Daryl Davis

Weighing the Business and Thinking About Markets

what's your #. (or give me a bit more info on your company, and I'll find you discretely.)


On Jul 29 02:45 PM SilasG wrote:

> Daryl,
>
> I wonder if I could call you and talk with you about your thoughts
> on an early stage Home Heallth Care business that I am considering
> investing in. I manage a venture fund and have read several of your
> articles about the industry and I would be interested in getting
> your take on the potential of new entrants to the industry.

Home Healthcare: Weighing the Business, Thinking About Markets

Epilogue

Prideful stock analysts usually put a premium on the value of their research. I am no exception, and I always try to be economical with my work. I am compelled, therefore, to explain why I would offer this work—which I believe to be the best research currently available on home healthcare from a professional or amateur—for free.

In January of this year, I put together an application to Joel Greenblatt’s Value Investor’s Club (VIC), in which I recommended AFAM at $30. For that reason, I finally put down on paper years worth of thoughts, analysis and research regarding this industry (and had to fill in many blanks with significant and conclusive research). I’d like to believe my subsequent rejection was caused by Obama’s budget proposal (compounded by the bear raid) that flattened the stock price—but I was rejected previously with a recommendation on AMPH (a recommendation that, thus far, has proven to be quite prescient). As they are usually long on analysis and short on preparation, VIC articles are often poorly written—and my two submissions were, sadly, no exception.

While I take nothing more seriously than my investing, I am also a prideful writer, and hope to write a book over the next decade (A Philosopher’s Journey Through Corporate America).

(Yes, I’m swerving here. A bit of latitude from the reader is all I need…we’ll get there.)

I’ve consistently viewed my shares of AFAM (purchased periodically since 1994) like a father views his talented son’s growth. There was no moment that more clearly demonstrated that AFAM had grown up than when Jim Cramer plugged it (for the wrong reasons) last fall. With significant pain, I realized that it was only a matter of time before all of the secrets of home healthcare were told. It may take a few more years, but the cat is out of the bag in this industry: “Call some place paradise and kiss it goodbye.” In coming months, many more value investors— genetically programmed like me—will go through the same routines I have gone through. Competitive market forces will dictate a more level playing field quicker than I would like—eventually leading to less and less discounting, and more appropriate valuations in this market as the Baby Boomers continue their relentless march onward. What might appear to be impressive research now will be considered old hat soon enough.

Somewhat aligning with that out-of-my-control market-force time frame is my not-as-controllable-as... professional career. Just after the bear raid earlier this year, I was offered an incredible opportunity to work as a business development manager for the insurance division of AIG, AIU Holdings. I decided to accept the job—which, of course, will distract my attention from investing for the short term (making it more reasonable to let go of this research). While I have been around the insurance industry for years, I’ve never been in it, or achieved any great insights about it. I will now dedicate myself to learning this critical and all-encompassing industry. While there would be plenty of sex appeal to this opportunity for any business-head because of the AIG story (what an incredible vantage point!), I truly am more interested in using it to achieve an unfair investing advantage in the world of insurance for the rest of my life.

Separately, I honestly felt that even I put out this research for free, no one would read it—which, for the most part, has proven true. (My experience with people leads me to believe that only a small percentage would even consider reading 17,000 words on such a dry subject.) Still, I have long considered running a hedge fund for the non-accredited investment community. As SeekingAlpha’s reader base is comprised mostly of non-accredited investors, I thought this series would at least afford me the opportunity to test the waters and see if, on the off chance, I could achieve enough of a following over the next few years to pull off this rather far-fetched and altruistic goal (altruism is not one of my strong suits).

Related to that, in the past, when I have discussed the potential of managing money professionally, it has been difficult to explain to potential customers what type of investor I am. It is difficult (impossible?) to succinctly describe my style of focus investing, where I am in the top 1% both of “most researched” and “least diversified” managers. The concept “fewer than 10 holdings” is easily understood—if still avoided like the plague by most. With this series, I can now point to a resource that explains my research characteristics.

Almost finally, I have always wanted to work for a hedge fund manager to learn the various non-investing aspects of the industry. I thought this series might just catch the eye of one or more hedge fund managers who are seeking cheap (possibly free) research help. “Lemme hear from ya,” if you are interested.

Put all of the above together, and I still did not want to give away my research.

As I was sorting through all these thoughts and decisions (which was a couple of weeks after the bear raid) I felt it my duty to contact the SEC to report the insider trading that I detailed in my fourth article. After communicating with that commission, I didn’t have enough faith it would do anything. I quite selfishly wanted to give a cocky wink to those short managers—that fourth article wound up being the most fun to write. That was the tipping point.

To decide to write this series is quite different than actually writing it. There are research freaks like me all over the place, but few—or none—would foolishly and unnecessarily subject themselves to such a convention for communicating their findings. Independent analysts generally leave their detective work in their heads—not having to communicate unconventional ideas is one of the perks. Assimilating all my research and analysis in a digestible (and, hopefully, enjoyable) format was by far the hardest aspect of this task. But I was curious if I had the skill and patience to actually write a book, and this series gave me a chance to cut my teeth.

I couldn’t have presented anything remotely digestible were it not for my brother. He is a professional writer and editor, and, though a slave driver, he was magical for this series. I decided to save a few dollars for this self-indulgent and informal epilogue: he didn’t see it. Daryl Davis has nothing on Warren Buffett, but Carol Loomis has nothing on Mike Davis. He allowed me to mention his name, and suggest his services to those writers who want to take their game to the next level, only on strict conditions. I have to make a couple of things very clear: 1) he did not edit everything published; 2) many of the editions that he finalized were subsequently changed by SeekingAlpha’s editorial staff (the fifth article was the most butchered, with countless arbitrary paragraph breaks and deletions/changes).

So there you have it.

And now I turn my attention to property and casualty insurance. I’m looking forward to it.

D