Boykin Curry photoNote to readers: I am writing all these posts very informally. I have found that readers like this the best, and it enables me to take the most notes possible and get them up in real time. I will be updating the presentations in real time, and tweeting, so make sure to check back frequently or on TwitterFacebook or Feedburner. Also you can check out this website announcement Value Investing Congress Website Announcement.

All notes are the speakers, except words in the brackets which are mine.

Boykin Curry is the Managing Director of Eagle Capital, which has over $10 billion under management. Since inception in 1988, Eagle has returned an annualized 15.1% vs. 9.5% for the S&P 500. Boykin earned a bachelor’s degree in economics from Yale and an MBA from Harvard.

 

Will continue you on a long term theme.

There are two schools of investing:

1. Greater fool theory

2. The cash flows will be higher than current value justifies

The 1st type of investing can get you rich quick. The second way is long term but involves millions of other players.

WalMart closed at $55. Your mostly paying for the PV of future years of earnings. Analysts spend time focusing on the next 12 months. This is the opposite of the 80/20 rule. This is the same with financial media.

 

American Express in the recession was knocked down by analysts by $4, mostly due to write offs. But investors cut the price down from $49 to $20. We found that analysts were also selling!

Why? Because the five of the most top notch analysts from the biggest firms, were basing their earnings on back of the envelope calculations based on next years earnings. Amex just closed at $45, you did not need any insider information to figure this out, just some sixth grade math.

The market keeps getting shorter and shorter term. Why?

1. Constant media, twitter gets us into this thinking

2.

3. Sell side & media as mentioned earlier

4. Core problems with money management structure. Managers lose clients when they focus on the long term horizon even if  they are right. Compensation structure forces analysts to focus on December 31st.

I like AON and Goldman Sachs.

AON should have 15% compound return for five years. You can ignore short term headwinds. This does not mean buy with blood on the street, value investors got killed doing that without research.

Aon will not have any organic growth over the next year, and GAAP makes the company look less attractive.

Aon is part of a duopoly which adds a few extra percent to returns over years. Free call option-their new GRIP system-captures millions of bids right away.

The insurance cycle turn should add a lot of profit. We dont know when it will happen but at some point it will happen. With compound rates above 100%, some catastrophe will cause premiums to increase. I did not even discuss multiple expansion, which is another call option.

You know all the temporary headwinds, which Goldman Sachs is facing.

95% of job candidates accept offers from Goldman Sachs, even today after everything.  The gap is only growing. The free call option- new assets, new trading opportunities.

Goldman Sachs is trading at $82 billion. We put 14x multiple on i-banking, $1billion. 13x multiple on their pe division. The assets are currently worth $55 billion. The liquidation value of $155 billion. Most of the assets are very liquid. Goldman could buy back 30% of its equity in the next 3 years.

As long as you can think  beyond one or two years you should be okay.

You need to differentiate between risk and permanent impairment. In 2007, Amex traded with almost perfect correlation with the financial ETF. Based on a quant screen you would say that it is just as risky. However this completely decoupled in 2009.

In 2003, pharma multiples started to go down. We brought in chemists who said that there was nothing left that could be found in pharma.

Staples would be a perfect company for us. They have the best management team in retail. The culture is unparalleled and cannot be replicated. They are gaining market share every year. At some point we will not use paper anymore whether it is 5 years or ten years. So invest at risk.

Q&A:

People in 2008 learned the long lesson by looking top down. Unemployment rate for college grads is 5% so employment situation is not bad if you have those skills. If you have global skills it helps even more.

We still have $600billion manufacturing deficit, we just dont have the skills or infrastructure to do it. Germany did it but it took ten years to do it.

Goldman balance sheet? They are paying $2billion a year to borrow long and sit in cash 1. to protect against bank run 2. Take advantage of a potential opportunity.

Goldman marks their private equity very conservative according to discussions we have had with private equity firms. They shut down their trading, so that eliminates their risk.

 

(Whitney Tilson adds in that Goldman is his prime broker and they are extremely conservative with their valuation. They dont play games like French banks do with Greek debt. We avoided AIG even though it looked cheap because we knew they were playing games with derivatives. While we knew Berkshire, which on the surface looked problematic, did not play games.)

 

Regulatory uncertainty is a problem for Goldman Sachs but either way they should make a lot of money.

The question is when you give up is because of capitulation or your idea was wrong. You dont want to sell or cling emotionally. It is best to take a deep breath and think rationally when investing.