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.
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)
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.”
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.
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.”
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…”
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.”
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 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, 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)
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)