Trinity Mirror - a case study

A little background..

Shares in Trinity Mirror are a nice example of where investing meets my everyday life. It's not very often, particularly in the sort of (mostly boring!) small cap companies I look at, that something hugely material to the share's performance gets reported on the normal news - by which I mean not the adrenaline fuelled, ticker whirring programming that characterises most 'business' news channels. The most obvious retort to that is that it's not particularly often any of the companies I've invested in are embroiled in huge legal scandals, but there's all sorts of more intriguing elements to Trinity Mirror's alleged involvement in the phone hacking scandal. The storm span up around the first wave of allegations, one point of view goes, was as much about Murdoch as it was about the actual crime that was alleged to be committed.

That might be the case. The portfolio holding shares in Trinity Mirror means I am in the unenviable position of having to come up with an opinion on that, I suppose. That's something I don't particularly like doing - there is a good reason I try to avoid buying in to ongoing legal disputes. Trinity Mirror got in, though, and now there's another factor complicating the valuation of the business. Or is there? Well, not really. I read the discussion boards when interesting events happen because I enjoy seeing how other people interpret the information, and one on ADVFN struck me as nicely summing up my views here:

"Regarding the exciting hacking development: the market dislikes uncertainty. But uncertainty is NOT the same as risk... It is still possible to value TNI, but the RANGE of valuation has widened. There is more uncertainty."

This is not to say the share price fall is unwarranted or illogical, and I'd actually go one step further than the above - the risk to Trinity Mirror was always present and, as many have interjected, obvious. It is simply that the balance of probabilities has changed - it now feels a lot more likely, and a lot more imminent, that Trinity Mirror will start stumping up in legal fees. Something new in the model? I don't think so. To say so is to pretend the risk was never there before. 

The more interesting side

As is probably obvious, I don't think I have a lot to contribute to the debate about how this affects the valuation of TNI - though I'll meander to that conclusion below - but there is a bit which always fascinates me, and that's the response to the news. Without sounding too airy-fairy, big price movements are always an entertaining test of your own rationality. The most common camps in this sort of situation, I expect, are the two extremes - those who sell out immediately and those who justify holding, perhaps using the price movement as rationale - "it's bad news, but since it's down 20% it's been priced in" - a line I've used more than once.

I suspect I am irrationally loss averse. In the past I've held shares all the way down, and hindsight is 20/20 for realising that there were several points I should've sold - where I should've seen that something was materially wrong with the way I was valuing the company. I tend to remember my buying point for shares, another irrelevance. After you have bought the shares, it doesn't matter what you bought them for, whether you're in notional profit or notional loss. The only factor that matters is your perception of whether X pence is worth more, or 1 share in the company. It probably won't surprise to hear that I'm holding Trinity Mirror, then, for what I perceive to be perfectly justifiable reasons!

If it sounds defeatist, it needn't. It's just a fact of life that, for the majority of us, even when cognisant of our tendencies we follow the same path. Crucially, though, I don't think that justifies simply doing the opposite - trying to counterbalance it, if you will. For me, it just means I should hold myself to higher standards of analysis, and be more rigorous. Letting a prevailing bearish mood influence me, perhaps by my tweaking some figures in a valuation, would be exactly the wrong thing to do. That makes my answer to the Trinity Mirror valuation question quite simple. Is the gap between my previous valuation of the company and the market valuation of the company great enough to absorb the potential legal costs and my estimate of the fallout?

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Well, yes. I don't even need to estimate the legal costs and the fallout, and nor will I try. That, again, might sound a little defeatist, but I don't think it is either. I suspect trying to figure it out is an exercise in futility. I take heart in something I quoted earlier:

the market dislikes uncertainty

It does, and so do I. I'm not sure anyone can really quantify the costs, which  puts people off... but that's why I want a big discount between my valuation and the market valuation - something which is there at the moment. It's risky, yes, in that there is an obvious catalyst for serious problems in the business. Again, though - risk is only relevant when balanced with the reward, and the potential reward is (to my mind) sufficient.

Still, if you want a cohesive story, here's one off the cuff - the market hates uncertainty. It also tends to rather dislike companies in long-term decline, and overvalues those which are growing. They're cheap relative to earnings - a grouping which tends to outperform, on average - and have the attraction of not realistically facing any new competitors, given the way newspapers are going. Alternatively, it's just another loss-averse investor sticking to his guns and holding down the slope.

C'est la vie!