Bob Robotti: Passive Fund Flows Have Created Many Stock Picking Opportunities

During his recent presentation at the Value Investor Conference 2024, Bob Robotti explains why the passive flow of funds has created investment opportunities by diverting attention away from individual stock research.

Investors are focused on indices and speculative patterns, neglecting bottom-up stock analysis. Many companies, especially in overlooked industries, are undervalued. Cyclical businesses, particularly in North America, have been discounted due to prolonged economic weakness and global competition.

However, these companies have adapted and consolidated, positioning them for future growth as economic conditions improve. This shift presents a fertile opportunity for stock pickers to invest in undervalued companies poised for significant growth.

Here’s an excerpt from the presentation:

The passive flow of funds we think is you know part of what’s creating the opportunity because where are people looking? They’re not looking first off, they’re looking for how do I figure out which index I want to buy?

How do I figure out you know the last three times this happened and maybe this should happen this time? So it’s all this wild speculation we kind of think.

So the flow of funds we think eliminates the idea that you should do bottom-up stock research and we think that there’s a huge number of companies that have been forgotten about.

No one has an interest in industries and companies and therefore for a stock picker it’s much easier today to pick a company that is substantially undervalued.

Valuation matters, valuation is critical. So a lot of what we do is invest in companies that are cyclical and the reason we do that is when a cyclical business goes into a cyclical downturn the businesses get discounted.

The advantage over the last decade pluses that cyclicality in those cyclical businesses has been worse than normal because the economic environment has been weak.

And in addition to that you lay over many other structural issues, if you’re an industrial company in North America for 50 years you’ve been at a competitive disadvantage because there another country in another part of the world.

That it now has become the second largest economy in the world that’s eating your lunch, and so therefore you’ve had a compete against someone who had advantages that you did not have.

And so therefore movement of capital, the movement of business has happened.

Now that we think that means the remaining companies that are here have right size, downsize, consolidated so that you have a very different industry structure with tough mutters who’ve competed and or you know in a good place today, especially since the underlying economics is in the process of it already has started to change, and it’s clear and identifiable there’s a dramatic period of time of growth in front of it.

So there’s a fertile opportunity as opposed to you fighting huge winds. So we think that’s a critical part of how we identify the right kinds of companies to invest in and there’s a lot of right kinds of companies today because there’s a lot of companies that people just don’t want to look at.

You can watch the entire presentation here: