Value Invest

November 2015

November 12
12:00 2015

Welcome to the 23rd Edition of Value Investor Digest

In this edition, we feature a Business Insider summary of a recent Baupost letter, a summary of Guy Spier’s approach to using checklists, a video of Tom Russo’s talk at Google on “Global Value Investing”, a ValueWalk article on Pzena Asset Management, an FT article on Steve Jobs which analyses the start-up conditions at Apple; plus two more videos at the end of this issue – one from Bill Miller on why he thinks now is the perfect time to buy US stocks, the other from London Value Investor Conference speaker Jean-Marie Eveillard who speaks about market cycles and the risks he sees ahead from “valuation problems” brought about by quantitative easing.

Baupost Letter
This Business Insider summary of a recent letter in which Baupost partner Brian Spector, who joined in 1998 and will retire at the end of the year, speaks about the ethos and processes of the company. The letter addresses his views on the advantages of Baupost maintaining high cash positions as well as commenting on the difficulties of having high conviction in ‘tide markets’:“Investing in tide markets takes chutzpah. To do so effectively, you need to fly in the face of public opinion, you have to fight normal human emotions, and you have to be prepared to double down on your bets when your conviction is most in question. As Benjamin Graham once said, ‘The investor’s chief problem and even his worst enemy is likely to be himself.’ But most importantly, you have to be at a place that empowers you to succeed—a place that is uniquely situated to take advantage of these market conditions. A place like Baupost.”

Summary of Checklists
An investor who has written extensively about the need for checklists is Guy Spier. If you have not yet got around to reading his excellent book – The Education of Value Investor then this Hurricane Capital article provides a brief summary of Guy’s approach to using checklists and also includes some of Guy’s checklist items. In addition, it includes some contributions from others – including Charlie Munger: “I’m a great believer in solving hard problems by using checklists, you need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.”

Talks at Google: Tom Russo – “Global Value Investing”
Tom Russo gave this hour long talk at Google last month which he referred to as “a good excuse to get away from the markets”. Tom speaks about the advantages of family controlled companies, the problems with management having stock-option driven compensation, the long-term orientation required for successful investment and the pricing power and predictability of demand created by brand loyalty. Tom also goes in to detail on what he sees as some of the superior qualities of the corporate culture created by management at two of his holdings – Nestle and Unilever. Alongside the theme of the need for a longer-term outlook, he also speaks about how growth often hides value, using Buffett’s investment in GEICO as an example he mentions that the owners of a business need to have the “capacity to let the income statement bear the burden” of the short term investment needed to grow the business.

Pzena: Successful Value Investing Provides More Than Passive Exposure to a Value “Factor”
This Valuewalk article summarises a recent letter by Pzena Asset Management which discusses the Value Cycle and how many Value Managers have underperformed their growth and momentum counterparts (leaving aside any arguments about the blurred lines between the style distinctions of value and growth). The article goes on summarise the letter from Pzena, including their thoughts on what lies ahead. Pzena mention that by having “a disciplined approach, it is hard for us to escape correlation with naïve value benchmarks, but our goal is to add value through understanding the specifics of every individual company we buy…Value investing is not a simplistic factor, but rather a philosophy that requires research to outperform over the long-term.”

Imitators take note — Steve Jobs was more Than a Showman
This FT (subscription) article highlights the different startup conditions present when Apple was being formed, as compared with today’s “Unicorn” tech businesses valued at $1bn+. In the early days of Apple, Steve Jobs – as Apple’s principal founder and subsequent re-inventor – was subject to a lot of pressures which the author believes forged part of the culture of Apple. This is a process that most companies in the sector today may not have been through: “The need to stretch every nickel informed the way Apple was run during the early days. It is on that spell, rather than the enormous public profile commanded by Steve Jobs in his later years, that would-be emulators should dwell.”

Bill Miller: Now is a Perfect Time to Buy US Stocks
In this CNBC video from 14th October Bill Miller gives reasons for why in his view now is the perfect environment to buy US stocks, listing several factors as to why he believes this is the case: “We want the economy growing, but not too fast. We want inflation to be low. We want interest rates to be low and not really competitive with stock prices. We’d like earnings to be growing, but again, not too fast. We’d like return on equity to be high, profit margins to be high, GDP at an all-time high, household net-worth at an all-time high, but we also want people to take their money out of stocks because they hate them so they are cheap. That is exactly the environment we are in today.”

Jean-Marie Eveillard Video on Market Cycles
Jean-Marie mentions that throughout his career there have almost always been opportunities to invest in equities but that there are some “valuation problems” arising from the risks he sees ahead, partly because of the unintended consequences of quantitative easing: “To my mind quantitative easing is a monstrosity – money is not supposed to be free for heaven’s sake. Those steps that have been taken by the authorities are completely unprecedented and one cannot make historical comparisons…I suspect there is bound to be some major negative unintended consequences.”

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  • “We will only do with your money what we would do with our own.”
    Warren Buffett
  • “The trick of successful investors is to sell when they want to, not when they have to.”
    Seth Klarman
  • “Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”
    Charlie Munger
  • “The stock market is filled with individuals who know the price of everything, but the value of nothing.”
    Phillip Fisher
  • “To thrive as a value investor you have to risk being called a dummy from time to time.”
    Christopher H. Browne
  • “The game of life is the game of everlasting learning. At least it is if you want to win.”
    Charlie Munger
  • “Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.”
    Seth Klarman
  • “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
    Ben Graham
  • “Rule #1: Never Lose Money; Rule #2: Never forget Rule #1.”
    Warren Buffett
  • “Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety.”
    Ben Graham
  • “All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”
    Charlie Munger
  • “Practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many.”
    Phillip Fisher
  • “In theory, there’s no difference between theory and practice. In practice, there is.”
    Yogi Berra
  • “We really can say no in 10 seconds or so to 90%+ of all the things that come along simply because we have these filters.”
    Warren Buffett
  • “Whenever you find yourself on the side of the majority, it’s time to reform.”
    Mark Twain
  • “It’s not supposed to be easy. Anyone who finds it easy is stupid.”
    Charlie Munger
  • “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.”
    John Maynard Keynes
  • “Believe me, there’s nothing better than buying from someone who has to sell regardless of price during a crash. Many of the best buys we’ve ever made occurred for that reason.”
    Howard Marks
  • “Acquire Riches by Industry and Frugality.”
    Benjamin Franklin
  • “Cash combined with courage in a time of crisis is priceless.”
    Warren Buffett
  • “The Stock Market is designed to transfer money from the Active to the Patient.”
    Warren Buffett
  • “Great investors are not unemotional, but are inversely emotional – they get worried when the market is up and feel good when everyone is worried.”
    Bill Miller
  • “Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory.”
    John Kenneth Galbraith
  • “In the world of investing, being correct about something isn’t at all synonymous with being proved correct right away.”
    Howard Marks
  • “The single greatest edge an investor can have is a long-term orientation.”
    Seth Klarman
  • “For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.”
    Warren Buffett
  • “Buy companies with strong histories of profitability and with a dominant business franchise.”
    Warren Buffett
  • “There’s little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future.”
    Howard Marks
  • “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
    Warren Buffett
  • “Having great clients is the key to investment success.”
    Seth Klarman
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    Seth Klarman
  • “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
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    Seth Klarman
  • “As Buffett has often observed, value investing is not a concept that can be learned and gradually applied over time. It is either absorbed and adopted at once, or it is never truly learned.”
    Seth Klarman
  • “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”
    John Templeton
  • “Wall Street research is strongly oriented toward buy rather than sell recommendations. There is more business to be done by issuing an optimistic research report than by writing a pessimistic one.”
    Seth Klarman
  • ‘If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.’
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    Phillip Fisher
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    Seth Klarman
  • “Once you adopt a value-investment strategy, any other investment behaviour starts to seem like gambling.”
    Seth Klarman
  • “What the wise man does in the beginning, the fool does in the end.”
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  • “Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.”
    David Swensen
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    Charlie Munger
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    Seth Klarman
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