Exclusive Interview With Keith Smith Of Empire Valuation Consultants by John Mihaljevic, BeyondProxy
We recently had the pleasure of interviewing fellow value investor Keith Smith of Empire Valuation Consultants. Keith lives in Rochester, NY and will be well-known to those of our readers who are also members of the excellent Corner of Berkshire & Fairfax message board. Keith’s investment success has also been noted by the financial media, including here.
Please tell us a bit about your background. How did you get started in value investing?
Keith Smith: Over one summer when I was in college (at an internship at Cornell University), I read Security Analysis and The Intelligent Investor and obtained an initial understanding of the concepts of value investing and applied them by applying manual screens to data in the Media General database newspaper. Subsequently, I began my career as an engineer working for the Air Force in Los Angeles, California. In the 1980s and early 1990s, I ran screens and tracked subsequent performance of the firms passing the screens and the performance was OK but not great but primarily invested in funds. In the mid-1990s, I attended UCLA to get an MBA. I took a number of finance and investment classes. I had one with Richard Roll (a professor that practiced value investing himself) where we put together portfolios (mine was value tilted) and tracked them over the semester. When I completed my MBA, I worked for Price Waterhouse in their valuation services group. In this group, I learned how to value private companies, derivatives and intangible assets. In early 2000, I moved to Rochester, NY and started to work for Empire Valuation Consultants.
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During 2000, I made my first concentrated value investment in Berkshire Hathaway. At the time of purchase in April 2000, it represented about 20% of my portfolio. My other holdings were primarily US media/telecom stocks. In 2002, I joined Corner of Berkshire and Fairfax and learned more about Fairfax Financial. In early 2003, Fairfax was my second concentrated investment of about 8% including both shares and LEAPs. By the time I sold the Fairfax positions, they were up 300 to 400% (with the LEAPs up 500 to 600%). Thereafter, I started investing more in LEAPS (10 to 15% on a cost basis) but the gains came to an end in 2008 when I sustained large losses. I learned LEAPs appear easier to invest in than they actually are due to the timing aspect of the investment (if you cannot time when the stock price will increase, many LEAPs will expire worthless). Since 2008, I have eliminated the LEAPs from my portfolio and only invest in warrants when I had a longer period of time to realize the potential stock price increase, such as with TARP warrants. I also invested in oil and gas from 2003 as there was a supply shortage due to lack of investment over the previous decade. Since 2008, I have reduced oil and gas exposure as more supply has come on line. In addition, I have focused on smaller US names after 2008 and have transitioned to more international names over the past three years.
How would you describe your underlying investment philosophy? To what extent has your experience at Empire Valuation Consultants influenced your approach to investing?
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