Value Invest

VID July 2018

July 23
13:34 2018

Welcome to the 35th edition of Value Investor Digest

In addition to the usual collection of articles of interest to Value Investors we are delighted to announce the launch of a new conference: Value Invest New York – December 4 2018.

The articles featured in this edition include a link to an FT article titled “Can Factor Investing Kill Off the Hedge Fund”, a Boyar Value Group report on five “orphaned” stock ideas, our archive of the Berkshire Hathaway Annual Meeting videos from 1994 to 2018, a WSJ article on the “existential crisis” facing Value Investors, some analysis of the performance of 100 stocks presented at the London Value Investor Conference since 2012, an FT article from John Authers on how FANG stocks are having an outsized effect on index performance, an article which details how Amazon steers customers to their own brand products, an article by Ronald Chan on the richest man in Hong Kong Li Ka-shing’s investment record, an article by conference speaker David Iben titled “Master and Servant” and finally another FT article which reveals a painful short-squeeze for some hedge funds who made bets against UK retailers.

Can Factor Investing Kill Off the Hedge Fund?

BlackRock estimates that there are $1.9tn of assets in dedicated factor strategies, and predicts this will swell to $3.4tn by 2022. This FT article is a summary of a prominent current trend in investing and focusses on Cliff Asness of AQR, whose strategies include some funds focussing on factor investing. “By in theory replicating what a lot of professional money managers do at a fraction of the cost, factor investing puts more pressure on fees. This is why Mr Asness thinks AQR can play the same disruptive role for hedge funds that Vanguard did for mutual funds. ‘It is part of our business to be the Vanguard of hedge funds. It’s not all of our business, by any means. But to take some of the basics and say you should get this for lower fees,’ he says ‘What [hedge funds] are doing as a group is good, but simple. And they’re kicking up a whole lot of dust around it.’”

Boyar Value Group: Five “Orphaned” Stock Picks

The Boyar Value Group recently gave an online presentation detailing their new “orphaned” equity strategy and discussed the investment cases for five “orphaned” stocks. Explaining what constitutes an oprhaned stock, Jonathan Boyar said “An ‘orphaned’ stock is a stock that analysts and investors have for the most part disregarded. A stock can become “orphaned” via a variety of ways. A stock may not be included in one of the major S&P indices (S&P 500, S&P 600, etc.) and therefore cannot be bought by index funds as well as “closet” indexers, which tend to focus on stocks included in the major indices to ensure that their performance doesn’t deviate greatly from their respective benchmark. Some of the reasons why companies may be ineligible for index inclusion include companies that are listed in the U.S., but maintain headquarters outside of the U.S., companies with super-voting share class structures and tracking stocks.These so-called “index orphans” are not limited to small companies.”

Berkshire Hathaway Annual Shareholders Meeting Videos 1994-2018

Many Value Investor Digest readers will know that since 2016 the Berkshire Hathaway Annual Shareholders Meeting has been live-streamed around the world from Omaha. More recently, the previously un-released archives of video footage from the meetings back to 1994 has also been made available. We have compiled a single page with links to full videos, highlights videos and other clips from the meetings on both the CNBC and Youtube websites. For the Youtube videos prior to 2008 our links also skip the introductory and business session remarks in the morning so that the video starts at the beginning of the Q&A. Alongside these links are a photo and one of our favourite quotes from either Buffett or Munger during that years meeting. It is interesting to us as organisers of the London Value Investor Conference to see in the older videos how many conference delegates were asking questions at the BRK meeting as far back as the mid-1990s.

Value Investors Face Existential Crisis After Long Market Rally

This WSJ article outlines problems facing some Value Managers from the temptation to “style drift” and/or engage in “portfolio window dressing” for their investors: “Hunting for cheap stocks has been out of favor for so long that some self-proclaimed “value” investors are embracing a broader mandate, a potentially costly move in the later stages of an economic cycle…Some critics say the measures used to identify value have aged poorly in a market dominated by passive investing strategies and asset-light technology companies. Those trends have pushed more investors into the shares of fast-growing companies such as Apple Inc. and Netflix Inc. that have powered the market higher in recent years. Other investors have turned to studying momentum trading, crowded positions, fund flows and event-driven trading, strategies not typically associated with value investing.” Some would argue that the investment landscape has changed permanently and that managers should change with it, although those reluctant to move on from their approach might be reminded of when Warren Buffett was asked whether the buy and hold style of investing was dead and he replied “it depends what you buy and hold”.

Analysing the Performance of the Stocks Presented at the London Value Investor Conference Since 2012

To celebrate the launch of the inaugural Value Invest New York conference on December 4 2018, we have done some analysis of the 100 stocks presented by fund managers at the London Value Investor Conference since it started in 2012 and have presented the results in a video on the conference website. In addition to identifying the top long-term compounders and strong performance of most of the stocks presented, it was also interesting to note that when seperating the stocks presented in to annual “conference portfolios” the outperformace of these portfolios versus the MSCI World was remarkable; with CAGR of the individual portfolios of between 14%-28% in each year other than the 2015 portfolio, which was the only year in which the conference portfolio underperformed the MSCI World. We look forward to many more investment ideas being presented in future at Value Invest New York.

Fangs for the Memories

This Financial Times article from John Authers reveals that if the FANG stocks were removed from the S&P 500 Index this year, the index would be down in 2018. The article goes on to talk about the momentum effect of the FANG stocks whilst “unloved cheap stocks grow ever cheaper”… “For the purposes of this exercise, I took the Fangs to be Facebook, Amazon, Apple, Microsoft, Netflix, Nvidia and Google. According to a few calculations I made on the back of an envelope (or more precisely, with a Bloomberg terminal and a spreadsheet), the market cap of these seven stocks has risen by $772bn so far this year. Meanwhile the market cap of the S&P 500 as a whole has risen by $673bn. Excluding just those seven Fangs takes the S&P from a 2 per cent gain for the year to a slight loss.”

How Amazon Steers Shoppers to Its Own Products

It is remarkable that AmazonBasics now has a 30% share of the online battery market and outsold both Duracell and Energizer on its own site. The company also now has around 100 private label brands for sale using anodyne names in a similar manner to supermarkets own brand products. If, as a quoted analyst in the article suggests “nearly half of all online shopping in the United States will be conducted on Amazon’s platform in the next couple of years” the opportunity for Amazon to increase sales of own brand products using the strategies they have adopted detailed in this article could be substantial.

Superman, the Oracle, and the Value of a Long View

his Bloomberg article by Value Invest New York speaker Ronald Chan of Chartwell Capital, who is based in Hong Kong, provides a profile of Li Ka-shing who recently hosted his final shareholder meeting as founder and chairman of the Cheung Kong group. Since IPO in 1972, Li Ka-shing has “generated a return of 5,000 times, including reinvested dividends. That’s equivalent to an annualized compound rate of 20.3 percent over 46 years.”

David Iben, Kopernik Global Investors Commentary: Master and Servant

This is the latest commentary written in June 2018 from Dave Iben (who will be speaking at Value Invest New York on December 4). The commentary covers a lot of ground on a range of topics from the rise of robo-advisors, ETFs and passive management; through economic theory and on to ESG investing under a unifying theme of the “fallacy of servitude to misguided ivory tower theory, behavioral heuristics, ill-conceived formulas, fiat money, and other ‘false Gods'”. Regarding the increasing role of computers in financial markets Dave writes: “Obviously, computers are far faster, much better at gathering data, and calculation is instantaneous. But, while robots and algorithms are vastly superior to humans in many ways, they still lack judgment. They can’t think nor exhibit anything akin to the ‘wisdom of Solomon’. And, in investing, a field that is famously a blend of science and art, isn’t judgment what really matters? In a weird paradox, computers have allowed mankind to formulate and embrace more theories, which in turn, have caused increased use of computers, which unfortunately, due to the inherent fallacies embedded within, have had spurious consequences. Perhaps the prime example of the problem is that computers’ need for data have led mankind to quantify and digitize items that can’t be quantified and digitized.”

Stockpickers Prosper as Value Bets Pay Off with UK Retailers

A recent Bank of America Merrill Lynch fund manager survey showed the UK remains the least popular destination for global investors, with many large instiutions “uncertain about Brexit and a limp domestic economy”. Given this backdrop the recent performance of some UK retailers is surprising: J Sainsbury, Tesco, Next and UK online grocer Ocado are up 30%, 24%, 40% and 162% year to date and this FT article article from Miles Johnson suggests that “there may be further gains to come as the market slowly comes around to the idea that certain unglamorous but still profitable high street and consumer-facing businesses in the UK are not simply going to disappear overnight as a result of political uncertainty or the threat of Amazon”. This has also led to a painful short squeeze for some Hedge Funds: the John Authers detailed that according to Markit data 28% of Ocado stock was out on loan to hedge funds in the middle of 2017.

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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
  • “The focus of most investors differs from that of value investors. Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”
    Seth Klarman
  • “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
    John Templeton
  • “A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss.”
    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.’
    Warren Buffett
  • “It is easier to rationalize than it is to be rational.”
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  • “Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others which they know nothing about.”
    Phillip Fisher
  • “Value investing is the discipline of buying shares at a significant discount from their current underlying values and holding them until more of their value is realised. The element of a bargain is the key to the process.”
    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.”
    Howard Marks
  • “You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have that cast of mind, you’re destined for failure even if you have a high I.Q.”
    Charlie Munger
  • “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
  • “Conservative investors sleep well.”
    Phillip Fisher
  • “Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group… then to hell with them.”
    Charlie Munger
  • “Price is what you pay. Value is what you get.”
    Warren Buffett
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    Seth Klarman
  • “In my whole life, I have known no wise people who didn’t read all the time – none, zero… You’d be amazed at how much Warren reads – at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
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    Howard Marks
  • “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”
    John Kenneth Galbraith
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    Charlie Munger
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    Howard Marks
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    Howard Marks
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    Seth Klarman
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    Seth Klarman
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    John Maynard Keynes
  • “…active management strategies demand uninstitutional behaviour from institutions, creating a paradox that few can unravel.”
    David Swensen
  • “Investing is the intersection of economics and psychology.”
    Seth Klarman
  • ‘Risk can be greatly reduced by concentrating on only a few holdings.’
    Warren Buffett
  • “The number of things that can go wrong (in business) greatly exceeds the number that can go right.”
    Seth Klarman
  • “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”
    Warren Buffett
  • “How do value investors deal with the analytical necessity to predict the unpredictable? The only answer is conservatism.”
    Seth Klarman
  • “We look for a horse with one chance in two of winning and which pays you three to one.”
    Charlie Munger
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    Warren Buffett
  • “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
    Warren Buffett
  • “It is better to fail conventionally than to succeed unconventionally.”
    John Maynard Keynes
  • “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”
    Warren Buffett
  • “An investment in knowledge pays the best interest.”
    Benjamin Franklin
  • “Know what you own, and know why you own it”
    Peter Lynch
  • “In both economic forecasting and investment management, it’s worth noting that there’s usually someone who gets it exactly right… but it’s rarely the same person twice.”
    Howard Marks
  • “The four most dangerous words in investing are: ‘this time it’s different.’ ”
    Sir John Templeton
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    Warren Buffett
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    Howard Marks
  • “In investing, what is comfortable is rarely profitable.”
    Robert Arnott
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    Howard Marks
  • “No wise pilot, no matter how great his talent and experience, fails to use his checklist.”
    Charlie Munger
  • “Wide diversification is only required when investors do not understand what they are doing.”
    Warren Buffett
  • “A hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.”
    Howard Marks
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    Charlie Munger
  • “The wise investor can profit if he can think independently of the crowd and reach the rich answer when the majority of financial opinion is leaning the other way.”
    Phillip Fisher
  • “Analysis should be penetrating not prophetic.”
    Ben Graham
  • “…it never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles.”
    Charlie Munger
  • “This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.”
    Phillip Fisher
  • “Without numerical fluency, in the part of life most of us inhibit, you are like a one-legged man in an ass-kicking contest.”
    Charlie Munger
  • “All Investors should devote themselves to understanding the nature of the business and its intrinsic worth, rather than wasting their time trying to guess the unknowable future.”
    James Montier
  • “There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us.”
    Phillip Fisher
  • “The disciplined pursuit of bargains makes value investing very much a risk-averse approach.”
    Seth Klarman
  • “The successful investor is usually an individual who is inherently interested in business problems.”
    Phillip Fisher
  • “In a commodity business, it’s very hard to be smarter than your dumbest competitor.”
    Warren Buffett
  • “Because investing is as much an art as a science, investors need a margin of safety.”
    Seth Klarman
  • “Chains of habits are too light to be felt until they are too heavy to be broken.”
    Warren Buffett