Value Investor Conference London

January 2018

Welcome to the 32nd edition of Value Investor Digest

In this edition we feature a Hosking Partners report on The Death of the Brand, a letter that Warren Buffett sent to the Management of See’s Candies in 1972; a 1975 video with John Templeton, Warren Buffett and Robert Wilson; videos from CNBC and the Oxford Union with David Einhorn of Greenlight Capital, plus an interview with Kyle Bass and Jim Chanos on the construction and banking sectors in China.

Hosking Partners: The Death of the Brand?
Django Davidson of Hosking Partners was a speaker at the London Value Investor Conference in May 2017. In this thought-piece he outlines a thesis that “Big Brand Inc” was a 20th Century phenomenon which was aided by powerful linear media, mainly television advertising from the 1950s onwards, on which Charlie Munger commented “if you were Proctor & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of network television because you were selling so damn many cans and bottles. Some little guy couldn’t. And there was no way of buying it in part.” Django suggests that the 21st century may play out differently for Big Brand Inc and that, for reasons he explains “Simply being ‘Big’ and therefore able to monopolise customer ‘mindshare’…is not the advantage it once was.”

Warren Buffett Letter to the Management of See’s Candies from 1972
Buffett sent this letter to the management of See’s Candies in 1972 regarding concerns and advice he had about third party distribution of the product after a recent visit to a Department Store. Both Buffett and Munger often give the impression of being very hands-off with the management of the companies Berkshire owns – in the past Munger has referred to the culture of managing investee companies at Berkshire as being “decentralization almost to the point of abdication” but this letter suggests Buffett was not shy about making an interjection where he thought it was necessary: “Brandeis has taken a number of our boxes and placed them on the counter with 25 other offerings of cheap bulk candy, and other run of the mill products. They have taken a standard card sign out of their own display department and put a few descriptive lines on it, which is not much different than the card next to it which might say ‘Jelly Beans, 99¢ a lb'”

1975 Interview with John Templeton, Warren Buffett and Robert Wilson (Video)
The three investors in this video from 1975 discuss their very different approaches to investing. Each speaker also talks about the merits of investing from their chosen geographical locations. It is well known that Buffett and Templeton, based in Omaha and the Bahamas respectively, preferred to be isolated from Wall Street “chatter” – with Buffett saying“Believe it or not, we get mail here, we get periodicals and we get all of the facts needed to make decisions but unlike Wall Street we don’t have 50 people coming up and whispering in our ear that we should be doing this or that this afternoon”. Contrasting this, Robert Wilson, who is based in New York, said that “In the first place I would be bored to death simply living in the Bahamas or Omaha and so the most important thing is to enjoy life. But secondly I never really did all that well in the market until I came to New York. Unlike these other distinguished gentlemen I am not an original thinker and I tend to rely on other people to feed me ideas and I’m very interested in what a lot of other people are thinking and more bright people are in New York in this business than anywhere else”. If you want to skip to the section which interests you most, John Templeton’s starts at 1:55, Buffett’s 10:10 and Robert Wilson’s 17:30.

David Einhorn Video in Defence of Value Investing
David Einhorn had written an investor letter in October which, at first glance, appeared to question the fundamentals of value investing – Bloomberg and many other media outlets took his comments literally and ran stories with titles such as “David Einhorn Is Wondering If Value Investing Even Works Anymore”. In this video Einhorn explains that there was an irony in the letter which was not picked up: “I’m actually saying the exact opposite of the way the letter is being interpreted. The letter is actually a defense of value investing. What we’re saying is, is that the value of a company has to do with the current and future profits discounted back at an appropriate rate and then wtih a tone of irony, we are saying hypothetically what would it take for that theory to be wrong and advancing the way that we think some investors are investing today; and we think ultimately this is a temporary phenomenon time to time when value investing gets out of focus, people question, hey, is this ever going to work again…I think over time, this is going to revert and value investing which historically has been a terrific strategy is due at some point for a significant recovery”.

David Einhorn: Full Oxford Union Q&A (Video)
In a second link to a David Einhorn video, this hour-long “fireside chat” and audience Q&A covers a lot of ground in areas including his early career, investing philosophy, details how he built Greenlight Capital and also the work of the Einhorn Foundation Charitable Trust.

Interview with Jim Chanos and Kyle Bass on China (Video)
In this interview Chanos and Bass discuss the Chinese construction and banking sectors:, Kyle Bass remarked on the latter that “In the worst possible kind of assets, it’s 4x worse than we were at our peak in 2006. So for those that believe somehow that China, with a declining working age population and a banking system that has been wrecklessly built…is going to grow at 6.5% from now on, or 8% nominally, I just think that they’re wrong and if you follow what’s happenging right now, sometime in the next 18 months you’re going to see a real banking crisis in China. Even though they are a Communist Totalitarian Government, economic gravity takes over.” With Chanos adding that “To amplify Kyle’s point…we think that their banking and shadow banking assets will grow somewhere around 20% this year. To put that in perspective: that will be new debt to the tune of $6-7 trillion in a $12trillion economy and I would dare say that if the US did a similar type of stimulus, say $10 trillion in new debt on a $17trillion economy, we’d be growing at 6% too. There’s no magic to this, literally almost half the economy is construction still, after all these years it’s still investment…it’s very similar to the Japanese model of the late 80s except this one is on steroids”

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