Invest Like David Tepper – Search For Stocks With ‘Cheap Optionality’

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During his recent interview with Tobias, Thomas Braziel, the Founder of 507Capital, discusses the importance of searching for stocks with ‘cheap optionality’. Here’s an excerpt from the interview:

Tobias Carlisle: What’s your overriding philosophy? I think that there are two principles. One is that you’re prepared to look anywhere. You’ve got to be very open to where you could find any of these possibilities. The other one is… Well, maybe there’s three. The position is very important. You want to be in the right place to make sure you’ve got some leverage or you’ve got the payoff, you’ve got some return possibility. The third is just to be alive or aware of the possibilities for that optionality where you could have a very large payout. Then, to sort of…

Thomas Braziel: Buy a steak, get the sizzle for free. That’s it. That’s all investing is. Buy a steak, get some sizzle for free. I think that there’s a lot of steak out there, where it’s just steak, I mean there an’t no sizzle coming. I mean this is kind of a beaten up company and the returns on invested capital are super low. You could make money doing it, especially the portfolio and whatnot, but the really interesting ones are where you can kind of get some sizzle along with the steak. The steak is the price. It’s all price driven. If you have, again, crypto distress is interesting because you’re getting distressed pricing and you’re getting a real steak because you’ve got a state value above what you’re paying. Again, it’s very price dependent. Then, you get this big sizzle for free.

Thomas Braziel: You can say the same thing in a lot of… You buy a liquidation, you get some lawsuits for free, that’s great. Again, steak and sizzle. I guess the more technical way to say it is you’re looking for cheap optionality or free optionality or free options and things like that. I think it’s better to not dress it up too much because I guess I’m a quite a revered person, I like to poke around. Yeah. Keep your eyes open for opportunity everywhere and yeah. I do think, though, that cheap optionality is probably the overarching theme if I was really going to… Cheap or free optionality, because you don’t know outcomes, the outcomes you don’t know. I’m very skeptical of people that have top down thematic use on stuff.

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