CSIMA (Columbia Student Investment Management) Conference Notes

AGENDA

A Conversation with Bill Ackman, Pershing Square Capital Management

Moderator: Bruce Greenwald, Columbia Business School

 

Panel 1: Activism as a Catalyst for Unlocking Value

Jesse Cohn, Elliott Management Corporation

Scott Osfeld, JANA Partners

Tom Sandell, Sandell Asset Management

Moderator: Ken Squire, 13D Monitor and the 13D Activist Fund

Panel 2: Behavioral Biases: It’s not IQ, It’s EQ

Kent Daniel, Columbia Business School

Michael Maubousssin, Credit Suisse

James Montier, GMO

William A. von Mueffling, Cantillon Capital Management

Moderator: Mark A. Cooper, PIMCO

 

Panel 3: Best Ideas

J. Kyle Bass, Hayman Capital Management

Thomas S. Gayner, Markel Corporation

Jonathan L. Salinas, Plymouth Lane Capital Management

Thyra E. Zerhusen, Fairpointe Capital

Moderator: Jason Zweig, The Wall Street Journal

 

The Big Secret for Value Investors

Joel Greenblatt, Gotham Asset Management

Moderator: Bruce Greenwald, Columbia Business School


A Conversation with Bill Ackman, Pershing Square Capital Management

Moderator: Bruce Greenwald, Columbia Business School

 

What did you learn from your first fund with David Berkowitz?

  • Started our first fund, Gotham Partners, when I was 26. We raised $3mn. Compounded at 31% in first few years, went to $500mn. Went into PE as the market got expensive, and spent two years investing in PE and real estate
  • Ultimately learned that the opportunity cost of liquidity and time is more than you think. Learned that it’s easy going from public to private investing but hard to then go back. It took two years for the fund to go through its liquidation program
  • Learned that activist short selling is a challenging and difficult thing from MBIA experience (was investigated by Spitzer and SEC). Spent 2003 winding down fund. Waved fees, worked for free. Started new fund with Joe Steinberg (Leucadia) as co-investor. Have to treat your investors fairly/well and then they’ll back you repeatedly. Pershing is attempts to be Gotham did right and nothing it did wrong
  • Came up with notion of “Return on Invested Brain Damage” – how much return is required to justify the immense amount of work involved in realizing it

 

How do you source ideas?

  • No systematic way to identify ideas. Think that’s a good thing. Any approach that employs an algorithm will ultimately see returns get squeezed out. Pershing’s strategy is more bruit force. That said, do have a framework/lens through which look at world
  • Lens: Most important thing is business quality, second is price. Buffett says moat, simple/predictable FCF. Price. Element number three is why there is a gap between price and intrinsic value? What will change to close that gap? Strategy, management, capital structure, under-earning asset with a great franchise? Also have to closely understand shareholder structure
  • Consider self to be a generalist but having “models” you rely on to analyze a business is important. See real estate as a model. MCD often seen as a restaurant company but is really a brand royalty company. Currency-hedged, inflation-hedged royalty stream. Always good to read the book about the company if one exists. Understanding the history of a company, you often see when it loses its way they were generally doing it right the first time around
  • Saw MCD as three different businesses. Real estate investors don’t care about GAAP, just cash flow. Sometimes GAAP is a good measure of economic earnings, sometimes not. This can create an opportunity, such as with real estate
  • The best businesses are when you own a royalty on someone else’s capital and hard work

 

What are the pros and cons to activist investing?

  • PE is a good strategy. Buy control, make changes to management, optimize operating structure and capital structure. One big problem, especially with large cap PE, is companies don’t sell themselves unless there’s an opportune time. Companies will hire GS/MS to sell and they do great job garnering interest and hence raising the control premium
  • Feel Pershing has the same cost of capital, leverage constraints as others. Take same steps as PE except don’t take control. Seek to get backing of other investors to pressure management
  • What might be seen as a big con is there is a public good problem; Pershing is doing all the work and spending all the money and other minority investors  get to go along for the ride. However, it’s the other shareholders who provide the influence often necessary to pressure management. Blackrocks of the world rely on activists to take lead but they do provide support/backing

 

How see current economic/investing environment?

  • The U.S. banking system is the best capitalized it has been in a long time. Healthy thing. Also have a well capitalized corporate America. Low interest rate environment supportive. Equities fairly priced though some sectors may be more than fairly priced. Amount of uncertainty has been reduced. Note this is a U.S.-centric view. Economy should continue to improve from here
  • Don’t know what the black swans could be. Note, however, that people don’t talk about white swans. Think what’s happening in Silicon Valley/Alley is amazing, a lot of innovation occurring. Period of potentially unprecedented entrepreneurship. GE (?) started program where if someone has an idea, you can email the idea, and if they like it they will do all the work and you just get a royalty. Pretty bullish on US

 

Specific investment ideas?

  • One thing haven’t talked about is FNM/FRE. Before they were created, people used to have 5-10 year balloon loans. FNM started to provide liquidity to the FHA. In the 60s/70s FNM/FRE started the MBS market. This lead to the development of liquid 30-yr fixed prepayment loan. This is critically important and needs to stay
  • This is uniquely American because of the great mis-match given floating deposits. What FNM did is make US mortgage market a global phenomenon. All MBS investors had to think about is managing interest rate risk. As a result, the U.S. has the only 30-yr pre-payable mortgage market and with the lowest cost
  • However, FNM lost its way. CEO of FRE said will never buy own MBS, going to be pure guarantor. Low and behold, successor decided otherwise. Could issue debt only 3bps wider than Treasuries and then buy own MBS. Created fixed income arbitrage portfolio. Before long, 2/3 of earnings became arbitrage business. Capital intensive, liquidity sensitive, interest rate risk. They then had to move down the risk spectrum to meet affordable housing requirements which accelerated into 2006/2007
  • Government put in $187bn on a senior basis with cheap warrants. In early 2012, both FNM/FRE became profitable. FHFA has been raising their required guarantee fee. The G-fee was 23bp historically and was raised to about 60bp in most recent quarter because the government views FNM/FRE as monopolists. They want the G-fee to be at a level where others will seek to enter the market. The private sector is expected to set up 10 or so new mortgage bond insurers and they are going to take first loss position with the government taking all losses thereafter. Don’t think the public will finance capital required. G-fees will need to be multiples what FNM/FRE are charging. Mortgage insurers have a history of blowing up. Business is inherently oligopolistic. Time is your friend if you own the common stock of FNM/FRE because the businesses are only becoming more valuable. Expect them to remain an oligopoly, just need more capital and higher fees than before

 

What is your advice for students soon getting into business?

  • Wouldn’t necessarily jump into finance right out of business school. One opportunity you have is taking risk. A lot of skills focused on finance/investing are applicable to business. You will be a better investor if you first work for a business. I would go work for a start-up doing something cool.  Regardless of whether works out, you will learn a lot, see how easy/hard it is to get something done

 

Student/Audience Q&A

 

Best practices in your investment process?

  • Pershing has 10-person team, non-hierarchical set-up. Typical idea has 2-3 people working on it with one person leading. Bill is always one of the three people. Bill is sometimes the 20% person (spending less time, serving as a sanity check), sometimes 80% (lead researcher on idea). Person who spent last two months working on something has incentive to get something out for having spent so much time on it. Need to have others involved to avoid bad decisions because of this
  • Best practice is way structured in terms of team and comp. Good portion of comp deferred for several years so people don’t gun-sling and leave PM with reputational risk if things go awry. Incentive structure very important

 

What undergrad majors most important to go into investing?

  • Some of best skills are reading, writing, speaking – has nothing to do with quantitative analysis, finance. Bill was a social studies major. Think analytical skill is almost a commodity because there are a lot of talented analysts who can build a model and understand a business
  • Buffett very good at finding out what is and isn’t a great business – probably the most important thing. Investing is a business about predicting the future, not next quarter’s earnings. You have to think a lot about dis-intermediation. Maybe philosophy as a major is better than economics. Something that teaches you how to think, write, speak, learn

 

How do you balance your life priorities?

  • Better start with health because without that everything else is a null set. Health is kind of like compounding. If you can address it early, it compounds in a good way. Try to focus on the people closest to me: family, friends, people I work with
  • But you have to consider a broader mandate. Way to live life is pretend you’re at your funeral. Your best friend gets up and starts the eulogy. What do you want him to say? Live your life in reverse. Want to have a meaningful, beneficent impact on a large number of people
  • Icahn says I’m sanctimonious. Think activism is a healthy thing for the market, companies to be optimized. Short activism crucial because government/SEC doesn’t have resources. Think SEC should have weekly meeting with short sellers to see what they’re focused on

 

With you investment in Howard Hughes, how do you think about potential catalysts?

  • REITs are valued on a multiple of cash flow but General Growth had land and other assets that generated no cash. Felt there were undervalued/hidden assets. The company is now monetizing things that should be monetized, redeveloping things that should be redeveloped

 

How do you think about time management?

  • Time management is the most difficult thing to do. Easier in job, harder with daughter’s performance or doctor’s appointment. Much easier when you’re a student. Want to be a good father, good husband, run a company. It’s hard and I’m continuing to work on it. Sometimes have to say no to meetings
  • From a business point of view, your great investments consume relatively little amount of time. Activist short selling is time consuming. Waited five years after MBIA to do my next activist short-sale, probably going to wait a long time again after this one

 

How do you think about the former CEO of Herbalife’s large ownership stake?

  • Doesn’t bother me if someone is long or short a stock. Want to hear everyone’s point of view, especially the other side. Former CEO was interviewed by Bloomberg, focused on HLF as a nutritional company. Issue isn’t product, is the way it’s sold. Think he hasn’t done enough work to understand this
  • You’re never going to be a successful investor if you make a decision based on what others do (selling what you think is a good investment if someone high profile initiates a short). Everyone makes mistakes. You’re not right or wrong because a large number of people agree or disagree with you. You’re right or wrong based on the facts and reasoning you apply

 

Foresee changes in corporate governance due to focus on activist investing?

  • U.S. corporations used to have the imperial CEO, BOD who were old buddies. Shareholders were ignored. Largely because of shareholder activism, balance of power has changed where BOD has a lot more power because shareholders are paying attention, can be thrown out of office if not doing good by investors

 

Lessons learned from JCP?

  • Began discussion on business quality. Sometimes sacrificed this if thought opportunity was great enough. JCP peaked in mid 90s. Generating 100/ft2 in malls, half others. Owned some very good assets. Had bloated expense structure. Brand name that was respected but tired. A lot of underutilized assets lying around that had value. Teamed up with Steve Roth at Vornado who knew the prior CEO. We together owned 21% of company
  • Met with Mike and was fairly quickly invited to join board. Never join a board that would invite you to become a member. For many reasons, thought Ron Johnson was the right guy. Ron had some visionary ideas. Wanted to be a mall within a mall. Apple-like customer service and check-out service
  • Think is correct vision but, during the strategic shift, JCP operated like two companies. It was like you were living in your home while doing a major renovation. Made changes to pricing that scared away core customers that were financing the improvements. Working for Steve Jobs is you learn customer doesn’t know what they want. As a result, at Apple, you don’t test, you just do. This is very dangerous in retail but was applied to JCP. There wasn’t a coherence in the board about thinking in what to do. Became a turnaround and Ron wasn’t a turnaround guy and the group was running out of money. Hard to recruit a new CEO so got previous CEO but needed to refinance debt. Board got comfortable with Mike again, rejected Ackman’s push to replace Mike. Found self in position with one seat on 11 seat board of directors. Wrote letter to alert others so couldn’t be accused later

 

View on ADT?

  • Looked at it. Shareholders don’t think about cash flows correctly. Doesn’t generate as much FCF as people think because customer acquisition costs are high and customer life is not very long
  • Phenomena now where companies using non-GAAP accounting to report earnings. Have gotten to the point of absurdity where company loses money but have high adjusted earnings. Common in tech. Bad for capital markets. GAAP is the right way to think about earnings for many of these business

 

Plans for FNM/FRE?

  • Gave story. I will do what’s good for America. Think people (politicians) will figure it out. If liquidated, will be many years from now and will still be an attractive outcome for investors

 

How do you determine which security is best for a given investment?

  • Short selling is a treacherous business. Short few for good reason. Most done through purchase of CDS, pay small premium and potentially make a lot. Did not expect Icahn/others to pile into HLF on the long side. Once that took place, there are technical factors where you can be right but get carried out. As a result, converted shorting stock outright to put options which helped with managing shorter term risk against the longer term reward
  • Pick investment based on risk/reward, size based on how much you might lose. P&G is a AA+ company that probably deserves to be a AAA. Highly under-levered. Can buy long-dated options on P&G with essentially no premium. It’s like your own private LBO. Originally thought would be active; became passive after they made change in management

 

How actively monitoring for activist ops in EM?

  • Not. Understand rule of law in US. One person removed from every CEO in America. Easy. Proxies/legal/culture to difficult internationally

 

Which other investment managers do you admire most?

  • Big fan of Bruce Berkowitz because he runs a mutual fund but not a closet indexer. Opposite of that, makes bold bets, does so thoughtfully. Great guy. FNM/FRE was on my watch list for a long time, Bruce gave a nudge which got me over the line

 

How do you think about your investment in Air Products given growth is so capital intensive and the company has seemingly been a poor capital allocator?

  • Industrial gas one of the great businesses of the world. Selling oxygen to steel mills is essential, no one is going to disrupt. Oligopolistic. More and more uses for industrial gases (insulation, circuits, food). As the world industrializes, demand will increase materially, particularly in EMs. Steal mill opens, sign LT contract, may make low margin on that 70% of business but get good margins on other 30% servicing the local community. It’s a capital intensive business. For a long time didn’t invest in railroads because too capital intensive. Best businesses are those that don’t need capital to grow but second is those that are capital intensive but generate good returns on that capital. Air products is in that category
  • Praxair the best-in-class player. Expecting APD margins to better converge

 

Guidance for people going to sell side?

  • Sell-side often makes a huge mistake. I get a lot of value from the sell side when understanding new industry but get no value on predicting earnings. Herbalife analysts all focused on next year’s earnings and multiple applied, no one looking at pyramid scheme possibility. Best analysts are focused on competitive dynamics, what a business is worth. Issue is compensation model. Can learn a ton by being an analyst if focus on right things

Panel 1: Activism as a Catalyst for Unlocking Value

Jesse Cohn, Elliott Management Corporation

Scott Osfeld, JANA Partners

Tom Sandell, Sandell Asset Management

Moderator: Ken Squire, 13D Monitor and the 13D Activist Fund

 

JC: When approaching activist opportunity, how do you balance activist element with fundamental?

  • When approaching any investment, always starts with fundamentals/value component. Activism is overlaid onto the value thesis. If out of 100%, 95% value, 5% activist tools overlaid. Two step thing. Have to be able to create value at company, have to be able to win (there has to be a pathway to realizing change/success). See people coming into activist situations where that isn’t the case. Activist efforts may or may not pan out but better like the business since you’ll be putting a lot of capital to work

 

SO: JANA has great returns but is an activist in less than a majority of holdings. How?

  • If was an activist in all investments, returns would be worse. Extremely selective when deciding when to be active. Use V-cubed criteria: Value, Votes, Variety of ways to win. Net result is far less frequent to find activist opportunity than value-catalyst opportunity. If opportunity set changed, we would change, but don’t want to be activist for activist’s sake. In terms of pros and cons, biased because think activist is the best way to invest. With activism, you have control over the outcome, bring in a well-planned path that hasn’t been anticipated by the market. If you can find new sources of value or bring existing value forward, it’s an attractive way to generate returns. Con is harder to change your mind after involved and you take reputational risk every time

 

TS: Lately you’re allocating more money to activism. Something you see in current financial markets?

  • During 2009-2011 didn’t focus on activism because were worried over outlook for equities. Then found better opportunities in credit. Now see less in credit, more in activism and equities. See opportunities at companies that are undervalued and mismanaged. Often best opportunities are when a company is underperforming because management’s inability to unlock value for shareholders. Currently seeing opportunities in the U.S. and Europe

 

JC: How important is it to have good relationships with larger passive investors and is it getting easier as the activist stigma goes away?

  • Those relationships are very important. You’re ultimately asking a company to do something they’re not already doing. Company will listen to ideas and hopefully do them, but a large percentage of the time they’re doing things because they’re afraid to lose. Large shareholders actually carry a lot of the work. Companies don’t call Fido or TROW short term as they often do with activists. A collaborative understanding is powerful when you approach companies. Always seek the shortest, easiest path to change. Having these relationships often provides backbone to go ahead with a proxy contest, if you need to

 

SO: What do you do that causes companies to acquiesce to your ideas?

  • Presenting ideas that create durable and lasting value. Others: Reputational capital, garnering shareholder support which is the most powerful force an activist can garner; the implicit threat they will exercise rights and seek board control. Try to take a reasonable approach where don’t try and embarrass CEO or go on CNBC to pitch plan
  • Is threat of proxy fight a big source of leverage? Yes, there is certainly an implicit threat but don’t go into meetings with that as a starting point

 

TS: How has activist landscape changed?

  • Started in the 80s/90s working at Bear at a time when activists were considered raiders. Change really happened around 2004/2005 where corporate foundations welcomed activists. Realized reason why a company isn’t performing is because of management not managing business properly, games going around in board room, getting paid way too much when underperforming

 

JC: Talk about one present portfolio opportunity?

  • Juniper which announced a 6.2% stake in. Leader in routing sold to service provider, big switches that direct traffic over networks. Interesting because suffered from being good in one space (routing) and bad in others where sought to diversify. Those efforts led to a messy company, enormous amounts of R&D spend, products not working out, acquisitions not creating value, built up a lot of cash creating inefficient balance sheet. Core business is solid. Put presentation public with three areas to address: (1) inefficient cost structure re new initiatives (“science fair projects”); (2) return $4bn of excess cash; (3) clean up portfolio to focus on things they’re good at

 

SO: JANA position?

  • SUPERVALU. Supermarket business. Has a lot of dynamics of reorg equity. Company was severely distressed, got lifeline from Cerberus. Sold piece of Albertson’s that Cerberus hadn’t acquired but created large capital loss. 5x FCF, down 20% YTD so clearly debate/tension in stock. (1) de-centralized collection of supermarket flags scattered around the US, each of which is attractive to strategic buyers; (2) significant tax asset allows to sell businesses without tax consequences; (3) balance sheet is healthy after Cerberus recap. See over 100% upside

 

TS: Idea?

  • Like Bob Evans Farms. Family style restaurant. See 60% upside if management does the right things. They have not been focused on unlocking value for shareholders. Stock has underperformed peers by 180% over last 5 years. Not done royalty model or sale/leasebacks of real estate. Good assets. Plan put forward is: (1) sell/spin-off packaged food business as only 5% of sales go to owned restaurants; (2) real estate worth up to $700mn, received 4 unsolicited offers from publicly listed REITs at cap rate of 7% which is where they’ve been valuing it; (3) take proceeds to buy back stock. Could end up with $80 stock

 

Student/Audience Q&A

 

SO: Given your past experience with supermarkets, how does one idea lead you to another?

  • Try to leverage in one situation into another, try to operate without industry silos in the firm, specialty is more on the catalysts that can be applied across industries. See these opportunities often as addition by subtraction, i.e., taking out underperforming business to make the whole more than the sum of the parts. We will pursue any opportunity that is not highly regulated (third party who can dictate the outcome, as with financial institutions). Can’t control your destiny in these cases. Have had disproportionate participation in cyclicals like energy/materials

 

Is the positive change in thinking re activism secular or cyclical?

  • TS. Biggest change is with pension funds. CalSTRS has own governance department closely monitoring managements. In their case, there is a realization that something might be wrong when companies are not performing as they should
  • SO. Broader acceptance. Increasing concentration of shareholder ownership among institutions. Changes giving shareholders greater say over pay, etc., probably emanating from the financial crisis. Factors that make activism easy: cash on balance sheet, low interest rates, “deconglomeratization” after a wave of M&A, tougher economic/operating environment. Want as many options for exit as possible so market environment crucial
  • JC. The infrastructure is now in place that allows for activism. Funds have people focused squarely on governance and performance

 

TS: From where came your interest in Spectra Energy?

  • Interesting in that stock underperforming peers by 73% over last 5 years, CEO second highest paid in industry over last three years. Example of shenanigans that can occur in board rooms. Opportunity was they underperforming so much, they adopted our plan relatively quickly

 

TS: For companies that have a real estate component, activists often seem to go straight for that. How important is it?

  • With Bob Evan Farms, doing a sale-leaseback is actually cheaper for them than to rent space. They should take some of this money and repurchase stock. This is a better capital allocation strategy because they don’t need to own real estate
  • Tools are spit-offs (?), spin-offs. Conglomerate discount is often the opportunity for activist to unlock value. Also, harder for analysts and investors to understand the company and intrinsic value. Separating entities also enables you to better incentivize management team with shares/options – can be held more accountable if managing one business line than conglomerate

 

JC: Google like Juniper?

  • Nothing wrong with R&D, is essential to tech. What is wrong is when doing R&D, you’re making an investment. In the case of Juniper, they start projects but don’t have a way to finish them. You have to analyze a company’s business plan and go-to-market strategy for a project and see if it is well thought through. When you see a poor trend like this as with Juniper, as with Juniper, you know something is wrong at the company

 

SO: What is your experience teaming up with others or avoiding specific opportunities because of the involvement of another activist?

  • Rational of teaming up is sound when capital is the principal limitation. Back in 2005, when initiated position in Kerr-McgGee, didn’t have the capital. Brought in Carl Icahn. He did the same with us in the case of Time Warner. When an activist is already in a stock, when think it strong thesis and investor, view that as a good thing

 

One criticism of activism is you aren’t sufficiently informed to have a credible opinion. Is this valid?

  • SO. Clearly there is an informational inefficiency but the numbers don’t lie: simply look at return on capital, margins versus peers and historic trends; incentives for managements (focus on growth at the expense of returns). Probably the greatest informational asymmetry is tax basis which can become a contentious issue. You can try and triangulate by studying the DTA that has been formulated over time
  • JC. May not have all the info but also don’t have a bias. Activists bring a fresh perspective. Looking outside-in but have broad perspective. Can make up for informational gap in other ways

Panel 2: Behavioral Biases: It’s not IQ, It’s EQ

Kent Daniel, Columbia Business School

Michael Maubousssin, Credit Suisse

James Montier, GMO

William A. von Mueffling, Cantillon Capital Management

Moderator: Mark A. Cooper, PIMCO

 

MC: Three quotes as an opening:

1. You don’t need to be a rocket scientist

2. All is behavioral, if not behavioral what the hell is it

3. Investing is not like being a supermodel, where you can always get away with things because of your looks (MC quote meant to be funny because not the most attractive person!)

 

Why we should study behavioral finance?

  • KD. Start with assumption that everyone is smart and wise, so markets should be efficient. Found not the case, behavioral finance tries to go in and explain why. Study of human fallibility in competitive markets. Human fallibility: We know there are a lot of idiots, people with biases, but not helpful to just say it. Need to know how people take in information, process it, and then make mistakes. We do individual experiments and classify the outcomes
  • See Daniel Kahneman’s book; as good a summary of the field as any. Try to take what this means for security prices. A couple aspects: (1) How do these biases come into market patterns? We’re making some progress on that; (2) Limits to arbitrage. Standard economic argument of why markets are efficient is smarter investors will push prices back to fair value. This is not a very sophisticated argument. You can still lose money
  • We have shown how outcomes are inconsistent with standard models like CAPM. We study trading, build theoretical models to understand why people trade the way they do. Doing more neurological analysis to understand why people have biases, why their brains fire as they do

 

How can use this information to become better investors?

  • MM. Understand basic principals. A lot tougher trying to be smarter; easier to not be dumber. Consider the inside view versus the outside view. Recalls the story of racehorse Big Brown. Finished last in Belmont, first time for Triple Crown contender. Outside view: Think about problem as instance of larger reference class; appeals to statistics. Inside view is to use model, adhere to some institutional view of the way something should work out
  • JM. Mentions several quotes: (1) “My brain: it’s my second favorite organ” (Woody Allen); (2) “An economist is someone who sees something that works in practice and wonders if it would work in theory” (Ronald Reagan); (3) Zoologists don’t look at unicorns to understand horses
  • Investing and behavioral finance are intimately related. Any time you make a decision it involves your brain which is why behavioral finance is applicable across so many domains. At GMO, there have been two basic approaches: (1) I understand sources of behavioral biases so will outsmart the market. Ignores first rule of behavioral finance which is everyone is overconfident; (2) Understand where behavioral biases are likely to arise in the investment process and then create checks and balances
  • WVM. Holy grail is if you can find devices to change behavior, but really it’s about avoiding bad behavior

 

How did you set up firm to help avoid?

  • WVM. At first firm, always had television on with CNBC. Doesn’t really help you do anything. People spent so much time listening to economists. Many people can tell you every member of the Fed which is useless
  • We try to eliminate negative alpha as opposed to seek positive alpha. Focused time on avoiding the more difficult ones to catch, things like cognitive dissonance, framing bias. Most obvious way is to do everything in an open environment. If not done in front of everyone, tend to convince oneself of our own inherent biases

 

How do you combine theoretical and practical of behavioral finance?

  • MM. Had dinner with Phil Tetlock. Expert political judgment. Now working on government’s forecasting tournament. Been able to identify 120-130 “super-predictors.” Turns out super predictors work well on teams, but they don’t have physical proximity. Focus is on bouncing ideas and conflicting, but not sitting next to one another. You’re more likely to go along with your colleague’s view if you sit next to them (desire to avoid conflict)
  • Kahneman says to keep an investment journal. Write how you feel physically/emotionally, why you’re making the decision, what outcome you expect, when you’re making it. Be number/probability-specific. Helps to avoid hindsight bias, creeping determinism
  • Like the idea of a checklist. that covers parts of the investment process.
  • WVM. Everything done at firm is recorded (price target, etc.). Extremely important in maintaining discipline, avoiding bad behavior

 

Anyone able to generate alpha by exploiting behavioral flaws?

  • KD. Some funds market themselves as behavioral. Should be a big part of any process but don’t think it’s good to market oneself that way. Find good businesses, value them, compare value to price, determine what’s different from what everyone else’s thinking. What are the various psychological factors that cause the market to go wrong?

 

On the topic of why people make mistakes, what are yours?

  • JM. Been married three times. Biggest mistake is probably being overconfident in own abilities. Built models that were built to work and should have, and then overruled them. Spent a good 18 months being trapped by own models (tinkering). Humbling to see I thought that I knew more than the original model which had spent a lot of time on, but then decided to change
  • WVM. List on Wikipedia of all bad behaviors out there. One example: Ikea disorder: If you build something, you value it more. Don’t think I suffer from that one. Overconfidence is definitely the one that jumps out. Spend so much time thinking about avoiding mistakes, you sometimes overlook your own

 

How do you think about organizational structure on the ability to succeed out in the world?

  • MM. 1. One way to exploit on the positive side. Be greedy when others are fearful, fearful when others are greedy. Seth Klarman quote: “Value investing is at its core the marriage of a contrarian streak and a calculator.” Sometimes the consensus is right. If a house is on fire, run out. Calculator: When does that lead to a disparity between price and value?
  • Fundamental attribution error. People often attribute mistakes to the individual as opposed to the context in which they operate. If you create too much stress, that pulls in time horizons. Essential to have the right environmental conditions
  • JM. Idea is to have both the idea and framework to do the right thing. You need to have good valuation framework that produces a signal you can trust. You then need the discipline to act which is a second step

 

How do you think about evaluating an employment candidate?

  • WVM. Resumes all look the same, most all are great today. It’s not really about IQ. My view is one can’t deduce judgment/character in a 20 min interview. Only way to do it is to have interns. I think I can figure out in three days if someone has the right traits but I can’t do that in an interview and I certainly can’t from a resume
  • MM. Keith Stanovich has written a number of books (“What Intelligence Tests Miss”). Distinction between IQ and RQ. RQ rationality quotient which is the ability to make good decisions. Once can have high IQ and low RQ or Forest Gump types of high RQ and low IQ. Need to defer gratification. People’s willingness to rely on system two to make decisions. In March 2009, system 1 was saying don’t want to have anything to do with this market, need to look at system 2 which is your value model
  • JM. “Robots Rebellions” another good book by Keith. Reading broadly and thinking deeply are hugely underappreciated skills. Looking for people who can think and with evidence of thought (and not just repeating what JM has written in the past). In an interview, I’m looking for breadth of experience, someone who thinks differently. Really want someone with integrity. Integrity is being clear on why you do someone or you why you didn’t do something. This is something you cannot assess in an hour interview

 

How should a value investor use quant strategies to optimize outcomes?

  • KD. Appropriate to have some level of skepticisms to quant strategies. Sometimes they go wrong. But you also shouldn’t ignore the information they provide. As an example, momentum. Ben Graham said technical analysis doesn’t work so many value investors have ignored it. It has worked historically in currencies, commodities, fixed income, equities. Like other things discussed, should be one part of an investment strategy. Momentum strategies tend to work well in a low-vol positive environment; is related to overconfidence as people are slow to update their thinking
  • If a stock has fallen a lot, one should think twice about when they buying into it. That said, toward the end of financial crisis, one should have ignored quant/momentum models
  • JM. Models create a ceiling from which to subtract, not a floor from which to build. When it comes to something like momentum, have real issues with it because don’t think anyone really understands momentum which makes it a sure way to lose money. Not part of any economic/accounting set
  • MM. Freestyle chess. 1997 machine beats man in chess. About 15 years ago along came freestyle chess. Combination of two where man can defer to computer or override. These players can beat man or machine. They’re not great chess players (1,500 – 1,600). What are these guys doing? What is that skill that enables them to know when to override the machine? That is out there. Chess is a simpler model, closed system. Glimmer of interesting light. Appears in books “Averages Over” and “Second Age of Machines”
  • KD. A lot of people who purse value and won’t touch momentum and vice versa. Both have made money. Why not combine?
  • WVM. Appreciate the value of quant but hard to implement in practice. Have to watch trading cost/liquidity because can have a dilutive impact if not careful

 

What’s next in behavioral finance?

  • WVM. Charting doesn’t work
  • MM. We have a pretty good understanding of mistakes made. We have less traction about what we should do organizationally to mitigate. Very few organizations have implemented processes to sidestep mistakes
  • JM. Biggest open issue is how do we use this? Neuro-economics is one of the world’s biggest red herrings. Doesn’t help you understand a damn thing
  • KD. Optimistic over field in next couple of decades. One phenomena is people put a lot of weight on gains and losses. Different part of brain function when thinking about gains and losses

 

Student/Audience Q&A

 

What missing from lack of women on panel?

  • KD. Great paper by Barbara Modine. Men tend to be more overconfident in trading behavior. Tend to pay more, lose more money. Good to see that a lot more women are entering the field of behavioral finance
  • WVM. A lot of bad behaviors are male-biased. Street focused on getting PMs to trade, take action. Odd that there is under-representation of women in money management. They should be able to do better than men
  • MM. Study showed similar average performance but men with higher standard deviation
  • JM. Women smarter and figured out a lot better ways than spending time than on finance

 

Wiki list doesn’t give much of an explanation of each bias. Can you rattle off a few of your favorite explanations, books or other sources?

  • Good manual by Richard Goyer with CIA. Psychology of intelligence analysis. Scott Luce on judgment and decision-making which is a good one-stop resource. Dan Kahneman “Thinking Fast and Slow.” Max Bazerman “Judgment in Managerial Decision Making”

 

Specific trading strategies that take advantage of others’ behavioral finance mistakes?

  • KD. PhD student doing research on disposition effect. Old axiom of ride winners, sell losers. Individuals tend to hang on to losers too long, sell winners too quickly. However, if something goes down a lot, people tend to sell. She looked at interaction of volume and volatility. Results are amazing. Not much out there on this but its starting to develop. Can potentially infer what this does to prices and trade on it

 

Can all models be arbitraged away?

  • JM. Think the idea that we tend toward efficiency is rubbish. Used to justify economists’ existence. Reason why they don’t get arb’d away is most investors fail and ultimately go away. This keeps opportunities for good value investors. Unlikely to be arb’d away forever
  • WVM. 35% of Americans believe in ghosts – people are nuts (indicating why we won’t tend toward rational/efficient markets)

 

Can you speak to the usefulness of case studies in reducing behavioral biases?

  • MM. Writing a piece on this know. Bit cranky on case studies because think harder to learn from history than most others believe. Categorization allows for induction which can be a problem. Have to be extremely careful, if you’re looking for similarities, you’re going to find them


Panel 3: Best Ideas

J. Kyle Bass, Hayman Capital Management

Thomas S. Gayner, Markel Corporation

Jonathan L. Salinas, Plymouth Lane Capital Management

Thyra E. Zerhusen, Fairpointe Capital

Moderator: Jason Zweig, The Wall Street Journal

 

How do you distinguish your best ideas?

  • TG. One that crowds out the others
  • KB. One in which you have most conviction, done the most work on. I might be known as a macro investor but it’s all bottom-up and event-driven. Situational analysis and conviction help best ideas rise to the top

 

How do you find best ideas?

  • TZ. Any number of places. Talking to managements, reading the paper, a lot is just reading and watching different companies and stocks. Sometimes stocks that get knocked out of a benchmark create opportunities (Dow Chemical pushed out of S&P 500 to midcap index had a lot of forced selling)

 

For someone starting out, are there any techniques to help structure selection or decision-making process?

  • TG. Need to break down the world and focus by opportunity type. Look for real asymmetry between reward and risk where, if wrong, will only lose a modest amount of money. A lot of ideas come from top-down themes and businesses/industries where have focused on for years. Try to narrow industries where have highest degree of expertise

 

In your finds, how many ideas do you regard as best?

  • TG. Answers aren’t black and white. If that’s what you think, you’re probably on the wrong track. 80/20 rule applies to a lot of things. Top 20 ideas 80% of our portfolios; akin to our major league roster. Need to have some exposure to focus on it (when initiating a new position). Then moves up as knowledge/conviction grows
  • KB. We have 5 or 6 investments at a time. Don’t want to over-diversify. Today, one’s a currency, one’s a sovereign debt, two big equity positions, one debt
  • NS. Only a dozen ideas max, 10 today on long side. A little over a dozen on short side. Better to be deep than broad. Short side takes a lot of time so need to be particularly focused

 

How do you manage the problem of concentration without having style police scream at you?

  • TZ. Need to have 80% in midcap. If look at Russell Midcap (we have value and growth). Have 80% $1bn-15bn. In Russell, midcap goes up to $28bn

 

How do you think about sizing since high concentration can be very harmful on downside?

  • TG. Practical. Top-10 roughly 50% of portfolio. Unique advantage for me is I work for an organization that makes cash every day
  • KB. Every single asset class is different. Equity holding might max out at 15% but you can have a credit exposure at 300% of NAV paying 3 points as carry. You need to use leverage with currencies because moves aren’t generally so great
  • JS. Focus on margin of safety if event-driven idea. If compounder, need high confidence that earnings will compound at the rate you expect. Always are careful that balance sheet won’t impair investment outcome

 

For mutual funds, what is the max position size you can take?

  • TZ. 6% in single name. For a short time we had 7%. Suppositions became tax sensitive so reduced. Becoming paranoid so max today is around 4%. Manage $5bn over 50 names so have fairly large positions in absolute terms

 

What do you do when a best idea turns into a worst idea?

  • JS. If you’re going to take concentrated positions, detrimental to let thesis creep unnoticed. If something emerges to contradict your thesis, you have to recognize it and adjust accordingly. Try to stress test your thesis ahead of time so won’t lose much if you’re wrong
  • TG. I make mistakes all the time but my bad ideas have generally not been that bad. Started out as an accountant. Put on a silly assignment but thought found discrepancy, showed more senior person my calculations. Senior person said, “Tom, if it’s all wrong, how wrong can it be?” Ask myself that same question now
  • KB. Have security level risk mgmt, have portfolio level risk mgmt. Have outside members on risk board. If have 2% drawdown have internal meeting, if have 5% have external meeting. Reconsider then if hedged appropriately. Think the two ways complement one another. If 10% drawdown, pursue mandatory risk reduction

 

If analyst, how much do you have to defend your ideas?

  • KB. Every analyst has P&L. Not created to be cutthroat. Analysts only do well if fund does well. Team quizzes you every Monday morning. KB serves as the benevolent dictator

 

What is your best idea now?

  • TZ. Caveat is best often doesn’t turn out to be the best stock. Sometimes takes 2-3 years. That said, best today is Cooper Tires. Apollo wanted to buy but deal fell through because Chinese JV didn’t want to be part of it, manufactured a series of strikes. People who bought into it for the deal then dumped it, now trading lower than it was before. Company learned Chinese JV could be problem and is trying to partner differently going forward. Stock is now 6x P/E, sales 0.37x, low end of historic range
  • JS. Blackberry. Look for contrarian. See free option on excellent CEO turning business around. Pro forma for some RE, will have $7 in cash, stock trades at $9-10 now. If you give credit for global database center, property rights, some software like Messenger, can easily get to $10-12 but think $15-20 is more likely. New CEO focused on harvesting value left in Blackberry. He did this once before at Sybase. CEO owns about 10% of company which doesn’t vest for around 5 years. Now sells on consignment after outsourcing manufacturing to Foxconn
  • TG. My ideas is a concept: time. Bill Miller talks about time arbitrage because people in industry working on too short a time horizon. We try to institutionalize at Markel. Senior management is paid on 5-year rolling performance. Try to frame every decision in a way that puts it into clear perspective
  • From a stock perspective, best idea is Markel. Fun place, spectacular culture, P&C company that made underwriting profits more years than not. Similar architecture to Berkshire. Henry Singleton at Teladyne did a similar thing. Four part test that every idea goes through: (1) Business is generating good returns without much leverage?; (2) Managements have equal measures talent and integrity?; (3) What are reinvestment dynamics of the business? We want it to be able to grow while maintaining/increasing returns; and (4) Valuation: what do you have to pay to purchase those three attributes? If you focus on first three and are patient, any mistake on valuation will help smooth out the downside risk
  • KB. Argentina. Believe what is going on is idiosyncratic. Have leadership that is inept. FX reserves, balance of trade, current account, fiscal deficit would tell you to run away. Perhaps no better place to consider investing in over the next 3-5 years. Have a debt hold-out situation that will get resolved one way or another in the next 12 months. Kirchner is out soon (October 2015). Problem stems from balance of trade, inelasticity of demand for energy. Going to take $200-300bn of FDI to extract energy reserves. Greece going to have further writedowns yet trades at 7-8% coupon versus 13% for Argentina with much less external debt

 

KB: How do you think about margin of safety with that?

  • Provincial rates pay in dollars. Still a 30% spread between onshore and offshore financing. Things will get worse before they get better. Margin of safety is 10-12 points. might trade at 50. Have willingness to pay, Kirchner just doesn’t like Paul Singer and has dug her heels in as a lame duck politician

 

Student/Audience Q&A

 

KB: Can you go through Japan idea?

  • One thing you have to pay attention to is Japan has had a structural current account surplus for the last 30 years which is now going to a structural deficit. Structural deficit will put a ton of pressure on the currency. Yen has to be at 118 at the end of 2014 to have 2% CPI inflation Abe seeks. Embracing this trend suggests one should go short Yen and long Dollar for next two years

 

TG: With biggest holding and most successful investment (CarMax), is it difficult to be honest with yourself?

  • Largest position is Berkshire but similar situation. Every other week have executive meeting at Markel. Full 35% tax payer and this is the company’s capital. When have something that has gone up, have a financial bias as well as behavioral bias not to see something. Think about opportunity cost of tax consequences in terms of after-tax reinvestment rate of return needed to justify the sale

 

TG: What’s your research process?

  • Only have one analyst working for me within Markel. Know 16 of top-20 shareholders. Two might be new, two computers so don’t chat with those. Relationships with smart investors have helped source ideas, challenge our thinking. Spend 50% of time on the road

 

JS: Why didn’t anyone take Blackberry private?

  • Some bids were not acceptable (e.g., Lenovo). Some wanted to buy pieces (people speculate Apple, Google). Company decided that a good operator can create a more profitable exit if managed sometjhing of a turnaround. Think Blackberry will look a lot different and may well be sold in pieces after the turnaround


The Big Secret for Value Investors

Joel Greenblatt, Gotham Asset Management

Moderator: Bruce Greenwald, Columbia Business School

 

JG most famous books:

“Little Book that Beats the Market”

“You Too Can be a Stockmarket Genius”

 

How did you arrive at spinoffs and special situations?

  • Started investing when in junior year at Wharton. Read an article about Ben Graham. A light bulb went off. Started out as a value investor with dad and his friends. Got into spec sits since first job was at a risk arbitrage firm. One thing about it is if deal goes through make 1-5%, if doesn’t lose 10-20%. Didn’t like those odds so thought to look at periphery. Was seeking a way out of business had gotten into. Looking off the beaten path. Spec sit means something extraordinary or out of the ordinary is going on. Nooks and crannies of the market was a way of finding easier hurdles (Buffett talks about looking for 1 foot hurdles). Lost a bet with someone, had to take them to Lutece. Looking at menu, pointed at something. Asked chef Andre Soltner if anything good, said no, everything is horrible. Got the message: As with ordering at a fine restaurant, decided to look for ideas where everything’s likely to be good

 

How do you select in new investors into your investing club?

  • One of great things in late 90s was internet push. Viewed as a good opportunity to create investment club to share ideas. Partner found on Yahoo investment board a write-up of stock we had found that looked very promising but was complicated. Realized there is intelligent life out there. Guy who wrote the posting was working at a deli counter at the time. I had already started teaching at Columbia. Said to students, if they got A+ on investment thesis paper, which occurred maybe 3 out of 40 at the time, would let you join the club. Only obligation was had to share two best ideas per year. Morphed into Value Investors Club. Turned into American Idol for hedge fund managers. Many not deli counter workers but also not professionals, thought can help get them money

 

What makes someone extraordinary?

  • Simple thesis, easy to understand. I think what about this, and then I come to an answer to that question. Then think what about that, and find answer to that. If there was a Vulcan mind meld, saw as attractive

 

Is it true that you entered the financial crisis owning just two stocks?

  • No. Generally 6-8 ideas are 80% of the portfolio. Never really changed that. High volatility (we see a setback every couple of years) but good way to extraordinary performance. However, don’t think it’s a good business model when investing other people’s money. Really only ran outside money for the first 10 years. Returned half after 5 years and all the rest after 10. When take decision to manage other people’s money, there’s a lot of additional pressure you put on yourself. Wanted to take one extra issue/concern off the table. Was a personal choice for enjoyment

 

Since then moved onto magic formula with mechanical approach and a lot of holdings. What occasioned that change?

  • Investing is statistical yet it represents ownership shares of businesses, not stocks. We’re trying to value businesses and pay a lot less than they’re worth. Ben Graham was more systematic. I was trying to share two things in the “Little Book that Beats the Market:” (1) Figure out what a business is worth and pay less; and (2) if you can buy a good business cheap, all the better. We back-tested the approach and were surprised that it worked so well over so many years. We have fundamental analysts looking at company but use the framework to measure intrinsic value.
  • Lots of ways to skin the cat but when I got into this project it was a full time job. You’d have to look at 70-100 names to find your 6-8. This is a benefit of systematic investing. One or two names aren’t going hurt us during a period of times when they underperform materially in the short run. Think can bang out 15-20% over time with limited risk. Have over 300 stocks on long side and 300 on short side. Bad day is more like 20bp down, not 20%

 

Started magic formula as long only?

  • When wrote the book it was meant to help individuals for themselves. People wrote and said, “Can you just do this for me?” So I set up an interesting experiment regarding formula investing. Gave people two options: (1) List of around 50 companies based on cheap and good where they can choose at least 20 and update quarterly; (2) Added a check box that said just do this for me. 95% or 97% said just do it for me. After first two years, examined just do it for me relative to people doing it with some discretion. Self-managed did fairly well in first two years: up 59% versus market up 61%. Automatic portfolio was up 84%. Self-managed underperformed so shut that down to avoid people hurting themselves. Then opened two long-only mutual funds. We just passed the three year anniversary. Both got 5 stars from Morningstar, one was #1 out of 147. Have another fund that is 170% long, 70% short

 

How do you eliminate biases?

  • Nothing I do has to do with momentum or anything else. Focus is on straight valuation. Importance is, no matter how good your strategy is, there will be periods when you’re not beating a benchmark. During those times when what doing appears to not be working, you don’t have to say your strategy is not working. Don’t change anything. Simplest thing is these are not pieces of paper, they are pieces of companies. I tell my class, if you’re good at valuing companies, I guarantee you that the market will agree with you, I just can’t say exactly when. Two or three years should be enough time for an individual stock. Occurs faster for a group of stocks. Market is efficient over time, not efficient at a point in time. Things that are hidden or uncertain become less hidden or uncertain over time

 

How risky or attractive is the current environment?

  • Because we do only bottom-up work, I’m fascinated by where stock market is going on that basis. Actually have power now with group of analysts (cover 3,000 largest companies). Went back several decades and looked from a bottom-up standpoint how each company was priced and added them all up. Looked at R1000. Did every day for last 23 years (FCF metrics and a couple other value criteria). Looked at conglomeration of bottom yields and where was market a year forward from that yield. What we would conclude today is that we’re in the 53rd percentile of cheapness. In the past, the year forward return would have been 8-13% but this is not a forecast. The estimated forward return is slightly negative for R2000; one reason is the first 20 names in S&P500 are over 30% of the index. If equally weighted R1000, be in 26% (i.e., cheaper 74% of the time). Mega caps therefore look quite a bit cheaper than small caps

 

Any industries that look appealing?

  • Found there is no predictive power based on where we concentrate within industries at any point in time. Our ability is with specific stocks. Don’t have a good answer but don’t care since don’t look at it that way

 

Student/Audience Q&A

 

What advice do you have for students as we enter the real world?

  • Ability to pick stocks well does not have a lot of social value in it. A lot disagree with that. I think it’s about as socially valuable as picking horses. While teaching students, I tell them I had a wonderful career doing it and wasn’t doing any harm, but key for real success is to give back in some way that is important to you

 

When looking at Magic Formula output, do you sanity check and tease out businesses that appear like damaged goods (e.g., for-profit education companies)?

  • Don’t follow specifically the MF. Focus on cheap and good. Almost everything we buy there appears to be something wrong with. Around 3-4% of companies eliminated are because we don’t trust data or we think there’s something wrong with what looking at. Generally, however, we don’t try to override. Small-cap pharma company came up 3-4 years ago, makes one drug that I take, and I knew it was coming off patent next year. Didn’t do anything about it after we were already long and the stock doubled over the next 6 months. Everyone knew it was coming off patent, you weren’t paying for that. Pretty much everything we buy people have some bad thoughts about so you have to be disciplined

 

How do you think about monetary policy in the context of your approach?

  • Not smart enough to say. We value businesses, put more in the ones cheapest relative to own assessment of intrinsic value. The way I think generally about macro things is if I spent my life building a chain store in the Midwest and something happened in Greece, am I going to sell it for half of what it is worth? Answer is probably not

 

What’s the “Big secret?”

  • Not only did people not buy that book, I buried the secret at the end. Story of first fund-of-funds that invested in Gotham Capital. At time we were sending out quarterly letters. So this FoF asked for monthly returns. In the first month we were up 1.1% and I got a call from the FoF head saying others were up 1.2%, on average, and to what do I attribute the underperformance. Think I said they should call me back in a year. In the book, fast forward a couple decades and I report on two academic studies of fund flows. The only factor that really mattered was, “How did it do last year?” We’re picking stocks that may have done well recently but aren’t forecast to do quite as well over the next few years. These kinds of stocks tend to be systematically avoided by most investors. Value investing has been employed for quite a while. With all the smart people out there you would expect returns to degrade over time but they haven’t
  • We’re basically playing time arbitrage: Buying good companies cheap and being patient. Classic risk arbitrage is someone buying gold in NY and selling in London to exploit a price differential of, say, a few dollars while it lasts. Relating this to value investing, if someone said you could buy gold today in NY and sell in London in few years but you might lose 40% in the interim, a lot of people wouldn’t get too excited about that trade. Time horizons for the vast majority of investors aren’t increasing, they’re shrinking. So things are getting better for value investors

 

What are key lessons/mistakes would have liked to learn as you started career?

  • A lot of theories about investing and a lot of things that may not work over a longer period of time. Try not to get swept into thinking about trading stocks or portfolio theory. It really comes down to figuring out what a business is worth. Ask students what do you do with a business where competition/technology is constantly changing? I say skip it and find another. No business is worth investing in if you can’t value it with confidence. Stick to things you can understand and have blinders to for everything else. Otherwise, you’re speculating and not investing
  • Lesson about mistakes is I had a nice career after making a lot of mistakes. No one is perfect. Stay disciplined. One or two mistakes aren’t going to keep you from continuing in the game. Learn from your mistakes, don’t be discouraged by them

 

Has the performance of spin-offs degraded over time since its has gotten a lot more attention?

  • There have been three spin-off newsletters for at least the last 20 years. There are always extraordinary events going on that are primed for mispricing, maybe too high or maybe too low. It doesn’t matter what the average is. There’s always a fertile ground when significant change is occurring

 

Separate question from an owner of JG funds. Which one is right?

  • Depends on you and your risk tolerance. A concentrated fund, while great, may not be right for you if you can’t stomach the associated volatility. Looked at study of best performance managers over prior 10 years. 97% of best performers spent at least 3 years in bottom quartile. 47% spent at least 3 years in bottom decile. Most investors probably didn’t stick it out

 

Do the two MF factors remain equal weighted throughout time?

  • Price versus value determines whether it’s a good investment. Any opportunity that doesn’t have a good price component is not a good investment. Buffett: IF can buy a GOOD business cheap, even better. If you don’t have price, you’re not investing

 

Do you believe that talking to customers/suppliers gives an extra edge?

  • Gives some an edge if you’re good at it. Bruce and I were talking before that there’s not enough specialization today. Knowledge is always helpful but the key is first day of class, I tell students will fail if their goal is to go out and “beat the market.” The difference between those who are successful and those who are not is the way they contextualize the world. People who are good keep the bigger picture. Don’t throw in complicated math, Sortino ratios, Sharpe ratios, or a focus on things that won’t help predict future outcomes. It’s important to look at the veins on the trees but you also need to keep your eyes on the forest

 

Why chose 1 year horizon in little book?

  • Tax reasons but there’s no “magic” horizon

 

Is indexing good or bad for value investors?

  • Doesn’t really change anything. Believe market cap-weighting is not good because insures you’ll own too many of the overpriced stocks. Equal weighting results in random errors which is better than the systemic errors of market cap-weighting. The more people that do things that don’t make sense to me, I am fine with that

 

Do short horizons create mispricings in large caps (i.e., most investors think it’s dangerous to be overweight MSFT or AAPL)?

  • Tell students not to consider Apple as an individual investment since, as good as its franchise appears today, we don’t know with confidence what it will be selling or what its competitive position will be in a few years. That said, I own it and several other similar companies because I employ a highly diversified bucket approach where most company-specific risks will get diversified away (if you have enough high return, cheap stocks the upside from the majority will far outweigh the downside from the few that don’t pan out)

 

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 (www.heroinnovator.com), 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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