Vol III, No. 5 

June 2015   



A monthly commentary about the role of behavior (and misbehavior) in investing



The Misbehaving Investor



The pricing of art is hard to understand. One thing we believe is that it's not based on fundamental factors.


Valuing businesses is easier (at least for us).


We hope you enjoy this month's issue!


John Feb 5  

John Heldman, CFA

Partner | Portfolio Manager

Dave Hutchison, CFA
Partner | Portfolio Manager
About Us

Triad Investment Management manages all-cap, small-cap and balanced portfolios with a focus on Research, Behavior and Ethics.  Founded in 2008, Triad is a 100% employee-owned SEC registered investment adviser.  Learn more at www.triadim.com


Triad managed $131 million as of March 31, 2015.  The Concentrated All-Cap Equity composite return, annualized and net of fees since inception, is 9.7% vs. 8.3% for the S&P 500 Index (April 30, 2008 to March 31, 2015).


Please review our Concentrated All-Cap Equity annual disclosure presentation and the important disclosures at the bottom of this issue. Past performance does not guarantee future results.

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I'm no artist.  That was clear to me in first grade.  I struggled through most artistic endeavors.  I was even instructed during our fifth grade Holiday music presentation to hold my instrument - a Yamaha Recorder - to my mouth, but don't dare try to play the thing.


So I may not be the best person to opine about the finer aspects of the art world.  However, sometimes things are so obvious that even I can spot when the emperor has no clothes.


Christie's and Sotheby's - the dynamic duo that make up the global art auction oligopoly - held contemporary art auctions last month that pulled in a record haul for the sellers.  Art for me is like wine, another area where I'm no expert.  I taste wine and either like it or not.  Same for art, I see it, I like it.  Or not.  My tastes lean toward the old Masters.  Call me a fuddy-duddy. I have no interest in contemporary art.  I dare say it's not art in many cases.


Granted, beauty is in the eye of the beholder.  That must have been the case with these recent auctions.  Artist Mark Rothko
(1903-1970) was a big seller at both auctions.  He painted with a certain style and quality that reminds me of, well, a fifth-grader's best work.  Actually, a good first-grader could do this.  Untitled (Yellow and Blue) sold for $46.5 million while No. 10 (1958) pulled in a cool $82 million.  It was thought No. 10 was prized because the somber colors matched Rothko's mood at that point in his career.  Uh huh.  Right.




Mona Lisa and No. 10 (1958)


What can we learn from these seemingly absurd auction prices?  Clearly there is plenty of spare change floating around among the billionaire jet-set.  And opinions about artistic merit are just that: opinions.  I wouldn't pay fifty bucks for a Rothko.  To me they're a far cry from Rembrandt, Monet, Da Vinci or Van Gogh.  I'd even venture that most people would pick an old Masters painting over Mr. Rothko's first-grade finger painting. But some poor soul - oops, rich soul - forked over $82 million for a Rothko finger-painting.


Could it be that we are witnessing a contemporary canvas bubble?  Or are the buyers playing the greater fool game, hoping to peddle these works to another fool down the road?  Does the high price authenticate the artwork as intrinsically valuable?  Or is it the scarcity factor, that each piece is an original?


As you might guess, I don't have any answers.  In fact, I'm puzzled.  But while I can't calculate the value of any particular artwork, it is possible to value a business.  Far less subjectivity is involved, and while a range of values is usually the result, it's a lot narrower than the $82 million paid for a Rothko versus the fifty bucks that I might pay.


Our valuation efforts rely more on facts and less on fashion.  That's fortunate for us, because I would be lost in an art auction, trying to make sense of the prices - not to be confused with values - that collectors put on this stuff.  Because it really makes no sense.  It's much easier to analyze a company's future prospects for products, markets, competition, and the resulting sales, earnings and cash-flow.


Investing in the stock market is no different than investing in a private business.  Imagine buying a gas station, dry cleaner, hardware or convenience store or a widget maker.  You'd review the sales, earnings and cash-flow the business generates.  You'd calculate a fair price for the cash-flow that can be taken out of the business from here to eternity.  And you'd pay no more than that.  That's essentially what we do, only it's done in the public markets.


So we won't be spending any time perusing art auction catalogues or trying to fathom the value of contemporary "art."  We'll stick to more prosaic pursuits where beauty is less in the eye of the beholder, and more in the objective facts and numbers.


I'm guessing I might not get invited to the next Christie's or Sotheby's auction.  But that's OK, as watching a group of Emperors without clothing isn't my idea of a good time. 


-John Heldman, CFA
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Triad Investment Management, LLC claims compliance with the Global Investment Performance Standards (GIPS®). Triad has been independently verified by Ashland Partners & Company, LLP for the period from the strategy's inception, April 30, 2008, through March 31, 2015. Triad is an SEC-registered investment advisor. The composite includes all fully discretionary separately managed accounts that follow the firm's Concentrated All-Cap Equity investment strategy, including those accounts no longer with the firm. Triad's strategy is to invest in a concentrated portfolio (usually holding between 20 to 30 securities) of common stocks, unrestricted as to market capitalization, of both domestic and international companies. The U.S. Dollar is the currency used to express performance. Past performance is not a guarantee of future results, and there is a risk of loss in investing in equities. Results are presented net of fees and include the reinvestment of all income. Investments made by Triad for its clients differ significantly in comparison to the referenced indexes in terms of security holdings, industry weightings, and asset allocations. Accordingly, investment results and volatility will differ from those of the benchmarks. As of June 30, 2013, the Triad Equity Composite was renamed the Concentrated All-Cap Equity Composite.  For more information or for a copy of the firm's fully compliant presentation and the firm's list of composite descriptions, please contact us at (949) 679-3991.



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