Welcome to the 38th edition of Value Investor Digest
Featured in this edition is the January 2019 investment review from Jonathan Ruffer, a Spectator USA article from Mark Asquith of Somerset Capital Management, an Irish Times profile of Michael O’Leary’s 25th anniversary as CEO of Ryanair, an article on Costco’s surprisingly high sales of its own-brand Kirkland, an interview with C.T. Fitzpatrick, what you can learn from one of Warren Buffett’s smartest investors, why Barron’s thinks there’s still value in Apple, a Bloomberg piece on the wide dispersion of hedge fund returns; plus an FT article with a warning about banks cutting their trading inventories of triple-B bonds.
Value Invest New York 2018 – Overview Video
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Jonathan Ruffer was last a speaker at the London Value Investor Conference in 2015, we are delighted that he will speak again on 14th May 2019. In his January 2019 Investment Review he writes: “Our central belief is that there lies ahead of us market conditions which are capable of causing permanent damage to people’s wealth, and our absolute preoccupation is to prepare for this, while continuing to accept that the timing is uncertain.”
The Failure of Globalization and the Return of Inflation
Globalists Beware: Inflation is a Tax on the Poor
In this Spectator USA article Mark Asquith of Somerset Capital Management summarises the key milestones of globalisation that have taken place since the 1970s. He suggests that in future higher borrowing, labour, environmental and other costs to producers; as well as shifts in industrial capacity could feed through to the return of inflation. “Higher borrowing costs mean less capacity and higher costs in general. Even if this capacity moves to southeast Asia or back westwards, few companies will manage to take on higher environmental and labor costs without needing to raise prices.”
Michael O’Leary has just celebrated 25 years as CEO of Ryanair. This article in the Irish Times covers some of the issues the company has faced during the airline’s remarkable growth. Ryanair was based upon the model of Southwest Airlines, whose founder Herb Kelleher died on 3rd January 2019 aged 87. Kelleher played a role in convincing Michael O’Leary to make Ryanair a low-fare carrier. Paying tribute to Kelleher, Michael O’Leary said“Herb was the Grand Master Yoda of the low-fare airlines. He was the leader, the visionary and the teacher: without Herb there would be no Ryanair, and no low fares airlines anywhere.”
Last year Costco’s own brand Kirkland Signature label topped $40bn in sales, more than Campbell Soup, Kellogg’s and Hershey combined. “Kirkland, which Costco sells for at least 20% cheaper than national brands at its warehouses, helps the club keep prices low even on the products it doesn’t make. ‘Kirkland acts as a universal club marshal,’ said Timothy Campbell, analyst at Kantar Retail. ‘It keeps suppliers honest.’ “
This Forbes interview with C.T. Fitzpatrick covers a lot of ground, including detailing Vulcan’s sometimes decades-long pursuit of great companies “We are value investors but we don’t look for cheap stocks. We look for businesses with inherently stable values that can compound their values steadily over time. We get to know them very well before we buy them because they are overvalued, by our math, most of the time. On the rare occasions when they do become discounted, we can move very rapidly to take advantage of those discounts because we’ve been following the companies for many years, sometimes decades.”
The godfather of the index fund, economist Paul Samuelson, believed that beating the market is hard—but not impossible. The greatest active investor of our time, Warren Buffett, advocates investing passively. Their paths crossed, decades ago, in ways that should remind us how rare the lightning bolt of a great investing idea is.
After recent guidance on profits from Apple this Barron’s looks at the future for Apple shareholders: “In the end, investors are better off holding on anyway. While Apple’s stock performance is currently tied to iPhone sales, its future is tied to a lucrative installed base that’s estimated to be 1.3 billion devices. CEO Tim Cook needs to find a better way to monetize that base with more services revenue. The latest slip-up is sure to accelerate those efforts.”
This Bloomberg article looks at the wide dispersion of the returns of some well-known hedge funds in 2018 (Odey, Dalio, Howard, Loeb and Einhorn) around the -6.7% industry average, arguing the results are “evidence of a healthy contrariness in strategies. If the gains and losses were concentrated around the average, the numbers would suggest everyone was backing the same crowded trades. While hedge-fund fees have declined in recent years, they remain sufficiently high compared with most other asset classes to be unjustifiable if the funds are investing like sheep rather than predators.”
Steve Eisman is warning that banks have cut their trading inventories of triple B bonds by about 80 per cent, to $20bn, as they try to comply with tougher rules on capital and liquidity. This FT article summarises his comments by saying that “With the traditional market-makers on the sidelines in the next recession…the only way to sell such bonds will be at painfully deep discounts — forcing big marked-to-market losses on funds holding them.”