Extracts from various interviews and other document on Paul Sonkin
TABLE OF CONTENTS Paul Sonkin operates in Nano cap and small caps................................................................ 2 Enjoy both teaching and investing: .................................................................................... 2 Limitation of being in micro cap: ........................................................................................ 2 Process is more important than the outcome ..................................................................... 2 Source of ideas ................................................................................................................. 3 Catalyst ............................................................................................................................. 3 In Crisis everything is correlated ........................................................................................... 3 Consistent performance is key and not one-offs:................................................................... 4 Allocation to nano-caps ......................................................................................................... 4 Time allocation .................................................................................................................. 4 Macros relevant or no? ......................................................................................................... 4 Selection criteria for investment –some examples................................................................. 5 Capital allocation, portfolio structure and position limits all important for diversification purposes ............................................................................................................................... 5 Favourite investor ................................................................................................................. 5 General thoughts .................................................................................................................. 6 Learn from all great investors and their philosophies and apply what suits you ................. 6 Meetings with management .................................................................................................. 6 Portfolio construction: ........................................................................................................ 6 Diversification .................................................................................................................... 6 Security selection criteria/ Valuation / DCF ........................................................................ 7 Investment process ............................................................................................................... 7 Catalyst ............................................................................................................................. 7 What to look for in investment candidates ............................................................................. 8 Arbitrage in small and micro caps ....................................................................................... 10 Portfolio Construction framework ........................................................................................ 10 Gradually build up position and do not buy entire position at one go ............................... 11 Maintain strict position limit .............................................................................................. 11 Sell Discipline:..................................................................................................................... 11 How to use screens ............................................................................................................ 12
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Extracts from various interviews and other document on Paul Sonkin
PAUL SONKIN OPERATES IN NANO CAP AND SMALL CAPS I have always loved micro and nanocap stocks. We don’t really do small cap if you define small cap as $1 to $2 billion. We really specialize at the sub-$100 million, which is the smallest of the small. We are trafficking in the smallest 40 basis points of the U.S. market where there are still 8,000 companies. So there is still tremendous opportunity. Where we get an edge is by being where nobody else is. We fish deeper and we fish alone, and I think that’s really it. We are looking for companies that are unloved, there is no institutional sponsorship, there’s no analyst coverage. We are always looking for a stock that can return a multiple on our money. We look for situations where the stock could easily double. With these small companies, we’ve seen stocks go private at double where they were trading. Where there’s very little liquidity, and where management is pretty quiet – they have been sort of “run silent, run deep.” So you go from unloved, no institutional sponsorship, no analyst coverage, little liquidity, and quiet management, to – these stocks become loved, they get the institutional sponsorship, the analyst coverage, more liquidity, and management starts selling the story. We have taken an activist role in the past but it is something I shy away from. We focus on companies that are shareholder friendly. Being an activist investor takes up an enormous amount of time.
ENJOY BOTH TEACHING AND INVESTING: What I really enjoy about teaching it gives me time to research on the research process. A lot of the materials I have start as lecture. It is hard to know where the money manager starts and the teacher begins. I really try to integrate them both and I really try to bring a lot of live theses into my class.
LIMITATION OF BEING IN MICRO CAP: I think in doing what I do it is not going to make you rich and a lot of guys want to get rich. Because in the small cap world you can only get so big. There are very few people in the micro cap and small cap world making millions of dollars. As a micro cap investor what you are looking for is something where it can grow against the industry returns or grow against negative economic trends. [I also thought it was interesting that Sonkin sees some of these companies as ones with great long term prospects to grow as business. I know that other investors only venture into companies of this size range in order to find net-nets or special situations, but it seems like Sokin is taking a much comprehensive approach. To find these kinds of companies you’re probably going to have to broaden your search a bit in order to find them, since they may not come up on an ordinary screen. ] – view of Streetcapitalist.com
PROCESS IS MORE IMPORTANT THAN THE OUTCOME I think you need to look at the process and relate the process to what has and hasn’t worked historically. We have tried to determine what works, which part of the market is the richest http://contrarianvalueedge.com/
Extracts from various interviews and other document on Paul Sonkin pond to fish in. Then we’ve tried to identify which bait is the best to use – we fish deep and we fish alone. If you stick to your discipline, then you won’t get into too much trouble. We stuck to our discipline and we are still down 50%, so people have asked us if we are will change our discipline – I said absolutely not. I lot of the damage has already taken place. Again, it’s this issue of people just wanting the pain to go away, they just don’t want to look at it anymore. Now, we are probably in the best time in a generation to be investing in these kinds of companies. [CBS interview 2009]
SOURCE OF IDEAS You know I’d say that most of my ideas come off of the new lows list. I take that that’s sort of the best hunting ground. And then the other thing that I do is I have these lists of companies I’ve owned before or am interested in. And then I get the news headlines for them on a daily basis and then I do a lot of keyword searches for like spinoffs, liquidations, merger arbitrage, stuff like that. And then I go to conferences I source my ideas pretty much from everywhere. The only place where I don’t source my ideas from is Wall Street. Not a lot of Wall Street research at all. [Interview with Streetcapitalist.com, 2009] You can buy a few shares in a stock that meets your criteria to force yourself to follow the business. By purchasing a very small piece of a business, you’ve guaranteed that you will not forget the business, and that you’ll have consistent reminders about that business. Paul Sonkin of the Hummingbird Value Fund calls this his grab bag. In his personal account, Sonkin has purchased one share of more than 300 companies. In the mail each day, he usually receives something from some of the companies. He has followed some of the companies for many years, and he uses this method as a way of filling his in-box with companies that he has already screened as being interesting. [Shearn, Michael (2011-0921). The Investment Checklist: The Art of In-Depth Research (Kindle Locations 571-575). Wiley. Kindle Edition.]
CATALYST You always want to look for a catalyst but sometimes there is no catalyst. So with Steinway (NYSE:LVB) there’s no real catalyst there. Earnings will recover and that will be the catalyst but the catalyst isn’t obvious and when it is obvious it’s too late. Interview with Streetcapitalist.com, 2009]
IN CRISIS EVERYTHING IS CORRELATED What we have experienced is that when you have a crisis, everything is correlated. Since June 2007 and until very recently, there was nowhere to hide. The only place where you would have been safe was short-term treasuries. If you were in equities then you would have gotten killed. I think that there are some people that call these things and there are some people who are ahead of the curve and they are lauded as geniuses. We had a horrific year last year. We were down 40%, just like everybody else. What I find very surprising is that people said for a microcap fund, if you were only down 40%, that was pretty good. The Russell 2000 was down around 33%. What killed us was illiquidity. Usually, we are long illiquid names. That usually works out well over the long-term as long as you don’t have any major panics. If you want to sell a house today, it is a very illiquid asset, but if you want to sell a house over six months then it is more liquid, depending on the price. It is
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Extracts from various interviews and other document on Paul Sonkin the same way with our stocks. In the short term they are illiquid, but in the longer term, they are very Liquid. [CBS interview 2009]
CONSISTENT PERFORMANCE IS KEY AND NOT ONE-OFFS: A former student of mine has a $2 million fund and was up 40% last year because he had one long that did really well and one short that did really well out of only five positions. Statistically you are going to have a few of those. Wayne Garzarelli called the 1987 crash. John Paulson called the subprime crash and made a ton of money. You can’t look at those guys. You have to look at the Seth Klarmans who have consistently been able to sidestep these disasters. You can’t really look at the one-offs. [CBS interview 2009]
ALLOCATION TO NANO-CAPS You need to manage your investor’s expectations very carefully. What we try to do is write very honest, sober letters and we tell our investors that we are not the place to put all of your money. You ideally want to have less than 5% of your net worth with us because it is a very risky strategy. Of course, we don’t feel it’s all that risky. So, in terms of risk, it’s the permanent capital loss versus volatility. We think our permanent capital loss risk is low, but volatility risk is high. [CBS interview 2009] Concentration and micro caps don’t mix all that well, so we typically own around 100 names, with a big position being 3-4% of the portfolio. Tiny companies are by definition more vulnerable to catastrophe if something goes wrong, so we try to limit the potential damage from that by owning a lot of them. I’ve had people ask, if we’re spreading ourselves too thin by owning so many positions at a time. What I answer is that there’s an enormous difference in the effort required to follow a big company than a small company. I’d argue that a portfolio of 20 large-cap companies, each of which is in five or six distinct businesses, is more difficult to keep track of than 100 small companies that typically operate in a single niche. An IBM or a Disney can have a single footnote longer than a lot of the entire annual reports look like.
TIME ALLOCATION It was a big position, so we put a lot of work into it. Typically, you start out with a small position and you put a little bit of work into it. As you start to build on the position, you do more and more work. Eventually, your biggest positions are the ones you’ve put the most work into. [CBS interview 2009] You know when you have a company where there are just fewer moving parts it’s just easier to do the analysis. So that’s why we’ll keep track of 100 different companies and it’s pretty easy to do that because there’s just less to analyse.[Streetcapatalist.com, 2009].
MACROS RELEVANT OR NO? It’s [giving more importance to macro after credit crisis] like closing the barn doors after the horse has gotten out. Everybody saw the signs, but you just didn’t think there would be this huge catastrophe. There are a few guys that had insurance against a huge catastrophe and a few guys that thought there would be a huge catastrophe. But I think it was just a very low probability scenario that actually played out. So would I do anything differently?
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Extracts from various interviews and other document on Paul Sonkin I make mistakes every day and I try to learn from those mistakes. Everybody makes mistakes, but the fact that so many people are paying attention to macroeconomics…it’s not going to be there because that’s where everyone expects it.
SELECTION CRITERIA FOR INVESTMENT –SOME EXAMPLES For example, a battery distributer we own. I have seen this business model many times in the past. They carry a lot of SKUs in inventory. If you need three of some kind of battery and you need it tomorrow, you can get it from these guys. The only other option is to order 2,000 from China with a six month lead time. I’ve seen this model many times; they have a low ROA, because of all the inventory, usually about three years’ worth. They do it because they are able earn high margins. When you speak with them, once they showed me an invoice where they bought the product for a nickel and sold it thirty-five cents. They’ve generated 10% operating margins as a distribution company. When have you heard of a distribution company with 10% operating margins? Their customers are paying for the convenience. That is the type of businesses model that we really look for and they are out there—and they’re cheap. [CBS interview 2009]
CAPITAL ALLOCATION, PORTFOLIO STRUCTURE AND POSITION LIMITS ALL IMPORTANT FOR DIVERSIFICATION PURPOSES By default I don’t like positions more than 5% of the portfolio. And in both funds around 1020 positions will be about 50% of the portfolio while another 100 stocks will make up the remainder. But we have quite a few 5% positions. [CBS interview 2009] In general allocation to arbitrage portfolio is 50%. But oflately there aren’t that many interesting arbitrage deals. So we have allocated a lot more money to the general portfolio. So it’s become a little bit overweighted in that respect. [Streetcapitalist.com]
FAVOURITE INVESTOR My favourite investor is Seth Klarman. It’s not the record. It’s more the quality and clarity of thought, the discipline, and the creativity. Another investor I have a lot of respect for is Walter Schloss. He kept it really simple, he kept it small, and he has tremendous discipline. He also had a long, consistent track record. I think he had the longest unbroken track record, I think it was about 45 or 46 years. It was about 500 basis points for 45 or 46 years. And he just kept it really simple; buy cheap stocks. If you ask me who I admire, I guess it’s Buffett, but I think there are five different Buffetts. My Buffett would be Buffett #1 from the Buffett partnership. There’s Buffett the value investor with Berkshire. The third incarnation is Buffett the rock star. The fourth incarnation is Buffett that buys and holds businesses. The fifth incarnation is Buffett the philanthropist. So I identify most with the first and a little bit with the second. [CBS interview 2009]
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Extracts from various interviews and other document on Paul Sonkin
GENERAL THOUGHTS LEARN FROM ALL GREAT INVESTORS AND THEIR PHILOSOPHIES AND APPLY W HAT SUITS YOU Keep your eyes open and your mouth shut. The most common mistake that students make is when a boss, for example, asks him for a red umbrella and then he comes back with a blue one and an explanation for how it’s going to keep him dry. If you have seven different teachers, you might need to learn how to do something seven different ways. Then you can just absorb it and decide what suits you. Then when you go to work, you’re probably going to need to learn to do it in an eighth way. Arguing with your boss is just not a good idea. [CBS interview 2009]
MEETINGS WITH MANAGEMENT Sometimes they [management] are very receptive sometimes they’re not receptive. I would say that we always talk to management over the phone and we’ll sort of have them walk us through the story and we’ll discuss their capital allocation decisions and just you know, go through various things like that. Since shareholder base is very small better to work along with other shareholders. In our larger holdings we will have done a lot of due diligence and expect to know management and need to be impressed with them. In our smaller positions contact with management is less important – we’re buying into the business mostly because it’s statistically cheap. The financials and whatever other communication exists can generally give us a good sense of how shareholder friendly those companies are. I’d add that while it takes a lot less time to cover a micro-cap company, the potential value added by the research is substantially greater. I have a lot less competition. I’m also much more able to speak directly with the CFO or CEO, who may not be as polished in the ways of Wall Street and might be more open and forthcoming about their business. All of that makes it easier to uncover new and previously unknown facts, which can be an important edge. [investor insight, 2009]
PORTFOLIO CONSTRUCTION: We divide our investments in this fund into two basic types -- General Portfolio Operations and Arbitrage Operations -- each with several sub-categories. We look to maintain a rough 50/50 mix between the General Portfolio and Arbitrage sections. If we are unable to find enough securities in either category, we hold the remainder of its allocation in cash. That is, even if there are additional opportunities on the General Portfolio side, we will try not to let it expand beyond 75% of the entire portfolio. Maintaining this balance is one of our mechanisms for reducing risk.
DIVERSIFICATION We employ two powerful tools to reduce risk. The first is stock selection, where we look for a substantial margin of safety between the intrinsic value of the shares and the price at which we are able to buy them. Our second tool for limiting risk is diversification. Though some value investors prefer to focus their investments on a select number of companies they http://contrarianvalueedge.com/
Extracts from various interviews and other document on Paul Sonkin follow with great intensity and expert knowledge, we remain committed to diversification. Diversification in the small, micro, and nano cap sector is different from diversification in the large cap sector. In the small, micro and nano cap universe, each company is likely to be in one or two lines of business. We could own shares in twenty separate companies and still have a portfolio more concentrated, as measured by lines of business, than if we invested only in General Electric or Hewlett Packard. A large capitalization mutual fund may be diversified with twenty names, provided they represent 100 separate businesses. We need 100 names to do that job. In our case, diversification comes from two sources. First, as previously noted, we diversify the portfolio into two sections with three sub-sections within each. Second, we spread the investments within each segment among enough companies to ensure that each represents only a small fraction of the whole portfolio. For example, in the microcap arbitrage subsection, we may have 30 positions, of varying size. If one deal breaks, it will hurt, but damage to the entire portfolio will be limited.
SECURITY SELECTION CRITERIA/ VALUATION / DCF Why does anyone buy a stock? They expect it will go up. Why does a stock go up? A change in expectations about future cash flows. Why cash flow? Because the value of any asset is the cash flows produced by that asset discounted for risk. If an asset can’t produce cash flow it is worthless or may have negative value. If you can get increased cash flow from an asset, it becomes more valuable. A security’s cash flow equals dividends plus capital appreciation which in turn is a function of cash flow times some multiple. We will predominantly buy either low price to book or low price to earnings stocks. We want to buy assets or earnings power at a significant discount to intrinsic value. We look to get any growth within the franchise for free.
INVESTMENT PROCESS CATALYST The central question is how we are going to make money. The catalyst is an event, person, or other source of change that causes the gap between the price and the intrinsic value to shrink. If we can identify a catalyst, we have an answer to the question of how we are going to make money, and also a sense of when that will happen. We earn money only when the gap between the discounted market price and the intrinsic value closes. We want this closing to be upwards; it does no good if the intrinsic value falls to the price of the security. And the closing should be timely -- a security trading at a significant discount may not be a good investment if the spread closes only over an extended period. In most cases, we try to identify a specific catalyst that will close the gap. There are two main types of catalysts—internal or external. An internal catalyst may simply be that the business improves, thereby increasing the intrinsic value. In this case, the gap remains but the stock price increases in conjunction with the rise in intrinsic value. For example, a stock trading at five times earnings of $1, or at $5 per share, should go to $10 if earnings double, even though the price/earnings ratio doesn’t change.
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Extracts from various interviews and other document on Paul Sonkin
Introspection: Throughout the process, we continually ask where we could have made a mistake. Introspection starts with the search process and stays with us like a guilty conscience always asking, “Have we made this mistake before?” What might happen that will cause us to sustain a permanent loss of capital?” We challenge each of our assumptions. After all, we have picked a security that the market has rejected. What makes us confident that the market is wrong and we are correct? This is something we must think about constantly.
WHAT TO LOOK FOR IN INVESTMENT CANDIDATES Opportunities in nano cap Given our value commitment, we try to buy securities when the sentiment for a company’s outlook is bleak and the price of the stock is low, and to sell them in periods of optimism and high prices. The margin of safety lies on a bed of broken dreams. Our experience is that a portfolio of small companies will provide us with a greater return than the market as a whole, with lower risk and volatility. Because these firms usually operate in a single niche, they are easier to analyze than companies in ten or twenty separate lines of business. Their financial statements are clearer, and the management of the company is more accessible to those few investors who bother to get in touch with them. Their small size does make them vulnerable if things go wrong . But we protect ourselves by owning shares in many companies, and also by looking for firms with little or no debt. The crux of our value add, of our “edge”, is that we invest in the most inefficient sector of the US capital markets and in many cases, work closely with management to unlock value. We are unaware of any other fund that allows investors access to these extremely tiny companies. Because stocks in the General Portfolio Operations area have been beaten down, shareholders with high expectations about future prospects have already sold out. The
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Extracts from various interviews and other document on Paul Sonkin remaining shareholders, often referred to as “strong hands,” are less prone to panic and sell into a declining market. Our contention is that there’s no better place to look for inefficiently priced securities than in those of unfollowed, unwanted and unloved companies. We call it combing through the back alleys of Wall Street for garbage people have thrown away. That’s how you can find small, obscure companies trading at 2-3 times earnings. Deeply neglected companies have lost sponsorship and analyst coverage. Disparities between intrinsic value and price can be extreme because few investors are watching. It is not uncommon to find a company trading at the value of the cash on its balance sheet, net of all debt. When buying the stock, we pay for the cash and get the business for free. High ROIC: What do we look for? Ideally, we want to purchase securities in a company engaged in a business with great economics as evidenced by high returns on invested capital. Ideal Investment: The perfect business is one that has a large spread between its return on capital and its cost of capital, has boundless opportunities for growth, and requires little investment to generate this growth. These companies are extremely rare in the business world and are hardly ever available at a reasonable multiple of earnings, much less a low one. We buy established small and microcap companies with customers, revenues, and earnings. We look for companies with pristine balance sheets including large cash balances, good growth prospects, seasoned management, large product and customer bases, defendable competitive positions, , and high returns on capital which generates free cash flow. We seek companies with share repurchase programs and insider buying. We seek to purchase these businesses at low multiples to normalized cash flow. Most of the time we have to compromise on some of these features. Premium companies usually command premium multiples, for which we refuse to pay. Alternatively, we also find opportunities buying break-even businesses at a discount to their tangible assets. For example, we might buy a broken dot com trading at the value of the cash on its balance sheet, which is currently breakeven but with a potential to grow. We prefer to invest in a situation where the stock price can become detached from the fundamentals or the economics of the business. We look for a story or a dream. Will people buy the stock because they believe? In these situations, each incremental penny of earnings may be worth 25 to 50 times in a dot-com; if the company made some mundane product, such as drill bits, the same penny might be worth only 10 times. We also seek out volatility. Volatility is the friend of the value investor. It gives us opportunities to buy at low prices and sell at high prices. One area, which offers a lot of volatility, is the technology sector.. [Eg. Stock price moving from 2 to 10 and then from 10 to 2. He is not talking about stocks which may move by 40-50%, but stock which can move up by 4-5x] Extreme pessimism: Finally, genuine mispricing can exist because prevailing opinion often goes to extremes, from too pessimistic to too optimistic and sometimes back again. For example, in the fall of 2002, many Internet companies, some of the verge of profitability, were trading below the cash on their balance sheets. The whole sector was tainted by the collapse of the euphoric bubble that had pushed some share prices beyond any reasonable valuation, and investors were still shying away. Our alternative hypothesis recognized that http://contrarianvalueedge.com/
Extracts from various interviews and other document on Paul Sonkin some of these companies had restructured, focused on cash flow and profitability, and were ready to put up financial results that would surprise the few analysts or investors that still cared. We bought one stock for around $.50 a share and were able to sell out the position at prices ranging from $1 to $5. Research There is an art to identifying what needs to be analyzed in each situation and how to go about analyzing it. An arbitrage deal can entail reading reams of documents and speaking with the company. A moderate neglect situation may require a complete competitive analysis, talking with customers, competitors and industry consultants as well as the company. We always begin by reading. This includes public filings and screening online databases for articles about the company and its principals. We also do enough industry analysis to put the company into some type of context. For example, if a company makes parts that go into forklifts, we need to know the outlook for the forklift industry. We also analyze competitors and customers. We array as many years of financial data as possible to see how the company has performed in good and bad times. With a long list of questions, we then either talk or meet with management. Diagnosis: Is the market really making a mistake? Once we have weeded out the obviously undesirable, we scrutinize the remaining to understand why the price has declined. We ask ourselves whether the market is really making a mistake. Prices in the stock market are set by the collective judgment of many intelligent and energetic investors. While we believe that prices do not always reflect intrinsic value, we start with the assumption that most prices are reasonable. We want to know whether the security is in fact a bargain. Why are we getting such a gift? Once we have uncovered what looks like a mispricing, we seek to understand why it should exist.
ARBITRAGE IN SMALL AND MICRO CAPS Lucrative arbitrage opportunities do not last very long. We try to exploit opportunities in the micro-cap area that are too small for the established arbitrage community. The spreads on these deals may not close instantaneously, affording us our opening. Arbitrage can become correlated, like in the current environment [credit crisis of 2007-08], when credit is scarce and deals are broken. So you will get some correlation to the market in the tails, but arbitrage is a wonderful place to be. In last ten years we have only one down quarter. [CBS interview 2009] We do a lot of small odd-lots and other forms of arbitrage. We really don’t deviate because the competition there are the big arb funds and they have a mandate to put a lot of capital to work so the spreads and risk/reward scenarios aren’t appealing. With these larger deals you can do these odd-lots, like if they’re tender but they’re going to do it on a pro-forma basis if you own less than 99 shares usually you can tender into that. So it’s possible to do odd-lots with larger tender offers but it’s not an area of our focus.{So in general it appears to me that Pual tries to stay away from Wall Street competition} – Streetcapitalist.com, 2009
PORTFOLIO CONSTRUCTION FRAMEWORK
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Extracts from various interviews and other document on Paul Sonkin The search process is never-ending; we look for new candidates every day. After a stock comes to our attention and we do a preliminary analysis, we put it into one of three baskets: discard, put on the watch list, take an initial position.
GRADUALLY BUILD UP POSITION AND DO NOT BUY ENTIRE POSITION AT ONE GO When we first buy a security, we tend to take a small position. Only in the most exceptional situation do we commit to a full position all at once. A security can look like a great bargain and then fall an additional 50 percent. Having conviction in our estimate of its intrinsic value allows us to move with confidence and buy more after the price drops. Even if the price does not decline, we gradually scale into a security as we become more comfortable with management, the company's business, and the way it trades. Accumulating a full position can take months, and if the price rises, we may never get a full position.
MAINTAIN STRICT POSITION LIMIT Position limits are an additional constraint we impose on ourselves to ensure that we stay disciplined. If the price of a security drops after we have established a full position, it may become a smaller portion of the portfolio. This decline allows us to buy more shares and restore the position to the level we want. If the price rises, we trim back our holdings to regain that level. Though there is some flexibility here, we use the position limit rule to reinforce our goal of buying low and selling high. Combined with the margin of safety requirement, position limits work to make us move against the market trends, selling when prices rise and buying when they fall. Example of sell: We sold into the price rise for three reasons. First, the move happened very quickly; the stock went from $20 to $30, a 50 percent increase, in just one month. We thought this rise was unsustainable, so we reduced our position. Second, as the stock approached our estimate of intrinsic value, the margin of safety shrank. Though we were willing to hold on to some of our shares because it was still a decent value, it was no longer the undisputed bargain it had been at $20 per share. Third, as it increased in price, it came to represent a larger portion of the portfolio, and our diversification guidelines mandated that we trim it back. Position limits serve two related purposes. First, they are simply another way to think about diversification. As such, they serve as a powerful tool for containing risk. In The Hummingbird Value Fund, we try to keep our largest positions at no more than 7 percent of the portfolio although depending on circumstances positions might be higher. We expect most will be in the 1 percent to 5 percent range. Second, position limits allow us to buy more shares when prices drop and compel us to sell when prices appreciate.
SELL DISCIPLINE: Selling is generally the most difficult decision we have to make. No one, ourselves included, can consistently buy at the bottom or sell at the top; realizing this limitation reduces frustration. As with buying, we try to sell in stages and scale out of a position. We can lock in a sure gain, leaving the rest to sell later. The decision to sell or prune back a position is driven by two factors -- the margin of safety and our position limits. If the margin of safety shrinks due to a rise in the stock price or a decrease in our estimate of the intrinsic value we will usually sell. We also sell when we realize we have simply made a mistake and http://contrarianvalueedge.com/
Extracts from various interviews and other document on Paul Sonkin overestimated the intrinsic value from the start. Alternatively, if a security rises in price, especially within a short period of time, we may be moved to sell if the position becomes too large. We make our decisions to sell based on the relationship between price and intrinsic value.
HOW TO USE SCREENS Paul Sonkin, manager of the Hummingbird Value Fund (a micro-cap fund), uses stock screens and new-lows lists, but he believes these tools are misused by investors 99 percent of the time. According to Sonkin, “. . . a lot of investors will put together a screen of low priceto-book or low price-to-earnings stocks, but usually 90 percent of the companies on the screen are cheap for a good reason. Many stay on these lists for a long time.” Sonkin believes the proper way to use a screen or new-lows list is to run them on a weekly basis and look for new companies that appear on the list. This way, you are able to separate the companies that deserve to be there from those that may only be suffering from a temporary problem.
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