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The art of selecting a good investment manager

First let's define what we mean by "investment manager." We do not mean someone who gives investment advice. Nor do we mean an asset allocator. We mean a true investment manager, one who analyzes and selects individual investments. Some investment advisors and asset allocators may also be investment managers, but most are not.

Recently I enjoyed an investment research note from Angelo Martorell, founder of Martorell Capital Partners. I spend two or three hours a day reading company research and investment theses from all manner of authors. The level of detail and substance in the paper, leading to a well argued non-consensus view, was one of the better I've seen. So I did what any normal person would do - I searched "Angelo Martorell" on Google and Twitter. I assumed I would find recent articles discussing his investment process, recent picks, etc.

To my great surprise, neither search yielded results post-2016. The most recent articles and mentions where mostly from 2015, when Martorell won the Sohn Investment Contest with a presentation on IAC, the firm that owns Tinder. You can see him discussing it on CNBC here.

I do not make a judgement on IAC or Tinder. I only observe the quality of the investment thesis and the subsequent timeline. In this case, The presentation was given in early May 2015. For the two years leading up to the presentation shown below, next 12-month (NTM) revenue and EBITDA estimates had been not positive to put it mildly. In other words, the pick was not "obvious." It had to have taken deep conviction in one's own analysis.

NTM Revenue shown on the purple line, NTM EBTIDA shown on green line, and IAC stock price shown on the blue line.

What came next would have had to take even deeper conviction, and I suspect is the reason there hasn't been much written in the time since Mr. Martorell won the Sohn contest to now. The stock price cratered by more than 25%, from around $75 in May '15 to around $56 in May '16. It reached a low of $40 on 2/11/16 - a greater than 45% drop from Angelo's presentation just nine months earlier.

But this isn't the end of the story. The next part explains (somewhat anecdotally) why one cannot rely on short-term results to determine an investment manager's ability.

Any investor relying on the results from May '15 to May '16 would have sold the stock or fired Martorell's firm. Investor's relying on the quality of the analysis would have been more likely to stick with him.

The chart below shows the results from May '16 to present - an increase in IAC's stock price of 338% in a little more than three years. Further, NTM revenue and EBITDA estimates have also consistently risen. Thus shows just one example of the power of staying with quality work, and the futility of short-term price measures.

Ending note

I do not know Angelo Martorell, nor do I know if he held the stock the entire period. (I would like to think he did.)

I found Martorell's research via SumZero, a platform for fund managers and institutional investors. For further reading, see this Barron's article from 2016 on Martorell and SumZero.

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