Undervalued-shares.com is a great resource for investors. Regular reports are published and the underlying approach seems to be a solid and easily grasped with two underlying heuristics. In the interview I’m listening to, the founder Swen Lorenz talks about how he searches for shares that are undervalued – basically the hypothesis is that the shares are worth more in the future by at least a factor of double, over a time period of three to four years – hence they are currently undervalued by the market right now. The minimum of at least doubling justifies the risk undertaking this investment. The second heuristic is that there also needs to be a catalyst for the shares to go up (being undervalued is insufficient) that is, there needs to be a potential catalyst for growth that turns the potential future value into actual increased value. This was an interesting insight because it requires deeper research into the asset that is potentially undervalued.
It’s basically an asymmetric upside with important addition of a catalyst.
When I think about a catalyst in terms of entropy, a catalyst is a threshold breaker – it provides the necessary condition for a system to move to a new state of order or disorder. It accelerates transformation, whether toward entropy increase (decay, dissolution, chaos) or ‘reverse entropy’ (emergence of higher-order complexity) something that withstands the natural course of entropy, which is ultimately what we would want from an organisation.
These catalysts could be:
- technological catalysts (new types of technologies)
- conceptual or cultural catalysts (a paradigm shift or a rapid diffusion of a new idea)
- crisis catalyst (some societal or environmental event causes disorder or a shift, and something new and valuable can emerge).
The undervalued asset must therefore be in a low energy state now (potentially going into further disorder or potentially achieving a new higher state of order) and requiring a catalyst to achieve this.
Recent catalysts that have bumped up the value of some of my shares have been: a government change, AI, and war.
So whilst we’re looking for a catalyst, it seems we’re also looking for companies that can respond and get upside from some future entropic event. That also assumes either an ability to respond (i.e. set up in an agile manner) or sufficient ‘f*ck you’ assets to survive the event.