Value Investor Conference London

November 2015

Welcome to the 23rd Edition of Value Investor Digest

In this edition, we feature a Business Insider summary of a recent Baupost letter, a summary of Guy Spier’s approach to using checklists, a video of Tom Russo’s talk at Google on “Global Value Investing”, a ValueWalk article on Pzena Asset Management, an FT article on Steve Jobs which analyses the start-up conditions at Apple; plus two more videos at the end of this issue – one from Bill Miller on why he thinks now is the perfect time to buy US stocks, the other from London Value Investor Conference speaker Jean-Marie Eveillard who speaks about market cycles and the risks he sees ahead from “valuation problems” brought about by quantitative easing.

Baupost Letter
This Business Insider summary of a recent letter in which Baupost partner Brian Spector, who joined in 1998 and will retire at the end of the year, speaks about the ethos and processes of the company. The letter addresses his views on the advantages of Baupost maintaining high cash positions as well as commenting on the difficulties of having high conviction in ‘tide markets’:“Investing in tide markets takes chutzpah. To do so effectively, you need to fly in the face of public opinion, you have to fight normal human emotions, and you have to be prepared to double down on your bets when your conviction is most in question. As Benjamin Graham once said, ‘The investor’s chief problem and even his worst enemy is likely to be himself.’ But most importantly, you have to be at a place that empowers you to succeed—a place that is uniquely situated to take advantage of these market conditions. A place like Baupost.”

Summary of Checklists
An investor who has written extensively about the need for checklists is Guy Spier. If you have not yet got around to reading his excellent book – The Education of Value Investor then this Hurricane Capital article provides a brief summary of Guy’s approach to using checklists and also includes some of Guy’s checklist items. In addition, it includes some contributions from others – including Charlie Munger: “I’m a great believer in solving hard problems by using checklists, you need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.”

Talks at Google: Tom Russo – “Global Value Investing”
Tom Russo gave this hour long talk at Google last month which he referred to as “a good excuse to get away from the markets”. Tom speaks about the advantages of family controlled companies, the problems with management having stock-option driven compensation, the long-term orientation required for successful investment and the pricing power and predictability of demand created by brand loyalty. Tom also goes in to detail on what he sees as some of the superior qualities of the corporate culture created by management at two of his holdings – Nestle and Unilever. Alongside the theme of the need for a longer-term outlook, he also speaks about how growth often hides value, using Buffett’s investment in GEICO as an example he mentions that the owners of a business need to have the “capacity to let the income statement bear the burden” of the short term investment needed to grow the business.

Pzena: Successful Value Investing Provides More Than Passive Exposure to a Value “Factor”
This Valuewalk article summarises a recent letter by Pzena Asset Management which discusses the Value Cycle and how many Value Managers have underperformed their growth and momentum counterparts (leaving aside any arguments about the blurred lines between the style distinctions of value and growth). The article goes on summarise the letter from Pzena, including their thoughts on what lies ahead. Pzena mention that by having “a disciplined approach, it is hard for us to escape correlation with naïve value benchmarks, but our goal is to add value through understanding the specifics of every individual company we buy…Value investing is not a simplistic factor, but rather a philosophy that requires research to outperform over the long-term.”

Imitators take note — Steve Jobs was more Than a Showman
This FT (subscription) article highlights the different startup conditions present when Apple was being formed, as compared with today’s “Unicorn” tech businesses valued at $1bn+. In the early days of Apple, Steve Jobs – as Apple’s principal founder and subsequent re-inventor – was subject to a lot of pressures which the author believes forged part of the culture of Apple. This is a process that most companies in the sector today may not have been through: “The need to stretch every nickel informed the way Apple was run during the early days. It is on that spell, rather than the enormous public profile commanded by Steve Jobs in his later years, that would-be emulators should dwell.”

Bill Miller: Now is a Perfect Time to Buy US Stocks
In this CNBC video from 14th October Bill Miller gives reasons for why in his view now is the perfect environment to buy US stocks, listing several factors as to why he believes this is the case: “We want the economy growing, but not too fast. We want inflation to be low. We want interest rates to be low and not really competitive with stock prices. We’d like earnings to be growing, but again, not too fast. We’d like return on equity to be high, profit margins to be high, GDP at an all-time high, household net-worth at an all-time high, but we also want people to take their money out of stocks because they hate them so they are cheap. That is exactly the environment we are in today.”

Jean-Marie Eveillard Video on Market Cycles
Jean-Marie mentions that throughout his career there have almost always been opportunities to invest in equities but that there are some “valuation problems” arising from the risks he sees ahead, partly because of the unintended consequences of quantitative easing: “To my mind quantitative easing is a monstrosity – money is not supposed to be free for heaven’s sake. Those steps that have been taken by the authorities are completely unprecedented and one cannot make historical comparisons…I suspect there is bound to be some major negative unintended consequences.”

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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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