Are You An Inside or Outside Zebra?

A favorite value-investing book of mine goes by the title “A Zebra in Lion Country”. It was written by Ralph Wagner who formerly managed the Colombia Acorn Fund where he put together a solid track record of 16.5% CAGR over a 20-year period.The book gets its title from this metaphor on investing that Wagner shares early on. It goes:

Zebras have the same problems as institutional portfolio managers like myself.

First, both have quite specific, often difficult-to-obtain goals. For portfolio managers, above-average performance; for zebras, fresh grass.

Second, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions.

Third, both move in herds. They look alike, think alike and stick close together.

If you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best, for there the grass is fresh, while those in the middle see only grass that is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better.

On the other hand-or hoof- there comes a time when lions approach. The outside zebras end up as lion lunch. The skinny zebras in the middle of the pack may eat less well but they are alive.

A portfolio manager for an institution such as a bank trust department, insurance company or mutual fund cannot afford to be an Outside Zebra. For him, the optimal strategy is simple: stay in the center of the herd at all times. As long as he continues to buy the popular stocks, he cannot be faulted. On the other hand, he cannot afford to try for large gains on unfamiliar stocks that would leave him open for criticism if the idea failed.

Needless to say, this Inside Zebra philosophy doesn’t appeal to us as long term investors.

There are three edges available to investors.

1. 1. Informational
   2. Analytical
   3. Behavioral

The majority of people fail to beat the market because they consume the same information that everyone else consumes. They think about that information in the same way everyone else thinks about it. And they behave just like all the other punters. Put another way, they’re inside zebras; slowly starving on trampled scraps within the warm confines of the herd.There’s nothing wrong with that I suppose. But to me, that’s just no way to live…I mean, if you’re devoting time and energy to the game of investing then I’d think you’d want differentiated returns — or I should clarify —  you’d want positively differential returns. You know, get paid for your hard work.Since you’re reading this then I assume that describes you. You prefer being an outside zebra. Going to where the grass is lush and plenty.But, of course, this raises the risk that we get ripped apart by a lion. That’s why we need to go back to our three edges and work diligently to stack them in our favor. This way we can fill our bellies while not raising the risk that we end up being someone’s meal.Enter our resident value investor, Brandon.Brandon’s been informally working with us for a few years and he’s been formally with us since he left his job at a large fund a few months ago.We’re lucky to have him.Why?The dude is a crazy outside zebra.He’s always finding the weirdest misvalued stocks.One month it’s a polish tech firm servicing Fortune 500 companies growing its top line in the double digits annually yet trading for basement level multiples of free cash flow. The next month he’s telling me about a tiny US microcap ammunition maker that has tons of interesting IP, is run by a serial entrepreneur with a looong history of outsized success, and is working on inking major deals with the DoD… Oh, and it’s trading for pennies on the dollar because it’s so small it flies under the radar.Brandon’s the kind of people I like to surround myself with. He gets way out there, and I mean way out there, far from the herd. It’s like he can’t even help himself. It’s just in his blood to take in different information, look at things from a variant perception, and just all-around approach markets in a way that most others don’t.And you know what the best part is?He’s good at it. I mean, really good at it.Does that mean he hits every single pitch out of the park? Absolutely, not. He’s no trading Jesus. But he is insanely good at uncovering wildly asymmetric investments that you won’t read about anywhere else.If that sounds like the kind of thing you’d be interested in reading about on a regular basis then go ahead and sign up for his monthly letter, Value Ventures.Jump in and kick the tires a bit and see if that style of investing is for you. See if you feel comfortable traveling way off the beaten investing path.He does a great job of not only sharing his research but also his process each month. Which is a grossly neglected topic that’s left out of most newsletters. That actually reminds me of a great quote from Joel Greenblatt who said once that: “Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”I love that.