Value Investor Digest – Issue 53 April 2021 In the 53rd issue of Value Investor Digest we feature our interview with Charles Heenan and Geoff Legg from Kennox Asset Management.
The issue also features the Berkshire Hathaway Annual Shareholders Meeting plus other articles, videos, podcasts and letters from Matt McLennan, Michael Mauboussin, Jeremy Grantham, David Einhorn, Joel Greenblatt, Rich Pzena, Li Lu, William Green, Bill Miller, Ted Seides and Nick Kirrage.
Next week we will also be releasing our latest interview with Andrew Wellington from Lyrical Asset Management. Berkshire Hathaway Meeting Livestream – Saturday, May 1st
The Berkshire Hathaway Annual Shareholders Meeting will be streamed live on Yahoo! Finance on Saturday May 1st from 12.30pm ET. If you can’t watch live tomorrow then you can also watch on demand at the same link for 30 days after the event. (Livestream link) 
 VID Interview with Kennox
“CAPE for the US is on about 35x. Markets are incredibly expensive just at the moment. By comparison we are happy to pay up to around 12x our sustainable earnings number so a very steep discount to what the market is charging…Because we are paying such frugal prices, we are typically looking at companies facing headwinds, often on depressed earnings. What we want to do is be able to pick up those companies when they are trading at very advantageous valuations…and benefit from those headwinds over time turning to tailwinds. What very often happens when you get that swing from headwinds to tailwinds is that you do get a growth in those earnings accompanied by a rerating of the business as well. That combination can be very powerful.”
Matt McLennan Interview in Barron’s (Free to View)
“I’m torn at the moment. On the one hand, we’re recovering from a deep cyclical trough, and that’s usually a good time to be an investor. On the other hand, prices aren’t that attractive, and we have all these secular issues…Markets will also have to move beyond the focus on fiscal stimulus to ‘How are we going to pay for all this?’ And we’re going to see the emergence of a new regulatory architecture, which isn’t likely to be any more business-friendly. Inflation expectations have also moved up quite a bit, and what happens if inflation rises more than people expect? These are all issues that can weigh on the market as we roll forward.”
Morgan Stanley: Market-Expected Return on Investment (co-authored by Michael Mauboussin)
“This report breaks new ground by connecting valuation (MEROI) and accounting (properly measuring intangible investment)…This report seeks to help executives and investors in three ways. First, we describe market-expected return on investment, which measures the return at which the present value of a company’s profits equals the present value of the investments a company makes. An understanding of MEROI allows us to understand how high the bar is set for corporate performance. Second, we note that measuring returns has become more difficult as corporate investments have shifted from being primarily tangible to intangible.”
Podcast with Jeremy Grantham: A Historic Market Bubble
“‘Don’t fight the Fed’ has had a pretty good record and has not applied to my life or GMO. We have always played value first and if the Fed wanted to be on the other side of that game for a while we would carry on regardless and eventually the great bubbles broke. We didn’t catch the top, we were painfully early but they broke and we won and we made more money on the decline than we lost on the upside.”
Aon Report: ‘Respecting the Grey Swan’
“Many extreme events are referred to commonly as Black Swans but, once investigated, are found to be Grey Swan events…Grey Swans can fly in from anywhere…sudden events that threaten significantly the reputation of a company. The analysis builds on research conducted over 30 years and is based on data drawn from Pentland Analytics’ Reputation Crisis Databank that includes currently 300 corporate reputation crises spanning the last four decades. The data are global and all major industry sectors are represented. The analysis will demonstrate that the impact of Grey Swan events on shareholder value is significant and sustained.”
David Einhorn Greenlight Capital Q1 2021 Letter
“As for the Fed, it fundamentally changed its framework last August. It no longer seems to care that monetary policy works with a lag. Actually, it has embraced an asymmetrical inflation policy: The Fed wants to be ahead of the curve on the downside to protect the stock market and corporate bondholders the economy. Behind the curve is fine on the way up no matter how frothy the stock market the recovery is. Now, it says it is only going to react to actual inflation that exceeds its 2% target for a period of time.“
Joel Greenblatt and Rich Pzena Interview
“Value investing is valuing a business like you’re a private equity firm buying the whole business – and what they care about is cashflows and future cashflows and what are the risks of receiving them down the road – and what are you paying for them.”
Behavioural Investment: Why Should Equities Be Fairly Valued?
“It is not that investors are using identical information but coming up with different answers; it is that they are using information for entirely different purposes. If investors are making decisions based on price momentum, multiple expansion, monetary policy, fiscal stimulus or simply adopting a passive approach, why should the assets in question be priced at their fair value?”
Kernow: The Best Opportunity in a Generation for UK Equities?
“As we have said many times, post-Brexit, the UK should be viewed in the eyes of the international investing community as a larger Norway or Switzerland – a nice place to do business, slightly different rules, still in Europe, just not in the EU. On top of this, we have now seen the UK roll out a world-leading vaccine plan, which should allow the UK economy to be better positioned for a successful, permanent, and quicker reopening.”
Fund of Funds Insider: You Can Win With Kids
“Why is this 28-40 age such a sweet spot for managers? It’s the threshold between having enough experience to avoid the really stupid mistakes, but still being sufficiently curious, passionate and willing to take risks. It’s we older fund managers who have bigger challenges. How do we keep our mojo once we’ve proved ourselves? Or become risk averse? Or are managing too large a fund?“
Bruce Greenwald and Li Lu Fireside Chat (April 2021)
“…if you claim a circle of competence, you have to be very honest with yourself. So we really insist on knowing inside and out a particular business to the point we’re able to predict its outcome, for example in the next ten years. At least I want to know at the worst case scenario, what the business would look like ten years from now.”
StockViews Inaugural Whitepaper: Walking a Tightrope
“This inaugural report draws on the output of our proprietary machine intelligence system, Dragonfly, which scans across 1300 companies in Europe. Dragonfly uses NLP to take unstructured datasets in the notes to the accounts and converts more than 800 data points on every company into a unique red flag system designed to spot a variety of risks that signal balance sheet stress. This allows us to form a picture of the “hidden health” of a company that isn’t simply based on “vanity metrics” like adjusted earnings growth or share price performance.”
William Green Article on Bill Miller
“I like General Motors. It used to be part of the problem, and now it’s part of the solution. It was a massive polluter and couldn’t solve its own problems. Now, that’s reversed. You’re at the cusp of the conversion of all its new cars from the internal combustion engine to electrical vehicles. But GM’s valuation has not reversed. On a sum-of-the-parts basis, you can easily come up with 50% more than the current price, and you can pretty easily come up with 100% more. They’re at eight times next year’s earnings in a market that’s 20 or so times earnings. GM is certainly not expensive, given the optionality. And people are excited about anything that combats climate change.”
Schroders: The Value Perspective Podcast with Ted Seides
“In this episode, Ted sits down with Juan and Nick to discuss what Ted has learned through his podcast’s 200+ episodes, a bet he made with Warren Buffet on hedge funds vs. S&P 500, and his views on analysing investment processes including probabilistic thinking, the importance of diversity and recognising biases.”
Ruffer Investment Review April 2021
“I take it pretty much for granted that the forty year bull market is ending, and that it will be replaced by hard investment times. I am sure it will be a period dominated by what has come to be known as financial repression – a period when the post-tax returns from assets don’t keep pace with higher inflation. Savers will endure many years of enforced declines in the value of their wealth – in real (inflation-adjusted) terms. It is through the eyes of the income owner I want to examine this phenomenon.“
There’s Nothing to Do Except Gamble: Welcome to the non-Fungible, Memeified, Cryptodenominated, Degenerate Future of Finance
“Every day, some new money weirdness crosses our feeds: teenage TikTok stars apologizing for recommending a Star Wars–themed cryptocurrency that turned out to be a scam, a longhair trader best known as DeepF**kingValue and Roaring Kitty testifying before Congress, the R&B singer Akon announcing he’s building a new city in Senegal that will operate on his proprietary cryptocurrency. Naturally, the Jack Bogle of this moment is the fratty founder of Barstool Sports, Dave Portnoy, who launched an exchange-traded meme-stock fund earlier this year…His biggest rival for meme-economy influence is Elon Musk, who has the ability to tweet a single phrase — for example, ‘Use Signal’ — and cause a defunct penny stock to rise 6,000 percent.“
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