Santangel's Review

Commentary

Notes from the Ben Graham Centre’s 2013 Value Investing Conference

I had the pleasure of attending the Ben Graham Centre’s 2013 Value Investing Conference in Toronto. It was an excellent event the day before the Fairfax Financial AGM. With the permission of Professor George Athanassakos, I have typed up a brief summary of some of the speakers. What follows is not a transcript nor is it investment advice.

A. Gary Shilling (Watch video of this speech)

  • Deleveraging has started and is moving back to trend. There is still a long way to get back to trend though
  • The savings rate looks like it is reversing too, but it is very erratic with tax rebates etc
  • Americans are “trained” to spend money as long as there is financing
  • Germans basically drew the line on buyouts with Cyprus (maybe they thought it was so small they could get away with it)
  • We haven’t restored rapid growth in this process (fiscal/monetary policy)
  • Deleveraging is going to result in continued slow growth
  • What is interesting is that massive fiscal and monetary stimulus hasn’t overcome the deleveraging effect
  • If we had this massive fiscal and monetary stimulus in a normal environment, the economy would be through the roof
  • As long as current Prime Minister of Japan’s approval ratings remain high, thinks that his plans will continue (Yen trade)
  • Looks for a strong Dollar vs Yen
  • AA Corp bond yields are below the S&P 500 dividend yield
  • Individual investors are now moving into stocks
  • In the long run, commodities are not a very good investment
  • Ability for corporations to cut costs more is not great (profit margins may have peaked)
  • Thinks we are in a secular bear market that started in 2000
  • Long-run investments he recommends: Treasury bonds and high quality bonds, income producing securities, food and other consumer staples, small luxuries, USD, rental apartments, health care, productivity enhancers, North American energy
  • Avoid: big-ticket consumer purchases, credit card companies, conventional home builders and suppliers, banks, junk securities, commodities, developing country stocks and bonds

Tom Russo

  • To compound well for long periods of time, you need to invest in companies with management teams who are willing to take temporary pain from time to time. You can’t get there with smooth and steady reported earnings
  • Many of Berkshire’s successful investments came about because they were willing to burden current income for future gains (Geico is an example)
  • Spends by far the most amount of his time meeting with management trying to determine if they are good stewards of shareholder capital
  • Currency has been a gentle tailwind for him the last 25 years
  • Expects foreign currencies to be stronger than the dollar over time
  • Financial industry seems to be the only industry that is really out of favor right now

Francis Chou

  • Investors are short-changing themselves big-time if they don’t look at debt securities
  • Always important to give up some returns to get higher margin of safety
  • Some companies are C.R.A.P. – “Cannot realize a profit” but if the balance sheet is good enough, the debt can be a way to make money rather than through the equity
  • Dex West Media is one he is buying now, but most debt is fully priced today
  • Dex West Media Term Loan – Dex West  is one of the subsidiaries of Dex One and the term loan is the most senior debt in capital structure. They are using free cash flow to buy back debt at 100 cents on the dollar and trades at 76 cents now (4x FCF), as they buyback debt it will trade at 1x FCF in 2016
  • Can get returns as good as equities with far higher margin of safety in bonds sometimes

Bob Robotti

  • Being comfortable losing money in the short term is a component required to be a value investor
  • Investors are driven by emotion so markets will never truly be fully rational
  • Fear, greed and apathy drive the market
  • Most people cannot be a contrarian because they are too emotional
  • He is not sure if ability to go against the herd can be taught
  • Stolt-Nielsen Limited (OB:SNI) – Leading player in chemical container oligopoly, high insider ownership, poised to benefit from strong chemical manufacturing resurgence, chemical shipping industry is better than shipping business and should have  barriers to entry and higher returns although this hasn’t been in the numbers in recent years, order book for chemical tankers is limited so supply of ships will be flat, market assumes it is a value-trap and that has been the case so far, but seems to be changing, trades at 80% of TBV, thinks it trades at half of estimate of intrinsic value

Tim McElvaine

  • Focused on bad news, spin-offs etc
  • When he was a kid, his Dad gave him a small chicken farm instead of an allowance and it was an early lesson on liquidation value because he got far less than value when he sold all of his chickens
  • Peter Cundhill-isms
    • “Cash is subject to theft and stupidity”  (ie backing out cash in valuation is a corporate governance decision not a valuation one)
    • “Concentrate but not too much”
    • “Benign neglect” (usually the stock you are just about to give up on is likely the one to be your best performer)
    • Cash is your most important asset, it is not a zero earning asset, it is potentially your highest earning asset if you get a great opportunity to put it to work
    • “The pendulum never stops in the middle”
    • “Value stocks don’t run, they hop”