This is part one of a multi-part interview with Joe Boskovich Sr, Chairman and Chief Investment Officer of Old West Investment Management. The interview is part of ValueWalk’s Value Fund Interview Series.
Old West’s approach to investing is grounded in Ben Graham’s observation that ‘investing is most intelligent when it is most business-like’. The firm’s focus is on investing in businesses run by management teams with large stock ownership and smart pay. Old West is looking to buy into such businesses at discounted prices that offer an attractive forward return with limited risk of capital impairment.
Prior to founding Old West, Joe spent seven years as the Vice Chairman of Aletheia Research and Management, Inc. At Aletheia, Joe’s responsibilities included co-portfolio management and marketing, and during his time with the company, he collaborated in making investment decisions, and was instrumental in growing the firm’s assets under management from roughly $80 million to over $10 billion.
The interview will be downloadable as a PDF at the end of the series.
Interview With Old West Investment Management [Pt. 1]
First off, could you tell our readers a little about Old West and your investment strategy?
My partners and I started Old West in October 2008 at the depth of the financial crises. At the time, it seemed like a crazy period to start a money management firm given the turmoil in the markets, but that’s also what conventional thinking would tell you. Like many value investors, we think a little differently. The last 8 years have been good for the overall market, but it has also been a difficult and frustrating time period for active managers. I believe that value investing will reward the active management community greatly over the next many years, and we are very excited about our future and many of the companies that we are invested in.
Our investment strategy largely focuses on the people in control of our capital. As a first principle, we believe that the surest way to protect and grow our capital is by aligning ourselves with management teams who have high stock ownership and smart pay. It is our contention that incentives matter deeply, and that there is no surer way to understand the character and motivation of a management team than to study stock ownership, and how management gets paid. In the time that it takes us to print out the proxy statement and study stock ownership, pay levels, and the business metrics that drive incentive pay, we are able to intelligently eliminate the vast majority of the potential companies that would otherwise absorb much of our time and resources. Simply, we seek to invest with management teams that have more to gain or lose through their equity ownership than they do through their compensation.
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A second and equally important consideration is valuation. Not only do we seek companies that are led by talented owner operators, but we want to buy into those businesses at substantial discounts to our assessment of their intrinsic values. We spend a lot of time trying to understand what will make a company’s stock price appreciate. It is unlikely that a company will appreciate just because it’s undervalued, so we try to identify catalysts that the market will recognize.
How do you go about finding potential opportunities, where do you think the best ideas come from?
We find potential investment opportunities in a number of ways. We read a lot of industry periodicals, we look at special situations, we talk to our network of business leaders from varying industries and we talk to other like-minded and value oriented investors. However, I have found that our best ideas are sourced from Form 4 filings and 13-D filings. We monitor every purchase or sale of stock by insiders, every day. If a CEO and/or several directors purchase millions of dollars of their own stock in the public markets, we will print out the proxy statement to determine if we too think it might be an attractive investment. Once the proxy is printed, we will look at total stock ownership by management, study how that ownership was accumulated, and most critically, seek to understand total stock ownership as it relates to compensation.
What do you look for in a prospective investment, what makes you say, “yes we want that” or “no we don’t”?
We look for undervalued and/or misunderstood investments that can ideally earn high returns on capital, and for investments where we can invest alongside great and proven owner/managers as silent partners. The process by which business value will grow is a direct function of management’s approach to capital allocation, and we spend a lot of time trying to understand the various capital allocation levers at management’s disposal. Because there is not a single and quantifiable data source to vet such issues, it requires a fluid and qualitative analysis that considers past actions as a way to understand how management will make future decisions. If we can’t get comfortable with management, we simply move on no matter how compelling the valuation.
How much concentration are you prepared to take your portfolio?
We concentrate our capital in our most compelling ideas, and about 60% of our AUM is weighted in our top 10 names. We believe that our best idea is better than our 20th best idea, and that our clients will be better served by allocating incremental capital toward the former. Further, our knowledge about a business will inherently decline with the number of businesses we own, and we struggles to see how less knowledge translates into less risk. Average position sizes for a long position range between a 5-10% investment. A full sized 10% position is typically allocated to a company led by talented owner/managers at a great price, whereas a smaller 5% position might be made in a talented owner/operator run company at a fair price. For short positions, our average position size is significantly lower (2-3%) because of the inverted risk/return profile.
At the end of July, Old West Investment Partners had a short exposure of 40.4%. What’s your strategy for finding shorts, what would be the perfect short situation for you?
On the short side, we selectively sell short companies with the goal of achieving attractive absolute returns on capital. Selling stocks short allows our clients to profit