“Courage is not simply one of the virtues, but the form of every virtue at the testing point.” – C.S. Lewis
C.S. Lewis put it well: courage isn’t a discrete virtue but, in fact, is the cutting edge of every virtue we put into action. I also find my clearest insights come from being shocked awake by counter-intuitive truths. I’d like to share one I heard from Dr. Thomas Howard, Chief Investment Officer for Athena Invest, last week.
Putting your money where your mouth is: Can negative net worth signal a “good” company?
Investors are always looking for that key to unlock the door to their next great stock or mutual fund pick.
Courage is being scared to death…and saddling up anyway.
– John Wayne
Dr. Howard made a shocking statement about picking a sound investment. He proffered that negative net worth could be a great proxy to uncover intangible strengths of a good company to invest in. I would have never thought to look at negative net worth as a potential key! How could this be a key, you may ask?
Suppose you are examining a company that has such high debt levels that the balance sheet shows a negative net worth—its debt exceeds its assets. Why would anyone of sound mind want to invest in such a loser? Our gut response would be to avoid it and look for a higher quality company to put our money into.
But, suppose there were signals that might let you know how management and key creditors felt about the growth prospects of the firm. What if that same company also had factors such as the following going for it:
- Made regular dividend payments (signals management’s confidence in future cash flows)
- Had low, but growing, PE ratio (signals directional improvement)
- Growing sales numbers (a figure least susceptible to accounting manipulation)
What appears, initially, to be a high risk investment may, in reality, turn out to be a value-based one! This hypothetical company is one that the average investor, acting on an emotional reaction but not a fundamental evaluation, would avoid. Thomas is a courageous stock-picker because he does, actually, choose companies like this to populate his fund.
As John Wayne said, it takes courage to saddle up and get on the horse. But if you’re betting on the conviction, confidence, and yes–courage of management and creditors, then you’re making a sound and courageous bet.
Toolkit:
Where can you find contrarian insights or actions to take this week? Then consider: Is this something about which I need to exercise courage?
