucrative to buy when they’re cheap and sell when the valuation goes from highly depressed to merely depressed. However, businesses that don’t get more valuable, over time, tend to throw curveballs at you that you might not be expecting. Whether it’s a balance sheet issue, a capital allocation issue, or a management change, trouble just breeds more trouble.
There was such a company that Benjamin was relatively public on. When investing in this company, Benjamin thought there was a distinctive margin of safety. He believed the management team understood how to create value for shareholders. The company had valuable assets that could be sold at higher prices in the current valuation. And that capital allocation changes could have increased the company’s value relative to the current stock price.
For this reason, Benjamin thought that the business connectivity and the business services sides were worth a certain fair amount more than the stock was trading for. He was looking at a situation where the value was much higher if they could just unlock it via divestitures. Amazingly, that’s precisely what the management did. They sold three businesses, all of which were at multiples higher than the stock price. But, to date, the stock is still down.