Cutting Through the Noise: More than two dozen of the country’s top value investors weigh in on key elements of the research and decision-making process


Cutting Through the Noise


More than two dozen of the country’s top value investors weigh in on key elements of the research and decision-making process.

Professional investors are an exceedingly competitive lot—unsurprising, given that their chosen field is one where the score delineating winners and losers can be tallied at every market close. But as results-driven as investors tend to be, the best money managers put equal emphasis on the process they follow for conducting research and making portfolio decisions. They have a clear understanding of the most important questions they want answered and how best to answer them. Of course, their methods of discovery can vary widely. Some investors put great emphasis on having macro views that inform their decisions, while others firmly reject that approach. Some consider time spent with management critical to their research process, while others consider it a waste of time. Some see industry specialization among analysts as a benefit; others see it as a detriment. But nearly all successful fundamental investors see their research and decision-making process as a primary source of competitive advantage, and should be able to explain in detail why that’s so.Equity strategist James Montier, now at the Boston investment firm GMO, describes the importance of process this way:

“As much as I’d like to be able to control the outcomes, I can’t. The only thing I can do is maximize the probability of getting a good outcome by following what I’ve defined as the right process. A good process doesn’t negate bad outcomes or bad judgments, it just tries to mitigate them.

It’s like a preflight checklist. Pilots do the same thing thousands and thousands of times in their lives, but they still go through the physical checklist to eliminate what could be a catastrophic error if they try to circumvent it. Investors are well served by having similar types of checklists and sticking with them.”

Below, culled from interviews with scores of the country’s top value-oriented money managers over the past eight years for the Value Investor Insight newsletter, two dozen top value investors weigh in on how they address one of the most difficult challenges facing investors today: How to cut through the noise to make better decisions.

Macro Versus Micro

More people are saying, “Everything’s macro; you’ve got to think in terms of risk on, risk off.” I think that’s really a nutty thing. I just don’t believe you can be effective in trying to get those decisions right in the short term.

—Howard Marks, Oaktree Capital

I would argue that if macro factors are too big a determinant in your appraisal of a company’s intrinsic value, you should just sit that out. Given all the issues in Europe, for example, we don’t have to bet on European consumer companies whose fortunes are closely tied to how the debt crisis there plays out. In the U.S., we don’t have to bet on health-care stocks whose futures depend on macro health-care legislation or the financial strength of government entities that pay a lot of the bills. We should just move on to where the micro is driving value.

—Staley Cates, Southeastern Asset Management

Most of the time, [investing with less regard for macroeconomic forecasts] is the right approach, but in my experience there have been times when one or a handful of major factors—such as large waves of liquidity going in and going out—overwhelm traditional metrics of value to set market prices. In such times, ignoring those factors has proved to be dangerous.

—Mohamed El-Erian, Pimco

“There’s no question that getting the macro picture right is hugely valuable—I just wish I were capable of doing it.” —Bruce Berkowitz

There’s no question that getting the macro picture right is hugely valuable—I just wish I were capable of doing it. When it comes to macro events, you can either predict or react. I’ve proved time and again that my crystal ball is horrible, so my focus has to be on reacting to extremes in individual securities by selling at high valuations and buying at low valuations.

—Bruce Berkowitz, Fairholme Capital

In Search of Quality

My favorite ideas tend to be companies that generate free cash flow, not cheap cyclicals or stocks trading at big discounts to book. One big advantage of investing in companies generating free cash flow is that you can be more patient because the intrinsic value tends to grow while you own it—they’re adding cash to the balance sheet, paying down debt, buying back their stock. The stock price may not perform for a time, but the intrinsic-value growth will eventually be reflected in the market price. You’re getting paid to wait.

—Andrew Jones, North Star Partners

High-return businesses have something special that allows them to earn above-average rates on employed capital. That may be intellectual property, scale economies, a regulatory advantage, high customer-switching costs, or some sort of network effect. We want to see evidence that the business model produces unusual returns, to understand why and to believe that’s likely to continue. Part of that is a function of the opportunity yet to be realized—we’re always asking, “How wide and how long is the runway?”

—Chuck Akre, Akre Capital Management

One reason we can find opportunities is that the market is pretty good at forecasting top-line growth, but then it gets a bit fuzzier as you go from sales growth to what earnings growth is going to be, and then most research gets really fuzzy when it comes to things like how much capital will be needed to support growth, where the capital will come from, and how much excess cash will be generated—all of which feeds into ultimate business value.

—Bill Nygren, Harris Associates

We would love to own great businesses as much as the next guy, but the problem is finding them at the right price. We’re perfectly happy looking for the average company, where we think there’s something going on that the market hasn’t recognized that can make it better than average. You’re rewarded as much for that as for a good company becoming very good.

—Vincent Sellecchia, Delafield Fund

What Could Go Wrong

If you look at sports history, the champions have usually been the best defensive teams, not those with the most exciting offenses. I went to school at Michigan State when Woody Hayes was the football coach at Ohio State. Woody’s philosophy was that a “three yards and a cloud of dust” offense was all you needed if you played great defense. We lost to him every year.

I’ve always believed that above-average, long-term performance in the stock market is highly correlated with avoiding serious errors, so I always focus on what can go wrong first. I want to know the downside risk potential before looking at the upside. While it isn’t in real life, paranoia can be a virtue in the investment business.

—Robert Olstein, Olstein Capital Management

“As the saying goes, the plural of anecdote is not evidence.” —Michael Mauboussin

We are big fans of fear, and in investing it is clearly better to be scared than sorry.

—Seth Klarman, The Baupost Group

Spreadsheets make everything look linear and controlled, but the real world oscillates, overshoots, collapses, and rebounds. A company with operational and financial flexibility—what we mean by staying power—is able to exercise options that are quite valuable at different points in the cycle. Without the firm handle on that flexibility that credit analysis provides, we’d argue you can’t fully understand the wealth-creation process as an equity investor.

—Mitchell Julis, Canyon Capital

M.B.A.s learn all about optimizing capital structures, but I’ve been quite content sticking with companies that have extrasafe balance sheets. I’ll trade return on equity for safety any day.

—Jim Roumell, Roumell Asset Management

How Important Is Management?

Making judgments about management is important to us, and something I think value managers tend to underweight. You can analyze something statistically, but if you expect to own it for 10 years, management is going to make thousands of decisions you can’t predict and may never even know about, which collectively make earnings compound at a rate more or less than they would have other- wise. Those things can add up over time to the difference between a great performer and an also-ran.

—Boykin Curry, Eagle Capital

We tell management that the idea is not for them to get investors to buy their stock, but to give them reasons never to sell it. When they get that, we’re interested.

—James Rooney, Avenir

The most important aspect of analyzing management is how well they’ve invested cash in the past, not what they say they are going to do. Because we typically own companies generating a lot of free cash flow, we’re in trouble if management doesn’t allocate that cash wisely.

—Donald Yacktman, Yacktman Asset Management

I started my career doing criminal defense work and learned a lot from having my clients lie to me and having to see through that. That’s been invaluable in dealing with Corporate America.

—Edward Studzinski, Harris Associates

Management is clearly a potential resource, but you always have to consider the source—it can be like asking a bartender if you need a drink or a barber if you need a haircut.

—Carlo Cannell, Cannell Capital

Most turnarounds involve making tough decisions about the portfolio of businesses. We spend a lot of time looking at each business within a company and how we think its value can be maximized. We’re suspicious of management saying they can fix everything.

—Lloyd Khaner, Khaner Capital


We really don’t pay that much attention to why something is undervalued. If we buy companies in which shareholders’ capital compounds at a 20% rate of return over a reasonable time period and we pay a below-average multiple for it, our investors will do extremely well.

—Chuck Akre, Akre Capital Management

We focus first on good businesses with high returns on capital, barriers to entry, and significant free-cash-flow generation over a cycle. If you’re right about the business, time should be your friend, so catalysts are not important.

—Charles de Vaulx, International Value Advisers

In our experience, it can take a lot longer for value to be realized than we expect, but that it’s taking longer doesn’t mean we’ve made a mistake. If the market hasn’t recognized the value we see and the company is continuing to increase its intrinsic value, that’s when we’d be buying more.

—Ric Dillon, Diamond Hill Investments

The catalysts we look for can be company-specific or more macro. It could be any number of things—new management, a reorganization, buying back stock, a new product launch, the resolution of litigation. It could also be a call on a specific sector turning up. We’re just trying to push back against the natural propensity of value investors to be early—there’s just no way around the fact that if you’re way too early, you’re wrong.

—William Nasgovitz, Heartland Advisors

Getting It Done

We’re big believers in the Peter Lynch quote, “The person who turns over the most rocks wins the game.” We always say that people who know what they’re doing can get 80% of the story in no time, just by looking through the financials. But it’s that last 20% that requires tremendous effort and that is going to set you apart, or not. That’s the detective work, the site visits, the channel checks, the background checks, the legal research—all the things that may or may not give you unique insight, but which you have to do well to get any kind of edge.

—Scott Hood, First Wilshire Securities

As the saying goes, the plural of anecdote is not evidence.

—Michael Mauboussin, Credit Suisse

“The last step in our research process is to invite in a Wall Street analyst who is a bear, and they come in and make a pitch why we shouldn’t buy this stock.” —Richard Pzena

The last step in our research process is to invite in a Wall Street analyst who is a bear, and they come in and make a pitch why we shouldn’t buy this stock. We want to see if the reason they don’t like it is if they see a real structural flaw in the business that we didn’t pick up on, or if it’s just that they don’t know what’s happening. Most of the time they’re negative just because of “no earnings visibility,” which is Wall Street language for “I don’t really have a clue what’s going to happen next.”

—Richard Pzena, Pzena Investment Management

It’s important to hire people with diverse experiences and viewpoints, which you don’t necessarily get if you just hire straight-A Harvard M.B.A.s. Getting good grades and having courage are not the same thing. Being really smart and having good judgment are not the same thing.

—Susan Byrne, Westwood Management

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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