Value Invest

March 2017

Welcome to the 29th edition of Value Investor Digest

In this edition we feature the Berkshire Hathaway annual shareholder letter and subsequent CNBC interview with Buffett; an article from Miles Johnson which examines some common factors with successful fund managers and an FT article on London Value Investor Conference speaker Nick Train.

London Value Investor Conference 2017 
The sixth London Value Investor Conference will take place on Thursday 25th May with speakers including Nick TrainSteve RomickFrancisco García Paramés and Gary Channon. After the conference finishes on 25th May we will also be holding the LVIC Dinner for speakers and conference delegates in the Members Dining Room at the House of Commons – there is very limited ticket availability for the dinner so if you would like to attend then book now.

Berkshire Hathaway Shareholder Letter
Warren Buffett put pen to paper during February for his shareholder letter included in the Berkshire Hathaway annual report. Many readers will have made the annual pilgrimage to Omaha at some point and many of you attend every year – the letter is always worthwhile reading for Buffett’s thoughts on Berkshire and other matters.

Warren Buffett – Annual Interview with CNBC
In this overview of his three-hour long annual interview with Becky Quick on CNBC Buffett covered a lot of ground – including on his recently added, but long-avoided, positions in airline stocks: “If you look at the last 30 years I think there have been almost 100 airlines bankruptcies. It’s true that the airlines had a bad first century – they are kind of like the Chicago Cubs, everybody has a bad century now and then and they got that century out of the way I hope. But it has been a disaster for capital – it’s got glamour to it so you can always get guys to put some money up for an airline…I bought in to one called US Air in the late 1980s. Ed Colodny who was the CEO came up here for dinner at Gorat’s and I gave him $350m and it disappeared almost before we finished dinner (although Berkshire did eventually make money on US Air). It’s a very tough business because the marginal cost of a seat is practically nothing, you have these huge fixed costs and if you take one more person on board there’s virtually no cost to it, so you’re very tempted to sell that last seat too cheap, and if you sell the last seat too cheap it becomes the first seat in a way…the hope is that they keep orders [of aircraft] in reasonable relationship to potential demand and lately they’ve been operating at 80% [load factors] for a while. But it’s a business you can always mess up.”

What are These “Super Investors” in the Stock Market Doing?
An excellent article from Miles Johnson of the FT looking at some common factors among these investors who have been successful over a long period of time: “Using analysis of US regulatory filings…we are able to look back at the record of almost every large investor from the start of 2001. David Tepper’s Appaloosa have made 1,324 per cent since 2001, compared to a 142 per cent for the S&P 500 index over the same period. Mason Hawkins’ Southeastern Asset Management has made 435 per cent over the same timeframe, while Seth Klarman’s Baupost has made 368 per cent. Steven Mandel’s Lone Pine has made 361 per cent, and Berkshire Hathaway is up 287 per cent on this basis. So what are these “super investors” in the stock market doing that allows them to so roundly demolish the performance of their rivals? All are different, but they share some similar traits and none of them are particularly new or innovative. Firstly, from their public statements these investors tend to ignore or place little emphasis on macro forecasting…instead they invest in businesses and industries, not stocks. These investors also tend to concentrate their investments in a small number of their best ideas rather than hundreds of mediocre ones and hold these positions for long periods of time. Mr Klarman’s Baupost currently holds 70 per cent of his US stock investments in 10 ideas, and holds on average its top 20 ideas for eight quarters, while Southeastern holds for 9.5 quarters. These are time horizons that in the world of modern fund management are more akin to decades.”

LVIC Speaker Nick Train on Why He is Still Holding Pearson
This article provides a profile of LVIC 2017 speaker Nick Train as the “British Buffett disciple…The Oxford university history graduate, who co-founded his company in a small, unheated flat in the London district of Kensington 17 years ago, [who] has not removed a stock from his £3.2bn UK equity fund since 2013…the hype around the company has helped its assets grow nearly 40 per cent last year, to £9bn — its fastest annual growth rate.” Referring to his ideal holding period Train also referred to Buffett “One of our favourite Warren Buffett quotes is ‘the ideal holding period for an investment is forever’, and we are doing our level best to try and put that into practice,” On Pearson, which has recently suffered from falling sales Train remarked that “We are pretty stubborn, but we have got to ask ourselves if this company can deliver real returns over a 20-year period. If its competitive position has changed, or there is new technology that has undermined its market position, that is when we get worried.”

M&A Deals that Add Value are Rare – Expensive Deals that do so Rarer Still
The Schroders Value Team will also be speaking at the LVIC 2017 and Nick Kirrage recently wrote this article which outlines why they are sceptical about the Reckitt Benckiser acquisition of the US baby milk manufacturer Mead: “Ultimately, of course, you can only judge M&A success in hindsight but, as we did with BAT and Reynolds, we are nevertheless prepared to stick our neck out and say Reckitt buying Mead looks a pretty poor idea from a valuation perspective…all could turn out fine. But, over the years, value investors have learned the importance of playing the averages and, on average, a deal with metrics this poor ends poorly over time. Regardless of the personalities, the track records and all the reassuring brands involved, we remain highly sceptical of this kind of acquisition.”

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  • “It’s very much the Rolls-Royce of the investor conference market”
    Paul Scott, Stockopedia
  • “The people in that room were a more powerful cadre of the powerhouse of investment than has been gathered for a very long time”
    Jonathan Ruffer, Ruffer LLP
  • “It’s kind of like Glastonbury isn’t it, for the Value Investing community”
    Nick Train, Lindsell Train
  • “What I like about it is that it is a practitioners conference and it’s an opportunity to come and hear from your peers about the work that they are doing and how they see value investing”
    Hassan Elmasry, Independent Franchise Partners
  • “I think people really look forward to it and enjoy it. There’s a good bunch of people here who have travelled a reasonable way – the speaker after me was from Hong Kong and there’s a big Canadian crew and a big US crew – people come from around the world to see this”
    Nate Dalton, Affiliated Managers Group
  • “If somebody’s already been through that process of seeing what the conference is about and then is willing to pay their money for the effort of coming here, that’s a great filtering process.”
    Gary Channon, Phoenix Asset Management
  • “The conference has become a part of the furniture of the London scene. You can discover that is what lies inside you – that you are innately a value investor.”
    Richard Oldfield, Oldfield Partners
  • “I do speak at a fair number of conferences to investor bases, this one is really quite a good list – some very, very good investors present and some very interesting speakers”
    Jon Moulton, Better Capital
  • “Definitely worth it and I know a number of people who have ‘ummed and arred’ about coming along and I’m sure that they will be regretting that they didn’t come today – and it’s only going to get better as far as I can see”
    Tim Green, Private Investor
  • “Having sat through the whole day as I wanted to come and hear all of the speakers – I’ve been really impressed by the quality”
    Anthony Bolton, Fidelity
  • “I’ve got a bunch of business cards to add to my collection and some folks I’ve been looking forward to meeting, plus some firms I didn’t even know existed but sound really interesting and I’m looking forward to building on that relationship base”
    Mason Morfit, ValueAct Capital
  • “You couldn’t find that anywhere else really, where you’re speaking to the principals who have been voted on to the Board [of Microsoft] to effect change”
    David Shapiro, Willis Towers Watson
  • “What I was impressed with is, because the subject is very similar, value investing, they found a variety of ways of attacking the same subject. I was also very impressed, having done this in another location, of seeing them stay on target time-wise so that it moves along at a great pace and I think the audience is greatly rewarded by that discipline”
    Don Yacktman, Yacktman Asset Management
  • “Very well organised and it was a treat for investors like us to hear some great speakers”
    Roli Saxena, Drona Capital
  • “I came last year and I liked it so much that I have been looking forward to today ever since”
    Dominique Levy, Sonian Capital
  • “We’e got a very sophisticated audience who are used to value investing – I think this is a good audience”
    David Samra, Artisan Partners
  • “The profile of the speakers is one of the main reasons that I came”
    Niels Borgen, Private Investor
  • “When you look at the ideas speakers have put forward in previous years and how they have performed over the last few years, they’ve done very well – if that performance continues it would be quite remarkable. It does show that you can pick up some good ideas at a conference of this sort”
    Jonathan Mills, Metropolis Capital
  • “I came last year as well and I thought that it was the most outstanding event that I have been to”
    Leon Boros, Equity Strategies