Welcome to the 24th edition of Value Investor Digest<\/p>\n
In this edition we feature two memos from LVIC speaker Howard Marks, both released in the past week. There is also a Bloomberg video interview where Howard briefly discusses the first memo. In addition, we feature an FT article on Amazon, an interview with Sanjay Bakshi, a recent letter from Jonathan Ruffer; there\u2019s also a Jim Chanos video and presentation on both his short position in leveraged oil majors and his thesis on exploration and production companies; plus a video interview with David Herro on why he thinks that fears that a slowdown in China is going to disrupt the world economy are overblown.<\/p>\n
Howard Marks Memo 1:\u00a0<\/strong>On the Couch<\/strong> Howard Marks Memo 2:\u00a0<\/strong>What Does the Market Know?<\/strong> Amazon: How to be a Bull<\/strong> Interview with Sanjay Bakshi<\/strong> Ruffer Investment Letter<\/strong> Jim Chanos Short all of the Leveraged Major Oil Companies<\/strong>
\n<\/i><\/a>Howard will speak at the London Value Investor Conference on 26th May 2016 in an audience Q&A session hosted by Richard Oldfield. Unusually, Howard has written two memos in the space of 5 days. This first memo was released on January 14th and is Howard\u2019s attempt to\u00a0\u201csend the markets to the psychiatrist\u2019s couch\u201d<\/i>\u00a0to see what could be learned. Past memo\u2019s have covered the idea of the swing of the pendulum between greed and fear, through the various stages of investor sentiment that lay between the two extremes.\u00a0\u201cIn the real world, things generally fluctuate between \u2018pretty good\u2019 and \u2018not so hot.\u2019 But in the world of investing, perception often swings from \u2018flawless\u2019 to \u2018hopeless.\u2019 The pendulum careens from one extreme to the other, spending almost no time at \u2018the happy medium\u2019 and rather little in the range of reasonableness. First there\u2019s denial, and then there\u2019s capitulation.\u201d\u00a0<\/i>This and the subsequent memo below are both worth reading in full, however there is a short\u00a0Bloomberg video<\/a><\/u><\/strong>\u00a0where Howard briefly discusses a small part of this memo.<\/p>\n
\n<\/i><\/a>The second memo is a follow up to the first and written shortly afterwards on 19th January. It elaborates on the theme of the psychology of market participants:\u00a0\u201cSo, what does the market know? First it\u2019s important to understand for this purpose that there really isn\u2019t such a thing as \u2018the market.\u2019 There\u2019s just a bunch of people who participate in a market. The market isn\u2019t more than the sum of the participants, and it doesn\u2019t \u2018know\u2019 any more than their collective knowledge. This is a very important point. If you believe the market has some special insight that exceeds the collective insight of its participants, then you and I have a fundamental disagreement. The thinking of the crowd isn\u2019t synergistic. In my view, the investment IQ of the market isn\u2019t any higher than the average IQ of the participants. And everyone who transacts gets a volume-weighted vote in setting an asset\u2019s price at a given point in time.\u201d<\/i><\/p>\n
\n<\/a>For most Value Investors Amazon is not easy to value. Amazon yields little cash, about $1.30 per share and it is currently trading at over $550. Therefore, all sensible valuations of Amazon will value it on the basis of what it might become, as far away as 2035 according to this article in the FT and perhaps using Wal-Mart\u2019s growth trajectory as a proxy. Whilst growth that materializes will always be a part of value \u2013 being sure about the level of growth that will be achieved and how it will translate to earnings is altogether a more difficult prospect. There are some Value Investors that have identified value in the growth path they expect for Amazon \u2013 for instance, London based value investors Mundane Asset Management have held a substantial position in Amazon: recently, more than 20% of their World Leaders Fund was in Amazon stock (as of October 2015).<\/p>\n
\n<\/a>There are 2 parts to this interview, Part 2 can be accessed from a link at the bottom of the article. A variety of topics are covered including his views on buy\/sell discipline, investing in airlines and also brand value:\u00a0\u201cThere is a lot of fuzzy thinking about sources of competitive advantages. While it\u2019s great that authors like Pat Dorsey and others have written about these sources, one has to keep in mind that these things don\u2019t live in silos. They overlap. Take brands. Don\u2019t they create high switching costs? Of course they do. Switching costs are not just financial; they are also psychological, and successful brands make customers switch them from system 2 type of reflective thinking to system 1 type of automatic, reflexive thinking. Why do most customers automatically pick Heinz ketchup instead of the cheaper, store brand ketchup from the supermarket shelf? Brands also create scale, and scale produces cost advantages\u2026\u201d<\/i><\/p>\n
\n<\/a>This letter was written 3 months ago by Jonathan Ruffer, it is full of insight in to where he perceives risk to be at present:\u00a0\u201cI am intrigued by the nature of risk at the moment. Wearing my hat as a trustee of a family trust, I found myself reviewing a portfolio which, by today\u2019s standards, had an exceptionally high yield \u2013 upwards of 3%. I asked the managers if they were comfortable with this, and whether they would opt for a lower yield if they were free to do so. The response was that it would give the managers the latitude to increase the risk by investing in low\u2013yield stocks. The thrust of my question, of course, was that the high\u2013yield portfolio was high\u2013risk, since it concentrated into those stocks which all yield\u2013seekers had sought out, and would be the most vulnerable if financial conditions reverted to something more normal\u2026when you overpay for a \u2018safe\u2019 asset, it becomes doubly dangerous, since you have no possibility of being bailed out by happy surprises; it was bought for its inability to surprise in either direction.\u201d<\/i><\/p>\n
\n<\/a>This Jim Chanos video with CNBC (skip to 3 minutes 15 seconds in) details that\u00a0\u201cyou can be pretty much sure that we are short all of the major leveraged oil companies\u201d.<\/i>\u00a0Related to this video but providing more detail specifically about the exploration & production space of the industry is this\u00a0powerpoint presentation<\/a><\/u><\/strong>\u00a0given in October 2015 by Chanos. The presentation analyses the economics of E&P in recent years \u2013 according to Chanos the extent of capital market support for energy since 2010 is demonstrated in energy companies\u2019\u00a0financial figures; cash flow from operations at many major E&P companies has not covered capital expenditure since 2010.\u00a0\u201cWe don\u2019t think the model worked at much higher prices because the wells just deplete too fast, so you constantly have to reinvest to keep your production constant \u2013 that\u2019s a whole different story than the integrators.\u201d\u00a0<\/i><\/p>\n