Value Invest London

November 2015

Welcome to the 23rd Edition of Value Investor Digest

In this edition, we feature a Business Insider summary of a recent Baupost letter, a summary of Guy Spier’s approach to using checklists, a video of Tom Russo’s talk at Google on “Global Value Investing”, a ValueWalk article on Pzena Asset Management, an FT article on Steve Jobs which analyses the start-up conditions at Apple; plus two more videos at the end of this issue – one from Bill Miller on why he thinks now is the perfect time to buy US stocks, the other from London Value Investor Conference speaker Jean-Marie Eveillard who speaks about market cycles and the risks he sees ahead from “valuation problems” brought about by quantitative easing.

Baupost Letter
This Business Insider summary of a recent letter in which Baupost partner Brian Spector, who joined in 1998 and will retire at the end of the year, speaks about the ethos and processes of the company. The letter addresses his views on the advantages of Baupost maintaining high cash positions as well as commenting on the difficulties of having high conviction in ‘tide markets’:“Investing in tide markets takes chutzpah. To do so effectively, you need to fly in the face of public opinion, you have to fight normal human emotions, and you have to be prepared to double down on your bets when your conviction is most in question. As Benjamin Graham once said, ‘The investor’s chief problem and even his worst enemy is likely to be himself.’ But most importantly, you have to be at a place that empowers you to succeed—a place that is uniquely situated to take advantage of these market conditions. A place like Baupost.”

Summary of Checklists
An investor who has written extensively about the need for checklists is Guy Spier. If you have not yet got around to reading his excellent book – The Education of Value Investor then this Hurricane Capital article provides a brief summary of Guy’s approach to using checklists and also includes some of Guy’s checklist items. In addition, it includes some contributions from others – including Charlie Munger: “I’m a great believer in solving hard problems by using checklists, you need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.”

Talks at Google: Tom Russo – “Global Value Investing”
Tom Russo gave this hour long talk at Google last month which he referred to as “a good excuse to get away from the markets”. Tom speaks about the advantages of family controlled companies, the problems with management having stock-option driven compensation, the long-term orientation required for successful investment and the pricing power and predictability of demand created by brand loyalty. Tom also goes in to detail on what he sees as some of the superior qualities of the corporate culture created by management at two of his holdings – Nestle and Unilever. Alongside the theme of the need for a longer-term outlook, he also speaks about how growth often hides value, using Buffett’s investment in GEICO as an example he mentions that the owners of a business need to have the “capacity to let the income statement bear the burden” of the short term investment needed to grow the business.

Pzena: Successful Value Investing Provides More Than Passive Exposure to a Value “Factor”
This Valuewalk article summarises a recent letter by Pzena Asset Management which discusses the Value Cycle and how many Value Managers have underperformed their growth and momentum counterparts (leaving aside any arguments about the blurred lines between the style distinctions of value and growth). The article goes on summarise the letter from Pzena, including their thoughts on what lies ahead. Pzena mention that by having “a disciplined approach, it is hard for us to escape correlation with naïve value benchmarks, but our goal is to add value through understanding the specifics of every individual company we buy…Value investing is not a simplistic factor, but rather a philosophy that requires research to outperform over the long-term.”

Imitators take note — Steve Jobs was more Than a Showman
This FT (subscription) article highlights the different startup conditions present when Apple was being formed, as compared with today’s “Unicorn” tech businesses valued at $1bn+. In the early days of Apple, Steve Jobs – as Apple’s principal founder and subsequent re-inventor – was subject to a lot of pressures which the author believes forged part of the culture of Apple. This is a process that most companies in the sector today may not have been through: “The need to stretch every nickel informed the way Apple was run during the early days. It is on that spell, rather than the enormous public profile commanded by Steve Jobs in his later years, that would-be emulators should dwell.”

Bill Miller: Now is a Perfect Time to Buy US Stocks
In this CNBC video from 14th October Bill Miller gives reasons for why in his view now is the perfect environment to buy US stocks, listing several factors as to why he believes this is the case: “We want the economy growing, but not too fast. We want inflation to be low. We want interest rates to be low and not really competitive with stock prices. We’d like earnings to be growing, but again, not too fast. We’d like return on equity to be high, profit margins to be high, GDP at an all-time high, household net-worth at an all-time high, but we also want people to take their money out of stocks because they hate them so they are cheap. That is exactly the environment we are in today.”

Jean-Marie Eveillard Video on Market Cycles
Jean-Marie mentions that throughout his career there have almost always been opportunities to invest in equities but that there are some “valuation problems” arising from the risks he sees ahead, partly because of the unintended consequences of quantitative easing: “To my mind quantitative easing is a monstrosity – money is not supposed to be free for heaven’s sake. Those steps that have been taken by the authorities are completely unprecedented and one cannot make historical comparisons…I suspect there is bound to be some major negative unintended consequences.”

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