Welcome to the latest edition of Value Investor Digest, Issue 58 – November 2023.
In this instalment, delve into Michael Mauboussin’s insightful Consilient Observer piece on Total Shareholder Return, explore an FT article shedding light on the enduring presence of active asset managers, and join Sequoia Capital as they scrutinize CapEx investments in AI. Additionally, gain valuable insights from the latest memo by Howard Marks, along with engaging content from Oldfield Partners, Merchants Trust, Money Maze Podcast featuring Ray Dalio, Andrew Hollingworth, The Value Perspective with James Montier, Orbis, a compelling Eeagli data visualization, as well as contributions from Barry Ritholz and Hosking Partners. This issue is packed with thought-provoking articles, videos, and podcasts.
“This report examines the sources of TSR and ties them to underlying economic principles. The goal is to create a bridge between theory and practice. The concepts are relevant for helping to assess the prospective returns of the stock of any company. We emphasize value traps, stocks of companies that appear to have an inexpensive valuation but have drivers consistent with outcomes below the average.”
“On the other side of the Atlantic, a study by the UK’s Competition and Markets Authority arrived at similar results. Digging into the world of investment consultancy, they found that active managers that had been researched and assessed as ‘buy-rated’ outperformed their benchmarks by 0.92 percentage points a year on average, before costs. They also found a randomly selected fund would outperform by 0.7 percentage points, gross of costs. While management costs to retail fundholders might devour such gains, for large institutional clients they tend to be more modest.”
“Consider the following: For every $1 spent on a GPU, roughly $1 needs to be spent on energy costs to run the GPU in a data center. So if Nvidia sells $50B in run-rate GPU revenue by the end of the year (a conservative estimate based on analyst forecasts), that implies approximately $100B in data center expenditures. The end user of the GPU—for example, Starbucks, X, Tesla, Github Copilot or a new startup—needs to earn a margin too. Let’s assume they need to earn a 50% margin. This implies that for each year of current GPU CapEx, $200B of lifetime revenue would need to be generated by these GPUs to pay back the upfront capital investment…there’s a $125B+ hole that needs to be filled for each year of CapEx at today’s levels.”
“Importantly, however, Templeton allowed that things might really be different 20% of the time. On rare occasions, something fundamental does change, with significant implications for investing. Given pace of developments these days – especially in technology – I imagine things might genuinely be different more often today than they were in Templeton’s day.”
“We last saw such low levels in the US equity risk premium before the outbreak of the Great Financial Crisis, but even then they remained at above 1%. Today, we have reached this point as a result of bond yields rising and the valuation of the S&P 500 remaining almost unchanged. This situation, looking at history as a guide, seems unlikely to persist.”
“All these challenges have led to the UK being out of favour and there’s been almost no buyers. The only buyer that’s left really, has been the corporate sector…Companies have been buying back a lot of their equity. (a) because they’ve got cashflow and (B) because their equity is very cheap, but in many cases, the buyer of last resort. That’s a really unusual situation as well.”
“Three things that are happening in our lifetimes now that never happened in our lifetimes, but happened in history, are the amount of debt creation and debt monetization…The second is the amount of internal conflicts between the left and the right populists…And number three is the great power conflict, in other words, comparable powers, the rising power, economically and militarily – and that rising power challenging an existing power and existing world order.”
“Between the Meta share price being $280 in February 2022, and then again $280 in June 2023 – a lot happened – and very little! During this period c.$8bn of shares were traded in this company each and every day.1 Behind each of these transactions was a likely high IQ person (or computer) who analysed the company with diligence, deciding to ether buy or sell the shares. This was no meme stock. Of course, there was investor uncertainty towards the company’s future direction and towards its near-term cash flows. But very little changed in its core business – which was rock solid as the chart below demonstrates.”
“That leads onto the fifth sin – short time horizons. Everybody, of course, wants short-term results – and that overfocus on short-termism can lead to overtrading. The average holding period for a stock is – what? – 10 months today in the US, which is insane. If we go back to the 1950s and 1960s, it was 10 to 12 years; now, it is less than one year. I think at one point, somewhere around 2008, it got down to something like five or six months. That’s not investment, that’s just speculation – that’s just absolutely insane.”
“We believe this makes TSMC an excellent way to participate in the AI boom without having to guess which chip designer will be the ultimate winner. Perhaps most importantly, we don’t need to pay a steep valuation for TSMC. Its shares can be purchased for less than 20 times earnings, a lower valuation than the typical global stock, despite TSMC’s superior fundamentals.”
“Apple is now 51 percent of Berkshire Hathaway’s publicly-listed equities portfolio. Apple is not just a fruit for Warren Buffett. It’s a brand that generates a lot of valuable cash, which he can re-invest and compound even further. Back in the early 2000s, Warren Buffett was all about Coke and American Express. He still loves coke but as he explains: ‘CocaCola is a wonderful business, but it’s not growing as fast as Apple’. He has not ditched Coca-Cola – He has held on to it. But Apple has exploded off the blocks since he made his first investment.”
“Django Davidson, portfolio manager at Hosking Partners, interviews Material World author Ed Conway for the inaugural episode of Capital Cyclists. A deep dive into the materials that shape our world through the lens of the capital cycle. ESG, China and industrial policy are put into the context of the incredible supply chains that make up the Material World”