Value Invest London

February 2017

Welcome to the 28th edition of Value Investor Digest

In this edition we feature the video and transcript of Charlie Munger speaking at the Daily Journal meeting, an article with some of Seth Klarman’s comments from his most recent Baupost letter to investors, a recent memo written by Howard Marks and an FT article by Miles Johnson on why he thinks that the “cookie-cutter approach” to Value Investing is a mistake.

Charlie Munger – Daily Journal Annual Meeting: Video and Transcript
After the formalities of the meeting Munger took almost two hours of questions from the audience (skip to 7 minutes 30 for Munger’s short speech – questions from the audience start 16 minutes 45 seconds in). Commenting on the Daily Journal’s business Munger said “It’s a long, slow kind of business, the first time we contact a customer until we start making money it may be five years…the money goes and the effort goes out and it starts coming in later on and I love that kind of stuff when I think we are taking territory – it doesn’t look good when we’re writing it off and not posting wonderful numbers but if it makes sense in the long term we just don’t give a damn how it looks in the short term and we know we’ve collected a bunch of shareholders that share our ideas – after all we’re running a cult and not a normal company and I think most of you feel you’re willing to wait. I’ve lived all my life with people who are in to deferred gratification, in fact most of them will never have any fun – they’ll just defer gratification all the way to the end. Deferred gratification really does work if you’re trying to create a great company or if you want to get wealthy yourself.”

Seth Klarman: ETFs and Illiquid Underlying Securities Will Result in Market Dislocations
In Baupost’s most recent letter to investors Seth Klarman weighed in on the issue of ETFs: “This trend away from active stock picking, if anything, accelerated in 2016…but ETFs are not without their own risks. According to the Financial Times, ‘Because the securities they hold are often not as liquid as the ETF itself, there are risks of mismatches and forced sales…12% of a typical stock turns over each year, compared with 880% turnover for ETFs’. Large concentrations of ownership in a small number of ETFs has left corporate ownership increasingly concentrated. And because of the high volume of ETFs, short-term trading has become even more dominant…the inflows into ETFs will make markets more brittle, susceptible to more severe crashes, and less efficient. One of the perverse effects of increased indexing and ETF activity is that it will tend to “lock in” today’s relative valuations between securities. When money flows into an index fund or index-related ETF, the manager generally buys into the securities in an index in proportion to their current market capitalization…Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings. Conversely with money pouring into market indicies, stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it. This should give long-term value investors a distinct advantage. The inherent irony of the efficient market theory is that the more people believe in it and correspondently shun active management, the more inefficient the market is likely to become.”

Howard Marks Memo: Expert Opinion
Howard Marks released a memo in January with the title Expert Opinion – in it he said that when he had lunch with Warren Buffett last year, Warren said to him “for a piece of information to be worth pursuing, it should be important, and it should be knowable.” Throughout the memo Howard comments on the validity of the opinions of experts in an unknowable future and whether it is worthwhile exerting any effort in thinking about these “unknowables”. The article details one description of economists given to Howard in the 1970s as “portfolio managers who never mark to market” because they find it easy to overlook the times when they’re wrong. Certainly 2016 was a year in which most expert opinion did not yield any foresight as to the results that followed, or as Howard put it: “Developments in economies, interest rates, currencies and markets aren’t the result of scientific processes. The involvement in them of people – with their emotions, foibles and biases – renders them highly unpredictable. As physicist Richard Feynman put it, ‘Imagine how much harder physics would be if electrons had feelings!’”

The Cookie-cutter Approach to Value Investing is a Mistake
Miles Johnson of the FT has attended the London Value Investor Conference in the past and he recently wrote this article which many conference attendees would identify with. “The value investor is not simply trying to find stocks that trade on low p/e multiples. The true value investor is trying to dig out securities that are, for one reason or another, mispriced and misunderstood by the wider market. Whether a share trades on a low or high earnings multiple is meaningless in and of itself. More important is how accurately the price that it can be bought for reflects its intrinsic value.”

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    Paul Scott, Stockopedia
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    Jonathan Ruffer, Ruffer LLP
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    Nick Train, Lindsell Train
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    Richard Oldfield, Oldfield Partners
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