Patience is one of the necessary requirements to earn money on the stock market with value investing, with time being the best ally of good investments. However, there is a resource for the most impatient investors, the so-called investment catalysts. In this article we will see what investment catalysts are, some examples of them, and we will analyze whether or not they are indispensable when investing in a company.
Catalysts in chemistry
Catalysts are substances whose only effect is to increase the speed of a chemical reaction, without affecting its result. Catalysts are present in many chemical reactions, both industrial and natural.
For example, cars use catalysts (platinum, palladium, and rhodium) to reduce the toxicity of the gases they emit. Our body also uses natural catalysts, called alegoría de Mr. Market, is that we do not know how long it may take for an action to reach its intrinsic value. To avoid long waits, some investors look for companies that are going to benefit from some notorious and upcoming event.
Therefore, we can define investment catalysts as events in the environment of the company that cause their price to rapidly approach their underlying value. Examples of value investors who analyze the existence of catalysts when they carry out the investment valuation process are Mario Gabelli or Seth Klarman.
Examples of Stock Investment Catalysts
There is no closed list of investment catalysts, but the possibilities are limitless. Some examples can be:
- Entry of a major investor in the shareholding
- Market launch of new products
- Discovery of a mining deposit
- Registration of a patent
For example, it is very common to see how the price of a company's shares begin to rise considerably after the announcement that an investor such as Warren Buffett or Carl Icahn takes positions in the company.
Is it necessary to invest in companies with catalysts?
In my opinion, it is not necessary, although if the company contains catalysts it should be considered as a positive aspect to consider. Of course, what I do not recommend is to rule out investing in good companies that are listed at reasonable prices just because they do not have catalysts, since that would mean losing investment opportunities that are often scarce in the markets.