Howard Marks at the Value Investor Conference, Omaha. Nebraska.
Notes by Ryan DeVitt
First up…. Jeff Matthews- price is what you pay, value is what you get
Ram Partners LP
Secrets in Plain Sight, Business and Investing Secrets of Warren Buffett
The Warren Buffett CEO – Miles – unique insights
No. 1 Secret – ignored everyday by most investors
Learned in Omaha – 45B BNSF acquisition – Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) stock did not react at all – Quality shareholders is key
Learned personally during crisis – didn’t take institutional money, wanted individual investors
Hedge funds went under because shareholders were scared and withdrew – Matthews was fortunate because his investors were friends – “Hey are you okay- how are the kids?”
Think about who your investor is- what and why you are doing what you’re doing – free to fail or succeed on your own merit
“How I spent My Summer Vacation”
Soft drink- Waco TX 1885 – dr pepper
Public co.
1979 – started on wall st. – Shah of Iran was disposed – oil prices tripled – hostage – interest rate – economic crisis
Buying General Foods while everyone was buying oil stocks- Brands=shelf space – cheap price- bought
2 down years out of 48 years – buffett
Charlie Munger: Gift to UM – “Buffett Sidekick”
Ivan Martin-Aranguez
Santander Asset Mgmt- 150B euros under mgmt.
Santander
Global Asset manager- South America, Europe, UK, Japan,
55% of market share in Spain – 20% share in Spain
Has managed 11 years personally- Spanish Global Fund – beaten index handily – Read Security analysis etc in 2001 and opened value based fund soon after
Klarman quote about inherently inefficient markets – even if all became securities analysts and attended Buffett meetings – would still be attracted to momentum strategies and hot ipos/fads – inherent behavioral aspect to investing
Structural Factors Re: Euro Value Inv
Lower average analyst coverage per company
High Concentration of indices in few large co’s
Euro asset mgmt. business controlled by large fin inst. Banks, and insurance co’s
Culture of benchmarking and low tracking error
Capital structure (holdings, family controlled co’s)
Current Euro Crisis factors
Eurozone crisis in an apparent non ending worsening spiral
Equities in Eurozone suffering
Euro periphery suffering most
Argues easier to achieve alpha in Euro vs US
40~% vs. 22% of funds beating index in Euro vs US
Extremely low coverage of companies in Spain
Culture of low index tracking error
Strong divergence between countries in Eurozone=opportunities going forward
Best business to own is one that can invest capital at high rates of return over time
50% of IBEX trading below book value
Semapa – Portugal based company – 76% of revenue outside Port.
Paper Producer – Portucel – Best in class paper producer
High
Gas Natural
Gas and electricity integration – 25 countries – 20 mil customers – 20 % ROIC
Gas supply and transport – Has contract with Cheniere for 5 bcm of Shale Gas –one of the few contracts in US to export gas rewarded to date
Elec business- regulated – stable ROIC 5%~ in euro, 10% + in Latam
Potential 66% upside
Baron de Ley
Distrivutes Rioja wines domestic and overseas
World class rioja brand- margin 44%, roCE 13.5%
FCF 25 million euro – market cap 245 mil
60 million in cash – 25% market cap
40% of co is owned by chairman and CEO
heavily repurchases and amortization of treasury stock – 40% over last ten years
VIC Thursday
Global Value Investing – Tom Russo
Most interested in the ability to reinvest funds into companies – long horizon
Focus on consumer
Type of Value Investor
70% in non US companies – 60% invested in businesses that have family control
“Capacity to Suffer”
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)
GEICO – high persistency and low claims – NPV of $1500 per policy holder – 10.5 million policy holders
Equity Index Put Options – reporting paper losses but end up making handsome fortune – too much focus on quarterly earnings for most firms to take such risk – preference on wealth and not earnings
Extraordinarily cautious short term deposits, fiscal year 2007
Nestle- 35 year planning horizon – gives you capacity to reinvest – has owned since 1987 – mid teens compounded since 1990s
Capacity to reinvest: Consumer: Sustenance to Chivas Regal
Product/Brand Portfolio – consumers reluctant to switch – can build on that loyalty
Russian Ruble Crisis- 1998
Nespresso
China and India
Alcon
Novartis Payment/DiGiorno Acq.
2011 Chinese acq in confectionary and beverage
Pernod Ricard – CDS swap mayhem
SABMiller emerging market beer specialist
Invest for Long Term
White space
Position capital globally
Currency gains
Circle of Competence
Tax efficiency
Virtues of low expectations!
Concentration – few great ideas
Market volatility is long term investor’s friend
Smaller bev co’s vs multinationals?
Larger footprint for multinationals – much more valuable than regional dist. – smaller co’s struggle to get listed on shelves
High End Consumer Brands
Owns Richemont – family owned business – China’s growth declared “anemic” at 7.7% – Asian consumerism – those markets remain strong over time
Italian Luxury
Bulk of remaining is in soft goods vs hard goods- Ferragamo
VIC Friday
Howard Marks
Overestimating what you now about the future creates great risk
The I know vs I don’t know school
I know: invest for one outcome concentrate lever heavily target maximum gains
I don’t know: hedges against uncertainly, diversify, avoid or limit leverage
Oaktree Capital Group LLC (NYSE:OAK): if we avoid the losers, winners take care of themselves
Single scenario investing – difficulty of seeing future events as a range of possibilities
Risk means more can happen than will happen
Variability introduces risk into investing
View the future at best as a probability distribution – smartest are those who understand distribution better than others
Most people think in terms of the average or the norm and ignore the outliers – never forget 6 foot tall man who drowned crossing stream that was 5 feet deep on average
Not sufficient to survive on average- must survive worst days
In particular, most investors ignore the possibility of extreme outcomes – “Black Swan”
Taleb’s 1st book – most important badly written book to read
Deal with fact that world is uncertain, dist. Of possibilities, randomness plays great role in outcome
Anybody can be right once in a row
Twin impostors – short term outperformance and short term underperformance
Investors are right/wrong all the time for the “wrong reason”’ – correctness of a decision can’t be judged from the outcome randomness alone can produce just about any outcome – “fooled by randomness”
Non Appreciation of alternative histories – the difficulty of seeing past events as a range of possible things that could have happened and thus the reduced significance of what actually did happen
The difficulty of getting timing right – “should” isn’t the same as will
“markets can remain irrational longer than you can remain solvent
Pitfalls of investment bureaucracy
“active mgmt. strategies demand unistitutional behavior from institutions, creating a paradox that few can unravel”
Most inst. Investors expend extraordinary effort and often make decisions for the purpose of avoiding embarrassment
In many ways, the forces that influence investors push them to mistakes – obvious appeal, easily understood, popular, doing well
All things that apply to the herd – elevated prices, limited return, substantial risk
Most times bargains are found in doing things others won’t do, not things described above
Efficient market hyp – tells us market operates smoothly to incorporate info into prices, so that no indvidiaul can consistently do much better.
In fact “inefficiencies” – investing crowd’s mistakes 0 arise all the time arnd are superior to investors
Oaktree’s investment philosophy
-controlling risk
consistency
involvement in less efficient markets
high degree of inv specialization
No reliance on macro projections
No raising of cash for market timing
Common threat running through the tenets of philosophy is a recognition of and respect for the limitations imposed by real-world considerations
Not a time to be aggressive – move forward with caution
How has Marks learned through time: to observe whats going on around me in terms of investment behavior – heed market signals – less prudent others are the more prudent we should be
Most things are in favor – rarely give you best bargain – out of favor sectors: shipping, Europe, real estate – us commercial real estate – not buildings in any city
