What makes a situation ‘special’ for investors? With Mike Mitchell

Podcast guest Michael Mitchell, who is in the enviable position of having retired at just 39 after two decades in hedge funds, offers his thoughts on one of the more slippery concepts in investing – the ‘special situation’

25/01/2022

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

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Pinpointing what investors mean by a ‘special situation’ may not be as tricky as trying to describe a colour without being able to point at something but both do fall into the ‘I know it when I see it’ category. One person particularly well-placed to shed some light on the first concept, however, is former hedge fund analyst Mike Mitchell, who retired a couple of years back – at the age of 39 – to focus on investing for his family.

We were delighted to welcome Mitchell as a guest on a recent episode of The Value Perspective podcast, where he took us through a whirlwind career that began 20 years ago when he talked his way into an internship with value investing legend Michael Price. As a lot of his time since then has been looking to make money from special situations – evidently with some success – how would he define them?

I love special situations,” Mitchell begins. “I find them fascinating because they are always so different but, at heart, value investors will focus on special situations because we try to find things that are undervalued and the special situation can often be the catalyst that unlocks that value. So, usually, what a special situation means to me is there is a fundamental change and that fundamental change can mean opportunity.

“That is where I start to get excited – although I do not really consider myself a special situations investor per se. I consider myself a value investor who just happens to really enjoy special situations and tends to find a lot of opportunity in that area. Really what I am looking for when I wake up in the morning, though, is a way to compound my money at 10% – that is how I spend my time.

“I do not know if it is right for the rest of the world or if other people think this way, but the way my brain works is I gauge everything around this idea of 10% and I am very specific in what I can underwrite or invest in. Think about it – I cannot predict the future and I do not feel comfortable in my ability to see big structural change coming, so I depend on businesses’ earnings to pay the 10% I require.”

Crypto view

Here on The Value Perspective, we usually steer well clear of cryptocurrencies but, under the circumstances, it seems pertinent to our discussion to ask if Mitchell considers bitcoin to be a special situation these days. “When bitcoin did its first ‘rip’ in 2017, the fund I worked for hired an expert – a 21-year-old kid – to come in and give us a full download on cryptocurrencies,” he replies.

“I just asked him questions for several hours and then, as we walked out of the meeting, my portfolio manager asked me what I thought. Now, I would like to think I understand financial markets and economics a bit but I told him, well, I am certain of two things: number one, I do not understand anything that guy just said. And number two, I am pretty sure everybody else who is buying this also does not understand either.

“So I do not love the idea of making a big bet – or any kind of bet – on something where I am investing alongside people who have no idea what they are doing. That is usually a warning sign to me. Needless to say, of course, I am the idiot because bitcoin has done nothing but gone basically straight-up since but that is just not the way I look at the world.

“People can look at the stuff I buy and see a disaster but I see something I think can generate solid returns with a high degree of confidence, even if it is not sexy. Now, by the way, that forecloses me from doing a lot of ‘moon-shoot’ investments – for example, had I bought Microsoft in 2013 at 9x cash-adjusted earning or whatever, using my criteria, I would have taken a massive victory lap when it reached 15x earnings.

“I would have been out of the stock – but of course all the returns were generated after I would have sold, right? So my thinking forecloses me from some of the big moon-shoot investments but I do not really care because it works for me. I am sure people look at it and say, well, I can do better – and I am like, I hope you do, man, I really do. I would love for you to do better but this is just about me staying true to myself.”

Human incentives

For Mitchell, it is crucial that, if he does lose money on an investment, he still feels comfortable he knew what he was doing – that, as he puts it, “I went in thinking x and x did not pan out”. “I could have bought bitcoin or chased ‘software as a service’ stocks at huge multiples – and you can make a lot of money doing that, so there is no shade being thrown from my side – but it is just not what I understand,” he adds.

“I buy businesses for low valuations where I think the money is coming back to me. I buy liquidations, which I would say is a special situation, and I really love situations where assets have been under-managed or mismanaged – and not even because people do not want to do a good job. It is because the incentive structure around the management team and the people is not set up for them to do well.

“I am a huge believer in human incentives and special situations can often refocus people. Years ago, I got involved with Formula One as I thought that was the issue. You had a pretty famous Londoner running it as a huge operation by himself for decades – and doing a great job – but you think, well, is there an opportunity, if somebody comes in with a fresh set of eyes and a bit of vigour, to maybe improve the popularity of the sport?

“I love stuff like that – it just resonates that there is an opportunity to be had. If a situation fits my bucket of wanting to get 10% returns predictably – not necessarily evenly but just that I can predict over a period of time that that is what is going to happen and feel very comfortable it will – then I get excited.”

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team and manage Emerging Market Value. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet, I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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