Value Investor Conference London

May 2011

May 2011     Issue 3

A framework for investment success, Seth Klarman

http://pragcap.com/a-framework-for-investment-success
If you read only one article from this issue of the Digest, read this one.    Seth Klarman is an outstanding investor.  We featured his preface to Security Analysis in the last issue.  Here, we are providing you a link to an extract from his Annual Investor Letter, in which he sets out a framework for long-term investment success, essentially by not following the herd and maintaining a focus on price and value.

The Berkshire Shareholders Meeting

http://www.metropoliscapital.co.uk/wp-content/uploads/2011/05/A-weekend-in-Omaha-2011.pdf
http://www.scribd.com/doc/54483729/2011-Berkshire-Annual-Meeting-Notes
J
onathan and I attended the annual shareholders meeting in Omaha.  This year was always going to be interesting, coming so soon after the abrupt departure of David Sokol, who had been widely tipped as the successor to the operational management role of Berkshire.   The event lived up to expectations with a set of high quality questions and the usual lively, witty and insightful responses from the Chairman and Vice Chairman.  I am providing a link here to my own summary of the event.  There is a more detailed transcript of each question in the second link.

Vitaliy Katsenelson’s on margin shrinkage

http://contrarianedge.com/2011/03/16/margin-shrinkage-%E2%80%93-it-can-happen-to-you/
I caught up with Vitaliy in Omaha.  This is a particularly high quality article from this journalist / author / investor.   Looking at the US market’s current PE, stocks do not seem to be that expensive.  Vitaliy’s point is that we have to be very wary about the long-term sustainability of the “E”.

Pat Dorsey on how to identify an economic moat.

http://www.morningstar.com/Cover/videoCenter.aspx?id=349487
http://www.morningstar.co.uk/uk/news/article.aspx?articleid=80694&categoryid=465
Warren Buffett first coined the phrase “an economic moat”, by which he meant the factors that enable some businesses to sustain and protect above average profits for a long period of time.   In this Video, Pat Dorsey, the author of ‘The little book that builds wealth’ sets out his 4 categories of an economic moat.  I have included a second link, which covers the same content in an article rather than a video.

The value of focus: “Unconventional Wisdom”

http://www.fbr.com/services/asset-management/~/media/FBR/Misc/FBRFunds/2010/
FBR%20FFund%20whtpr%209%2014%2010%20CV.ashx
http://www.lse.ac.uk/collections/paulWoolleyCentre/WorkingPapers/dp624PWC3.pdf
The first link takes you straight to a PDF download.  The article provides an overview of some empirical evidence (which is set out in the second link) that, contrary to general perception, concentrated portfolios can not only out perform but also reduce risk.  There is an excellent quote in here from Warren Buffett:

“Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions…Therefore, we adopted a strategy that required our being smart –and not too smart at that—only a very few times. Indeed, we’ll now settle for one good idea a year… The strategy we’ve adopted precludes our following standard diversification dogma. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.”

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