Value Investing Congress: Notes From Day One ~ market folly

Wednesday, May 5, 2010

Value Investing Congress: Notes From Day One

The Value Investing Congress has been posting updates of the first day of the event on Twitter (make sure to follow us as well) and we wanted to aggregate their brief updates into a comprehensive post here on Market Folly. Yesterday, the Congress heard investment presentations from the likes of Mohnish Pabrai (Pabrai Investment Fund), Bruce Berkowitz (Fairholme Fund), Paul Sonkin (Hummingbird Value), Richard Vogel (Alatus Capital), Lloyd Khaner (Khaner Capital), Amitabh Singhi (Surefin Investments), Carlo Cannell, Guy Spier (Aquamarine Capital), and Patrick Degorce (Theleme). We'll start first with Mohnish Pabrai's presentation:

Mohnish Pabrai of Pabrai Investment Funds: His presentation was entitled "Leveraging Checklists to Dramatically Improve Investing Results." He has developed this list based on mistakes other value investors have made and thus far he has 80 mistakes on the list. Pabrai notes that no companies will pass all of the 80 questions on his checklist but that his list has helped him determine position sizing. He also mentioned that had this checklist been in place before some of his prior investments, some of his decisions would have been different. In terms of investment ideas, Pabrai feels that the property & casualty market is very soft but that there is value to be found there. For those interested, we've also detailed Pabrai's portfolio in the past.

Bruce Berkowitz of Fairholme Fund: The main thing to take away from Berkowitz's talk is that he is now long Goldman Sachs (GS) in size. It's not exactly clear what type of investment he made, but we do know he has a new position now. Turning to his stake in General Growth Properties (GGP), he mentioned that he is not raising his bid. On his new position in AIG (AIG), he noted that GAO has terrific reports on the company (we previously detailed Fairholme's new AIG stake). Lastly, Berkowitz jokingly mentions that the only 'perfect hedge' is a Japanese garden as everything is correlated when things turn sour. You can view the rest of our coverage on Berkowitz here.

Richard Vogel of Alatus Capital: Vogel is focusing on companies with 8-10% free cash flow yields that also have an "inflection point" with some sort of catalyst (a new product launch or tapping into a new market, etc). His presentation focused on Europe as all the countries are 'in a sea of red ink' because they all have budget deficits, except for Switzerland. Vogel focused on a Swiss based company: Valora (SWF: VALN). It has an estimated free cash flow yield of 11% and is the largest kiosk operator in Switzerland and Luxembourg with 1,175 outlets. He mentions that new management is taking positive steps as they improve margins and restructure.

Lloyd Khaner of Khaner Capital: Khaner gave a presentation entitled, "Why Some of the Best Value Investors Own Gold." He mentioned that he had formerly 'shunned gold' until the mid 2000's but obviously has had somewhat of a change of heart. He mentions that the gold to oil ratio has typically been "1 oz of gold to 15 bbl of oil." In terms of rationale for owning gold, Khaner cites that gold supply is decreasing as production is around 2,500 tons per year and consumption bests that at 4,000 tons. Central Banks have also been net buyers of gold for the first time since 1980. Khaner specifically highlights gold as a safe haven because it holds value even if it does not appreciate. It is the last currency standing as you cannot print more.

If you were to use the same inflation trajectory as the last gold bubble and apply it to current times, the price would be near $5,000 an ounce. There is one main reason value investors own gold: currency devaluation. While not a value investor, this is exactly the reason that John Paulson launched his gold fund. He is using gold derivatives and gold mining stakes as a proxy for his wager on the US dollar being devalued.

Khaner did not specifically cite the best way to play gold (whether it be via exchange traded funds, physical gold, or mining companies). John Burbank's hedge fund Passport Capital prefers physical gold and David Einhorn's Greenlight Capital does as well. In fact, at the previous Value Investing Congress in October 2009, Einhorn's presentation centered on gold.

Khaner did say that if you go the mining companies route, you have to focus on good management teams that have skin in the game, a company with a good history, and one with low production costs. Back in the 1930's when deflation was prevalent, gold mining stocks were the place to be. Both John Paulson and George Soros bought a stake in the same gold miner recently as well. In the past we've posted up copious amounts of hedge fund research on gold so definitely check that out if you're looking for more insight on the subject.

Carlo Cannell of Cannell Capital: Focusing on small cap value plays, Cannell founded his firm in 1992. He has 18 years of investing experience and will take on an activist role when needed. During his talk, he mentioned that all of his funds are named after islands. The were not many updates posted about his talk but he did mention that Research in Motion (RIMM) does not particularly interest him as he prefers to buy companies trading at 1x EBITDA. He gave one example of a gem: Core-Mark (CORE).

Patrick Degorce of Theleme Partners: Degorce recently launched Theleme (his new firm) with $200 million and he was previously co-founder of The Children's Investment Fund. Investment timeframe is very important to Theleme as they typically focus on 4-5 year timelines. Degorce echoed Warren Buffett by noting that you should invest in businesses/companies that you understand and not pay attention to short-term gyrations in the market. In particular, Degorce values companies based on discounted cash flows. Turning to his specific investment idea, Degorce recommended Deutsche Boerse (ETR:DB1). He notes that they earn 45% of EBIT from European equity derivatives and fixed income. They recently announced cost cutting measures to the tune of $150 million and have a growing cash horde of 6.5 billion euros. In 2009, they generated 3.40 in free cash flow and it currently trades around 10 times FCF.

Amitabh Singhi of Surefin Investments: Singhi focused on opportunities in India and noted that while many industries are mature, some have exploded like real estate, telecom, and pharma. He thinks there is more opportunity in small cap names as there is little research coverage. In particular, he buys 'cigar butts' as he prefers contrarian plays, special situations, and even some GARP plays (growth at a reasonable price). One such 'cigar butt' play is Cheviot (BOM:526817), a producer of Jute (vegetable fiber) that is trading at cash and below its net current asset value. Additionally, it has a return on equity of 26% over the last 10 years. Overall, when investing in India, Singhi likes to have 'assets on the ground in (the) country.' He typically avoids the metals and oil & gas sectors.

Guy Spier of Aquamarine Capital: Spier focused on Fortescue Metals Group (FMG) and notes it could be trading at 1x EBITDA if the market starts to take a hit. He also noted an idea from Passport Capital's John Burbank: 'go long what China is short.' Spier also mentioned something that Warren Buffett has in his office: 'invest like a champion today.' Guy also recommends to increase productive relationships and reduce toxic ones in order to associate yourself with people who are better than you so that you may become better. In essence, that is one of the main goals here at Market Folly. By tracking successful and talented investment managers, we strive to learn from both their successes and their mistakes.

Paul Sonkin of Hummingbird Value: Sonkin focuses on micro and nano cap value plays and looks for a discount to intrinsic value. He seeks internal and external catalysts and notes that certainty of outcome and timeline are essential as well. Interestingly enough, he sometimes competes with companies buying back their own stock due to the low liquidity. Sonkin's investment idea was Steinway Musical Instruments (LVB) citing three assets: real estate, piano business, and band business. Like many other companies, he anticipates growth in Asia over the next ten years as well as a recovery in the US for their piano business. He estimates their properties in New York might be worth $50-75 million. Additionally, Sonkin feels LVB has pricing power as they've raised prices on pianos 4% each year for quite some time. Lastly, a fun fact from Sonkin: he feels the Proxy statement is the most underrated tool out there and he also won't invest in a company if a CEO wears a lot of jewelry (guess he won't be investing in rapper mogul "Birdman's" new oil company).

That wraps up the summary of the first day of presentations. Thanks again to the Value Investing Congress for posting their Twitter updates and keep in mind you can follow us on Twitter as well. Hopefully readers have found this aggregation useful. Stay tuned as we'll also post up summaries from day two of the event here at Market Folly as well as more in-depth research regarding some of the investment ideas. In the mean time, head to our coverage of the latest hedge fund portfolio movements.

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