美国2010年价值大会纪要

The Inoculated Investor http://inoculatedinvestor.blogspot.com/ 2010 Value Investing Congress: May 4th and 5th in Pasadena, CA DAY 1 Speaker #1: Paul Sonkin from Hummingbird Funds Fund Background: Hummingbird focuses on microcap value and is modeled on Buffett-Graham Partnership. Focuses on $200M and below--usually around $100M; could have over 100 names in the portfolio. Tarsier Nanocap Value Fund: Focused on the wild, wild west of the investment management world. This fund focuses on companies with market caps in the $15M range. The micro and nanocap areas offer great opportunities for investors now. These sectors underperformed during the nuclear winter. A decade of neglect has been compressed into 2 yrs. Private market values exceed public market values by a large margin. Traditional managers have become too large and too scared to take advantage of these opportunities. Therefore, people willing to look at this space are left with a potential for superior returns with less risk. Huge premium you are getting paid for due to illiquidity--a result of there being so few investors in this space. Hummingbird takes larger positions (greater than 5%) because it makes it easier to influence management and can influence the outcome of their investment. Focus on firms with a single or a small number of niches because they are easier to evaluate than firms that are in 10-15 businesses. Also, management is much more accessible The goal is to maintain patience and a rational, disciplined approach to value investing. Try not to fall into the trap of style and market cap drift. Manage risk by diversification. 5 factors they look at: 1. Potential upside (discount to intrinsic value) 2. Can you estimate intrinsic value? 3. Certainty of outcome 4. Timing-how long does it take for the gap to close? 5. Margin of safety 3 areas in which they believe they can develop an edge---these 3 are absolutely critical: 1. Information edge 2. Analysis edge 3. Trading edge Other managers screen out (as a result of institutional constraints) the kind of stocks they look for and this limits competition because others are looking for liquidity. This gives them a huge pond to fish in. There are 5000 candidates that don’t file with the SEC and trade on the pink sheets that are on their radar. With companies with market caps over $1B, there are probably only 2000 companies. So they have a lot of stocks to look at without having to compete with hedge funds. They can get information by monitoring the company’s website. Also, they produce simpler financial statements to look over and there are fewer buy and sell side analysts covering the stocks. This allows them to get information that other don’t have. But, they have to be in the market every single day because of the wide bid-ask spread. It is a very trading oriented strategy. Looking for catalysts- internal and external: Internal (things that increase intrinsic value): things that increase ROIC, improving B/S External (things that help close the gap between intrinsic value and price): takeout, new analyst coverage Goldman Sachs: “Having read the complaint, I think GS did do it” The Inoculated Investor http://inoculatedinvestor.blogspot.com/ Investment Ideas: Steinway Musical Instruments (LVB): $17.99 • Piano, band business, real estate are main assets • Stock is up 100% off of its lows but still has a long runway to go before it is at fair value • Recent events: o Increased ROIC, o Reduced working cap by closing facilities—now making more money with less investment o Improved their balance sheet by taking on an Asian partner. • Asian partner should help with distribution in Asia--should be the growth driver • Bought back stock, debt and paid dividends • Great management capital allocators • Activist on the board • Piano business will improve as the economy improves along with margins • As margins recover then EBITDA should recover as well • Band business- negative competition from Asia killed margins o Led to negative operating margins o Company has outsourced production to China and has closed US operations; Question: Does Yamaha compete with Steinway in Asia? They are not competitors in the luxury markets-- only on the lower end of the business. If you are going to spend $100K on a piano you buy a Steinway. 30% are retrofitted as player pianos (bought by people who can’t play the piano) Question: Pricing power for Steinway, do they have it in band or piano? The company increases it piano prices 4% every year like clockwork. Some years they sell more pianos and some years they sell fewer. In the band business they have pricing power to some extent. Their brand name gives them some pricing power. Question: How do they look Steinway’s real estate value? They only place a value on it if there is an intention to sell. But they not going to sell in this market. They have excess space that they do not need and it does provide an extra margin of safety up to $50-$75M if something goes wrong. SouthPeak Interactive Corp. (SOPK.OB): $.30 • Develops and publishes video games for Xbox, Nintendo Wi, etc • Value investors in the video game business • Was a former SPAC • $18M market value • Could do a $100M in revenue over the next year or two • Volume has picked up over The Inoculated Investor http://inoculatedinvestor.blogspot.com/ the past couple of months • Former founder had 3M shares and was blowing out shares-- dumb seller • Make a lot of money on their sequels • Did a messy acquisition, had to take some charges, had some legal problems • Had poor IR until recently and no analyst coverage • Will introduce 20 games in the next year • Catalysts: o Earnings shine through o Big seller is out of the market o Big line up of games should drive growth Dyna Group International (DGIX.PK): $.80 • Make knick knacks--licensed goods from the NFL, NBA o Shot glasses, spoons, belt buckles • Have been in the business for 30 yrs---not fly by night and have a long history • Founder owns 50% of shares • Dirt cheap on normalized earnings • Market cap (with only 7M shares) less than $7M o Can earn $2M a year of with an EV of $5M • Long term value-- no catalyst but the company will recover • They could buy back stock or the owner could decide to sell the company--that is the exit strategy Question: What the success profile percentage in the portfolio? Out of 10 stocks 2 blow it out, 2 crash and the ones in the middle do OK. The problem is that you don’t know which are which ahead of time Question: How do they go about assessing capital allocation of these firms? Mechanically, you just look at the cash flow statement. You go to the proxy statement and look at management compensation. They always look at the section called related party transactions.. Get into a dialogue with mgmt at maintenance CAPEX, growth CAPEX and potential acquisitions--interviewing management teams is an art. Question: Market making activities--why do they do that? Their partner makes a market for them. If they are on the bid then it is a stock they are fine buying and if they are on the offer it is a stock they willing to sell. Need to be in the market each day just in case they need the liquidity--in 4 or 5 days they can get in and out of most positions. Question: Do they invest in roach motels? How do they stop redemptions? Not investing in roach motels. When they are buying stock they are often competing with management who is buying back stock. So they get a surprising amount of liquidity. They were able to get liquidity and cover redemptions during the crisis. They can also sell the company back some shares directly--may not get the best price but they do get liquidity Question: When you hold 100 stocks, how do you get comfortable about underlying advantages of each The Inoculated Investor http://inoculatedinvestor.blogspot.com/ company? Specifically, with Steinway they are apparently very dependent on certain employees. According to Sonkin, Steinway does actually train new people--they have been around for over 100 years. The knowledge base is cumulative. Steinway’s business has not changed in the last 10 years. He can jump right in and look at Steinway after 10 years and not miss a beat. He has a cumulative advantage when large cap investors have a wasting asset. Question: There are lots of scams going on with small companies. How do they get comfortable with diligence? They have gotten caught into 2 fraud situations over 10 years. So there is some risk of that in this space. Question: Did you ever look at some companies and didn’t invest because of potential fraud? They have avoided getting caught by reading the proxy statement. They see how management compensates itself and how much ownership the team has. Stereotypes are stereotypes for a reason. He won’t invest in a company with a CEO who wears a lot of jewelry. You don’t want the guy to be gawking at women all the time. A business is a collection of assets and people. They are betting on the jockey as opposed to just the horse. Speaker #2: Guy Spier- Aquamarine Fund “Value Investing for Mere Mortals” If you haven’t had these extreme experiences and don’t have a unique wiring, then how do you become as good an investor as some of the best investors? (He compared himself to Soros, Pabrai, Burry, Buffett and claimed that he did not share any of their unique traits). He believes that their experiences make them different and allow them to act better under times of extreme uncertainty. He was worried that he was not going to be able to compete. But he has figured out a few things he thinks he can do. Guy got incredibly interested in behavioral finance. An intellectual understanding of the factors that affect us when we are attempting to invest is not enough. “Invest Like a Champion”—a sign that Buffett has up in his office. Buffett is doing everything he can to set up his environment so that good investment ideas just come naturally. This is a way to affect the way you think in certain circumstances. Why do we imaging ourselves to be super rational? We should think of ourselves as Homer Simpson. We should be proactive about finding ways to help us act rationally if we don’t have unique wiring. List of things to remember: 1. Before investing, run a checklist. Don’t just go out and buy a stock but go through mistakes that you know you and other people make. Create a short circuit to stop your brain from leading you astray. Pabrai and Buffett prefer not to meet with management-- if you stay away from that you will be a better investor 2. Buy to hold for at least 2 years. When you take options off the table then people tend to make better decisions (fewer choices lead to better outcomes). If you close off the option to trade all day allows you to take a break and prevent your brain from doing dumb things 3. Reduce toxic relationships, increase productive ones. Conferences where you hear management pitching their stocks represent a toxic environment. But the Value Investing Congress (VIC) is not a toxic environment. People should reduce exposure to promotional conferences 4. Your friends’ friends can make you fat. Conclusion: it’s not just how obese your friends are that determine how fat you are, but your friends’ friends have influence as well. What does that mean about investing? You don’t even know Warren Buffett but if you know someone who knows Buffett then it could lead to outperformance. Guy Got rid of 3rd party marketers b/c he knew they were bad influences on his life. 4. Create a distance from the madding crowd. Guy got out of NY and went to Zurich. Our brains pick up fear from others in a non-verbal way. .During the crisis he was right next to the herd and he thinks he was affected in terms of fear by being in that environment. This is not true in Kiewet Plaza where Buffett is the only investment guy in the building. Guy thinks this had a profound effect on how he thought about things The Inoculated Investor http://inoculatedinvestor.blogspot.com/ during the financial crisis. Templeton left for the Bahamas because he could not think straight in NYC. The phenomenal investors in NYC have likely found ways to insulate themselves (Einhorn, for example) the madding crowd in NY. We know Einhorn spends a lot of time out of NYC with his family instead. Investment theme: Go long what China is short Guy was a brands guy—Nestle & Kraft. This was very painful in the crisis. When you pay up for a business, during bad times it can be very painful. Certain investments are bad for your psyche during a crisis. Think about how your psyche will be affected by movements in the stock price of a specific type of company. If you have investors who can pull all their money at the same time, you can get a double whammy in which people are pulling money and the portfolio is going down. The majority of China’s people lives in rural areas and will move to the cities-. Accordingly, they will need a lot of steel and iron ore. China is short on steel and are out of local iron ore. Much is being supplied by seaborne iron ore (from Brazil and Australia). Iron ore pricing has gone from annual to quarterly. As a commodity becomes scarce, you see pricing becoming more dynamic. People think pricing will go to spot eventually. Key to understand Aussie iron ore companies: -Reserves--have to be able to figure out which companies will run out of reserves and which ones won’t -Cost of infrastructure per ton of annual capacity -Direct production costs Investment Idea: Fortescue Metals Group (ASX: FMG): 4.17 (AUD) • $70 per ton infrastructure costs; $30 cash cost per ton • Has done the CAPEX already and will not have to spend as much going forward-- more free cash flow in the future • The competitors still have to spend a lot of money on CAPEX • Volume is up and prices are going up => it is potentially trading at 1x EBITDA • If the Chinese market grows like he expects, then the stock has substantial upside Question: What is the impact of 40% tax on iron ore profits just passed in Australia? All of the stocks are down 10% but if you don’t think this is a big deal then this is actually a good buying opportunity. Australia needs to remain competitive with other regions of the world and in the end, the taxes could impact that. Guy believes that there is plenty of profits to go around. China hates that they are dependent on Australia for their growth but companies should be able to extract a lot of value from China. Question (by Vitaliy Katsenelson): What about the bubble in China. Is there overcapacity in real estate and production? 100 years ago there were farms in midtown NYC--there are none anymore. He may be right that there is a massive real estate bubble. But there are 100 new cities that can hold $5M are being built and that can’t happen with steel and concrete. Blips may come but if you are always worried, you never make investments. Question: For people who can’t select their clients, how should they go about isolating themselves? Buffett has these great investments and permanent capital. For the rest of us we have to work on the margin. We have to make compromises when it comes to the toxicity of their environments. The majority of the money you make is often during market extremes, not being a stock picker in more normal times. The Inoculated Investor http://inoculatedinvestor.blogspot.com/ Question: Has the move to Zurich led to looking at more European companies? He moved at a unique time. He knows the US world of stocks a lot better. He has not become more focused at all in Europe because it is a basket case economically. He would not want to invest in a company that had a lot of exposure to Europe. Question: Among the other major investors in Fortescue-- Leucadia and Harbinger--what’s your impression? He claimed that they are smarter than him. They figured this story out before he did. The fact that Leucadia is in there is a big deal. They have 2 directors at the company. At some point we might be in a world where all steel is recycled. Want to make sure that companies take the iron ore out when it is still valuable. Speaker #3: Amitabh Singh of Surefin Investments “The Emerging Indian Investing Landscape” • India has been compared to an elephant: large, moves slowly, not in a hurry, smiling all the time • Currently at $1.3 trillion in GDP, expected to add another $1 trillion in the coming years • Public markets have exploded • 5000 listed companies; 2nd to US • Wealth is worshipped in India • Overall valuations today on large companies (BSE Sensex) appear to be stretched • To find value in India, investors need to look outside the top 100-150 companies • No value in looking at the top 30 companies • Have to invest in these companies on the ground- family owned without a lot of public information • Markets are prone to panic and volatility- 40% more volatile than the US markets • There is not that much competition out there so you can sit out overvaluations and wait for them to correct • India is under-owned by foreigners • Analysts are only covering the large companies-- many companies have no coverage at all • $500B in spending on infrastructure coming in the next few years-- ½ from private sector • McKinsey estimates that from 2005-2025 there will be a trillion dollars in consumption created just by the Indian middle class • There is lot of waste in the government as well as bribery and corruption • 31M cases pending in courts---no legal remedies available • Major mistake: Gujurat Fluorochemicals o Made a mistake by putting the company into buckets. As it moved from a net-net to GARP to more fairly valued, they did not follow it because they tried to categorize it. They missed a 25x bagger after owning it when it was a net-net Investment Idea: Cheviot Co. LTD (BSE Sensex- Scrip code 526817): 276.60 • This is a cigar butt; o Not going to like the business but it is very cheap. $26M market cap with $26M in cash • They make jute (something that can’t be made in China) o Jute is used to make bags and carpets The Inoculated Investor http://inoculatedinvestor.blogspot.com/ • Used for sugar packaging—the government forces companies to use jute packages • Net current asset value $34M; market cap is $26M • Makes $5M per year; doesn’t need much operating capital • This is a cash cow since they only need $1M in operating capital • Hit a peak in 2006 and has fallen since. • Cash has gone up as market cap went down • Value of investments provides a floor in the stock price • The owner has been buying back shares again (owns 74.1%) • Has never lost money and is a consistent dividend payer Question: Regarding Cheviot, are you concerned about a take under? Could the value not go to shareholders? • India has specific delisting laws. After 75% ownership a shareholder has to make a tender offer. Shareholders actually get to bid a price and if the owner doesn’t like it then he/she can’t re-tender for 3 yrs. • He visited the management team to see if they wanted to de-list together but the owner didn’t want to o He wants it to remain listed • Then, the question is what is he going to do with all of the cash? o He has a 26% ROE average in his history so his capital allocation decisions have been good o Put some cash into securities—Amitabh did not like that decision o If he does something great with the cash then the stock could easily double Question: In India, there appear to be low PE stocks with high volatility. Is there an opportunity to sell puts? The option exchange started in 2005 but there is no liquidity. It only offers 1-3 month options and there is no liquidity for individual stocks. Offshore investors can structure something but his gro