Invest in a “Game Changer”

Posted by Michael Berry Ph.D

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1. A Short Discovery Tutorial
2. Lakes of Lithium Brines


About a decade ago I realized that there was a big hole in current investing theory and practice. At the time I didn’t realize that my ideas would morph into a new approach I called Discovery Investing (D.I.). This investing discipline is different and, more important; it is more powerful in many ways than traditional investing strategies we have from academics and practitioners. 

First, though, we must define the technique.  Discovery Investing is a discipline that seeks significant value creation through market recognition of a world class discovery.  For example the discovery of a cure or effective treatment for cancer would be worth billions of dollars.  The recent sale of Imclone and its cancer treatment Erbitux, a $7 billion take-out, attests to this fact. In 2002, I recommended Western Silver as a micro cap (Incubator) Discovery company.  After 4 years of silver exploration in Zacatecas, Mexico the company had discovered millions ounces of gold and hundreds of million ounces of silver. Goldcorp (GG) ended up owning Western’s discovery for a premium of $2 billion.

Practitioners of the discipline seek companies that offer these mega-wealth creating opportunities in many different fields.  They may be found in the natural resource sector, bio tech sector, high tech sector or, today, in the infrastructure space here in the US.  The reformation of the Utility sector (the development of the electrical grid) is a good example of how the Discovery Space tends to expand and change over time. A major discovery always pays a significant wealth dividend.  The recent focus on health care and alternative energy discoveries has spawned dozens of new discovery opportunities.

D.I. is virtually an untouched investment space.  At the beginning of their life cycle the discovery companies are usually small, illiquid micro caps. We categorize them as “Incubator” companies. Nobody cares about them. They fly “under the radar screen.”  I developed a factor model to rank the best of these opportunities, the Discovery Investing Factor Model.  Consisting of just 10 rules or Discovery Factors, it is easy to use.  A quick examination of the grid’s analytical framework below provides a useful description of the discipline. For each company, each discovery factor is rated by its potential between 1 and 10 (10 points being the optimal rating).

  1. Discovery Potential is real.  Does this discovery have “world class” value-creation potential?
  2. Ownership share: does the company own control of the asset 100%?
  3. Is the potential discovery a game changer? Is it revolutionary, useful today and progressing towards realization?
  4. Is there diversification of discovery risk, multiple opportunities? Are there opportunities for serendipity?
  5. Management and the Board: track record, ownership and insider transactions, option strategy.
  6. Identify a Dominant Cycle (e.g. the Global Quality of Life Cycle) and Catalyst (e.g. the discovery).
  7. Is this a Contrarian discovery play? Are you buying into this for pennies?
  8. Financial strength: balance sheet & income statement management; sustainability of operations, dilution strategy.
  9. Does management communicate with employees, shareholders and customers? Is it honest and timely?
  10. Can you exhibit self control, patience, courage, sustain loss, and continue to invest in this opportunity?

… pages 2-4 HERE