Value Invest London

VID January 2020


In this issue we feature an FT article on the efficient markets hypothesis turning 50, Fundsmiths annual letter, a video from VINY with Howard Marks, an FT article on Hedge Fund returns in 2019, the latest memo from Howard Marks, a Visual Capitalist map of the $5.75 trillion ETF industry, an interview with Peter Lynch, a Behind the Balance Sheet piece on Amazon’s free cash flow, an FT article on how investment banks have cut their research departments due to regulatory changes, why “Value Investing Sucks” and a CNBC article with some comments from Seth Klarman’s recent letter that “the rocket fuel feeding this rally will soon run out”.

As the Efficient Markets Hypothesis Turns 50, It is Time to Bin it

“But consider the evidence of trends and momentum, and bubbles and crashes. Market participants observe the impact of short-term fund flows and are ambivalent — at best — about the idea of markets being efficient. They know that a high proportion of stock market trades bear no relation to fundamental value and that few professional portfolios are actually invested exclusively for long-term cash flows.”

Fundsmith Annual Letter to Shareholders

“We sold our stakes in 3M and Colgate Palmolive during the year and began buying Brown-Forman, the distiller of Jack Daniel’s Tennessee Whiskey, and Clorox, the US household products and personal care products company. With 3M we were acting on growing doubts about the current management’s capital allocation decisions, and in the case of Colgate Palmolive we grew tired of waiting for an effective growth strategy to emerge.”

Howard Marks “Mastering the Market Cycle” Video from Value Invest New York

“So I’m writing this book about cycles and I’m pouring everything I know from 50 years in to this book on cycles and about two thirds of the way in I said to myself ‘hold it, why do we have cycles?’…I think the answer is that we have a trend line and we are progressing on the trend line and then people get optimistic and they depart from the trend line on the upside, I would call that ‘an excess’, and when the excess becomes sufficient it either collapses of its own weight or something else brings it down and it becomes a correction.”

Top Hedge Funds Post Biggest Gains in at Least a Decade

“The top 20 best-performing hedge fund managers of all time made $59.3bn for their investors last year…as hedge funds took advantage of a strong tailwind in stock and bond markets. These managers, led by Christopher Hohn’s TCI and Steve Mandel’s Lone Pine, made about one-third of the $178bn of total gains bagged by the hedge fund industry in 2019.”

Howard Marks Memo: You Bet

“ make the best decision you can based on what you know, but the success of your decision will be heavily influenced by (a) relevant information you may lack and (b) luck or randomness. Because of these two factors, well-thought-out decisions may fail, and poor decisions may succeed. While it might seem counterintuitive, the best decision-maker isn’t necessarily the person with the most successes, but rather the one with the best process and judgment. The two can be far from the same, and especially over a small number of trials, it can be impossible to know who’s who.”

Visualising the Expanse of the ETF Universe

“Since the establishment of the first U.S. ETF in 1993, the financial instrument has gained broad traction — and today, the ETF universe has an astonishing $5.75 trillion in assets under management (AUM), covering almost every niche imaginable…As you can see, equities are by far the largest galaxy in the ETF universe, making up 76.4% of all assets.”

Peter Lynch Draws on 50 Years of Stock-Picking to Find Growth Opportunities in Today’s Market

Peter Lynch was generous with his time and insight when Barron’s sat down with him at Fidelity’s Boston headquarters. He was not, however, generous with his stock picks. Instead, he shared his views on various sectors and his thought process around choosing stocks today.”

Amazon’s Free Cash Flow

“We are not making any judgment here of Amazon’s valuation, nor of the sustainable Free Cash Flow which should be used to value the business. But we hope that we have highlighted that the cash flow is a complicated statement and that the use of free cash flow multiples is more complex than it looks. We recommend that Amazon should change its practice and consider using two measures of free cash flow, sustainable and total. This would be more meaningful to investors.”

Sell Side Analysts are Becoming an Endangered Species

“Investment banks’ cuts to their research departments have begun to weigh on their coverage of even Europe’s largest companies, as regulatory and commercial pressures force them to retrench from unprofitable business lines.”

Why Value Investing Sucks

“Eleven years ago, Institutional Investor proclaimed “The Death of Value Investing. It was November 2008. II columnist Edward Chancellor believed the ongoing credit crisis had revealed “a profound weakness” in the investment discipline popularized by Benjamin Graham, the economics professor widely known as the father of value investing.”

Seth Klarman: The ‘Rocket Fuel’ Feeding this Rally Will Soon ‘Run Out’

“Klarman noted in the Jan. 15 letter that he is worried about a possible ‘liquidity trap’ as low rates don’t seem to jolt economic growth, especially in Europe. That’s where ‘interest rates go to die,’ he wrote.”

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