Category: VID

Welcome to the 43rd Edition of Value Investor Digest

In this special edition of Value Investor Digest we feature a video of “Mastering the Market Cycle” with Howard Marks of Oaktree Capital from the Value Invest New York conference last year, as well as a complimentary interview with Dan O’Keefe of Artisan Partners from Value Investor Insight and 12 other articles.

Howard Marks “Mastering the Market Cycle” Video from Value Invest New York

“So I’m writing this book about cycles and I’m pouring everything I know from 50 years in to this book on cycles and about two thirds of the way in I said to myself ‘hold it, why do we have cycles?’…I think the answer is that we have a trend line and we are progressing on the trend line and then people get optimistic and they depart from the trend line on the upside, I would call that ‘an excess’, and when the excess becomes sufficient it either collapses of its own weight or something else brings it down and it becomes a correction.” This session is a masterclass from Howard on market cycles. As a reminder, at the next Value Invest New York on December 3rd, Joel Greenblatt will be taking part in a similar type of session titled: “The Evolution of Value Investing” a Fireside Chat and Audience Q&A with Richard Pzena, Pzena Investment Management.

 

Value Investor Insight interview with Dan O’Keefe of Artisan Partners

Value Investor Insight has kindly offered VID readers access to this interview where Dan O’Keefe of Artisan Partners gives a detailed discussion of his investments in Booking Holdings, Citigroup, Samsung Electronics and NXP Semiconductors and others – plus his lack of enthusiasm for investing in the auto industry. Long-term VID readers will recall that Dan was a presenter at the inaugural London Value Investor Conference back in 2012, his stock pitches were Google (now Alphabet) and Aon. We are delighted he will be joining us again at the LVIC 2020. David Samra of Artisan Partners will also be speaking at Value Invest New York next month.

Professor Richard Thaler Oxford Union Q&A on Behavioural Economics

“I met these two psychologists, Daniel Kahneman and Amos Tversky – this is in the late 70s – and they were in the midst of their pioneering work. What they were showing is that when people make judgements they use simple rules of thumb and that’s fine, it’s good to use rules of thumb, but that the use of these rules of thumb lead to predictable mistakes – and that idea was my big a-ha moment”.

Django Davidson – Hosking Partners: The End of the Beginning or the Beginning of the End? Investment Opportunities Late in the Technology Cycle

“It is a pattern where investment returns are front loaded early in the cycle, ahead of a period of technological maturity where society emerges as the ultimate beneficiary – disruptive innovation triumphs, but late arrival investors often lose out. A simple observation lies at the heart of this: human psychology is hardwired to extrapolate current trends.”

Meet The Buffett Bot: Quant Fund Tries To Crack the ‘Value’ Code

“In a small basement office near Portman Square in London, wedged between the Grazing Goat pub and the Red Sun Chinese restaurant, a handful of eggheads are attempting to code a robotic Warren Buffett.”

Deutsche Bank: Why Do Elderly Germans Save?

“Saving money is near and dear to Germans. Their saving rate (saving relative to disposable income) is significantly higher than that of most of their European peers. For example, it was around 10% in 2017, i.e. almost twice and three times the euro area and EU averages respectively. Only Swedes saved more, while Spanish and British households actually had negative rates.”

Bill Gates on the David Rubenstein Show

“We were doing what was called Windows Mobile. We missed being the dominant mobile operating system by a very tiny amount. We were distracted during our anti-trust trial, we didn’t assign the best people to do the work – so it’s the biggest mistake I made in terms of something that was clearly within our skill set; we were clearly the company that should have achieved that.”

Heineken’s Charlene de Carvalho: A Self-Made Heiress

“Until her father’s passing, Charlene had no money to her name except a single share of Heineken stock—then worth 25.60 euros, or $32—that her father had given her. Now, as his only child and the sole heir to the Heineken fortune, she was inheriting about 100 million shares, equal to one-quarter of the company’s total stock outstanding.”

How Do You Like We Now?

“Well obviously there will be a Harvard Business School case study about WeWork, but what will it say? What is the lesson? It’s a good lesson, right? A lot of kids starting at Harvard Business School next fall will be hanging up posters of Adam Neumann in their dorm rooms. Neumann, the founder of WeWork, will walk away from this corporate bonfire with a billion dollars and a bunch of fancy houses.”

The Spectacular Rise and Fall of WeWork

Continuing the wework theme, this Bloomberg video covers the story of”when a company got too much money, too fast with no effective oversight on how to spend it.” Astoundingly, according to Business Insider, the below is a real slide from Softbank’s quarterly earnings deck last week…

AQR’s Asness Says it is Time to ‘Sin a Little’ in Value Stocks

“Recalling the old joke that a recession is when your neighbour loses his job but a depression is when you lose yours, Mr Asness said: ‘To us a recession is when the value factor performs poorly but we still do well, a depression is when we suffer with it. For most of the last 10 years of the value factor’s drawdown it’s been a recession. For the last almost two years it’s been a depression.’”

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.

London Conference The next London Value Investor Conference will take place on May 12th 2020

New York Conference The speaker line-up for Value Invest New York on December 3rd 2019 has been announced

$700 VINY Discount Use “VID-VINY-19” for $700 off a ticket to Value Invest New York (expires Sept 30th)

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

“Parts companies like Ahresty have followed the big Japanese automobile manufacturers overseas as they’ve successfully established global footprints. There was always sort of a bargain struck, that if the parts makers came along they would be allowed to sell to others, and Ahresty has built a good business selling to companies such as General Motors and Volkswagen as well. It supplies customers from its production bases in Japan, China, Thailand, India, Mexico and the U.S.”

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.”

Welcome to the 41st edition of Value Investor Digest

This edition features a question on Brexit from a Member of the House of Lords to Warren Buffett at the Berkshire Hathaway Shareholders Meeting, a CapX article on how well GDP figures capture the benefits of modern innovations, a Hosking Post on the innovation cycle, an interview with Ryanair’s Michael O’Leary about the situation with the Boeing 737 Max and the state of the European Airline industry, a Charlie Munger interview with Jason Zweig, the latest memo from Howard Marks titled “This Time It’s Different”, an institutional investor article on a “Buffett-Bear” and details of Michael Burry’s latest additions to his portfolio.

Conference Calendar:

Value Invest New York 2019 – 3rd December 2019: VID discount (expires July 10th)
London Value Investor Conference – 12th May 2020: Save the date to your calendar
London Quality-Growth Investor Conference – Date TBC

Lord Gadhia to Buffett: “What’s your advice on solving the UK’s Brexit dilemma?”

A Member of the House of Lords who is a Berkshire Hathaway shareholder asked a question at the annual meeting this year. Buffett responded by saying he was: “hoping for a deal in the UK and/or in Europe (sic) no matter how Brexit comes out”. Charlie Munger also commented that “All my ancestors came from Northern Europe so I’m very partial to the place. On the other hand if you asked me how I would vote on Brexit if I lived in Britain I don’t even know. It just strikes me as a horrible problem and I’m glad it’s theirs, not mine.” but that if Berkshire had a deal that could be done in the UK he would “go in in a minute [because] those are my kind of people – I understand them.”

CapX: Are We Doing Better Than We Think?

This article questions how effective GDP is as a measure of the value of modern innovations versus those of the past: “The great inventions of the past, such as the steam engine and electricity, changed lives and raised growth. Their modern counterparts seem to be changing lives – the media and most of us can hardly stop talking about them – but not GDP. One explanation is that the GDP data are right and our impressions are wrong. The US economist Robert Gordon believes that the impact of today’s innovations on human welfare are trivial compared to the great innovations, such as indoor plumbing and antibiotics, of the past. A more optimistic explanation is that technology is raising welfare, but in ways that are not captured by conventional measures of economic activity. On this argument GDP underestimates the full benefit to consumers of today’s technology.”

Hosking Post: The End of the Beginning or the Beginning of the End?

In this latest Hosking Post Django Davidson talks about the innovation cycle: “It is a pattern where investment returns are front loaded early in the cycle, ahead of a period of technological maturity where society emerges as the ultimate beneficiary – disruptive innovation triumphs, but late arrival investors often lose out. A simple observation lies at the heart of this: human psychology is hardwired to extrapolate current trends…we see the management of today’s Unicorn Industry explicitly invoke the Amazon business template of losses-today-for-market-dominance-tomorrow in order to sell expensive new equity in the private markets or, increasingly, via IPO.”

Michael O’Leary: We’ve Got Long-Johns on at Ryanair

Michael O’Leary was interviewed on CNBC about the state of the European airline industry and the likelihood of more airline failures across the industry: “Fares in Europe are terrible which is great for our business…more airlines will disappear…You can never have enough competition – anything that’s good for the consumer – it is a bit like, as Buffett says, you wait until the tide goes out and you see who is wearing speedos and who is naked, we’ve got long-johns on at Ryanair.”

Charlie Munger Interviewed by Jason Zweig & Nicole Friedman

You need a WSJ susbription for the link above, although Morningstar also covered the whole transcript of the interview with Charlie Munger across several links, below. “Warren and I have reached exactly the same conclusion: At the top, you need a certain kind of a mind that automatically makes sense about investments and money…’The money mind’ he [Warren] calls it. And what I have discovered in a long lifetime is that people have it or they don’t, and if they don’t have it, you can’t create it…It’s almost an inherited knack…But, you know, once you realize that some people have the knack and other people don’t and that people with very high IQs, many of them lack the knack – so you can’t solve your problem if you want correct thinking by just hiring the bright people, because they do many dumb things.”

Morningstar links: Part 1 – Part 2 – Part 3 – Part 4 – Part 5 – Part 6

Howard Marks Memo: This Time It’s Different

We regularly cover Howard’s memo’s in Value Investor Digest and this is a very good one – he talks about 9 reason’s we are told why this time is different. One of which was “the avoidable recession”: “The questions I get most often these days are ‘Is the U.S. heading for a recession?’ and “’When will it start?’ My answer to the first is a simple ‘yes.’…When people ask about the coming recession, what they mostly mean is ‘Might it be a long way off?’ Well, the longest U.S. recovery on record lasted ten years, and the current one is in the twelfth month of its tenth year. There’s no reason a recovery can’t go beyond ten years; no gate will come down on June 30, foreclosing further progress. And it’s important to note that since this has been the most sluggish U.S. recovery since World War II, it hasn’t been characterized by excesses to the upside, meaning there needn’t be a recessionary correction on the usual schedule.”

A Buffett-Bear: Institutional Investor Article

Meyer Shields is an insurance industry specialist with Keefe, Bruyette & Woods and publishes hard hitting research reports and “slams Berkshire’s increasingly skimpy financial disclosures for its individual business and insurance lines compared to that of rivals.”This Institutional Investor article focuses on Meyer’s lack of an invitation to be on the panel to ask questions at the Bekrshire Hathaway annual meeting. With so many admirers in the investment community it is interesting to read about a “Buffett-Bear”.

Gurufocus: Michael Burry Stock Picks

This is the first look at Michael Burry’s portfolio for 2 years and details some of his stock holdings including JD.com, GreenSky and PetIQ. They also included a quote from his letter: “As much as the Fund is a value fund, it is an opportunistic fund. And as much as I enthusiastically explore the value of each business behind every stock, I seek the pockets of the market that are the most inefficient, the most temporarily imbalanced in terms of price. Whatever extra return this Fund will earn will be borne of buying absurdly cheap rather than selling dearly smitten. I certainly have proven no ability to pick tops, and I do not anticipate such a feat in the future. Rather, fully aware that wonderful businesses make wonderful investments only at wonderful prices, I will continue to seek out the bargains amid the refuse.”

 

Welcome to the 40th edition of Value Investor Digest

The Livestream of the Berkshire Hathaway Annual Shareholders Meeting will take place this Saturday (click here to set a calendar reminder) and so we have several articles to bring you related to that event, including a link to the live stream. In addition, this edition features an article which reveals Berkshire has recently invested in Amazon, a video which shows the performance of all 125 stocks presented at the London Value Investor Conference since 2012, an FT ainterview with Warren Buffett, an Economist piece on European airline consolidation, Steve Eisman’s Oxford Union address, a Staley Cates and Prem Watsa podcast, one of Warren Buffett’s first TV interviews, a Citywire Selector article on Spain’s “Value Investing Obsession”, an Institutional Investor article on the science of fund selection, a John Authers article on volatility versus risk; plus LVIC speaker Sir Martin Sorrell speaking about the “Walled Gardens” which still exist in digital advertising.

Conference Calendar:
London Value Investor Conference – 14th May 2019: View Agenda and Presentation Titles
Value Invest New York 2019 – Date Announced Soon

Berkshire Hathaway Annual Shareholders Meeting – Live Stream

The annual meeting will be streamed live on Yahoo Finance on Saturday from 9.45am ET (2.45pm BST). For anyone unable to travel to Omaha for the meeting the streaming of the event has been a welcome development. Over 1 million live viewers are expected to tune in from around the world to listen to Buffett and Munger’s wit, wisdom and insights. They normally take questions from journalists, analysts and shareholders in the audience for around five hours. If you can’t watch live then you can also watch on demand at the same link for 30 days after the event. (click here to set a calendar reminder)

You can also see our video archive of all Berkshire Hathaway Shareholders meetings since 1994, including selected highlights from each year.

Buffett: Berkshire Hathaway Has Been Buying Shares in Amazon

Referring to Ted Wechsler or Todd Coombs, Buffett said “One of the fellows in the office that manage money…bought some Amazon so it will show up in the 13F” although he added that “I’ve been a fan, and I’ve been an idiot for not buying…But I want you to know it’s no personality changes taking place.”

Stocks Presented at the London Value Investor Conference Since 2012

The London Value Investor Conference has had 125 stocks presented at it since it started in 2012. A video has been produced which provides an overview of the top performing stocks presented at the LVIC each year, the top compounders (including 20 stocks which have compounded at 20%+ p.a. since presented) and also the performance of all the stocks presented each year at the conference when considered as a portfolio versus major indices.

FT Article with Warren Buffett: ‘I’m having more fun than any 88-year-old in the world’

Three FT journalists sat down with Warren Buffett in his office in Omaha for nearly three hours covering lots of topics. As with this quote from the article where Warren answers a question about Berkshire’s relationship with regulators, Buffett often puts things in a way which invites readers to reach a certain conclusion, but without him putting it forward directly. “We will behave well, and we can afford to behave well. Whether we behave well because we’re rich or whether we’re rich because we behave well, we’ll never know.”

The Economist: Europe’s Airline Industry is Consolidating

“European skies have grown less crowded of late. The number of airlines in Europe has fallen from a peak of 180 in 2003. Since the start of 2018 at least 14 have collapsed…That is good news for shareholders, less so for flyers”

Steve Eisman Oxford Union Address

Earlier this year Steve Eisman took part in a debate at the Oxford Union. Eisman spoke for 10 minutes in opposition to the proposition: “This House Regrets Blaming Wall Street For The Global Financial Crisis”. “It has been my experience that most people, even extremely educated people, don’t fully understand why the financial crisis happened. So rather than throw thunderbolts I am going to spend most of my time trying to explain what happened because I think in the explanation the answer to the question will be fairly clear.”

Staley Cates Podcast Interview with Prem Watsa

In this Price-to-Value Podcast Southeastern Asset Management’s Vice-Chairman Staley Cates interviews Prem Watsa on his Insights on Investing, Underwriting and the Importance of Culture. On active investing, Prem remarked “Active investing, when you are picking stocks one by one is I think long term the only way to go but it takes a lot of time and a lot of devotion to the task.”

One of Warren Buffett’s First TV Interviews

Many readers might have seen clips of Buffett speaking in this interview with George Goodman in 1985 before, but perhaps not the full 7-minute interview which is included here. It is remarkable that many of the timeless principles Buffett speaks about in this video are not unlikely to be repeated at the Berkshire AGM tomorrow: “The intellectual process is defining your area of competence in valuing businesses and then within that area of competence finding whatever sells at the cheapest price in relation to value; there are all kinds of things that I am not competent to value. There are a few that I am competent enough to value.”

‘Bibles’, Buffett and Beyond: Inside Spain’s Value Investing Obsession

Many long-time attendees at the London Value Investor Conference will be aware of the strong value credentials among many investors from Spain. In some years, more than 70 attendees have travelled from Spain to the LVIC to hear from our speakers – including some of those highly rated managers featured in this Citywire Selector article (Cobas, Magallanes and azValor). The article comments on azValor, who were the highest rated speakers at the conference in 2018: “It sounds evangelical because it is. A religious-like belief in the philosophy is required to put your savings in funds which appear radical. For example, in March 2019 AzValor’s International fund has a 99% active share and 65% of its holdings in the commodities sector. This isn’t your run-of-the-mill global equities fund”.

Institutional Investor: How Good Science Can Weed Out Bad Managers

Institutional Investor looks at how applicable scientific studies in to issues such as cognitive bias are to the due diligence processes conducted on asset managers: “In conducting due diligence on investment firms, the correct null hypothesis should be that there is no alpha present…This means the default assumption should be not to hire the manager, and due diligence should be positioned as the search for evidence to disprove that. That is to say, the search is for a reason to say yes.”

John Authers: ‘Capital Ideas’ and the Streetlight Effect

This John Authers article analyses some of his readers responses to the ideas put forward in Peter Bernstein’s book “Capital Ideas” on equating volatility and risk – with one reader citing risk being the same as volatility as being an example of the ‘streetlight effect’: “A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, ‘This is where the light is.’”

Sir Martin Sorrell: ‘The Biggest Battleground at Present is the Control of Data’

Sir Martin Sorrell will be taking part in Fireside Chat and Audience Q&A with Robert Hagstrom at the London Value Investor Conference on 14th May, titled “The New Marketing Reality”. This article and podcast provides a good primer in to the way Sir Martin thinks about the way investors and businesses should think about building and sustaining brands through their marketing in future: “Walled gardens are dominating digital business at present. Their reluctance to share data is increasing…With the advent of the internet and the demise of local businesses, many brands saw an opportunity to create direct client relationships for the first time. Platforms, however, have driven a wedge between brands and their customers.”

 

 

Welcome to the 39th edition of Value Investor Digest

Featured in this edition are 15 articles including the Berkshire Hathaway Annual Shareholders Letter, a Barron’s article on LVIC 2019 speaker David Harding of Winton Capital, a Value Investor Insight interview with Oldfield Partners, a John Authers article titled “Let Me Tell You How It Will Be ’Cause I’m the Taxman”, Michael Mauboussin’s recent research paper “Who Is On the Other Side?”, Aviva Investors Little Book of Data, a CNBC video on where Joel Greenblatt sees value now, a Sir Martin Sorrell interview, a podcast which analyses why print magazines endure, a Kopernik letter from Mark McKinney, a Citywire Selector article on azValor, a Howard Marks Memo, an FT interview with Bill Gross and two videos with Charlie Munger – one an interview with CNBC and the other the video of the Daily Journal Annual Meeting.

Conference Calendar:

London Value Investor Conference – 14th May 2019
(Jonathan Ruffer, C.T. Fitzpatrick, David Harding, Alex Roepers, Sir Martin Sorrell and others)
Value Invest New York 2018 – Overview Video
(Sign-up to be kept informed about VINY 2019)

Berkshire Hathaway – Annual Shareholders Letter

Buffett did not cover a lot of new ground in his annual letter to shareholders in Berkshire Hathaway this year, other than to introduce a new “forest” analogy to explain how to evaluate the value of the large number of businesses now owned by Berkshire. “We own a vast array of specimens, ranging from twigs to redwoods. A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty. Fortunately, it’s not necessary to evaluate each tree individually to make a rough estimate of Berkshire’s intrinsic business value. That’s because our forest contains five ‘groves’ of major importance, each of which can be appraised, with reasonable accuracy, in its entirety.”

You can also see our video archive of all Berkshire Hathaway Shareholders meetings since 1994, including selected highlights from each year.

Barron’s: Winton Capital’s Idiosyncratic Founder on Artificial Intelligence and Statistical Fallacies

London Value Investor Conference speaker David Harding features in this Barron’s article. Harding says that “For 35 years, we have made money from trading momentum in markets—quite extraordinary…People like ourselves and our fellow travelers don’t look at individual situations. We look at patterns across time and across markets.” According to the article Winton’s London offices have a room devoted solely to charts that display the long-term price movement of 80 different assets from sugar to stocks.

Value Investor Insight Interview with Oldfield Partners: Value First

The editors of Value Investor Insight have allowed us to include a feature interview with Nigel Waller and Andrew Goodwin of Oldfield Partners in this edition of Value Investor Digest. In the interview Nigel and Andrew speak about their investments in Siemens, Tesco, Viacom, BT Group, Kansai Electric Power and Mitsubishi UFJ Financial.

John Authers: Let Me Tell You How It Will Be ’Cause I’m the Taxman

“Prepare to worry about something new” says John Authers, who is now Senior Editor for Markets at Bloomberg having previously spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. In this article he looks at a potential negative driver for markets from any political moves back towards higher rates of taxation: “The money that goes into hedge funds and stocks in general tends to disproportionately come from lightly taxed wealthy Americans. If the political bandwagon for higher rates continues to gather steam, that will be a significant negative for U.S. assets over the next two years.”

Michael Mauboussin: Who Is On the Other Side?

This detailed Blue Mountain Capital Management Research report by Michael Mauboussin looks at the sources of the edge an investor can have by understanding who is on the other side of the purchase or sale of a security: “If you buy or sell a security and expect an excess return, you should have a good answer to the question “Who is on the other side?” In effect, you are specifying the source of your advantage, or edge. We categorize inefficiencies in four areas: behavioral, analytical, informational, and technical (BAIT).”

Aviva Investors: The Little Book of Data

This compendium of over 30 visual depictions of interesting data sets was put together by Aviva Investors. The visualisations cover demographic issues, global debt, trade tariffs, trade flows, R&D spend by country, illiquidity premium and dozens of other worthwhile snapshots of the data.

Where Joel Greenblatt Sees Value Now

Joel comments in this video that there are plenty of good opportunities for most investors“Buffett is famous for saying that a fat wallet is the enemy of investment returns…For better or for worse we don’t have as much money to manage as Warren Buffett and so we don’t really have quite the challenges that he does..Even in the S&P 500 there are plenty of opportunities…The S&P 500 is an average of 500 names, if you look under the covers of the dispersion of those companies there’s plenty of opportunities.”

Sir Martin Sorrell Interview with Ian King

Sir Martin Sorrell will participate in the London Value Investor Conference this May, where he will be interviewed by Robert Hagstrom, who is also presenting at the conference. Whilst the bulk of the conference focuses on presentations from investment managers, the session with Tim Martin of J D Wetherspoon at the 2018 conference was so well received we have decided to make an interview with a CEO a feature of the conference every year. Sir Martin uses this interview to talk about his career and also his plans for S4 Capital “I’ve had three lives, not nine lives yet, so another six to go…one with the Saatchi’s, one with WPP and now one with S4 Capital. I can’t see myself retiring to the beach or on the golf course…and I can’t see myself doing a portfolio and I really want to remain active.”

Why do Printed Magazines Endure in an Era of Declining Advertising Revenue and Sales?

In this BBC podcast Evan Davis interviewed three publishers from across the industry, including Wolfgang Blau of Conde Nast International who commented that “You want a really intense close relationship to your readers and a print reader spends more time with you. So the print reader is your most valuable reader in terms of the time spent and the identification with the brand. And in the short term there is also the higher margin of your print advertising.”

Kopernik: These Go To Eleven

Mark McKinney of Kopernik focusses in his recent letter on the macro picture, while addressing some inaccuracies in public narratives surrounding Government policies from around the world: “While we at Kopernik always frame discussions around the fact that we are bottom-up stock pickers, I like to look at the big picture (macro) scenario to frame the risk profile. It is from this point of view that I consider the macro picture…I can’t speak for all value investors, but anecdotally I find that as a group they tend to question the common narrative more than others.”

Why These Spanish Value Stars’ Flagship Fund is 65% in Commodities

This Citywire Selector article looks at azValor’s investments in the natural resources sector. Fernando Bernad commented on gold miners “We are speaking about a sector that no one wants. The biggest funds in the world consider it uninvestable. We think this is very positive but it hasn’t been reflected in markets. This has allowed us to buy the best gold miners in the world at very interesting prices that aren’t reliant on the prices of gold increasing.”

Howard Marks Memo: Political Reality Meets Economic Reality

Two of Howard’s past memo’s were titled Economic Reality and Political Reality. In this, the latest of his memos, he explores what happens when the two realities collide: “The purpose of this memo is to describe what happens when political behavior collides with economic reality, as illustrated in one area where the government is taking steps – tariffs – and another in which debate among politicians is heating up – restrictions on the capitalist system.”

Bill Gross: ‘We Were Looking For Every Penny We Could Get’

Bill Gross who retired last Friday sat down with the FT’s Robin Wigglesworth where they discussed his long career: “Active, aggressive bond investing was Gross’ big innovation. Historically, insurers and pension funds were the big buyers of bonds. They rarely traded — in fact bonds were typically kept in a vault, and selling meant physically mailing them to the buyer — and enjoyed cordial, clubby relationships with Wall Street. Pimco, on the other hand, actively traded in and out of positions, expanded assertively into hot new areas like junk bonds and emerging markets, and used its increasing clout to cudgel banks into giving them better bids.”

Charlie Munger February 2019 CNBC Interview

Charlie Munger sat down with Becky Quick for this 30 minute CNBC interview which covers a lot of ground on investing and other topics. On the difficulties facing some investors at present he said: “There will be opportunities in the future, there are times which are easier and there are times which are harder. Now it’s tougher – it’s (A) that the valuations have come up and (B) that the competition sorting through those opportunities is more intellgient and more aggressive and more numerous – of course it’s harder. The net result is that people are going to get worse results. But I think valuations will go up and down because they always have.”

Charlie Munger: Daily Journal Annual Meeting

This 2 hour session with Charlie Munger has Charlie speaking at the beginning (5-46 minutes) on several topics then taking questions from the audience (47-120 minutes): “I do think that index investing, if everybody did it, won’t work – but for another considerable period index investing is going to work better than active stock picking where you try and know a lot…At a place like Berkshire Hathaway, or even the Daily Journal, we’ve done better than average and now there’s a question why has that happened? The answer is pretty simple. We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace and utilities and so on and so on. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. We realised that if we worked very hard we could find a few things where we were right and the few things were enough and that that was a reasonable expectation.”

Welcome to the 38th edition of Value Investor Digest

Featured in this edition is the January 2019 investment review from Jonathan Ruffer, a Spectator USA article from Mark Asquith of Somerset Capital Management, an Irish Times profile of Michael O’Leary’s 25th anniversary as CEO of Ryanair, an article on Costco’s surprisingly high sales of its own-brand Kirkland, an interview with C.T. Fitzpatrick, what you can learn from one of Warren Buffett’s smartest investors, why Barron’s thinks there’s still value in Apple, a Bloomberg piece on the wide dispersion of hedge fund returns; plus an FT article with a warning about banks cutting their trading inventories of triple-B bonds.

Conference Calendar:

London Value Investor Conference – 14th May 2019

Value Invest New York 2018 – Overview Video
(Sign-up to be kept informed about VINY 2019)

Jonathan Ruffer: Investment Review – January 2019

Jonathan Ruffer was last a speaker at the London Value Investor Conference in 2015, we are delighted that he will speak again on 14th May 2019. In his January 2019 Investment Review he writes: “Our central belief is that there lies ahead of us market conditions which are capable of causing permanent damage to people’s wealth, and our absolute preoccupation is to prepare for this, while continuing to accept that the timing is uncertain.”

The Failure of Globalization and the Return of Inflation
Globalists Beware: Inflation is a Tax on the Poor

In this Spectator USA article Mark Asquith of Somerset Capital Management summarises the key milestones of globalisation that have taken place since the 1970s. He suggests that in future higher borrowing, labour, environmental and other costs to producers; as well as shifts in industrial capacity could feed through to the return of inflation. “Higher borrowing costs mean less capacity and higher costs in general. Even if this capacity moves to southeast Asia or back westwards, few companies will manage to take on higher environmental and labor costs without needing to raise prices.”

Ryanair’s O’Leary: ‘He Really Does Seem to Enjoy a Crisis’

Michael O’Leary has just celebrated 25 years as CEO of Ryanair. This article in the Irish Times covers some of the issues the company has faced during the airline’s remarkable growth. Ryanair was based upon the model of Southwest Airlines, whose founder Herb Kelleher died on 3rd January 2019 aged 87. Kelleher played a role in convincing Michael O’Leary to make Ryanair a low-fare carrier. Paying tribute to Kelleher, Michael O’Leary said“Herb was the Grand Master Yoda of the low-fare airlines. He was the leader, the visionary and the teacher: without Herb there would be no Ryanair, and no low fares airlines anywhere.”

How Kirkland Signature Powers Costco’s Success

Last year Costco’s own brand Kirkland Signature label topped $40bn in sales, more than Campbell Soup, Kellogg’s and Hershey combined. “Kirkland, which Costco sells for at least 20% cheaper than national brands at its warehouses, helps the club keep prices low even on the products it doesn’t make. ‘Kirkland acts as a universal club marshal,’ said Timothy Campbell, analyst at Kantar Retail. ‘It keeps suppliers honest.’ “

Forbes Interview with C. T. Fitzpatrick of Vulcan Value Partners

This Forbes interview with C.T. Fitzpatrick covers a lot of ground, including detailing Vulcan’s sometimes decades-long pursuit of great companies “We are value investors but we don’t look for cheap stocks. We look for businesses with inherently stable values that can compound their values steadily over time. We get to know them very well before we buy them because they are overvalued, by our math, most of the time. On the rare occasions when they do become discounted, we can move very rapidly to take advantage of those discounts because we’ve been following the companies for many years, sometimes decades.”

What You Can Learn From One of Warren Buffett’s Smartest Investors

The godfather of the index fund, economist Paul Samuelson, believed that beating the market is hard—but not impossible. The greatest active investor of our time, Warren Buffett, advocates investing passively. Their paths crossed, decades ago, in ways that should remind us how rare the lightning bolt of a great investing idea is.

Barron’s: Why There’s Still Plenty of Value in Apple’s Core

After recent guidance on profits from Apple this Barron’s looks at the future for Apple shareholders: “In the end, investors are better off holding on anyway. While Apple’s stock performance is currently tied to iPhone sales, its future is tied to a lucrative installed base that’s estimated to be 1.3 billion devices. CEO Tim Cook needs to find a better way to monetize that base with more services revenue. The latest slip-up is sure to accelerate those efforts.”

Hedge Fund Returns Should Be All Over the Place

This Bloomberg article looks at the wide dispersion of the returns of some well-known hedge funds in 2018 (Odey, Dalio, Howard, Loeb and Einhorn) around the -6.7% industry average, arguing the results are “evidence of a healthy contrariness in strategies. If the gains and losses were concentrated around the average, the numbers would suggest everyone was backing the same crowded trades. While hedge-fund fees have declined in recent years, they remain sufficiently high compared with most other asset classes to be unjustifiable if the funds are investing like sheep rather than predators.”

Triple-B Movie: ‘Big Short’ Star Fears for Debt-Laden Companies

Steve Eisman is warning that banks have cut their trading inventories of triple B bonds by about 80 per cent, to $20bn, as they try to comply with tougher rules on capital and liquidity. This FT article summarises his comments by saying that “With the traditional market-makers on the sidelines in the next recession…the only way to sell such bonds will be at painfully deep discounts — forcing big marked-to-market losses on funds holding them.”

Welcome to the 37th edition of Value Investor Digest

Featured in this edition are an article in the Economist titled “the Agony of the Value Investor”, a new video interview with Charlie Munger from October 2018, the story of Bill Benter, the gambler who “broke the horse racing code”; a Wall Street Transcript article with Kopernik’s David Iben, an FT article on Index Funds and ETFs not being responsible for market volatility, a rare 1997 interview with Amazon founder Jeff Bezos, two video interviews with Value Invest New York speakers Howard Marks and Joel Greenblatt; Ian Lance of RWC Partners gives his thoughts and reflections on 30 years in fund management, Miles Johnson of the FT on the sin of selling good stocks too soon; plus a Barron’s article on where to look for bargains in China.

Conference Calendar:
Value Investor Roundtable – November 13th 2018
Value Invest New York – December 4th 2018 (Greenblatt, Marks, Hagstrom & others)
London Value Investor Conference – May 14th 2019 (save the date link)

The Economist: The Agony of the Value Investor

This article in the Economist comments on the performance of some value strategies over the past ten years and features comments from David Einhorn, Cliff Asness, plus also this from James Montier of GMO: “This agonising is not for most people. They don’t want to be wrong for as long as it takes. Value investors hope to be rewarded for being so out of step with everyone else for so much of the time. But a select few can endure—and even enjoy—it.”

Charlie Munger Interview from October 2018

Charlie Munger comments on the benefits of owning a great company purchased at ‘the right price’: “A great company will just earn more and more and more whilst you are just sitting doing nothing. A mediocre company won’t do that. So you are harnessing long range forces that will help you and it’s just very important. These mediocre companies, by and large, are going to cause a lot of agony and very modest profits; then if you do fine it goes up a little and you have to sell and find another one – it’s a lot of work.” (This quote from 16m 35s)

The Gambler Who Cracked the Horse-Racing Code

This Bloomberg Businessweek article tells the story of Bill Benter, who wrote an algorithm that “couldn’t lose at the track”. The story reports that he made almost a billion dollars in his career, which started when he was part of a professional card-counting team before he and other profesisonal gamblers profited at the Hong Kong race track in part by applying the Kelly Formula to construct their ‘portfolio’ of bets to maximise profits and minimise downside.

David Iben in TWST Interview: “We View This as One of the Best Times to be an Active Manager in the Last Century”

David Iben will be speaking at Value invest New York on December 4th. In this TWST interview he comments on some current investments and also on the opportunities available to active managers: “I reiterate that we view this as one of the best times to be an active manager in the last century. It’s right in line with 1972 and 1999, times where people were paying way too much for many stocks and, at the same time, selling things at way too low a price if it’s unpopular.”

Do Not Blame Index Funds and ETFs for Market Volatility

This FT article by Jonathan Davis says that not only does data reveal no relationship between bear markets and the growth of indexing; but in addition he points to US research by Vanguard which indicates that for every $1 in ETF trading volume on exchanges, less than 10 cents resulted in primary market transactions in the underlying securities.

1997 Interview with Amazon Founder Jeff Bezos

In 1997 when this interview was recorded Amazon was just three years old. Jeff Bezos describes why he started the company and demonstrates that he had a clear vision for how he was going to grow the business: “Three years ago I was in New York City working for a quantitative hedge fund when I came across the startling statistic that web usage was growing at 2300% a year. So I decided I would try and find a business plan that made sense in the context of that growth. I picked books as the first best product to sell online…there are more items in the book category than there are items in any other category by far…so when you have that many items you can build a store online that couldn’t exist any other way.”

Why Gotham’s Greenblatt Likes ‘Gushing’ Cash-Flow Stocks

We are delighted that Joel Greenblatt has joined the speaker line-up for Value Invest New York on December 4th. In this video interview he speaks about his approach and also makes some comments about value “versus” growth: “While I say we are not traditional value investors and we are usually categorized by let’s say Russell or Morningstar as ‘blend’, but as Warren Buffett would say ‘growth and value are tied at the hip’ as that’s part of valuation. So they put us in blend and not traditional ‘value’ but when ‘growth’ is really going and these are the companies priced on hope and what’s going to happen in 2024 and 2025, when those are doing really well they’re probably not going to love what we are doing as much.”

Howard Marks – Conversations with Portfolio Managers: Cycles

Oaktree Capital have released a series of videos interviews between Howard Marks and other Oaktree Portfolio Managers. Howard commented on the nature of credit cycles: “I think one of the most important things for people to realise is that these phenomena, like the credit market, are not mechanical and they don’t work like finely honed machines – they are really driven by psychology and it’s important to realise that psychology tends to go to excess. So when the delusions are prevalent people swallow them hook, line and sinker and then when some unceratinty arises they reject them wholesale and the credit window certainly slams shut from time to time and you can’t borrow.”

Thoughts and Reflections on Thirty Years in Fund Management

Ian Lance of RWC Partners has written this article with some observations from thirty years in the industry. “The last three decades have been mostly enjoyable, sometimes stressful, often frustrating but always interesting. There are, however, some things that I would not repeat if I had my time over again and other things that I would have begun sooner. So what follows are a few observations from thirty years in the industry that will hopefully also serve as advice to anyone entering the industry today.”

Alongside Nick Purves, Ian Lance will be participating in the Value Investor Roundtable on 13th November, which is a conference for those who work in Manager Research and Selection. You can reply to this email if you are interested in attending.

The Unspoken Sin of Investing is Selling Good Stocks Too Soon

In this FT article Miles Johnson analyses the “when to sell” problem which faces investors. He quotes both John Armitage and Charlie Munger in the article, making it an interesting read for many investors. From John Armitage: “I’ve bought stocks that have gone down, and they sear on your soul, but selling winners, that’s the big mistake . . . I have been a very bad seller of shares. I’ve sold lots of winners.”; from Charlie Munger:“Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years…and if the valuation gets a little silly, I just ignore it. So, I own assets that I would never buy at their current prices but I am quite comfortable holding them.”

Barron’s: After a Slide in Chinese Stocks, Where to Look for Bargains

This Barron’s article provides a summary of where some fund managers are finding value in China at present. Value Invest New York speaker Rajiv Jain is featured in the article, he commented “We are not piling into China in a big way, but valuations are very attractive, and the stimulus should bring a floor. You can’t underestimate policy makers’ willingness and ability to calm people.”

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.

Conference Calendar:
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)

Barron’s article on Joel Greenblatt’s Gotham Index Plus Fund Holdings

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.”

Value Investor Insight: An Alternative Alternative

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.

John Authers: In a Crisis, Sometimes You Don’t Tell the Whole Story

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.”

Interview with Nike Co-Founder Phil Knight

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…”

Value Investors Must Grit Teeth and Admit Mistakes on US Stocks

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.”

Charlie Munger and Li Lu Interview

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: GE has been a ‘Tale of Woe’ from a Capital Allocation Standpoint

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: A Template For Understanding Big Debt Crises

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)

Business Insider Australia: Podcast with John Hempton of Bronte Capital

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)

Welcome to the 35th edition of Value Investor Digest

In addition to the usual collection of articles of interest to Value Investors we are delighted to announce the launch of a new conference: Value Invest New York – December 4 2018.

The articles featured in this edition include a link to an FT article titled “Can Factor Investing Kill Off the Hedge Fund”, a Boyar Value Group report on five “orphaned” stock ideas, the latest memo from Howard Marks of Oaktree Capital, our archive of the Berkshire Hathaway Annual Meeting videos from 1994 to 2018, a WSJ article on the “existential crisis” facing Value Investors, some analysis of the performance of 100 stocks presented at the London Value Investor Conference since 2012, an FT article from John Authers on how FANG stocks are having an outsized effect on index performance, an article which details how Amazon steers customers to their own brand products, an article by Ronald Chan on the richest man in Hong Kong Li Ka-shing’s investment record, an article by conference speaker David Iben titled “Master and Servant” and finally another FT article which reveals a painful short-squeeze for some hedge funds who made bets against UK retailers.

Can Factor Investing Kill Off the Hedge Fund?

BlackRock estimates that there are $1.9tn of assets in dedicated factor strategies, and predicts this will swell to $3.4tn by 2022. This FT article is a summary of a prominent current trend in investing and focusses on Cliff Asness of AQR, whose strategies include some funds focussing on factor investing. “By in theory replicating what a lot of professional money managers do at a fraction of the cost, factor investing puts more pressure on fees. This is why Mr Asness thinks AQR can play the same disruptive role for hedge funds that Vanguard did for mutual funds. ‘It is part of our business to be the Vanguard of hedge funds. It’s not all of our business, by any means. But to take some of the basics and say you should get this for lower fees,’ he says ‘What [hedge funds] are doing as a group is good, but simple. And they’re kicking up a whole lot of dust around it.’”

Boyar Value Group: Five “Orphaned” Stock Picks

The Boyar Value Group recently gave an online presentation detailing their new “orphaned” equity strategy and discussed the investment cases for five “orphaned” stocks. Explaining what constitutes an oprhaned stock, Jonathan Boyar said “An ‘orphaned’ stock is a stock that analysts and investors have for the most part disregarded. A stock can become “orphaned” via a variety of ways. A stock may not be included in one of the major S&P indices (S&P 500, S&P 600, etc.) and therefore cannot be bought by index funds as well as “closet” indexers, which tend to focus on stocks included in the major indices to ensure that their performance doesn’t deviate greatly from their respective benchmark. Some of the reasons why companies may be ineligible for index inclusion include companies that are listed in the U.S., but maintain headquarters outside of the U.S., companies with super-voting share class structures and tracking stocks.These so-called “index orphans” are not limited to small companies.”

Howard Marks Memo: Investing Without People

Since its first edition in 2011 Value Investor Digest has regularly featured Memos from Howard Marks and we are delighted that Howard will be speaking at the inaugural Value Invest New York on December 4. Famously, Warren Buffett remarked of these memos “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.” In this latest memo Howard looks at the ways in which securities markets seem to be moving toward reducing the role of people through passive, quantitative and algorithmic trading, articificial intelligence and machine learning; and the effects of these current big trends in investing on active managers: “quantitative investing’s emphasis on profiting from short-term dislocations leaves a lot more to be mined. So much of investing these days considers only the short run that I think there’s great scope for superior active investors to make value-additive decisions concerning the long run.”

Berkshire Hathaway Annual Shareholders Meeting Videos 1994-2018

Many Value Investor Digest readers will know that since 2016 the Berkshire Hathaway Annual Shareholders Meeting has been live-streamed around the world from Omaha. More recently, the previously un-released archives of video footage from the meetings back to 1994 has also been made available. We have compiled a single page with links to full videos, highlights videos and other clips from the meetings on both the CNBC and Youtube websites. For the Youtube videos prior to 2008 our links also skip the introductory and business session remarks in the morning so that the video starts at the beginning of the Q&A. Alongside these links are a photo and one of our favourite quotes from either Buffett or Munger during that years meeting. It is interesting to us as organisers of the London Value Investor Conference to see in the older videos how many conference delegates were asking questions at the BRK meeting as far back as the mid-1990s.

Value Investors Face Existential Crisis After Long Market Rally

This WSJ article outlines problems facing some Value Managers from the temptation to “style drift” and/or engage in “portfolio window dressing” for their investors: “Hunting for cheap stocks has been out of favor for so long that some self-proclaimed “value” investors are embracing a broader mandate, a potentially costly move in the later stages of an economic cycle…Some critics say the measures used to identify value have aged poorly in a market dominated by passive investing strategies and asset-light technology companies. Those trends have pushed more investors into the shares of fast-growing companies such as Apple Inc. and Netflix Inc. that have powered the market higher in recent years. Other investors have turned to studying momentum trading, crowded positions, fund flows and event-driven trading, strategies not typically associated with value investing.” Some would argue that the investment landscape has changed permanently and that managers should change with it, although those reluctant to move on from their approach might be reminded of when Warren Buffett was asked whether the buy and hold style of investing was dead and he replied “it depends what you buy and hold”.

Analysing the Performance of the Stocks Presented at the London Value Investor Conference Since 2012

To celebrate the launch of the inaugural Value Invest New York conference on December 4 2018, we have done some analysis of the 100 stocks presented by fund managers at the London Value Investor Conference since it started in 2012 and have presented the results in a video on the conference website. In addition to identifying the top long-term compounders and strong performance of most of the stocks presented, it was also interesting to note that when seperating the stocks presented in to annual “conference portfolios” the outperformace of these portfolios versus the MSCI World was remarkable; with CAGR of the individual portfolios of between 14%-28% in each year other than the 2015 portfolio, which was the only year in which the conference portfolio underperformed the MSCI World. We look forward to many more investment ideas being presented in future at Value Invest New York.

Fangs for the Memories

This Financial Times article from John Authers reveals that if the FANG stocks were removed from the S&P 500 Index this year, the index would be down in 2018. The article goes on to talk about the momentum effect of the FANG stocks whilst “unloved cheap stocks grow ever cheaper”… “For the purposes of this exercise, I took the Fangs to be Facebook, Amazon, Apple, Microsoft, Netflix, Nvidia and Google. According to a few calculations I made on the back of an envelope (or more precisely, with a Bloomberg terminal and a spreadsheet), the market cap of these seven stocks has risen by $772bn so far this year. Meanwhile the market cap of the S&P 500 as a whole has risen by $673bn. Excluding just those seven Fangs takes the S&P from a 2 per cent gain for the year to a slight loss.”

How Amazon Steers Shoppers to Its Own Products

It is remarkable that AmazonBasics now has a 30% share of the online battery market and outsold both Duracell and Energizer on its own site. The company also now has around 100 private label brands for sale using anodyne names in a similar manner to supermarkets own brand products. If, as a quoted analyst in the article suggests “nearly half of all online shopping in the United States will be conducted on Amazon’s platform in the next couple of years” the opportunity for Amazon to increase sales of own brand products using the strategies they have adopted detailed in this article could be substantial.

Superman, the Oracle, and the Value of a Long View

This Bloomberg article by Value Invest New York speaker Ronald Chan of Chartwell Capital, who is based in Hong Kong, provides a profile of Li Ka-shing who recently hosted his final shareholder meeting as founder and chairman of the Cheung Kong group. Since IPO in 1972, Li Ka-shing has “generated a return of 5,000 times, including reinvested dividends. That’s equivalent to an annualized compound rate of 20.3 percent over 46 years.”

David Iben, Kopernik Global Investors Commentary: Master and Servant

This is the latest commentary written in June 2018 from Dave Iben (who will be speaking at Value Invest New York on December 4). The commentary covers a lot of ground on a range of topics from the rise of robo-advisors, ETFs and passive management; through economic theory and on to ESG investing under a unifying theme of the “fallacy of servitude to misguided ivory tower theory, behavioral heuristics, ill-conceived formulas, fiat money, and other ‘false Gods’”. Regarding the increasing role of computers in financial markets Dave writes: “Obviously, computers are far faster, much better at gathering data, and calculation is instantaneous. But, while robots and algorithms are vastly superior to humans in many ways, they still lack judgment. They can’t think nor exhibit anything akin to the ‘wisdom of Solomon’. And, in investing, a field that is famously a blend of science and art, isn’t judgment what really matters? In a weird paradox, computers have allowed mankind to formulate and embrace more theories, which in turn, have caused increased use of computers, which unfortunately, due to the inherent fallacies embedded within, have had spurious consequences. Perhaps the prime example of the problem is that computers’ need for data have led mankind to quantify and digitize items that can’t be quantified and digitized.”

Stockpickers Prosper as Value Bets Pay Off with UK Retailers

A recent Bank of America Merrill Lynch fund manager survey showed the UK remains the least popular destination for global investors, with many large instiutions “uncertain about Brexit and a limp domestic economy”. Given this backdrop the recent performance of some UK retailers is surprising: J Sainsbury, Tesco, Next and UK online grocer Ocado are up 30%, 24%, 40% and 162% year to date and this FT article article from Miles Johnson suggests that “there may be further gains to come as the market slowly comes around to the idea that certain unglamorous but still profitable high street and consumer-facing businesses in the UK are not simply going to disappear overnight as a result of political uncertainty or the threat of Amazon”. This has also led to a painful short squeeze for some Hedge Funds: the John Authers detailed that according to Markit data 28% of Ocado stock was out on loan to hedge funds in the middle of 2017.

Welcome to the 34th edition of Value Investor Digest

The Berkshire Hathaway Annual Shareholders Meeting will take place tomorrow (click here to set a calendar reminder) and so we have several articles to bring you related to that event, including a link to the live stream which can be accessed below. In addition, this edition has six other featured items including an article from Invesco Perpetual’s Stephen Anness titled The Impact of Electric Vehicles on Oil Demand, a Barron’s cover article with nine investment ideas from veteran fund managers, a Boyar Value Group article on “orphaned” stocks and a Boyar podcast interview with Home Depot’s Frank Blake; a WSJ article on “cheap” stocks in Russia, a CNBC video with Buffett in which he comments on the threat to the car insurers from driverless cars; plus several articles which pay tribute to Third Avenue’s legendary Value Investor Marty Whitman, who died last month aged 93.

Berkshire Hathaway Annual Shareholders Meeting – Live Stream

The annual meeting will be streamed live on Yahoo Finance on Saturday from 10am ET (3pm BST). For anyone unable to travel to Omaha for the meeting the streaming of the event has been a welcome development. Over 1 million live viewers are expected to tune in from around the world to listen to Buffett and Munger’s wit, wisdom and insights. They normally take questions from journalists, analysts and shareholders in the audience for around five hours. If you can’t watch live then you can also watch on demand at the same link for 30 days after the event.
(Click here to set a calendar reminder)

Invesco Perpetual: The Impact of Electric Vehicles on Oil Demand

Stephen Anness will be giving a presentation at the London Value Investor Conference later this month titled The Death of Oil Has Been Greatly Exaggerated. In this article, Stephen looks at one specific area of oil consumption where he believes many investors “under-appreciate the dynamics of global oil demand…out of the 95mb/d of global demand for oil, only 19mb/d, or c.20%, is actually for passenger cars…EVs are hugely topical and it is easy (and lazy) to directly extrapolate their impact on the global demand for oil.”

Barron’s: The Past Decade Has Not Been Kind to Value Investing But Veteran Value Managers are Still Finding Bargains

This excellent Barron’s cover article analyses the performance of Value over the past ten years and then identifies nine stocks recently purchased by the following veteran Value Managers, along with a summary of their rationale for buying each stock: Charles De Vaulx, Amit Wadhwaney, David Winters, Andrew Wellington, Ross Glotzbach, Sarah Kettere, Bill Nygren, John Rogers and Abhay Deshpande.

Investing In Orphaned Stocks – plus a Boyar Podcast with Home Depot’s ex-CEO Frank Blake

This Boyar Value Group interview in Seeking Alpha explores the investment opportunities in “orphaned” stocks. Explaining what constitutes an oprhaned stock, Jon Boyar said “An ‘orphaned’ stock is a stock that analysts and investors have for the most part disregarded. A stock can become “orphaned” via a variety of ways. A stock may not be included in one of the major S&P indices (S&P 500, S&P 600, etc.) and therefore cannot be bought by index funds as well as “closet” indexers, which tend to focus on stocks included in the major indices to ensure that their performance doesn’t deviate greatly from their respective benchmark. Some of the reasons why companies may be ineligible for index inclusion include companies that are listed in the U.S., but maintain headquarters outside of the U.S., companies with super-voting share class structures and tracking stocks.These so-called “index orphans” are not limited to small companies.”

In addition, here is a Podcast with Jonathan Boyar who will speak at the London Value Investor Conference this month. Jonathan interviews the ex-CEO of Home Depot, Frank Blake who comments on what investors should look for in a turnaround situation, the publicly-traded retailers that he admires and also where he believes we are in the U.S. housing cycle.

Russia’s Cheap Stocks Show What ‘Value’ Misses

Trading at six times forward earnings, this WSJ article by James Mackintosh covers the main issues investors should consider when assessing whether there is a value opportunity investing in the Russian market. The author mentions that GMO is among those adding to their holdings of Russian stocks, and includes a quote from GMO’s head of EM equities: “We’ve always said you make more money when things go from truly awful to merely bad than when they go from good to great”.

Buffett: Driverless Cars Will Dramatically Reduce Insurance Premiums

In a prior edition of Value Investor Digest we featured Buffett’s 1951 article The Security I Like Best on GEICO, an auto insurance company which Berkshire now owns outright (before Buffett started buying GEICO, Ben Graham was on the Board and had owned stock for many years). Although Buffett has said he thinks driverless cars are a long way off, in this Yahoo Finance video he comments that “Driverless cars will reduce — perhaps dramatically — the need for auto insurance if they’re safer…If driverless cars are successful and people don’t hack into ’em, that will reduce auto insurance premiums — and perhaps drastically reduce them.”

Remembering Third Avenue’s Marty Whitman

Several articles below remember famed Value Investor Marty Whitman, who died aged 93 on 16th April 2018.
Morningstar: Remembering Famed Value Investor Marty Whitman
Barron’s: Third Avenue’s Marty Whitman Dies at 93
Wall Street Journal: Martin Whitman Invested in Troubled Companies Others Shunned
Value Walk: Martin Whitman: A Value Pioneer Passes Away
Institutional Investor: Martin Whitman, Founder of Third Avenue, Dies at 93