Notes From Berkshire Hathaway's Annual Meeting 2014

Berkshire Hathaway's 2014 annual meeting has come and gone.  While many of you have undoubtedly already read synopses of the event, here's a set of detailed notes for a further glimpse into the minds of Warren Buffett and Charlie Munger.


Berkshire Hathaway Annual Meeting 2014 Notes

The meeting started out with Warren Buffett (WB) discussing the results from the first quarter.  $77B in float.  Insurance business is great.  Insurance earnings dragged down operating income, but a lot of that was foreign exchange.

Resolutions for dividend. 97% of the 'A' share voted against with 1% voting for.  Almost the exact percentages of the 'B' shares as well, 97% to 2%.  Almost as many people voted for WB as they voted not to put a dividend in place.


Q&A Session

Carol Loomis (CL) -  Coke vote on compensation.  Why did he handle it the way he did?

WB - Thought he handled in the most effective way.  Does not like the plan, but also does not want to fight with Coke.  Also, doesn't know David Winters, disagrees with some of the calcs from Winters.

Charlie Munger (CM) - Warren handled it well.

WB - CM still Vice Chairman.  If 50M shares at $40 are granted, and then exercised at $60 per share, then that is $10B in comp.  The proceeds plus the tax benefits are used to buy shares back.  

 

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Jonahthan Brandt (JB) - Is there a way to use 3G (given that they are so good as an operator) to manage subsidiaries or hire 3G alumni?

WB - Doesn't think the two fit too well.  Likes to partner with 3G.  Great partners.  Never had rules for subsidiaries regarding headcount.  Leads by example.

 

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Shareholder Question (SH) - The shareholder asked a long question about Obama and WB trying to change policy.

WB - Disagrees with a lot of that question.  Business is doing well.  Corporate taxes as a percentage of GDP are down a lot over the past 50 years.  Return on tangible assets very high in the US.  Corporate taxes are much lower than they've historically been.

CM - I'll avoid this one.

 

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Becky Quick (BQ) - Returns relative to 5 year S&P500, WB had said that when Berkshire fell behind those, then things would need to change.  Well, Berkshire underperformed the S&P500 over the last 5 years.  Thoughts?

WB - They will underperform in strong years, match in normal years, and beat in weak years.  Overall, thinks they will beat over the cycle.

CM - Berkshire's returns are after tax, S&P 500 are pre-tax.  

 

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Jay Gelb (JG) - Question about Berkshire and its discount to Intrinsic Value.

WB - Willing to buy at 120% of Book Value.  If Munger and Buffett both guessed Intrinsic Value, they'd probably be within 5% of eachother, but not 1%.  Lots of businesses are carried at very low book value.

CM - Never want to get stock above IV.  People that want stock high want egg in their beer.  Over long term, system works well.

WB - Using overvalued stock to buy other companies is a strategy that has worked well for others.

 

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Shareholder Question (SH) - Berkshire Hathaway known as buy and hold.  Also M&A usually very good.  What is the trick?

WB - Try to keep the promises and be comfortable about the promises they make.  They take very different approach to the other Private Equity companies.

 

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Andrew Ross Sorkin (AS) - Role in Coke vote vs. steward of culture for Howard Buffett.

WB - Has voted in favor of numerous compensations plans he wasn't crazy about.  Can't remember ever a time a compensation committee has recommended a dissenting vote.  Independent members where you get $300K a year.  They don't look for dobermans, but cockerspaniels.  Non-Exec Chairman is there as a safety valve.  Howard Buffett right for the job.

CM - Gotta pick battles for public disapproval.

WB - If you are in any social organization, if you keep belching at the table, eventually you'll be in the kitchen.

CM - Pleased with how WB has handled things.

 

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Greggory Warren (GW) - Question about BH's cost of capital and ability to exceed it.

WB - Size is an anchor to performance.  Lots of nonsensical cost of capital concepts.

CM - Never heard a sensical one.

WB - Just like CFOs like about cost of capital.  Real question is if retained earnings will exceed "market returns".  Just bought Canadian company for $3B.

CM - Cost of capital means different things to different people.  Likes WB's definition.  We're right and most other people are wrong.

 

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SH - Question about Nebraska Furniture Mart?

WB - Paid 11 or 12 times after tax earnings.  $7M Pretax and $100M in sales.  $4.5M After Tax.  Never asked for an audit.  Asked if she owned the building.  Tuesday sales were larger than monthly sales of RC Wiley in Sacramento.  Texas store 1.8 million square feet and 40 acres will do more sales than any store in the world.

 

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CL - Question about WB's comment about 10% bonds and 90% in index fund. Why wife's trustee vs. BH given he believes BRK will outperform SPY?

WB - Very bullish on BRK.  Allocation is for peace of mind.

CM - WB is peculiar in how he chooses to distribute money.  He can do what he damn well chooses.

 

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JB - Difference between BNSF and Union Pacific?

WB - BNSF has had a lot of service problems.  They spend more than Union Pacific (which also spends a lot).

Matt Rose - Weather had a big impact.  Did 206,000 units in a week.  No rail had ever handled 205,000 in a week.

WB - Thinks BNSF's results will get better.

 

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SH - Question about Natural Gas for utilities.

WB - Largest generator using alternative energy.

Greg Abel - Systems challenged due to weather.  There was enough gas for energy generation and heating homes.  39% of energy in Iowa was renewable / wind.

WB - Gas in Omaha.  Berkshire Hathaway Energy - Named for Mid American.

 

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BQ - Successor for CM?  Charlie is now 90.

WB - Berkshire is better off because of CM with WB.  Big applause.  Not sure anyone could succeed CM.

CM - People don't have anything to worry about.

 

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??? - Question about Matt Rose and WB's succession.

CM - Not worried about successor of WB.

 

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SH - If all net worth had to be invested in one thing, what would it be.

WB - Won't answer that question, CM?

CM - WB gave right answer.

 

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AS - Question about disclosure of compensation for other top paid managers are Berkshire.

WB - Current disclosure of officer compensation is based on SEC rules.  Disclosure of key people sometimes is bad if it is for top TV anchors as an example.  Most at Solomon Brothers not happy because of compensation they compared to others.  Lots of time compensation disclosure is bad for shareholders.

CM - Better of not adding to culture of envy.

 

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GW - Question about cash and acquisitions.

WB - Will always keep at least $20B in cash on hand.  Cash and credit are like oxygen.  You don't notice it until it is gone.

CM - They are better off having outlets for capital investment.

 

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SH - Question about allocation of capital.  Do WB or CM ever fight?

WB - They met at 29 and 35.  Have had lots of disagreements, but not arguments.

CM - Disagreements are good.  WB once called CM the abominable "No" man.

 

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CL - What are BRK's weak points?

WB - Sweep accounts.  Probably lead to better capital allocation.  WB slow to make personnel changes.  Lack of supervision also a weakness, but has benefits.

CM - Doesn't like the sweep idea.  Compares it to giving blood.

WB - No position of General Counsel.  Lots of trust of manager.

 

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JB - See's since 1999 See's growth has stalled.  Grow a lot from '70s to '99.

WB - Boxed chocolates sales are down.  Sees has done a lot other than boxed chocolates.  If they hadn't bought See's they never would have bought Coke.

CM - Ignorance Removal is important.  They still have a lot of ignorance.

 

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SH - Question about Bank of America and the change from cumulative preferred to non-cumulative preferred...was requested by Brian Moynihan...willing to make it non-callable.

WB - Non-call of 6% preferred a good deal.  Non bothered by recent error at BAC.

CM - I agree with you.

 

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BQ - Question on Net Jets.

WB - Small market.  They are biggest.  Have greater than 60% of the market.  Expanding to China.

 

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JG - Potential for using KO or other stock for acquisition.

WB - Unlikely, but possible.

CM - Rail and Utility at BRK is good for investment of extra capital.

WB - Have Todd and Ted, but really want to buy businesses.

 

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SH - Person asking question is an Italian from Genoa.  Question about borrowing money at low rate and investing now while they are able to invest.

WB - Both Rail and Utility could do more with debt.  If they were younger, they'd probably do it.  Good idea.  They'd do it if a deal came along.  Should not have used BRK stock in BNSF.

 

CM - Good idea.  Probably a good idea.

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GW -  Question about Todd and Ted.  How much are each running and where will it be in 5 years?

WB - At $7B now.  They know a lot about business and management.  They are doing lots of other things.  Only grow over time.

CM - Nothing to add.

 

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SH - Question about 0% interest rates.

WB - Very surprised by how well things have gone.  Would like to believe he would have done the same thing given how well they've gone.  Ben Bernanke is a hero.  Surprised by how other members of the fed didn't understand situation.

CM - In Japan no one would have expected low rates in 20 years.  Very confusing to economics professors.  If not confused, then didn't understand.

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CL - Conglomerate model has worked well for BRK, but not lots of others.  What is the future of that for BRK?

WB - Collection of businesses has worked well for America.  Thinks business plan is good.  System for allocating capital.  As if conglomerate is buying using cash or stock.

CM - They have more investment options than others.  Can buy companies, insurance companies, marketable securities, etc.

JB - Forest River vs. Thor for recreational vehicles?

WB - Bought Forest River about 10 years ago.  Pete sold it to PE firm in 90s.  PE firm created hell for him.  He quit, it went BK.  Pete bought it out of BK and sold it to BRK 10 years ago.  WB doesn't know the RV business and no one else at BRK does.  Talks to Pete once every couple years.  His company.  Six IT people.

 

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SH - Question about Oil sands and impact on BRK.

WB - Business in Marmon does business with Oil Sands.  Owns some XOM with business in oil sands.  Also has BNSF moving oil.  Rail moves oil 2x faster than pipelines.  Oil sands are important for mankind over centuries to come.

CM - Economic if NatGas is cheap and oil expensive.

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Before breaking for lunch, Buffett provided an update on the bet he made regarding the performance of the S&P500 relative to a fund of hedge funds.  Buffett is way ahead on bet.

 

 

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2ND HALF
 

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WB - Sent out 11,000 more tickets this year compared to prior year.

BQ - Question about Energy Future Holdings.  Also, other companies in umbrella of similar risk.

WB - He gets credit on Energy Future Holdings.  Business models can be at risk.  Geico - Mail - Phone - Internet.  When change from government employees at one point they almost went broke.

CM - Remove your ignorance, scramble out of mistakes.
 

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JG - Heinz - Normalized Earnings Power and his estimated future earnings.

WB - He will be filing public statements.  Has historically had 15% margins and expects those to go up over time.
 

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SH - Expand on thoughts of investment opportunity.  Why buy some companies vs others?  Example, ones he bought vs. KO or Moody's.

WB - Bought a bit early in Fall of 2008 vs. early 2009.  Did reasonably well overall.  Plus they did get BNSF in Fall of 2009.  Want to buy good businesses for reasonable prices over time.

CM - Private businesses more ideal target than stocks, and guesses that will continue, right Warren?

 

WB - Yes.

CM - Love buying transmission lines in Alberta.  Have to adapt to BRK.

WB - Have bought a fair amount of Wells Fargo last couple years.  Weak banks have bounced back the most.

 

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AS - Geico and usage based pricing and impact on auto industry and Geico.  Also, self-driving cars.  Would you sell Geico if need for auto insurance went away?

WB - Won't sell.  Underwriting in auto a bit different than life.  Different variables.  Feels very good about Geico, the management, and ability to manage risk.  Self-Driving cars will be good for society and bad for auto insurers.

CM - Things can take long time.  Example is movies on demand.  Thinks self-driving cars will take a while.
 

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GW - Why not many foreign acquisitions?

WB - No preference for US businesses, but that seems to be where the deals are coming from.  More recognition in the US.  Some awareness.  Lots of great things to say about Iscar.  April had record sales.

 

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SH - Circle of competency.  How does one know what their circle of competency is?

WB - Good question.  Need to be self-realistic.  Was out of his circle of competency when he bought Berkshire Hathaway.  Has also stretched in the area of retail.  Ms. B (of Nebraska Furniture Mart) didn't take BRK stock because it wasn't in her circle of competency.  Her areas were cash, retail, and real estate.

CM - Not that different.  Someone that's 5'2" probably isn't going to be great at basketball and someone that's 350 pounds probably not going to be great at ballet.  95 year old probably not going to get the leading role in a romantic movie.  Circle of competence can be a relative concept.  I need to compete against idiots and there's a large supply.

 

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CL - Question about the logic of comparing the annual change in Berkshire's Book Value vs. S&P 500.

CM - (Charlie interrupted Buffett from answering) - Doesn't make any sense.  It's insane and doesn't make sense, but WB likes impossible challenges.

WB - Given that wishy washy answer, Buffett won't add to it.
 

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JB - Question about Prices on Marmon and Iscar.

WB - Iscar was 80% then put the rest.  Marmon was an installment sale with 64% was first, then 36% was 2nd and 3rd installment.

CM - Price went up as value went up.

WB - With both transactions, all feelings are good.

 

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SH - What non-tech thing would you do if you were 23?

WB - I'd probably do what I did, go into investment business.  One question he'd ask if they had to put all money in one business (not their own) for 10 years, what would it be?

CM - Larry Bird trick - asked every agent, if I don't go with you, who's the 2nd best I'd go with?

 

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BQ - Capitalism vs. Rooms given his comments about people using AirBnB.

WB - Omaha can't size itself to the event.  Doesn't like 3-day minimum rule.

CM - Nothing to add.

 

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JG - Question about Geico.  Allstate's share = 10%, State Farm's = 19%.

WB - Passing Allstate this year.  State Farm is a great company.  Recommends "The Farmer from Merna".  Says he thinks Geico will be number one by time he's 100.  Tells Geico he'll do his part.

CM - Geico is like Costco in that cost is part of its soul.  Easy to talk the game, but they can back it up.

 

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SH - Question about frugality.

CM - WB is frugal.  Doesn't like to spend money.

WB - Bought house in 1958.  CM bought his in 1960.  Life would be worse with more.  At certain point there is inverse correlation.

 

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AR - Berkshire paid $8.9B in taxes last year.  Pfizer is looking at offshoring for taxes.  Thoughts?

WB - Wouldn't do it.

CM - It'd be crazy.

WB - Tries to minimize taxes, low cost housing, tax breaks on energy.

 

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GW - Union Pacific moving freight to Mexico, thoughts relative to BNSF?

WB - UP has edge in Mexico.  KSU has good presence in Mexico, but also good prospects elsewhere.
 

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SH - Intrinsic value difference and what are competitors to Berkshire?

WB - Intrinsic value is present value of all future cash.  Aesop bird in the hand is equal to two birds in a bush.  Sees no competition to Berkshire.

CM - Too tough to replicate and no one teaches it.
 

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CL - Question about inflation from Goodhaven.

WB - Berkshire would be worse off.  EPS would go up.  Intrinsic value would go up in dollar terms.
 

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JG - Question about acquisitions.

CM - Sum return of all deals is bad.  We are peculiar, but most don't want to be like us.

WB - Having a corporate acquisition team is bad because they always want to do acquisitions.

 

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SH - Question about too big to fail.

CM - Thinks the crisis has improved things dramatically, but there will always be problems.  Criminal prosecution of individuals does change behavior.

WB - Like prosecutions of individuals more than prosecutions of corporations.  Corporation is just going to write a check.  There will be problems from time to time.  At BRK, there are 300,000 employees.  He's sure there is someone doing something they shouldn't be.

 

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BQ - Question about serious rail accident and insurance for major accident.

WB - Ajit has offered to provide insurance, Matt Rose has proposed it.

CM - BP was the big surprise.  No one imagined that could happen.

 

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JG - Question about insurance (P&C, Specialty Lines).

WB - BRK has competitive advantages (people, capital, ratings, underwriting).

 

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SH - Any plans to buy sports team or manufacturers?

WB - Owns 1/4 of minor league team.  If you ever hear they are looking to buy another team, it is time to consider a successor).  Guard companies at airports should be owned by people without deep pockets.

CM - Whatever WB thinks of sports teams, CM thinks less.

 

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AS - Question about Ackman on recent transaction where he partnered with acquirer.

WB - Scares corps.  Can be good when managements need to be changed.

 

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GW - Question about cash and acquisitions.

WB - Love to buy company for 2 or 3 billion.  Prefers one 30 billion dollar deal over smaller deals.

 

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SH - What was the best question?

CM - Best was about Berkshire Book Value compared to S&P Performance.

WB - No answer.

 

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SH - Question about Mid American and Ebit + Depreciation - CapEx...resulting in negative return?

WB - Doing great with tangible assets.  Investment is available for more capital as long as regulators allow for  rates.  Plus their rates are generally more competitive.

CM - I agree.

 

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SH - Thoughts on education market in US and China in the future.

CM - We are getting the easy questions now.

 

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SH - Question about housing reform and GSEs

WB - 30 Year mortgage is good for homeowners.  Private industry can't do it alone.  Issue is how do you keep government in without it getting to be political.

 

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SH - Comment by Whitney Tilson about the Brazilian Partners.  Question was will Berkshire be able to get special deals once Buffett is gone (i.e. will the stamp of approval go away when Buffett is gone).

WB - Buffett name will be the Berkshire name.

CM - Good partners get good partners.  Success of Jorge Paulo.  Good at cost cutting.  Thinks cost cutting is good.

 

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SH - From Taiwan, named son after Warren Buffett.  If BRK doubles and then doubles market cap will be $1.2T.

WB - Depending on price, buybacks might make sense.  Will have excess cash issue.

CM - Not a tragedy to have that problem.

 

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SH - Question about AirBnB and Uber.

WB - Things are changing, stays away for investment purposes.

CM - Very disruptive.

 

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SH - Question about whether financial education should be taught in schools.

WB - Earlier the better, very important for good financial habits.

CM - Fault goes to parents.  Very hard to fix people with bad parents.  Lots of problems with college business schools and economics departments.

 

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SH - Question about dividend and breaking company into four parts.

WB - The company is much better and stronger as a whole than broken up.

 

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THE END

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What We're Reading ~ Hedge Fund Links 6/6/14

Hedge fund AUM hits $2.9 trillion [FINalternatives]

The hedge fund fee conundrum [All About Alpha]

Carl Icahn acquired Fannie/Freddie shares from Fairholme [Reuters]

Marcato Capital sends letter to American Realty Capital [Yahoo Finance]

Profile of David Abrams (ex-Baupost) [WSJ]

Want to work at a hedge fund? Go to these schools [CNBC]

Hedge fund cover without the hedge fund fees [Bloomberg]

The mysterious power pulling strings on Wall Street [Guardian]

In defense of hedge funds [Guardian]

Hedge fund replication: is it right for you? [P&I]

50 stocks most loved by hedge funds [WSJ]

The $13 billion mystery angels [BusinessWeek]

Icahn's son Brett setting up a hedge fund [WSJ]

What We're Reading ~ Analytical Links 6/4/14

Q&A with Alice Schroeder, author of The Snowball, book on Warren Buffett [Reddit]

For great returns, follow the cash [Millennial Invest]

Does value investing work in the tech sector? [Alpha Architect]

A lifelong pursuit of investment knowledge [Abnormal Returns]

On the importance of ROIC [Base Hit Investing]

Mauboussin on dividends and buybacks [Credit Suisse]

The demise of set-top box makers [BuysideNotes]

E-commerce is a bear - what one entrepreneur learned building [Medium]

Beware of emotions when investing [Investors]

Confessions of a former analyst [LinkedIn]

It's activists, not Buffett who can change corporate America [Dealbook]

Deciphering the economics of venture capital [TechCrunch]

What We're Reading ~ Hedge Fund Links 5/30/14

Baupost Group looks to real estate, Greek bank warrants [ValueWalk]

David Einhorn's comments at Greenlight Re investor day [Santangels Review]

Lee Cooperman's presentation why equities are the place to be [ValueWalk]

Top 500 hedge funds control 99% of industry assets [Reuters]

Interview with JANA's Barry Rosenstein [Barrons]

The rise of David Tepper [Marketwatch]

Hedge funds haunted by deflation spectre [FT]

Marcato Capital urges Intercontinental Hotels to pursue merger [Dealbook]

How do hedge funds get away with it? [New Yorker]

3 reasons the New Yorker is wrong about hedge funds [Forbes]

What to expect from a hedge fund [WSJ]

Hedge funds won't make you rich [Bloomberg]

Hedge funds' investing prowess doesn't live up to billing [WSJ]

How Athenahealth's CEO met his short-seller (Einhorn) [Fortune]

Ackman said to plan public hedge fund in London [Dealbook]

Woodbine Capital said to return client money [Bloomberg]

CQS' Hintze warns on market volatility [WSJ]

The trade of the century: when George Soros broke the British Pound [Priceonomics]

Tiger Global Exits Carter's Stake

Chase Coleman and Feroz Dewan's hedge fund Tiger Global has filed an amended 13G with the SEC regarding shares of Carter's (CRI).  Per the filing, Tiger Global has completely exited its stake and no longer owns any shares.

The filing was made due to activity on May 23rd.  The hedge fund had previously owned over 6.4 million shares and it had been a longstanding position.  Some hedge funds had been concerned with product cost inflation and the potential impact on gross margins this year.

Hedge funds that owned sizable CRI stakes as of the end of Q1 include Hound Partners, Pennant Capital, Glenview Capital, and White Elm Capital.

You can view other recent portfolio activity from Tiger Global here.

Per Google Finance, Carter's is "a branded marketer of apparel for babies and young children in the United States. The Company owns two brand names in the children’s apparel industry, Carter’s and OshKosh. Its Carter’s brand provides apparel for children sizes ranging from newborn to seven. OshKosh brand provides its line of apparel for children sizes newborn to 12. Its Carter’s, OshKosh, and related brands are sold to national department stores, chain and specialty stores and discount retailers."

Baupost Group Added to Vivendi Position

Seth Klarman's investment firm Baupost Group has added to its holding in Paris listed media company Vivendi (PAR:VIV).  Vivendi recently published the final version of its 2013 annual report which shows that during 2013 Baupost increased its holding from 1.38% to 2.0% (or 18.2 million to 26.8 million shares).

This newly updated shareholder information was correct as of December 31st, 2013 but unfortunately there's no clarity as to what they might have done with their stake since then (if anything).

Baupost have held a stake in Vivendi since 2011/2012 with a 2.04% stake.  By the end of 2012 they had trimmed the position down to 1.38% and now they've built it up again.

London Value Investor Conference Notes 2014: Morfit, Hawkins, Yacktman & More

Today we're pleased to present notes from the London Value Investor Conference 2014 that just took place benefiting School Aid to improve the quality of education in Africa.  Enjoy! 


Mason Morfit – ValueAct

Mason Morfit is a partner with activist manager ValueAct Capital.  ValueAct has held 75 core investments since inception in 2000.  Roughly half of these core investments (37) have resulted in a board seat. Unusually in the activist world, 36 of the 37 board positions have come via invitation rather than a proxy contest.  Mason Morfit has recently resigned his seat on the board at Valeant Pharmaceuticals.  Valeant was the highest returning investment in ValueAct’s history. 

Morfit is now focusing his energy on Microsoft where he took up a board seat earlier this year. The networks that ValueAct has built up over the years by sitting on boards has been a major contributor to their success.  Morfit said that gaining the Microsoft board seat while owning a relatively small amount of the company’s equity was the culmination of this work.  He mentioned that their contacts with people at Seagate and AT&T were particularly important in landing the seat. Interestingly, Morfit talked about ValueAct’s investment in Adobe which they started in 2011. Morfit seemed to suggest that there were similarities between the Adobe and Microsoft cases.  ValueAct has had success at Adobe partly due to the introduction of annual subscription charges for its leading software, Photoshop.  Is it possible that the subscription model could be pursued at Microsoft with, for example, Microsoft Office?

Executive compensation is a very important lever for ValueAct. Morfit said that their research shows that executive pay is not well connected to company performance. One of the key strategies they pursue is to put pressure on companies to directly tie CEO pay to shareholder returns. ValueAct are happy for CEO’s to receive high levels of compensation for high shareholder returns but they should only receive small sums for average and poor shareholder returns. ValueAct prefer CEO’s to own a significant amount of the company’s stock and in the Valeant case they succeeded in getting CEO, Michael Pearson, to borrow money to buy Valeant shares.

Another interesting fact that came out of Morfit’s presentation was that whilst he thinks the activist space is getting very crowed at present they have only bumped into another activist once and that was recently with Carl Icahn at Ebay.  ValueAct subsequently sold their stock quickly and moved on.

Morfit said that the UK offers a very good environment for activists to operate in as there are no regulations against large investors talking to one another. In the past, ValueAct has been involved with Misys and Invensys in the UK.  He admitted that they find mainland Europe a harder nut to crack but that he expects them to do more work there during the next ten years.

For more from ValueAct, we've previously posted Morfit's lectures on activist investing.


Mason Hawkins – Southeastern Asset Management 

Mason Hawkins said that if you want to outperform you must invest in companies with good leadership.  Finding high quality partners is even more important now that there is less value in the market.  He finds it relatively easy to identify investments at a good price but picking great business leaders is harder. Getting the people right is the hardest part.  He recommended William Thorndike’s book the “The Outsiders” as an excellent guide to how to identify successful CEOs. 

He pointed out that Southeastern has sometimes misjudged managements and in those cases they are prepared to get involved to put things right.  Southeastern has taken an activist stance many times over the years, filing twenty four 13Ds.  In the last year alone it has been involved in activist campaigns with four companies in the US: Level 3, ACS Group, Texas Instruments and Chesapeake Energy. In the previous year they were involved in gruelling battles with Dell and Olympus in Japan. 


Donald Yacktman – Yacktman Asset Management 

Perhaps the biggest piece of news from Don Yacktman was that during the Q&A he said they had recently been out buying Samsung Electronics.  He said the stock is currently very cheap. Yacktman talked about valuing stocks as bonds, a subject he has covered before. He sees value as a function of future cash flows. His funds like to invest in predictable businesses as this allow them to more accurately project cash flows into the future.  They like high returns on tangible assets at a reasonable price. Another interesting snippet from Yacktman was that they always vote against stock options as remuneration for management. 


David Samra – Artisan Partners 

Samra said that it is hard to find good ideas at the moment and that his best idea and largest holding was cash. Long Compass Group (LON:CPG). The company has a dominant position in the contract food and support services market. Great management, good growth, potential margin upside. They bought in 2009 at 11x earnings. Compass now trades at 19x earnings.

Long Samsung Electronics.  Samra said that he thought that Samsung was cheap compared to US companies like Apple.  Samsung is trading on a PE of 6.6 with a strong balance sheet and lots of cash. He likes the management team and is not worried that the company is family controlled.

Long Aker Solutions (OSL:AKVER). An oil services company which is going through restructuring. Sells for 0.6 of 2013 revenues and 11.6x 2013 operating income. The company is protected by entry barriers.

Long Chubb Corporation (NYQ:CB). A property and casualty insurer with low leverage, disciplined underwriting and a good track record over time.  It trades at 1.5 book value and 2013 10.7x PE.  It should trade at x2 book value. 


Aled Smith – M&G Investments 

Long: Ingredion (NYSE:INGR) Ex-quant, Aled Smith argued that the secret sauce for stock picking is not to be found in numbers and spreadsheets but in the qualitative aspects of today’s complex businesses.   He pitched Ingredion, formerly Corn Products International, a global manufacturer and supplier of starch and sweetener ingredients to food and beverage producers. Smith particularly rates the CEO, Ilene Gordon who he argues has increased innovation, cut waste, reduced injuries and introduced a continuous improvement culture. Ingredion is moving away from sugar to higher value added products.  Smith also likes the oligopolistic qualities of the business.  M&G own 1m shares which they purchased in March this year. 


Tim Hartch – Brown Brothers Harriman 

Tim Hartch focuses on high quality and resilient businesses with a durable competitive advantage. He requires a margin of safety in the region of 75% of intrinsic value.

Long: Zoetis (NYSE:ZTS) Zoetis was spun out of Pfizer in early 2013. Hartch purchased shares in Q1 2014 between $28-30. He values the company in the low $40s.  Zoetis is the world’s leading animal health company. They sell products to poultry farmers, ranchers, vets and cat and dog owners.  Sales relating to livestock account for 65% of the business whilst the animal companion market accounts for 35%. The pet and livestock market is growing driven by global population growth and growing global wealth. Unlike human health care, governments are not exerting downward pressure on costs. The customer base is loyal. Zoetis has the largest R&D budget in animal health. The company is diversified with over 300 different medicines, vaccines and services and is not dependent on a few big drugs. 

Long: Svenska Handlesbanken (Sweden).  This is a Swedish based bank that provides services for private and corporate customers.  The bank has been run conservatively and had a good financial crisis. Hartch likes the simplicity of the way they do business.  They make money from traditional banking. Local managers operate what they refer to as the 2church tower model “ where  local managers get to know their local clients.  Most Swedish towns have a church with a tower and the idea is the bank only serves the local community that can be seen by climbing to the top of the tower. Despite the traditional approach, Svenska Handlesbanken has the highest return on capital amongst banks in Sweden. Unusually, the bank does not pay bonuses but instead staff are rewarded via promotion. Capital ratios are good. The bank has entered the UK market over the last 12 years, opening 25-30 branches per year and now has 170 branches in total. Many customers in the UK are dissatisfied with the performance of British banks and Hartch thinks that the UK could become Svenska Handlesbanken’s most profitable market.


Andrew Cormie – Eastspring Investments 

Andrew Cormie argued that Asia Pacific region (excluding Japan) is currently cheap at 1.6x price/book.  He noted that historically when Asian markets have been priced this way returns have been positive over a one, three and five year time horizon.  Long: Bank of China (BoC) and Noble Group (Singapore) 


Philip Best & Marc Saint John Webb – Argos Investment Managers 

Best and Webb are deep value, Graham and Dodd style managers that specialise in buying things that most fund managers would not touch. Since inception in Dec 2007 they have returned 331% compared to the Euromoney European Smaller Companies index return of 192%  They like small, illiquid stocks, family owed stocks, orphan stocks, failed IPOs, fallen angels (once high flying growth companies that have fallen to earth and become hated).  They are not necessarily afraid of value traps and actively look for situations that make other investors fearful. Long: Donegal  Investment Group (Ireland); Camellia (LON:CAM); Les Nouveaux Constructeurs (France); Biesse (Italy); Hochdorf (Switzerland). 


Jonathan Mills – Metropolis Capital 

Jonathan Mills said that he agrees with Warren Buffett that it is better to buy a great business at a reasonable price but in the current market he is finding it a challenge to identify wide moat businesses with a margin of safety. Mills' answer to the problem is to consider a narrow moat business if it is what he calls “owner occupied”.

An owner occupied company is one where the founder has a significant ownership stake. Mills said that public markets do not distinguish between companies that are owner occupied and those that are not.  Yet a study by Bain & Co has shown that between 2002 and 2012 companies with founder traits outperformed the S&P 500 by three times. Mills says that founders tend to have long time horizons, be good capital allocators, are customer focused, restless innovators and keep costs down.

Long: Admiral Group (LON:ADM).  Admiral floated in 2004 and the founders Henry Engelhardt and David Stevens are still there. Since the IPO it has paid out dividends of over £1.4bn (current dividend yield 7%).  Admiral uses a capital light model and therefore should not be valued on book.  It is trading at 2013 13x PE – at the lower end of range for Admiral historically. 


Andrew Hollingworth – HollAnd Advisors 

Long: Buckle( NAS:BKE). Buckle is a retailer of casual apparel, footwear, and accessories. Return on Net Tangible Assets, last ten years avg 47%. Sales per share growth last 10 years 10.2% compounded. Management shareholding approx. 40%. Around 90% of net income has been returned to shareholders in the last 4 years. All growth has been organic (no acquisitions). 2013 13.4x PE. EV/EBIT 7.8x.  Eleven analysts cover the stock but there are no buy ratings at the moment. 


Charles Heenan – Kennox Strategic Value 

Long: Fujikon Industrial Holdings (Hong Kong).  Founded in 1983.  Heenan likes to see a long-term track record. Fujikon is primarily a manufacturer of headphones and headsets. Historic yield of 10%.  Strong balance sheet, 50% cash holding and no debt. In terms of historic PE values Fujikon has a 5 year average PE 11x and 10 yr average of 9x.  2014 10.13x PE. 


This concludes the notes from the London Value Investor Conference 2014.  If you missed it, we've also posted up notes from the Sohn Conference, that took place recently as well as the Next Wave Sohn Conference.