Value Invest London

September 2015

Welcome to the 22nd edition of Value Investor Digest.

In this edition, we feature the latest memo from Howard Marks: “It’s Not Easy”, a John Authers piece on the rise of indexes in recent decades, and another FT article by John Plender on the tough choices Pension Fund Trustees have with their Value Managers at present. There is also a video interview on CNBC with Jim Chanos where he comments on the situation in Chinese markets today. The final article in this issue is a detailed look at Valeant Pharmaceuticals by John Hempton – interesting given the number of high-profile investors who are taking opposing views on the stock.

Howard Marks memo: “It’s Not Easy”
At the beginning of his latest memo, Howard recalls a recent lunch he had with Charlie Munger. As he was about to leave, Charlie said to him “It’s not supposed to be easy. Anyone who finds it easy is stupid.” Howard goes on to say that anyone who thinks it’s easy is underestimating substantial nuance and complexity involved in valuing businesses and understanding markets – and is probably guilty of “first level thinking”. Those of you who have read Howard’s book The Most Important Thing will be familiar with his concept of “second level thinking” which he goes on to describe in this memo along with some other ways he thinks about businesses and the market. This is another very good memo which will remind Value Investors why Warren Buffett famously remarked “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.”

The Rise of the Index
The problems with blindly following an index are most obvious in the debt space, where indices give a higher weight the more debt a country issues –  this has been cited as one of the reasons why many funds were led to load up on Argentine Debt before its default crisis. This John Authers article and video gives a commentary on the rise of the application of indices around the world and identifies many problems with them. Going back a few decades, indices were simple averages which helped to gauge the general direction of the market – Fund Managers paid little attention to the FT-30 or the Dow Jones Industrial Average which only provided a crude guide to how the market was performing. Today, S&P Dow Jones, FTSE Russell and MSCI now provide the benchmarks for 73% of US mutual funds. Authers suggests that this has helped to accentuate market volatility.

 The Going Gets Tough for Value Managers: to Dump or not to Dump?
John Plender writes that “The next year or so will pose an interesting test of how fickle pension fund investment committees remain.”  He sees Pension Fund Trustees as facing some difficult choices with their Value Managers as conditions for these managers today are reminiscent of the dotcom bubble of the late 1990s, where they underperformed growth managers for a sustained period.

 Jim Chanos: China is Worse than you think
In this video Jim Chanos says that “[On China] it’s worse than you think, whatever you might think, it’s worse.” With regards to the various mixed signals and responses coming out of different Ministries he also said “People are beginning to realise that the Chinese Government is not omnipotent and omniscient…like many of us, sometimes they don’t have a clue.”

Valeant: A detailed look inside a story well told
Given that there are many high profile value investors taking different views on Valeant – including at some point Bill Ackman (long) and Jim Chanos (short); it is interesting to read this first of three detailed blogs by John Hempton on Valeant. He analyses management reporting over time, identifies that there isn’t enough information available for him to get comfortable with the numbers and also hints at some other reference points which he thinks makes the growth numbers of their acquired companies misleading. Through the process of his work on Valeant he also describes what he thinks makes a good analyst.

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