Value Invest

May 2011

May 2011     Issue 3

A framework for investment success, Seth Klarman

http://pragcap.com/a-framework-for-investment-success
If you read only one article from this issue of the Digest, read this one.    Seth Klarman is an outstanding investor.  We featured his preface to Security Analysis in the last issue.  Here, we are providing you a link to an extract from his Annual Investor Letter, in which he sets out a framework for long-term investment success, essentially by not following the herd and maintaining a focus on price and value.

The Berkshire Shareholders Meeting

http://www.metropoliscapital.co.uk/wp-content/uploads/2011/05/A-weekend-in-Omaha-2011.pdf
http://www.scribd.com/doc/54483729/2011-Berkshire-Annual-Meeting-Notes
J
onathan and I attended the annual shareholders meeting in Omaha.  This year was always going to be interesting, coming so soon after the abrupt departure of David Sokol, who had been widely tipped as the successor to the operational management role of Berkshire.   The event lived up to expectations with a set of high quality questions and the usual lively, witty and insightful responses from the Chairman and Vice Chairman.  I am providing a link here to my own summary of the event.  There is a more detailed transcript of each question in the second link.

Vitaliy Katsenelson’s on margin shrinkage

http://contrarianedge.com/2011/03/16/margin-shrinkage-%E2%80%93-it-can-happen-to-you/
I caught up with Vitaliy in Omaha.  This is a particularly high quality article from this journalist / author / investor.   Looking at the US market’s current PE, stocks do not seem to be that expensive.  Vitaliy’s point is that we have to be very wary about the long-term sustainability of the “E”.

Pat Dorsey on how to identify an economic moat.

http://www.morningstar.com/Cover/videoCenter.aspx?id=349487
http://www.morningstar.co.uk/uk/news/article.aspx?articleid=80694&categoryid=465
Warren Buffett first coined the phrase “an economic moat”, by which he meant the factors that enable some businesses to sustain and protect above average profits for a long period of time.   In this Video, Pat Dorsey, the author of ‘The little book that builds wealth’ sets out his 4 categories of an economic moat.  I have included a second link, which covers the same content in an article rather than a video.

The value of focus: “Unconventional Wisdom”

http://www.fbr.com/services/asset-management/~/media/FBR/Misc/FBRFunds/2010/
FBR%20FFund%20whtpr%209%2014%2010%20CV.ashx
http://www.lse.ac.uk/collections/paulWoolleyCentre/WorkingPapers/dp624PWC3.pdf
The first link takes you straight to a PDF download.  The article provides an overview of some empirical evidence (which is set out in the second link) that, contrary to general perception, concentrated portfolios can not only out perform but also reduce risk.  There is an excellent quote in here from Warren Buffett:

“Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions…Therefore, we adopted a strategy that required our being smart –and not too smart at that—only a very few times. Indeed, we’ll now settle for one good idea a year… The strategy we’ve adopted precludes our following standard diversification dogma. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.”

Sign up for value investor digest

  • “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