Value Invest

VID September 2019

September 16
17:23 2019

WELCOME TO THE 42ND EDITION OF VALUE INVESTOR DIGEST

In this edition we feature two articles from John Authers; the first is titled “Quality Stocks Are An Overcrowded Trade”, there’s also a Value Investor Insight interview with Mark Pearson, a new Warren Buffett interview which includes his comments on Berkshire’s investments in US banks, Jonathan Boyar’s open letter to James Dolan, Rajiv Jain of GQG Partners discusses portfolio management, Michael Burry’s views on a passive investing bubble, an article on discount supermarket chain Aldi, a Barron’s article which shows that “the top-10 stocks by market cap rarely stay there during the following 10 years”, Andrew Hollingworth’s open letter to Mike Ashley of Sports Direct, an informative visualisation of the world’s money and markets from The Money Project, John Hempton’s article on bank margins, a Citywire interview with Simon Gergel, a Robert Shiller’s “we’re in 2005 again”comments on the US housing market, a Deloitte piece on the decline and rise of London; plus Oaktree Capital’s primer on structured credit.

John Authers: Quality Stocks Are An Overcrowded Trade

“We need to be careful with definitions. Everyone would like to describe their stock as a quality investment. And even the quants who have broken down equity investing into a series of factors that drive returns are not sure how to define the quality factor. Broadly, it tends to refer to reliable profitability, and a strong balance sheet, in some combination.”

Value Investor Insight: Interview With Mark Pearson of Arcus Investment

“Those of you who think you have experience navigating tough markets likely have nothing on Mark Pearson. The British co-founder of Arcus Investment, which today manages approximately $1.3 billion invested almost exclusively in Japan, started his first fund-manager job in Japan on the day in December 1989 that the Nikkei Stock Average hit an all-time high of almost 40,000. Over the next 20 years the Nikkei fell 80%, bottoming below 7,500 in 2009 before starting a halting if long-overdue recovery that has brought it part of the way back, to roughly 21,700. ‘Let’s just say it’s been a fascinating ride,’ he says.”

The Big Short’s Michael Burry Sees a Bubble in Passive Investing

“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally…There is all this opportunity, but so few active managers are looking to take advantage.”

Warren Buffett on Berkshire’s Investments in US Banks

Buffett covered a lot in this new interview including comments on China, Costco, Elon Musk and more. Commenting on Berkshire’s investments in banks, he said: “They’re businesses I understand and I like the price at which they’re selling relative to their future prospects. I think 10 years from now that they will be worth more money and I feel there’s a very high probability that I’m right. I don’t think they will turn out to be the best investments at all, of the whole panoply of things you could do, but I’m pretty sure that they won’t disappoint me.” [Comments on banks at 53:40]

Jonathan Boyar in Forbes: Open Letter to James Dolan Outlining Ways to Unlock Shareholder Value

“Sometimes I think of you as the Rodney Dangerfield of investing—investors just don’t give you the respect you deserve. They’ve gone so far as to assign a ‘Dolan discount’ to entities you control—even though long-term shareholders of both Cablevision and Madison Square Garden (MSG) (my firm included) have been handsomely rewarded thanks to your shareholder-friendly actions. But your latest plan to build a concert/entertainment venue, the Sphere, in Las Vegas for $1.2 to $1.7 billion (and that’s just for the Las Vegas version) makes me wonder whether a ‘Dolan discount”’ is beginning to make sense.”

Rajiv Jain Discusses Portfolio Management

“I think the way to look at or to assess a portfolio manager or track record is [to ask] how do they do in different environments? So for example if you look at a ‘growth’  manager today, most of them look like geniuses. Most of them won’t have a good track record – if you go back to the 2000-2003 era – how many of them actually did well? So the whole ‘growth and value’ debate I personally feel is nonsensical in a way because why would you consciously overpay for anything?” [This discussion is at 31.30]

How a Cheap, Brutally Efficient Grocery Chain is Upending America’s Supermarkets

“When Walmart’s US CEO Greg Foran invokes words like ‘fierce’, ‘good’ and ‘clever’ in speaking almost admiringly about one of his competitors, he’s not referring to Amazon. He isn’t pointing to large chains like Kroger or Albertsons, dollar stores like Dollar General or online entrants like FreshDirect and Instacart. Foran is describing Aldi.”

Barron’s: History Says Apple and Amazon Probably Won’t Be the Next Decade’s Best Stocks

“Research from Gavekal’s Louis-Vincent Gave…looked at the top-10 stocks at the beginning of each decade since 1980. His findings demonstrated that the top-10 stocks by market cap rarely stay there during the following 10 years. Instead, prevalent investing patterns changed drastically, as the old winners were replaced with the new.”

HollAnd Advisors: Open Letter to Mike Ashley

In recent years, as you have sought to change the direction of Sports Direct (SPD) and invest for its future, many of the fair weather shareholders of 2011-15 have left you. They have been replaced by those that see value in your business and the skills you bring to it. To be a SPD shareholder in 2019 is to be someone who is backing Mike Ashley and taking the longer term view. As such most of your investors today are aligned with you. Please treat us accordingly.”

All of the World’s Money and Markets in One Visualization

This interesting visualisation from The Money Project compares the size of various asset classes, companies, people and other items. Each block in the visualisation represents $100bn.

John Authers: Bonds Meet the Four Criteria for Defining a Bubble

“There has been a tendency since the financial crisis to label any market that is rallying or deemed overvalued to be in a “bubble.” The word has become overused and debased. But if we treat it rigorously, the bubble concept is still vital in navigating financial markets. And the rigorous treatment reveals that bonds really are in a bubble.”

John Hempton: Thinking Aloud About Bank Margins – Part 2

Just over twenty one years ago The Economist wrote a glowing article about what was then a roll-up of British High Street banks. It was Lloyds TSB…And then it all went horribly wrong. The bank took only a decade to be nationalised. What went wrong was competition. At the time Lloyds revenue to risk weighted assets was 8 percent. This was the highest number I have ever seen on a major bank anywhere.”

Simon Gergel: Oil and Tobacco Aren’t Dead, Just Look at Their Profits

“I love the premise of that question [that oil and tobacco are sectors in decline], because oil actually isn’t in decline. The world is using more oil every year and has done since oil started being used and we still aren’t at peak oil. It may be another 10 or 15 years before we get to the peak and then I think you’ll probably see a gentle decline in oil. At the same time demand for gas is growing extremely fast. If you look at companies such as BP and particularly Royal Dutch Shell they produce huge amounts of gas. Gas demand is growing structurally and will do for decades so these aren’t necessarily businesses in decline.”

Robert Shiller on US Housing: ‘We’re in 2005 Again’

“I have seen this happen before. We’re back in 2005 again when the rate of increase in home prices was slowing down a lot but still going up. It would not take me be any surprise at all if in the next year or two we saw modest declines in home prices and if things play out right, there could be bigger declines. It has happened before on a number of occasions.”

Deloitte: The Decline and Rise of London

“The familiar story of London as the powerhouse of the British economy is relatively new. Within living memory London was a city in decline. Its population peaked in the late 1930s before going into a long decline. London’s population shrank by over a fifth between 1941 and 1992, losing two million people at a time of rapid growth in the UK’s wider population. Its economy also underperformed. The economic historian, Professor Nicholas Crafts, estimates that the premium of London GDP per head over the UK average shrunk from a peak of 65% in 1911 to 23% by 1971.”

Oaktree Insights: Structured Credit Primer

“Structured credit got a bad rap in association with the excesses in the subprime mortgage market preceding the Global Financial Crisis (GFC). It should be noted, though, that not every structured product played the same role or was affected the same during the last recession. Plus, the asset class has undergone significant reform since then. Today it offers materially improved investor protections while presenting potential for differentiated returns and a favorable relative-value proposition.”

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