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John H. Ford's  Instablog

John H. Ford
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For the past 30 years, I have been involved in startups, as a founder, and active investor. My first company was purchased by Johnson & Johnson, which set the foundation for future investments. My level of trading escalated after graduating from college, primarily as a result of my... More
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  • When things look bad, opportunity exists

    I remember a very bleak time at one of the early companies I worked with. We had a good product, that was fully developed and entering the market in prototype form. It was well received by doctors and hospitals, and the success of our company look like a slam dunk. But we needed money. We went to banks, no dice! Venture capital firms, the same story. We issued stock and began selling to family and friends, but even at $1 a share, it barely moved. Finally, Mitsubishi bank in Japan loaned us enough money to pay salaries and rent for six months. That gave us enough time to approach the large pharmaceutical companies and give them our pitch. Right away we hit a home run, and were bought out at $8 a share. The family and friends who got in for $1 were thrilled. Those who didn't invest were kicking themselves.

    Later on, another company I was invested in went through a similar situation. They had a commercial product on the market, but since it was somewhat revolutionary, the adoption rate was slow. With a questionable future, the stock price dropped to $3 a share, and stayed there for a while. The venture capital firm that back them was still bullish, so I held on to my position, even though I had lost 75% of my original investment. Finally, the market realized this was a truly great product, and sales took off. The company was bought out at $30 a share.

    What's my point? With most companies, there is a time when the market questions the viability and success of its products. That questioning is what creates opportunity for investors, because along with it goes a lower share price. Our job as investors is to determine whether or not the products are viable and if management is capable of executing a workable game plan.

    Remember, the best time to invest is when you believe in the future of a company's products, and the market isn't sure. Look at the early days of Microsoft, Intel, and Google. At that point of questioning, the opportunity was great. Now that the market is certain that these companies will succeed, most of the opportunity is gone. You're probably not going to double your money on any of these companies.

    It takes guts to invest in companies with low share prices and questionable futures. Especially when the market is telling you that this company is a dog! But, that's how we make money. With time, you will learn that the market is often wrong, and occasionally great companies are undervalued and overlooked. Your job, should you choose to accept it, is to find these companies, and take your position.

    Nov 13 9:46 AM | Link | Comment!
  • Searching for market inefficiency

    There is a long-standing debate about whether or not the market prices stocks inefficiently. Anyone who's been involved in trading for a long period of time, has come to the conclusion that frequently the market is truly inefficient. But, academics, with little or no trading experience have come up with the theory that the market always prices stocks efficiently. Fortunately for us as traders, the market has proven to be inefficient at times, sometimes extremely so. The greater the level of inefficiency, the greater the potential for profit.

    Remember the flash crash. I was sitting at my computer as it happened.  That moment is still engraved in my mind.  I was watching the numbers and couldn't believe what I was seeing. It was one of those rare moments of extreme market inefficiency, and those with sufficient courage and experience were able to profit.

    Bubbles on a macro level have existed throughout history. The tulip bubble, the South seas bubble, the high tech bubble, and most recently, the real estate bubble. Psychology and emotion are major factors in pricing. Perhaps if computers could trade on their own, without humans getting involved, the market would be efficient. But humans are ruled by fear, greed, and the herd instinct, and at times can blow reality completely out of the water.

    What happens when one of your stocks suddenly rockets upward? You and everyone else following the stock begin to believe that this is the greatest company that ever existed, and anyone would be foolish to sell at this level. Of course in reality, that is sometimes the best time to sell.

    And then there is the exact opposite situation, when your stock suddenly plunges. At this point, you feel you've made a huge mistake, and the desire to sell this dog becomes great. Unfortunately, other people are feeling the same way, and this is what drives the stock further downward. Sometimes this downward pressure has nothing to do with fundamentals, and those who sell end up regretting it.

    Our most recent real estate bubble can provide an excellent education in market extremes. What struck me most about that situation, was the number of high-powered firms, and supposed experts that stayed long even when real estate prices began to level out, and mortgage companies began reporting losses. We're not talking about some guy down the street trading on his laptop. Goldman Sachs, Merrill Lynch, Bank of America, Citigroup, Lehman Brothers, Bear Stearns, all were claiming that the real estate boom would continue, and there was no risk in the trade. They were wrong!

    Anyone with a telephone and a computer could have discovered that mortgage companies were making loans to just about anybody who applied. No documentation was necessary, no proof of salary, credit history etc.. Some of the more intelligent investors were calling these mortgage companies, and pretending to apply for a loan. " I work as a dishwasher, earning six dollars an hour, and have pretty heavy credit card debt, can I buy a house?" These investors were shocked to find out that they could actually get a loan, if they were able to sign their name. The handful of investors such as John Paulson, and Michael Burry, who were able to see the craziness of the real estate bubble, in advance, were able to profit. But the so-called sophisticated investors who stayed long, got killed. Lehman Brothers, Bear Stearns, and Merrill Lynch were severe casualties. It wasn't that long ago that these were names that were revered, but they were making really stupid decisions.

    A few investors, such as George Soros, were able to get in at the last minute and profit. But the majority stayed long until it was too late. Following the experts, and following the herd, can be disastrous.

    So what can an average investor learned from all of this? We need to do our own thinking and not rely on "experts". Sloppy due diligence is not an option! We need to dig deep, meet with management when possible and make our decisions based on what we see, rather than what the analysts are saying. Don't get me wrong. There are some very talented people working on Wall Street. But they aren't all talented, and none of them are right all the time. Just because the big boys are making a move, doesn't mean it's the right move.

    We can find inefficiency in the market every day. Today, there are some stocks that are underpriced and some that are overpriced. Extreme inefficiency is less common. And when it comes, it takes tremendous courage to jump in when the market has been beaten down to an extreme level. Your mind will start screaming "There must be something here I don't see, the market must be right". Maybe that's true, but that's where your due diligence comes in. If the market is wrong, you stand to profit greatly. Great inefficiency provides great opportunity.



    Disclosure: long INSM, OCLS, NIV, SIMG, LSI, NBY
    Oct 26 12:04 PM | Link | Comment!
  • A shareholder tours the oculus manufacturing facility

    I recently returned from a great meeting with the Oculus management team,. Here are a few of the highlights:

    I was once again impressed with the quality of the team that the CEO has put together. I was reminded of the fact, that all of these guys come from backgrounds of successfully building startup companies. This is not their first endeavor. They have learned and grown from previous efforts, and are applying what they have learned to this company.

    During this trip, I was able to take a tour of the manufacturing and administrative facility. It turned out to be much more impressive than I imagined. Many of the startups I have been involved with, were pretty rough around the edges in the early stages. That is not the case with oculus

    We walked around and poked our head in various doors, and one thing that surprised me was the number of laboratories. It seemed like every room, I looked in, had someone in a white lab coat, performing some sort of a high-tech bioengineering task. There was one very large room that was sealed off, and I was told that not even the spouses of management were allowed in there. This was the room that housed the machines that creates the Oculus products. There were no armed guards standing around, but you certainly got the feeling that it was a very secure room. I am sure the competition would love to spend a couple of hours in there.

    There were two main bottling facilities, one for the gel and one for the liquid. The machinery was impressive and modern, and I can see why the FDA is very pleased with this facility.

    One area that was particularly impressive was where they stored their inventory. There were these huge containers full of the Oculus products, ready to be shipped.  I was surprised by the sheer volume that was being produced, and of course eventually sold.

    During my meeting with management, a couple of things stood out. I didn't realize this, but they have been traveling to New York and meeting with institutional investors, the goal being to make these large investors aware of Oculus and it's future potential. Since it is institutional investors that move stock prices, this is a good thing in the long run for shareholders. On those days when millions of shares are trading hands, you can be sure the institutions providing the bulk of the trading.

    The other thing I was reminded of is that this is a company that works very hard at projecting low and delivering high. They consistently meet or beat guidance, and that is a result of carefully giving guidance that is conservative and well thought out. In terms of the 2013 $45-$60 million revenue, I was reminded that this is a projection based on existing revenue streams, and does not include any future revenue streams. In other words, the $45-$60 million guidance is conservative. There is a good chance they will beat that prediction.

    Here is what I walked away with after this meeting. Management is exceptional. They have a real business producing and selling a successful product. In my opinion, they have at least an 80% chance of success. As with all startups, things can go wrong, but this company has so much going for it, that even with a view missteps, their success is likely. The opportunity to get in under two dollars a share, provides huge upside potential.

     



    Disclosure: long OCLS
    Tags: OCLS
    Oct 06 1:43 PM | Link | Comment!
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