Value Investor Conference London

February 2017

Welcome to the 28th edition of Value Investor Digest

In this edition we feature the video and transcript of Charlie Munger speaking at the Daily Journal meeting, an article with some of Seth Klarman’s comments from his most recent Baupost letter to investors, a recent memo written by Howard Marks and an FT article by Miles Johnson on why he thinks that the “cookie-cutter approach” to Value Investing is a mistake.

Charlie Munger – Daily Journal Annual Meeting: Video and Transcript
After the formalities of the meeting Munger took almost two hours of questions from the audience (skip to 7 minutes 30 for Munger’s short speech – questions from the audience start 16 minutes 45 seconds in). Commenting on the Daily Journal’s business Munger said “It’s a long, slow kind of business, the first time we contact a customer until we start making money it may be five years…the money goes and the effort goes out and it starts coming in later on and I love that kind of stuff when I think we are taking territory – it doesn’t look good when we’re writing it off and not posting wonderful numbers but if it makes sense in the long term we just don’t give a damn how it looks in the short term and we know we’ve collected a bunch of shareholders that share our ideas – after all we’re running a cult and not a normal company and I think most of you feel you’re willing to wait. I’ve lived all my life with people who are in to deferred gratification, in fact most of them will never have any fun – they’ll just defer gratification all the way to the end. Deferred gratification really does work if you’re trying to create a great company or if you want to get wealthy yourself.”

Seth Klarman: ETFs and Illiquid Underlying Securities Will Result in Market Dislocations
In Baupost’s most recent letter to investors Seth Klarman weighed in on the issue of ETFs: “This trend away from active stock picking, if anything, accelerated in 2016…but ETFs are not without their own risks. According to the Financial Times, ‘Because the securities they hold are often not as liquid as the ETF itself, there are risks of mismatches and forced sales…12% of a typical stock turns over each year, compared with 880% turnover for ETFs’. Large concentrations of ownership in a small number of ETFs has left corporate ownership increasingly concentrated. And because of the high volume of ETFs, short-term trading has become even more dominant…the inflows into ETFs will make markets more brittle, susceptible to more severe crashes, and less efficient. One of the perverse effects of increased indexing and ETF activity is that it will tend to “lock in” today’s relative valuations between securities. When money flows into an index fund or index-related ETF, the manager generally buys into the securities in an index in proportion to their current market capitalization…Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings. Conversely with money pouring into market indicies, stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it. This should give long-term value investors a distinct advantage. The inherent irony of the efficient market theory is that the more people believe in it and correspondently shun active management, the more inefficient the market is likely to become.”

Howard Marks Memo: Expert Opinion
Howard Marks released a memo in January with the title Expert Opinion – in it he said that when he had lunch with Warren Buffett last year, Warren said to him “for a piece of information to be worth pursuing, it should be important, and it should be knowable.” Throughout the memo Howard comments on the validity of the opinions of experts in an unknowable future and whether it is worthwhile exerting any effort in thinking about these “unknowables”. The article details one description of economists given to Howard in the 1970s as “portfolio managers who never mark to market” because they find it easy to overlook the times when they’re wrong. Certainly 2016 was a year in which most expert opinion did not yield any foresight as to the results that followed, or as Howard put it: “Developments in economies, interest rates, currencies and markets aren’t the result of scientific processes. The involvement in them of people – with their emotions, foibles and biases – renders them highly unpredictable. As physicist Richard Feynman put it, ‘Imagine how much harder physics would be if electrons had feelings!’”

The Cookie-cutter Approach to Value Investing is a Mistake
Miles Johnson of the FT has attended the London Value Investor Conference in the past and he recently wrote this article which many conference attendees would identify with. “The value investor is not simply trying to find stocks that trade on low p/e multiples. The true value investor is trying to dig out securities that are, for one reason or another, mispriced and misunderstood by the wider market. Whether a share trades on a low or high earnings multiple is meaningless in and of itself. More important is how accurately the price that it can be bought for reflects its intrinsic value.”

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  • "We will only do with your money what we would do with our own." Warren Buffett
  • “The trick of successful investors is to sell when they want to, not when they have to.” Seth Klarman
  • "Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world." Charlie Munger
  • "The stock market is filled with individuals who know the price of everything, but the value of nothing." Phillip Fisher
  • "To thrive as a value investor you have to risk being called a dummy from time to time." Christopher H. Browne
  • “The game of life is the game of everlasting learning. At least it is if you want to win.” Charlie Munger
  • “Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.” Seth Klarman
  • "In the short run, the market is a voting machine, but in the long run it is a weighing machine." Ben Graham
  • “Rule #1: Never Lose Money; Rule #2: Never forget Rule #1.” Warren Buffett
  • “Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety.” Ben Graham
  • "All intelligent investing is value investing - acquiring more than you are paying for. You must value the business in order to value the stock." Charlie Munger
  • “Practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many.” Phillip Fisher
  • “In theory, there’s no difference between theory and practice. In practice, there is.” Yogi Berra
  • “We really can say no in 10 seconds or so to 90%+ of all the things that come along simply because we have these filters.” Warren Buffett
  • “Whenever you find yourself on the side of the majority, it’s time to reform.” Mark Twain
  • "It's not supposed to be easy. Anyone who finds it easy is stupid." Charlie Munger
  • “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.” John Maynard Keynes
  • “Believe me, there’s nothing better than buying from someone who has to sell regardless of price during a crash. Many of the best buys we’ve ever made occurred for that reason.” Howard Marks
  • “Acquire Riches by Industry and Frugality.” Benjamin Franklin
  • "Cash combined with courage in a time of crisis is priceless." Warren Buffett
  • "The Stock Market is designed to transfer money from the Active to the Patient." Warren Buffett
  • "Great investors are not unemotional, but are inversely emotional – they get worried when the market is up and feel good when everyone is worried." Bill Miller
  • “Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory.” John Kenneth Galbraith
  • "In the world of investing, being correct about something isn't at all synonymous with being proved correct right away." Howard Marks
  • "The single greatest edge an investor can have is a long-term orientation." Seth Klarman
  • "For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up." Warren Buffett
  • "Buy companies with strong histories of profitability and with a dominant business franchise." Warren Buffett
  • “There’s little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future.” Howard Marks
  • "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well." Warren Buffett
  • "Having great clients is the key to investment success." Seth Klarman
  • “The focus of most investors differs from that of value investors. Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.” Seth Klarman
  • "If you want to have a better performance than the crowd, you must do things differently from the crowd." John Templeton
  • “A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss.” Seth Klarman
  • “As Buffett has often observed, value investing is not a concept that can be learned and gradually applied over time. It is either absorbed and adopted at once, or it is never truly learned.” Seth Klarman
  • "To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit." John Templeton
  • “Wall Street research is strongly oriented toward buy rather than sell recommendations. There is more business to be done by issuing an optimistic research report than by writing a pessimistic one.” Seth Klarman
  • ‘If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.’ Warren Buffett
  • "It is easier to rationalize than it is to be rational." unknown
  • “Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others which they know nothing about.” Phillip Fisher
  • “Value investing is the discipline of buying shares at a significant discount from their current underlying values and holding them until more of their value is realised. The element of a bargain is the key to the process.” Seth Klarman
  • “Once you adopt a value-investment strategy, any other investment behaviour starts to seem like gambling.” Seth Klarman
  • “What the wise man does in the beginning, the fool does in the end.” Howard Marks
  • “You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have that cast of mind, you’re destined for failure even if you have a high I.Q.” Charlie Munger
  • “Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.” David Swensen
  • “Conservative investors sleep well.” Phillip Fisher
  • “Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group… then to hell with them.” Charlie Munger
  • "Price is what you pay. Value is what you get." Warren Buffett
  • “Sometimes a value investor will review in depth a great many potential investments without finding a single one that is sufficiently attractive. Such persistence is necessary, however, since value is often well hidden.” Seth Klarman
  • "In my whole life, I have known no wise people who didn't read all the time - none, zero... You'd be amazed at how much Warren reads - at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out." Charlie Munger
  • “Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.” Phillip Fisher
  • "Warren and I insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business." Charlie Munger
  • “there are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third; you have to be right.” Howard Marks
  • “When everyone believes something is risky, their unwillingness to buy usually reduces it’s price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing since all optimism has been driven out of it’s price.” Howard Marks
  • “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.” John Kenneth Galbraith
  • “Spend each day trying to be a little wiser than you were when you woke up.” Charlie Munger
  • “At one extreme of the pendulum – the darkest of times – it takes analytical ability, objectivity, resolve, even imagination, to think things will ever get better. The few people who possess those qualities can make unusual profits with low risk…” Howard Marks
  • "The harder you work, the more confidence you get. But you may be working hard on something that is false." Charlie Munger
  • “…at the other extreme, when everyone assumes and prices in the impossible – improvement forever – the stage is set for painful losses.” Howard Marks
  • "You shouldn’t own common stocks if a 50 per cent decrease in their value in a short period of time would cause you acute distress." Warren Buffett
  • “Many investors insist on affixing exact values to their investments, seeking precision in an imprecise world, but business value cannot be precisely determined.” Seth Klarman
  • “Greater risk does not guarantee greater return. To the contrary, risk erodes return by causing losses. By itself risk does not create incremental return, only price can accomplish that.” Seth Klarman
  • “Markets can remain irrational longer than you can remain solvent.” John Maynard Keynes
  • “...active management strategies demand uninstitutional behaviour from institutions, creating a paradox that few can unravel.” David Swensen
  • “Investing is the intersection of economics and psychology.” Seth Klarman
  • ‘Risk can be greatly reduced by concentrating on only a few holdings.’ Warren Buffett
  • “The number of things that can go wrong (in business) greatly exceeds the number that can go right.” Seth Klarman
  • "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." Warren Buffett
  • “How do value investors deal with the analytical necessity to predict the unpredictable? The only answer is conservatism.” Seth Klarman
  • “We look for a horse with one chance in two of winning and which pays you three to one.” Charlie Munger
  • "I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that. “I’m paying $32 billion today for the Coca Cola Company because. If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money." Warren Buffett
  • "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." Warren Buffett
  • “It is better to fail conventionally than to succeed unconventionally.” John Maynard Keynes
  • "You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing." Warren Buffett
  • "An investment in knowledge pays the best interest." Benjamin Franklin
  • “Know what you own, and know why you own it” Peter Lynch
  • “In both economic forecasting and investment management, it’s worth noting that there’s usually someone who gets it exactly right… but it’s rarely the same person twice.” Howard Marks
  • "The four most dangerous words in investing are: 'this time it's different.' " Sir John Templeton
  • "I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable." Warren Buffett
  • “Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.” Howard Marks
  • "In investing, what is comfortable is rarely profitable." Robert Arnott
  • “You can’t predict. You can prepare.” Howard Marks
  • “No wise pilot, no matter how great his talent and experience, fails to use his checklist.” Charlie Munger
  • "Wide diversification is only required when investors do not understand what they are doing." Warren Buffett
  • “A hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.” Howard Marks
  • “There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash — and I don’t want to go back.” Charlie Munger
  • “The wise investor can profit if he can think independently of the crowd and reach the rich answer when the majority of financial opinion is leaning the other way.” Phillip Fisher
  • “Analysis should be penetrating not prophetic.” Ben Graham
  • “…it never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles.” Charlie Munger
  • “This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.” Phillip Fisher
  • “Without numerical fluency, in the part of life most of us inhibit, you are like a one-legged man in an ass-kicking contest.” Charlie Munger
  • “All Investors should devote themselves to understanding the nature of the business and its intrinsic worth, rather than wasting their time trying to guess the unknowable future.” James Montier
  • “There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us.” Phillip Fisher
  • “The disciplined pursuit of bargains makes value investing very much a risk-averse approach.” Seth Klarman
  • “The successful investor is usually an individual who is inherently interested in business problems.” Phillip Fisher
  • "In a commodity business, it’s very hard to be smarter than your dumbest competitor." Warren Buffett
  • “Because investing is as much an art as a science, investors need a margin of safety.” Seth Klarman
  • "Chains of habits are too light to be felt until they are too heavy to be broken." Warren Buffett
  • “It's very much the Rolls-Royce of the investor conference market” Paul Scott, Stockopedia
  • “Very good event with excellent quality of speakers. Well done!” Andrew Hardy, Momentum GIM
  • “Please make this an annual event, thought it was brilliant, learnt lots and the topics were well diversified. Very interesting day. Thank you” Mary Allen, Rothschild
  • “Very well organised and it was a treat for investors like us to hear some great speakers” Roli Saxena, Drona Capital
  • “A fantastic conference with lots of superb speakers and interesting discussions- well done!” Paul McNulty, Setanta Asset Management
  • “Great conference overall. Hard to complain – good job” Travis Moss, JP Morgan

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