Value Invest

September 2018

Welcome to the 36th edition of Value Investor Digest

Featured in this edition are a Barron’s article revealing some of the stocks held by Joel Greenblatt’s Gotham Index Plus fund, a Value Investor Insight interview, an FT article by John Authers, a Bloomberg interview with Nike co-founder Phil Knight, an FT article on how bull-markets tend to develop, a video interview with Charlie Munger and Li Lu, a Bloomberg video which features Value Invest New York conference Matt Mclennan of First Eagle talking about the poor capital allocation decisions at GE over the past decade, a link to a free PDF of Ray Dalio’s book on Understanding Big Debt Crises; plus a Business Insider Australia podcast with John Hempton of Bronte Capital.

Conference Calendar:
Value Investor Roundtable – November 13 2018 (Avenir, RWC and others)
Value Invest New York – December 4 2018 (Joel Greenblatt, Howard Marks and others)
London Value Investor Conference – May 14 2019 (Tickets go on sale November 2018)

Barron’s article on Joel Greenblatt’s Gotham Index Plus Fund Holdings

Joel Greenblatt is speaking at Value Invest New York this December. This Barron’s article covers some of the holdings of his Gotham Index Plus Fund from mid-August: “Honeywell’s cash flow has grown 50% over the past five years, while competitor General Electric’s cash flow is down 80%. This speaks to execution and growth without having to rely on a financial division or accounting chicanery to meet quarterly numbers. As Honeywell spins off less profitable automotive and home-products businesses and targets more-profitable units like aerospace, they’ll be able to focus on further increasing profitability.”

Value Investor Insight: An Alternative Alternative

The editors of the highly regarded investment newsletter Value Investor Insight have agreed to make available to Value Investor Digest readers a feature interview with portfolio manager Connor Browne of Thornburg Investment from their recently published August 31, 2018 issue. Browne explains why he believes his Long/Short Equity Fund can capitalize on what he considers a “hedge-fund space ripe for disruption,” and illustrates his time-tested investment strategy by walking through the investment cases today for stocks including pharmaceutical company Gilead Sciences and food-distributor US Foods on the long side, and phone-accessory company Plantronics and healthcare IT provider Computer Programs & Systems on the short side.

John Authers: In a Crisis, Sometimes You Don’t Tell the Whole Story

The FTs John Authers reveals that 10 years ago he used his discretion not to publish a story which he believes could have caused a bank run: “It is time to admit that I once deliberately withheld important information from readers. It was 10 years ago, the financial crisis was at its worst, and I think I did the right thing. But a decade on from the 2008 crisis I need to discuss it.”

Interview with Nike Co-Founder Phil Knight

This David Rubenstein interview on Bloomberg with Phil Knight is a good overview of the main topics covered in his book Shoe Dog: A Memoir by the Creator of NIKE which explores the journey he went through in building the company: “We took advantage of the running boom, which became a jogging boom, then became a fitness boom and we’ve benefitted from all of that…what I’ve always said is that we’re a marketing company and our product is our most important marketing tool…”

Value Investors Must Grit Teeth and Admit Mistakes on US Stocks

This FT article is about market timing rather than Value Investing, but it does provide some interesting commentary on the historical patterns of bull markets developing over time, which often makes the investment climate progressively more difficult for Value Investors: “History suggests that the leadership of the stock market does not rotate into laggards late in the cycle – bull markets don’t broaden. Instead, investors chase the leaders even harder, narrowing bull markets further. This time round, US equities look like the obvious beneficiary. This is making life for value investors – who instinctively avoid momentum trades – very difficult.”

Charlie Munger and Li Lu Interview

Li Lu manages a significant proportion of Charlie Munger’s money which is not in Berkshire Hathaway or Costco. During the interview (much of which has English subtitles, which are quite hard to follow) Li Lu comments on Charlie Munger’s work ethic: “He is 95 years old now. Every day he works for basically as long as he did when I met him 15 years ago…if he gets any interesting books and materials he will read them until 4 o’clock in the morning. He will read all of the interesting reports without a rest. His passion and enthusiasm for work and his curiosity about the world have not been reduced at all.”

Matt McLennan: GE has been a ‘Tale of Woe’ from a Capital Allocation Standpoint

Matt McLennan of First Eagle will be a speaker at Value Invest New York later this year. When asked about General Electric earlier this year he made some comments about their track record on capital allocation: “GE has been a ‘tale of woe’ from a capital allocation standpoint: buying financial services companies at highs and selling them at lows after the financial crisis; buying oil services companies at the peak and looking to spin them out at the bottom; and buying back a lot of stock at high multiples of pro-forma expected earnings that were way above the underlying free casfhflow of the business – and now having to be a forced seller of other businesses at not so great times…”

Ray Dalio: A Template For Understanding Big Debt Crises

Ray Dalio, the founder and co-chairman of Bridgewater Associates, has written two books in recent years. Although the paperback version costs $50 on Amazon, his book “A Template For Understanding Big Debt Crises” is available for free as a PDF download on Ray Dalio’s principles.com website at the link above (sign-up required)

Business Insider Australia: Podcast with John Hempton of Bronte Capital

Bronte Capital’s John Hempton explains why he thinks that the current investment environment is so much harder for Value Investors than the previous period of tech dominance, the dotcom bubble: “The iconic time when there were cheap stocks available on a wide scale was actually 2000 which was the height of the dotcom bubble…if you were not a dotcom stock you were perceived to be someone that the dotcom companies would put out of business. These stocks were trading at 7-8x earnings and some of those really were worth 7-8x earnings because they really were put out of business – but others weren’t. So the next 5 to 6 years were the sort of grand period of the bearded value investors…”
(skip to 3 minutes 25 seconds for this quote in full)

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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
  • “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