Notes From London Value Investor Conference 2018

The 2018 London Value Investor Conference recently concluded and we've got notes from each speaker's presentation.  Click the links below to go each speaker's pitch.


London Value Investor Conference 2018 Notes


- Dawid Krige (Cederberg Capital): Long Kweichow Moutai (SHA):600519) & Dong-E-E-Jiao (SHE:000423)

- Nigel Waller & Andrew Goodwin (Oldfield Partners): Long Kansai Electric (TYO:9503) & E.ON (ETR:EOAN)

- Ben Preston (Orbis): Long Peabody Energy (NYSE:BTU)

- Nick Kirrage (Schroders): Long Standard Chartered (LON: STAN)

- Mark Asquith (Somerset Capital): Long Pacific Textiles (HKG:1382), Sunny Friend (TPE:8341), Cia Hering (BVMF:HGTX3) 

- Alex Wright (Fidelity Special Situations): Long Pearson (LON:PSON), Bunzl (LON:BNZL)

- Stephen Mitchel & Bryan Pilsworth (Foyston, Gordon & Payne): Long Transcontinental (TSE:TCL) & Walgreens Boots Alliance (NASDAQ:WBA)

- Adrian Warner (Avenir Capital): Long HCA Healthcare (NYSE:HCA)

- Stephen Anness (Invesco Perpetual): Long National Oilwell Varco (NYSE:NOV)

- Alvaro Guzman & Fernando Bernad (Az-Valor Asset Management): Long Buenaventura (NYSE:BVN)

- Jonathan Boyar (Boyar Value Group): Long Axalta Coating Systems (AXTA), Acushnet Holdings (GOLF), Madison Square Garden Networks (MSGN), Franklin Resources (BEN), Howard Hughes (HHC) 

- Mark Pearson (Arcus Investment): Long Asanuma Corp (TYO:1852)

New Graham & Doddsville Issue: Kingstown Capital Interview

Columbia Business School has released the Winter 2017 edition of its Graham & Doddsville newsletter.  In it, they feature a great interview with Guy Shanon and Michael Blitzer of Kingstown Capital.

They talk about their investment process and also outline their thesis for their largest position, Adient (ADNT), a spin-off from Johnson Controls (JCI).

The issue also features chats with Rupal Bhansali of Ariel Investments, Simeon Wallis of ValorBridge Partners, Jared Friedberg of Mercator, as well as Charles and Roy Studness of Studness Capital Management.

Lastly, this edition includes student investment pitches on short Foot Locker (FL), long Axalta Coating Systems (AXTA), and short Cardtronics (CATM).

Embedded below is Columbia Business School's latest Graham & Doddsville:



You can download a .pdf copy here.

You can also view past issues of this newsletter, including interviews with Meritage Group and MSD Capital.

Rich Pzena Likes Banks, Hilton, Seagate

Rich Pzena of Pzena Investment Management appeared on CNBC yesterday and said the market has divided into 2 groups: those that are in sync with the 'lower for longer' philosophy and those aren't cheap stocks, and those that are out of sync like financials/energy/materials that are selling for attractive valuations.

"Any stable, low volatility cash flowing stock" is basically overpriced he feels.

He argued financials were intriguing: "If interest rates go up, you make a fortune, but if they don't you make 10% a year." These companies are paying out their earnings.  He owns Citigroup (C) and Bank of America (BAC), among others.

On the market in general, he says that, "The steady decline in the 10-year is what's caused this whole market situation. And now, maybe it's bottoming."

He thinks interest rates will rise this year and then will go gradually higher.  He thinks his stocks are positioned well to weather downturns in the market or rising rates.

"As this interest rate bubble ends, I think we'll see a re-emergence of active management.  There's lot of interesting opportunities that's not in touch with where the money has flowed."

Pzena also preached what he thinks is instrumental to success:  "Volatility is the opportunity for every real investor.  What we do for a living is exploit other people's fear of volatility to be able to buy stocks at a low price.  Volatility has nothing to do with risk.  Volatility is just stuff going up and down.  And risk is losing money."


Pzena's New Pick: Hilton (HLT)

Pzena has also bought Hilton (HLT) and says that apartment REITs sell for twice as much as lodging REITs.  Hilton is splitting into 3 companies by year-end: a fee based management co, a lodging REIT, and a timeshare business.

"The company's depressed because it's in lodging and people are fearful that we're near the end of the upcycle in lodging."

He feels that it's not a spectacular value like the banks are, but for what it is (a leading franchise) it looks good. He notes HLT has 20% share of all hotel rooms under construction.

He thinks the spin-off in the near-term leads to 20% upside.  Post-spin, he hopes the management company would get a higher multiple than the REIT.  But he thinks that may take time to play out as the cashflow evolves.


On Seagate (STX)

This is one of Pzena's larger positions.  Seagate is in the middle of correcting the overcapacity it had.   They've had strong volumes on the enterprise side and he says that's the whole story:  "It's a replacement of storage in the cloud rather than in the device."


For more from prominent investors, head to David Tepper's recent interview, as well as Keith Meister's thesis on YUM and Barry Rosenstein's thoughts on the market.

Seth Klarman's Value Investing Lessons

Back in 2009, Baupost Group's Seth Klarman talked with the Ben Graham Center for Value Investing and the Richard Ivey School of Business.  In it, Klarman talks about his approach to investing and the timing of the talk (right after the financial crisis) leads to a few interesting tidbits.


Seth Klarman's Value Investing Lessons


Klarman says that, "All people are risk averse, it's a human tendency to be risk averse." He focuses on how the pain people feel from losing money is so much worse than the joy they receive from gaining money.

He gives the example of flipping a coin where heads you double your money, tails you lose everything you have.  Klarman argues almost everyone wouldn't take that trade for the fear of losing everything is so big.

Klarman then outlines Baupost's approach:

"What can go wrong?  How much can you lose?  We don't think of risk in an academic sense of beta, which doesn't make any sense to us at all.  Volatility's not risk, volatility is volatility.  Volatility creates opportunities and isn't necessarily risk at all, unless you absolutely needed to sell the day that prices are really low.  Rather, risk is the probability of losing and how much you can lose if you lose.  So we focus on risk before we focus on return."

He also notes that, "Long term orientation is critically important."

Klarman then goes on to focus on an aspect of the business that's not talked about as much but is just as important:

"Relationships are incredibly important.  In the buyside part of Wall Street, we work really hard to have the best brokers and be really good clients for them.  We don't want to be somebody's 50th biggest client.  Because we'll never get a phone call that says 'we've got a big block of this for sale, are you interested?'  But if we're somebody's first or second client, they're going to call."

On where Baupost looks for ideas:

"We think there are a lot of smart people out there.  We don't think we're the world's best analysts of businesses, we think we're good at that.  We think we're very good at complicated situations, the messier, the better.  We like situations with a catalyst where there's some reason that a pricing irregularity will correct.  But at a discount and something will cause it to correct.  That leads us into interesting places.  One of our favorite areas is distressed debt."

and

"Spinoffs are an interesting place to look because there's a natural constituency of sellers and there's not a natural constituency of buyers."

On the mental approach needed:

"This business is largely about psychology.  If you're down a huge amount, you're not thinking straight.  If the markets do something that completely surprises you, you can be a deer in the headlights.  It's a huge benefit to not have your own psychology get interrupted."

Lastly, Klarman had an excellent quote on trying to figure out who you'd be buying from and why they're selling:

"Inevitably, you want to buy from people that don't know what they're doing.  Warren Buffett has this saying that if you're playing poker and you look to your left and look to your right and you can't figure out who the patsy is, it's you.  Investing is the same way.  If you are buying something and there's a chance that the person knows more than you, there's a chance you're a sucker.  If you're buying and management is selling, you might want to think twice if you can figure that out.  If you're buying and Steve Mandel at Lone Pine Capital is selling, that's a really bad thing, because Steve Mandel does great analysis and probably knows more than you do."

Klarman is also the author of Margin of Safety, a hard to find book that's no longer in print.  It's revered by many value investors as a prime source of wisdom.

Embedded below is the video of Seth Klarman's talk:



For more from this respected investor, head to Seth Klarman's recommended reading list.

Donald Yacktman's Talk at Google: Viewing Stocks as Bonds

Donald Yacktman of Yacktman Asset Management recently had a talk at Google about investing and viewing stocks as bonds.

When talking about investing, Yacktman says that, "You're almost always wrong to some degree." 

He goes on to note, "Conceptually, if you think of what you're doing when you're buying an equity is you're buying two cashflows: the cashflow given out as a dividend and the cashflow that is retained by management or invested on your behalf and that's the wildcard.  And the longer term your investment horizon is, the more important that part of the investment equation becomes.  Because it can affect rates of return over long periods of time."

Yacktman also talks about risk management and conviction, noting that you should always allocate more capital to the ideas you have higher conviction in and where you perceive there to be lower risk.  And then your position sizes on less confident names should obviously be smaller.

The key to investing he says: "Have patience. Have a very long horizon time."

He also goes on to do a Q&A session.

Yacktman said there's 3 opportune times to buy: when the whole market goes down/collapses (like the financial crisis of 2008), an industry shortfall (like 1993 with concerns of changing the healthcare industry), or an individual stock temporarily out of favor.

When he can't find bargains, he says "cash is a residual.  When you think about cash, it shouldn't be because you're trying to predict the market. When you don't have opportunity, sometimes it's better off to just sit on it (cash)."

Embedded below is the video of Yacktman's talk at Google:

Mohnish Pabrai's Presentation at Boston College on Value Investing

Value investor Mohnish Pabrai of Pabrai Investment Funds recently spoke at Boston College on the topic of value investing.  He visited Professor Arvind Navaratnam's class on Applied Fundamental Analysis & Behavioral Value Investing.

In it, he addresses valuing businesses, talks about a bank in India, answers questions and more.

Embedded below is the video of Mohnish Pabrai's presentation:



For more from this investor, head to our post on Mohnish Pabrai on checklist investing: learning from mistakes.

Q&A With Guy Spier About His New Book: The Education of a Value Investor

A MarketFolly reader recently reached out to Aquamarine Capital's Guy Spier about his new book, The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment.  Guy graciously agreed to answer the reader's questions and to host it on MarketFolly so everyone can learn from his experiences.

Simply put, this book is Guy's look at his life and his investing evolution.  He candidly showcases his shortcomings and highlights the great attributes of other investors he's met with and learned from, such as Warren Buffett and Mohnish Pabrai.

One of our favorite sayings is that investing is a continual education.  The Education of a Value Investor exemplifies just that.  As you ride alongside Guy on his journey, you'll learn from his experiences and undoubtedly reflect on your own path and how you can further improve yourself.

Video: Q&A With Guy Spier About His New Book

Embedded below is the video of Guy's responses (email subscribers will need to come to the site to view it):




Here are the questions Guy answered along with a brief summary of his responses.  Be sure to watch the video for his full, in-depth answers to each topic.

1. Going Out of Your Comfort Zone (at 0:12 in the video) What other activities do you participate in that would have once been out of your comfort zone? What lessons have you learned from those and how have they shaped you as a person and an investor?  Guy did an Ironman triathlon and has looked into meditation.  He says listen to your gut instinct and if it's pushing you towards something, go for it.


2. On Mentors (at 3:35) Mentorship played a key role in your success. How do you suggest young people seek out mentors? And since mentees often have little to offer in return, how do you think the mentee can show appreciation and/or give back in the relationship?  Guy says, "Don't seek the masters, but seek what they sought."  The key here is since you're probably not going to get access to the likes of Warren Buffett, instead look at who those people have learned from and seek out their mistakes/successes.  If you do have the opportunity to meet with someone influential, send them a handwritten note expressing your gratitude.


3. Avoiding Bad Influences (at 7:38)  What advice would you pass on for people looking to create healthy, encouraging environments?  Guy says it's important to make decisions that make you happy and not necessarily what's expected of you.  He says to give your children choices/control early on to pursue interests.


4. Buying When the Market is Crashing (at 12:50)  How do you decide the right time to buy and who are the worthy candidates?  Guy found this difficult at first (especially due to not having longer-term lockups at his fund).  He says, "I think that the nature of one's liabilities is inextricably linked with one's ability to buy.  And the answer is I don't know how to run my emotions very well, but I do know how to modify my environment."


5. Advice on Selling (at 15:26)  When do you decide to sell? Have you received any advice on this from your mentors?  Guy admits that he doesn't have a great answer to this, but shared wisdom he received from Li Lu, who manages money for Charlie Munger.  Li Lu said that the time to sell is when you no longer want to buy it.  There is no 'hold', it's either buy or sell.


6. His Relationship With Mohnish Pabrai (at 18:21)  Has being close friends with Mohnish Pabrai slowly made you less risk averse in investing?  Guy says there's a distinction between risk and uncertainty.   Uncertainty is where you don't know the outcome while risk is that there's potential it goes to zero.  Everyone has their own tolerance level for dealing with 'hairy' situations so you have to find out what you're comfortable with.


7. Gaining an Edge on the Competition (at 20:40)  How do you think you gain an edge in a world filled with intelligent, driven individuals all looking to generate alpha?  Guy says to get a structural advantage (permanent capital or as close to it as possible, which allows you to act while others are handcuffed).  He also says to build a network of smart individuals over time.


8. On Macro (at 24:06)  How do macroeconomic considerations factor into your investment analysis?  Guy says that he doesn't think his brain is big enough to do both top-down and bottom-up investing at the same time but different investors have different approaches.  While some investors may provide commentary on the macro environment, it might not ultimately influence their investment decisions directly.


9. Sectors & Geographies For Value Investors (at 25:55)  Are there any sectors or geographies that fundamentally do not work with value investing? Guy thinks the most important thing is having an idea where the business will be in 5, 10, or 15 years; he wants predictability.  He highlights the tech sector as one rife with change and avoids countries where he doesn't understand the rules (specifically mentioning Russia and the natural resources sector).  He also notes that he's made money in the Philippines before.


10. On Activism (at 31:07)  Why do you think more value fund managers do not become activist investors?  Guy doesn't have any intention of being an activist and says you always hear about the successes but there's also failures you don't necessarily hear of.   


11. Evaluating Management Teams (at 35:15)  How do you learn about the character of management teams without sitting down to lunch with them? Guy says the best way to evaluate a management team is to look at their actions based on publicly available information.  Look at their capital allocation, what kind of debt they've issued, etc.  Every decision reveals something about the people making those decisions.  He avoids meeting with management because it can lead to biases.


12. Executive Compensation (at 37:22)  What's your take on executive remuneration?  Are most CEOs overpaid?  Guy says there are some 'superstars' out there that should be paid what they're worth.  At the same time, some are overpaid, some are underpaid.  He says the real question is: what to do about it?         


13. Analyst vs. Portfolio Manager (at 42:10)  How does an analyst know whether they'd make a good portfolio manager? Guy says you'll never know until you go ahead and do it.  In the mean time, he says to obviously manage your PA (personal account) or start one if you haven't already.  They are really two separate skillsets.

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Our thanks to a reader for organizing this and thanks to Mr. Spier for taking the time out to further comment on his experiences.  

Be sure to check out Guy Spier's book, The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment.  Everyone in the investment world takes their own path that defines who they are as an investor.  And more often than not, learning from others' journeys is an integral part of the process.  This book is a fantastic opportunity to do just that.

P.S.  As an added bonus, the book is a quick read so you can easily absorb it without taking a ton of time out of your schedule.

Philippe Jabre Interview: Columbia Business School's Graham & Doddsville

Columbia Business School is out with the Spring 2014 issue of its Graham & Doddsville newsletter.  In it, they interview Philippe Jabre of Jabre Capital as well as Arnold Van Den Berg and Jim Brilliant of Century Management.  It also profiles H. Kevin Byun of Denali Investors and Eric Rosenfeld of Crescendo Partners.

Additionally, pitches from the Pershing Square Challenge are presented.  MBA students presented longs of Allegion (ALLE), Carnival (CCL), Clean Harbors (CLH), Naspers (JSE:NPN) and a short of Cablevision (CVC).

The full issue is below, but here's some select quotes from Jabre's interview:

Jabre talks about starting his own firm and notes that,

"Before you start a  hedge fund you have to  follow the right steps. I  always tell people it's the  same as if you are a doctor,  architect, or lawyer opening  a practice. I first joined a  bank, then after ten years I  joined Lehman Brothers.  Then, with a group of four  partners, we spun off from  Lehman Brothers and  created GLG. And then  after that, I created my own  fund. You follow the steps  so people will follow you.    I remember after business  school I wanted to create  my own fund at age 25. My  father told me if you want  to lose money, go lose  money at other people's  expense. You can't become  a fund manager unless  you’ve lost a lot of money  and survived. So JabCap was  a normal evolution when I  started it seven years ago. A  lot of clients followed  because I had a very good  track record at my prior  funds over the previous  fifteen years and that made  it easier. But you need a  track record and you need  to have clients. The barriers  to entry are very high today  and what people look for is  a track record and the  experience of managing  money unsupervised. And  that's a very difficult concept that you learn with time."


Jabre on opportunities: "So the key thing is to find  things that have done nothing for ages and  suddenly there is an event  that you need to be the first  to understand or appreciate.  And this is where you have a huge opportunity to outperform."


Embedded below is the Spring 2014 issue of CBS' Graham & Doddsville newsletter:



For more from Columbia Business School, be sure to check out their interview with Maverick Capital's Lee Ainslie in a previous issue as well as their interview with Li Lu.

Eddie Lampert's 2012 Annual Letter: Sears Holdings

For value investors interested, below is Eddie Lampert's annual letter from Sears Holdings (SHLD).  He reviews 2012, provides SHLD specific commentary, and also shares thoughts on the retail industry in general.

Embedded below is Eddie Lampert's 2012 letter:




For other recent value investor commentary, be sure to also check out Warren Buffett's annual 2012 letter.

Rare Video of Benjamin Graham & His Legacy

Today we wanted to highlight extremely rare video footage of value investor Benjamin Graham.  This video was shown at the Columbia Investment Management Conference (notes from the event here).  In addition to the footage of Graham, the video also features interviews with his protege Warren Buffett, Irving Kahn, Charles Brandes and many others.

Here's one of the Ben Graham quotes from the video:

"The explanation cannot be found in any mathematics, but it has to be found in investor psychology.  You can have an extraordinary difference in the price level merely because not only speculators but investors themselves are looking at the situation through rose colored glasses rather than dark blue glasses."   

Marshall Weinberg, a student of Graham's on the teacher: "Ben Graham opened the course by saying, 'if you want to make money on Wall Street, you must have the proper psychological attitude.' "

Warren Buffett on Graham: "Making money did not motivate him."

Embedded below is the video on Ben Graham's legacy:



Of course if you haven't already, stop what you're doing and read Graham's two books: The Intelligent Investor and Security Analysis.

Hat tip to Santangels Review for finding the video.

Mohnish Pabrai on Checklist Investing: Learning From Mistakes

Value investor Mohnish Pabrai sat down for an interview with The Motley Fool to talk about his approach and how he uses checklists in his investment process.


Checklist Investing & Learning From Mistakes


Pabrai had an epiphany after learning from concepts discussed in Atul Gawande's book The Checklist Manifesto.  Essentially, he tries to learn from his mistakes by figuring out what went wrong with certain investments and how he could have prevented losses/a specific outcome.

But he also looked at some of the best investors in the world and incorporated their mistakes as well (looking at Warren Buffett, Charlie Munger, LongLeaf Partners, Third Avenue, etc).


Pabrai's Investment Checklist

Pabrai says that, "And what was stunning to me is that in almost all cases where I could figure out the reason for the loss, it was very apparent before the investment was made, number one. And the second is the reason was very basic. It wasn't some esoteric reason that you had to do some higher math to the fifth decimal to figure out this wasn't going to work. It was very basic."

While Pabrai has never revealed his checklist, he notes that there's about 98 questions on it that examines before making an investment.  He does drop a few hints as to what he looks for though:

"So for example, we have a set of questions which relate to leverage. Debt covenants, how levered and all kinds of different issues related to leverage, because that has caused a lot of investments to go south.  We have another set which relates to moats, the lack thereof, right? And so all kinds of things. There's another set of questions which relate to things like unions and labor relations. There's another whole set of questions on management and ownership. Just all kinds of nuances of whether they own stock, do they act like owners and all those sorts of things that come up. And then there are a few miscellaneous ones."

Since applying the checklist, Pabrai feels that his investment error rate has dropped significantly.  Embedded below is the video of Pabrai's interview on checklist investing:




For more from this value investor, be sure to also check out what Pabrai learned from lunch with Charlie Munger and Warren Buffett.

Charlie Munger & Warren Buffett's Secrets To Investing Success

Value investor Mohnish Pabrai recently sat down for an interview with The Motley Fool and he talked about what he learned from his lunches with Charlie Munger and Warren Buffett.


Charlie Munger's 3 Secrets To Investment Success

Pabrai talked about how Munger revealed 3 things investors can do to be successful:

1. Carefully watch what other investors are doing
2.  "Look at the cannibals" - look at businesses buying back huge amounts of stock
3. Carefully study spin-offs

Point number one is quite interesting as Munger flat out tells you to watch other investors (i.e. 13Fs, 13G's, public appearances, etc), something Market Folly's expanded on in our premium newsletter.  Rather than blindly copying their picks, we'd assume Munger means to use this as a source of idea generation and a starting place to do more work.

The second point (stock buyback) is something that numerous hedge funds take into consideration when evaluating ideas.  Steve Mandel of Lone Pine Capital is said to be a fan of 'share count shrinkers'. 

Lastly, the third point (spin-offs) is an excellent place to source ideas and Joel Greenblatt talks about spin-offs in his book.  In fact, many hedge funds buy companies that announce a spin-off and then once the split is complete, hold onto one piece of the company that they like most. 

An example that many hedge funds played was Expedia (EXPE) spinning off TripAdvisor (TRIP).  We'd assume Charlie also meant 'split-ups' and a recent example of that would be Tyco splitting up into PentAir (PNR), Tyco (TYC), and ADT (ADT).  


Warren Buffett's Words of Wisdom

Pabrai relayed a story Warren Buffett told him about his former partner Rick Guerin, who fell off the map so to speak.  Buffett, Guerin, and Munger used to all invest together but Guerin was in a hurry to get wealthy whereas Munger and Buffett weren't.  Buffett's outlined two lessons:

1. Avoid leverage
2. Be patient

Guerin was levered with margin loans in the 1973/74 downturn and received tons of margin calls, so he was forced to sell his Berkshire Hathaway (to Buffett).

So Pabrai described the lesson from Buffett as, "if you're even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient.  And so the lesson was, don't use leverage, right?  And be patient.  These are attributes he's talked about plenty, but I would say that it got seared in pretty solidly after hearing the format in which he put it."



Embedded below is the video of Pabrai sharing what he learned:



For more from these great investors, head to Warren Buffett's recommended reading list as well as Charlie Munger on the psychology of human misjudgment.

East Coast's Q2 Letter: What Defines A Great Business & A Look At IBM

Christopher Begg's is out with East Coast Asset Management's Q2 letter entitled, "The Beekeepers" where he makes an excellent analogy to investing.  In it, he also delves into what defines a great business and discusses IBM (IBM) as one of their new holdings in context of a larger theme.

Before diving into the IBM idea, we wanted to highlight a few of his salient points from the letter.  He makes a great analogy in the letter writing, "Bees also suffer from the biggest problem of most investors - the inability to sit in a room and do nothing."  Indeed, many great investors have extolled the virtues of patience in investing.

And on the topic of crowded trades, Begg writes,

"We observe that many investors appear to share similar behavior.  Too much demand chasing too little supply will eventually drive prices to extremes, diminishing the resources or future returns for a particular asset class.  We are witnessing this today with money markets and fixed-income securities where yields hover near all-time lows and the crowded hive has to swarm to find more resources."


Why East Coast Likes IBM

Begg highlights that Warren Buffett's Berkshire has become the largest shareholder of IBM (over $13 billion).  East Coast added the name to their books in the quarter and here's some of the rationale as to why:

- IBM has averaged unlevered returns on net tangible assets over the last five years of greater than 20%.

- Their durable competitive advantage exists in the sheer depth of their proprietary intellectual knowledge with which they can solve their customer's complex problems.

- They've targeted four key areas of market opportunity: developing markets, cloud and smarter computing, business analytics and optimization, and smarter planets/smarter cities.

- Perhaps one of the most important: pricing power.  As we all know, Buffett loves pricing power.

- Effective management.


Read their full thoughts in East Coast's Q2 letter embedded below:





For more from this firm, be sure to also check out their Q1 letter on mispricings as well as their thoughts on competitive advantage.

Presentations from ValueX Vail Conference: LINTA, BAC, AMZN, CNW, PSUN, SPLS & More

We wanted to post up the presentations from the ValueX Vail Conference that just took place last week.  Vitaliy Katsenelson (follow him on Twitter here) hosted the event and it featured numerous equity pitches, including Jim Chanos' presentation on value traps that we posted yesterday.

The other presentations are posted below and include:

- Patrick Brennan, CFA on the bull case for Liberty Interactive (LINTA)
- Kai Shih of Shih Investments on Bank of America (BAC)
- Josh Tarasoff of Greenlea Lane Capital on Amazon.com (AMZN)
- Dan Amoss of Strategic Short Report: Short Con-Way (CNW)
- Shane Calhoun of Belcaro Capital on Pacific Sunwear (PSUN)
- Adrian Mak on Staples (SPLS)
- Joe Cornell of Spin-Off Research: The ABC's of Spin-Offs
- JJ Abodeely of Sitka Pacific Capital on value investing from top-down
- Footnoted's Michelle Leder on diving into SEC filings
- Greg Merrill of Strategic Asset Management on exporting natural gas
- Alex Rubalcava on managing investor workflow
- Hendrik Leber of ACATIS: A European perspective
- Jon Markman on Reminiscences of a Stock Operator

Email readers please click here to come view the presentations embedded below:


Patrick Brennan: Liberty Interactive (LINTA) 




Kai Shih on Bank of America (BAC)




Josh Tarasoff on Amazon.com (AMZN)




Dan Amoss: Short Con-Way (CNW)




Shane Calhoun on Pacific Sunwear (PSUN)




Adrian Mak on Staples (SPLS)




Joe Cornell: The ABC's of Spin-Offs




JJ Abodeely on Value Investing From Top-Down



Michelle Leder on Diving into SEC Filings




Greg Merrill on Exporting Natural Gas




Alex Rubalcava on Managing Investor Workflow




Hendrik Leber: A European Perspective




Jon Markman on Reminiscences of a Stock Operator





Thanks again to Vitaliy for making all of the presentations available.

If you missed it, be sure to also check out Jim Chanos' presentation on CNX, PBR, HPQ, CSTR & SAN from the event as well.

Notes From Warren Buffett's Meeting With MBA Students

Berkshire Hathaway's Warren Buffett recently met with MBA students from the Richard Ivey School of Business and the legendary investor talked about how his investing principles have changed over time along with numerous other topics.  Here are some highlights and notes:

Question:  The key to your early career was essential information arbitrage. Given the  changes in the world and that information now moves at the speed of light, how do you continue to have such great successes?

Buffett: People have better information now, but they still act irrationally ... Sometimes you have to work a little bit hard to get the good deals.  And looking through the Korean stock manuals I've found some of these same opportunities today.  But ultimately, the key to success is emotional stability.  You don't need a high IQ to get rich.


Q: Explain your overall investing strategy

Buffett: Invest in equities slowly over time.  And invest in yourself.  Enhance your own talents and weaknesses.  And look to buy companies that will go on forever, like Coca Cola.  For the more serious investor, buy equities strategically, opportunistically.  And go all in when you can, and when there is a good deal.  I had a limit in my fund on the amount I could put in to one investment.  There was a fantastic opportunity so I approached my investors and told them I wanted to increase that amount.  I ended up putting 75% of the fund in that investment and it worked out well.  And I'm sure I will do it again.  Don't use leverage, and sit on cash if there are no good investment opportunities.


Q: What is the most important thing you have learned in life?

Buffett: Find your passion.  You will know it when you see it.  It is more important than money.  You want to ask the question, "Where am I going to have most fun?"


Embedded below is the full set of notes from Buffett's meeting:


For plenty more resources on the Oracle of Omaha, head to:

- Buffett's recommended reading list

- Tour of Warren Buffett's office

-  Key takeaways from Buffett's 2011 annual letter

East Coast Asset Management on Mispricings: Q1 Letter

Christopher Begg's East Coast Asset Management is out with their first quarter letter and in it they focus on mispricings.  We like to highlight their letters due to the focus on investment process.  After all, investing is a profession that requires continual education.

Begg shares his wisdom by writing, "Mispricing discovery is intelligent investing. We want to clarify that mispriced does not mean cheap - mispriced investments are not partial to any particular asset class nor are they partial to style boxes and growth rates."

We've previously highlighted how Greenlight Capital's David Einhorn looks for mispricing when investing, seeking to better understand situations to generate returns.

Begg goes on to breakdown mispricings into two types:

Structural - These exist "when an event occurs that forces a large population of owners to sell without any change in the investment's intrinsic value.  Examples of structurally induced selling would include: when an investment is deselected from an index, when a company is spun off from a larger parent company, or perhaps when a company's credit rating is reduced."

Psychological - He says that these mispricings "are driven from collective investor psychology which induces broad selling or a lack of buying in an investment."

East Coast feels that "our greatest source of mispricings occurs when myopic investors have difficulty focusing on the distant compounding merit of a great business (compounder category) or the inflection point of a material change in an industry that is improving (transformation category)."

Begg then goes on to highlight their investment in Colgate-Palmolive (CL) as a prime example.


Current Market Commentary

East Coast also summarizes their views on the current market, writing

"In aggregate, the market is reasonably priced at below 14 times 2012 projected earnings; inverting the multiple means that we are getting a 7.5% earnings yield.  If we include an economic growth rate of 2-3% we arrive at expected equity returns in high single digits."

Their letter also goes on to examine Apple (AAPL), concluding that, "We don't disagree with the quality of the business nor do we doubt that the valuation looks attractive.  What we do struggle with is the ability to truly compound at an attractive rate based on size."  We've also posted up on the subject with our post: The Apple Conundrum.

Embedded below is East Coast's first quarter letter:



For more from this firm, head to East Coast on embracing uncertainty as well as their great piece on gaining an investment edge.

Seth Klarman Interview With Charlie Rose

A few months back, Charlie Rose interviewed Baupost Group's legendary investor Seth Klarman. Just yesterday, we posted up notes from Seth Klarman's Margin of Safety so we figured this was a very appropriate follow up.

The video interview starts with talk about his nonprofit "Facing History" for the first 18 minutes or so. After that, they shift topics to Klarman's book, Margin of Safety.

One interesting tidbit from the conversation is when Klarman contrasted his investing style to that of Warren Buffett's. Baupost's leading man says that he buys "cigar butts" at cheap prices. Warren Buffett used to also do this. The difference between the two legends is that Klarman stayed focused on cigar butts while Buffett's process morphed into buying great companies at great prices and then into paying so-so prices for great companies.

Appearances and interviews by Klarman in public are rare, so needless to say this is a must-watch. Embedded below is Charlie Rose's interview with Seth Klarman:



If you missed it, be sure to check out notes from Seth Klarman's Margin of Safety.

Notes From Seth Klarman's Margin of Safety

Thanks to a reader for sending us the following notes from Seth Klarman's famous book, Margin of Safety. Written by Ronald Redfield, these notes provide a great summary of Klarman's book for those of you who don't want to pay $1,000 for a now out-of-print copy.

Why should you care about this? Well, for those of you who are unfamiliar, Klarman's Baupost Group is one of the top 10 hedge funds by net gains since inception. And since numbers do the talking in the investing world, it's time to pull up a chair and learn from the best.


Redfield singles out prudent quotes from Klarman such as this gem on risk:

"Targeting investment returns leads investors to focus on potential upside rather on downside risk ... rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk."

And by focusing on risk, Klarman of course hints that investors should seek a margin of safety in their investments. He goes on to specifically address this topic, writing:

"A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world."

Redfield points out that Klarman says investors can battle risk via diversification, hedging, and investing with a margin of safety.

Klarman also touches on other tricky aspects of investing, such as forced selling. He writes, "The trick of successful investors is to sell when they want to, not when they have to. Investors who may need to sell should not own marketable securities other than U.S. Treasury Bills."

John Burbank of Passport Capital has echoed this via his timeless quote: "cash is most valuable when others don't have it." This refers to cash's utility as a hedge during a downturn as well as its ability to fund opportunistic purchases while others are forced to do otherwise.

For more investing wisdom, we've also posted up Seth Klarman's recommended reading list.


Embedded below are notes from Seth Klarman's Margin of Safety (email readers click the link to come view):



And if you want to read the original book, you can try to purchase one here.


For our past posts on the Baupost Group founder, head to:

- Collection of Baupost Group letters

- Interview with Seth Klarman

- Profile of Seth Klarman & Baupost Group

Interviews With Sam Zell, William Von Mueffling & Michael Karsch: Columbia Business School Newsletter

Columbia Business School is out with the latest installment of its investment newsletter: Graham & Doddsville. Edited by MBA students, the issue features interviews with Sam Zell (Chairman of Equity Group Investments), William von Mueffling (President of Cantillon Capital), and Michael Karsch (founder of Karsch Capital Management).

Below are some excerpts we found insightful:

Sam Zell on key tenets of his investing philosophy: "I philosophically believe that if you can't delineate your idea in one or two sentences, it's not worth doing ... simplicity is critical."


Sam Zell on what has allowed him to be successful: "The definition of a great investor is someone who starts by understanding the downside. You must make the judgment in advance as to how much downside risk you are willing to take. I knew that I could always survive the good days, but the critical element is to be able to survive when the market isn't doing well or the investment isn't performing. I always focus on how much exposure I am taking."


William Von Mueffling on Cantillon's investment style: "One can broadly divide value investing into two camps. The first camp is the Graham & Dodd style which is buying assets at a discount or cash at a discount. The second camp is the Buffett style, which I characterize as buying financial productivity at a discount. We fall into the second camp. We believe that there are many different types of moats to be found, and that a moat around a business should allow it to produce outsized margins and wonderful returns on capital. The trick is being able to buy this stream of cash flows at a discount. Unlike Graham & Dodd investing where you might look at low price-to-book value companies or net-net companies, we are trying to buy high financial productivity at a discount to its intrinsic value."


Michael Karsch on the lifecycle of investing approach: "(It) is a framework that states that markets, industries, companies and stocks typically move through 5 stages over time. These stages are: 1) distressed, discarded and/or undiscovered, 2) value, 3) growth at a reasonable price (GARP), 4) growth, and 5) momentum. The lifecycle analysis and an appreciation for a company‘s evolution through the cycle often lead us to ask whether a company will be perceived as better (up the cycle) or worse (down the cycle) over a reasonable investment horizon."


Embedded below is the Graham & Doddsville issue:




For more from these three investors, we've posted:

- Michael Karsch on risk management

- Sam Zell on Brazil's investment opportunity

- Cantillon converts from hedge fund to long-only

Mohnish Pabrai Sells Pinnacle Airlines (PNCL) Shares

Value investor Mohnish Pabrai just filed a Form 4 with the SEC regarding shares of Pinnacle Airlines (PNCL). Per the filing, Pabrai has just sold 158,464 shares on April 3rd at a price of $0.70.

After the transaction, Pabrai Investment Fund II LP now owns 777,868 shares of PNCL. At the end of 2011, all of Pabrai's entities filed owning a collective 1,985,902 shares.

Shares of Pinnacle Airlines have plunged from $5.50 in 2011 down to where they currently trade at around $0.31. The company recently filed for bankruptcy protection to help tackle its debt and costs.

We've highlighted Pabrai's activity since it's a rare glimpse at his movements. As of the end of 2011, PNCL was his smallest US equity long allocation. His largest stakes were in Wells Fargo (WFC), Berkshire Hathaway (BRK.B), Potash (POT), and Terex (TEX).

For more on this investor, head to Pabrai on his checklist on how to approach an investment.

Per Google Finance, Pinnacle Airlines "an airline holding company based in Memphis, Tennessee. It is a parent company of three wholly owned subsidiaries: Pinnacle Airlines, Inc., Colgan Air, Inc. and Mesaba Airlines. The company's operating platforms include Regional Jet Operations and Turboprop Operations."