Value Investor Conference London

October 2017

Welcome to the 31st edition of Value Investor Digest

In this edition we feature the latest memo from Howard Marks “There They Go Again…Again”, an article from Pimco on the demographic issues surrounding the global savings glut (and whether or not this is likely to change soon), an Economist article which contains an unusually quantitative statement from Warren Buffett on interest rates and asset prices, an article in Bloomberg which details that Seth Klarman’s Baupost is to return capital to investors due to a lack of attractive investment opportunities; plus an FT article which gives a profile of “The Networker” Sir Martin Sorrell, the CEO of advertising empire WPP.

Howard Marks Memo: There They Go Again…Again
Howards Marks of Oaktree Capital Management wrote cautionary memos in 2000 (bubble.com) and 2007 (The Race to the Bottom). His latest memo “There They Go Again…Again” looks at how certain investor behaviours at present are starting to “echo” past trends leading up to crashes. The trends within certain asset classes which worry Howard at present are explored in great detail in this long memo. Whilst Howard admits he is often too early with these cautionary memos, given the timing of his prior red-flag memos, Value Investors would do well to take note of this one. As it is a long memo, Howard also did a short video which provides a summary of why he wrote the memo and the four key themes within it – click here to view the video summary

70 Is the New 65: Demographics Still Support ‘Lower Rates for Longer’
This Pimco article challenges the traditional thinking about the so called “demographic cliff” effect on demand for saving, which states that globally there will soon be more dissaving elderly people relative to the number high-saving adult workers, which will erode the demand for saving and reverse the global savings glut; this will have the effects of pushing the global neutral interest rate higher. Countering this thesis, the article provides data which suggests that perhaps this will not play out as imagined by many; among the reasons given are that even as the “dependency ratio” (i.e. retirees to traditionally working-age individuals) rises, aggregate savings will remain high as there will be a further period of “peak savers” – high earning adults who work for longer than expected – thus prolonging the savings glut. “Witness the dramatic rise in labor force participation within the top income quintile [in the US]. Over 60% of top-quintile [earning] individuals in the 65–74 age group are [now] employed or seeking work, a 19-percentage-point increase in participation over the 15 years through 2013. Moreover, participation among top-income-quintile seniors 75 and older has more than doubled over the same period.”

Asset prices are high across the board. Is it time to worry?
(Contains an interesting quote from Buffett)
This article in the Economist provides some commentary on current asset prices and looks at what might happen when the period of ultra-loose monetary policy comes to an end. Most interestingly, there is a quote from Warren Buffett which is perhaps the most quantitative statement he has made in recent years on interest rates and current asset prices: “Warren Buffett, the most famous disciple of Ben Graham, said this week that stocks would look cheap in three years’ time if interest rates were one percentage-point higher, but not if they were three percentage points higher.”

Klarman’s Baupost Plans to Return Some Investor Money
Seth Klarman’s $30 billion Baupost Group plans to return some capital to investors by year end because the hedge fund doesn’t see enough opportunities in the market. Baupost also returned capital to investors in 2010 and 2013 for similar reasons.

The Networker: Martin Sorrell of WPP
Sir Martin Sorrell is one of the world’s best connected executives . This FT article (from 2015) gives an excellent overview of his career, management style and his legendary responsiveness to emails: “When chief executives meet in Sir Martin Sorrell’s absence, they sometimes deliberately email him simultaneously to test how quickly he replies and to whom. The chief executive of WPP, the world’s largest advertising agency by revenue, is rarely offline, whether at a private dinner, a conference or a board meeting, his thumbs flashing terse replies back to contacts, colleagues, customers and the media. His rapid reaction time is legendary, triggering the occasional rumour (which Sorrell denies) that he has a team of assistants responding under his name.”

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