Value Invest

Digest

November 24
10:01 2012

Is Tech now ok for value investors?
Ever since Warren Buffett announced his investment in IBM, there has been a marked shift in the interest of value investors in this sector. We have believed for some time now that there are some technology businesses which have got such a strong lock into their customer base, that there is sufficient predictability of revenue to value the business. In the last 4 years, a material part of our out-performance has been from investing in undervalued software and technology businesses. In this article (which was published 3 months ago in the FT so the PE ratios are a little out of date), David Stevenson sets out the case for some of the huge tech companies and their undemanding valuations.  We do not agree with all of his recommendations but Microsoft is a holding, Apple was a holding until September and technology stocks are just over 30% of our portfolio today.

Trust cash cows rather than herd instincts
Luke Johnson, writing for the FT, explores the importance of quality of earnings in investment.  The article asks why high cashflow but low growth listed companies appear to trade on lower multiples than those paid in private equity buy-outs.  One major issue is that the herd instinct to which he refers puts pressure on listed company CEO’s to focus on growth, which is often achieved through over-priced acquisitions. Under PE ownership management are more constrained than on public markets. Although we use a similar valuation methodology to PE acquirers, we are very wary of ex-growth companies that have management with poor capital allocation discipline.

Reports of the death of equities have been greatly exaggerated – GMO
This excellent article makes the case for the long-term attraction of investing in equities.

More on Keynes
This article sets out the path Keynes took to becoming a value investor. After losing a lot of money in the 1929 crash, Keynes figured out for himself that the most successful approach to investing was to make concentrated investments in a relatively small number of stocks, on the principle, later adopted by Warren Buffett, that “it is a mistake to think that one spreads one’s risk by spreading too much between enterprises about which one knows little”. As he wrote in 1934 “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.”

An interview with Howard Marks
In this excellent interview by Oliver Mihaljevic, of the Manual of Ideas, Howard Marks, one of the highlights of next year’s London Value Investor Conference, discusses the huge challenges of finding an information edge in investment. The video covers a broad range of topics, working through some of the points in his excellent book, “The Most Important Thing”.

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