Welcome to the 28th edition of Value Investor Digest<\/p>\n
In this edition we feature the video and transcript of Charlie Munger speaking at the Daily Journal meeting, an article with some of Seth Klarman’s comments from his most recent Baupost letter to investors, a recent memo written by Howard Marks and an FT article by Miles Johnson on why he thinks that the “cookie-cutter approach” to Value Investing is a mistake.<\/p>\n
Charlie Munger – Daily Journal Annual Meeting: Video and Transcript<\/strong> <\/a> Seth Klarman: ETFs and Illiquid Underlying Securities Will Result in Market Dislocations<\/a><\/strong>
\nAfter the formalities of the meeting Munger took almost two hours of questions from the audience (skip to 7 minutes 30 for Munger’s short speech – questions from the audience start 16 minutes 45 seconds in). Commenting on the Daily Journal’s business Munger said “It\u2019s a long, slow kind of business, the first time we contact a customer until we start making money it may be five years\u2026the money goes <\/em>and the effort goes out and it starts coming in later on and I love that kind of stuff when I think we are taking territory – it doesn\u2019t look good when we\u2019re writing it off and not posting wonderful numbers but if it makes sense in the long term we just don\u2019t give a damn how it looks in the short term and we know we\u2019ve collected a bunch of shareholders that share our ideas – after all we\u2019re running a cult and not a normal company and I think most of you feel you\u2019re willing to wait. I\u2019ve lived all my life with people who are <\/em>in to deferred gratification, in <\/em>fact most of them will never have any fun – they\u2019ll just defer gratification all the way to the end. Deferred gratification really does work if you\u2019re trying to create a great company or if you want to get wealthy yourself.”<\/em><\/p>\n
\nIn Baupost’s most recent letter to investors Seth Klarman weighed in on the issue of ETFs: “This trend away from active stock picking, if anything, accelerated in 2016…but ETFs are not without their own risks. According to the Financial Times, ‘Because the securities they hold are often not as liquid as the ETF itself, there are risks of mismatches and forced sales…12% of a typical stock turns over each year, compared with 880% turnover for ETFs’. Large concentrations of ownership in a small number of ETFs has left corporate ownership increasingly concentrated. And because of the high volume of ETFs, short-term trading has become even more dominant…the inflows into ETFs will make markets more brittle, susceptible to more severe crashes, and less efficient. One of the perverse effects of increased indexing and ETF activity is that it will tend to “lock in” today’s relative valuations <\/em>between securities. When money flows into an index fund or index-related ETF, the manager generally buys into the securities in an index in proportion to their current market capitalization…Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings. <\/em>Conversely with money pouring into market <\/em>indicies, stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it. This should give long-term value investors a distinct advantage. The inherent irony of the efficient market theory is that the more people believe in it and correspondently shun active management, the more inefficient the market is likely to become.\u201d<\/em><\/p>\n