Value Invest

March 2018

Welcome to the 33rd edition of Value Investor Digest

In this edition we feature an FT article titled “Value Investors Brave Brexit Noise in Bargain Hunt”, Buffett’s Berkshire Hathaway Annual Shareholder Letter, an article describing how London Value Investor Conference speaker Tim Martin’s J D Wetherspoon conquered Britain, a transcript of a Michael Maubossin Q&A on the future of Active Management, a Bloomberg article on corporate America’s share buybacks being a “perfect contra-indicator” for the stock market; plus Bronte Capital’s annual letter which details the difficulties with scaling a fund which has a meaningful edge on the short-side.

Value Investors Brave Brexit Noise in Bargain Hunt

This FT article by Miles Johnson discusses the current negative sentiment towards the UK and, in addition to noting that Seth Klarman’s Baupost has invested in FTSE 250 listed Dixons Carphone, the article suggests “a growing number of contrarian investors are scouring the London stock market for bargains, believing that the lack of clarity over the path Brexit takes is now more than discounted in the valuations of certain assets”. The article also features comments from Nigel Waller and Andrew Goodwin of Oldfield Partners, who will be making a presentation at the London Value Investor Conference this year: “It is a question of sifting through UK assets and understanding how much is being priced in, what is in the valuation…The UK market is currently discounting a lot of noise. We are bottom-up stockpickers, and there are whole swaths of the UK market now screening as cheap.”

Warren Buffett’s Annual Letter to Berkshire Hathaway Shareholders

Buffett’s annual shareholder letter was released at the end of February and he covered a wide range of topics including Berkshire’s hurricane related insurance losses, tax-cuts, his now completed 10 year bet on the S&P versus hedge fund performance, succession planning, bond-yields, Berkshire’s current $116 billion cash pile and the problems with deploying that cash to large acquisitions because of current valuations – on which he commented that “In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price. That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high.”

How Wetherspoon’s Conquered Britain

Tim Martin is the Founder of the Pub Chain J D Wetherspoon – known colloquially as “Spoon’s” in the UK. This entertaining Esquire Magazine article provides a portrait of the founder and how he built the chain from its first pub in Muswell Hill in 1979 (which he exchanged for £40,000 in cash, a house in Putney and a two-week holiday at his Dad’s place in Jamaica), through to its IPO in 1992 and up to the present day where JDW has 900 pubs and 37,000 staff: “Along the way, Wetherspoon’s has taken on a cultural significance like no other pub company. It is favoured by students, pensioners, office workers, labourers, stag parties and hen dos. The company is known for offering the cheapest drinks on the high street, and nothing unites the Brits like their love of a cheap pint. But Wetherspoon’s is more than a drinking establishment. In 2015, the Guardian named it the nation’s fifth favourite breakfast destination. It sells more curries in the UK than any other restaurant, and more coffees than anyone bar Starbucks and Costa. It is the world’s largest retailer of Pimm’s. According to market research firm CGA, some 17.4 million people in Britain have eaten at a Wetherspoon’s pub in the last six months.”

Tim Martin won the Value Investor Award for Best CEO Capital Allocator (UK) in 2017 and will participate in a fireside chat and audience Q&A hosted by Will Thorndike at the London Value Investor Conference on 24th May 2018. You can nominate another CEO to win this award at the conference this year.

Michael Mauboussin on the Future of Active Management


This transcropt of a Q&A with Mauboussin, the ex-Chief Investment Strategist at Legg Mason, discusses active management and the way in which the industry has changed since the start of his career: “When I started on Wall Street, there were equity research analysts who didn’t have a computer. Think about that. To access a 10-Q, we had to make a request to the company library. There was no email, no Internet. Moore’s Law has reshaped lots of industries and certainly has had a huge role in investing…Academic research has also made major strides. Behavioral finance, which was formalized by Amos Tversky and Daniel Kahneman in the 1970s, has become much more mainstream. The work on factors, popularized by Gene Fama and Ken French in the early 1990s, has now also become commonplace. We simply know more about businesses, markets, and people than we did 30 years ago.”

The Big and Possibly Dumb Buyback Boom

This Bloomberg article reports on an estimate by JPMorgan Chase & Co. that, with US Corporations having lots of cash sloshing around on their balance sheetsafter tax-cuts and other factors, share buybacks will total more than $800 billion this year. One quote in the article details that “Corporate America’s track record buying in stock is just horrendous. It’s terrible. We are now again approaching a peak of buyback activity, no matter how you measure it. The prior peak occurred in the second half of 2007, the last market peak. The trough in corporate buyback activity? Early ’09. So, kind of a perfect contra-indicator for the stock market.”

Bronte Capital – John Hempton’s End of Year Letter

John Hempton’s annual letter is an interesting read in that he goes into a lot of detail about the edge he believes Bronte has in shorting stocks (which seems to be partly a unique asset in their database of unscrupulous characters), but how this approach is not as scalable as a fund which has a differentiated substantive edge going long: “…the advantage we have in shorting stocks is not scalable beyond a certain AUM…Most of the intellectual effort that Bronte has expended over the past nine years has been in systems to improve our edge short-selling. As our systems get better our edge gets better – and just as importantly – our ability to scale our edge becomes better…Our approach to longs is very different – value investing is a proven model, but it is a less differentiated and novel approach than our shorting. We have spent a lot of time trying to work out what makes for a “good business” and we try to buy those at reasonable prices. Our record is good – our longs have done better than market over the period we have been running Bronte. Our edge in longs scales pretty well – we could be managing 5x as much money and it would not meaningfully impair performance. Alas this is the wrong-way around. We wish our differentiatied substantive edge was in going long. The really big money in the world is made by people who own things, build things and invest in things. Short selling is just not as good a way to make money over the long run. Bluntly – you would rather be Warren Buffett than any of the, very few, famous short sellers though both approaches have generated a lot of ‘alpha’.

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Speakers: 14th May 2019

The speaker line-up will be announced in November 2018

  • “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
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    Dominique Levy, Sonian Capital
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    David Samra, Artisan Partners
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    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