James Tisch On Value Investing – CIMA Keynote via Columbia Business School
Thank you and good morning.
I’ve always wanted to start a speech off with the following Beatles quote – and today I’m gonna do it: “It’s wonderful to be here; it’s certainly a thrill.” I feel like I am an impostor who is taking my 21-year-old son’s job. You see, at the age of 18, when he was thinking of what he wanted to do for a career, he settled on the profession of keynote speaker. So here I am today, scooping his first gig.
For those of you who may not know, Loews Corporation is a diverse holding company, which owns six very different subsidiary companies – and not one of them sells lumber or shows movies. And while our six subsidiaries may vary, our business strategies are actually quite similar.
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At Loews, our investment strategy is based upon analyzing economic variables of a particular industrial sector and then investing for the purpose of long term return on investment to our shareholders. Sounds simple – well, yes and no.
It is simple because we tend to look at investment opportunities using basic microeconomic principles, like supply and demand and, . . . It is not simple because -- as we all know -- investing in industries like energy can be highly cyclical and very risky.
I said that Loews tends to look for “long term” return on investment; we do that by seeking to acquire businesses that are temporarily undervalued and that have a strong senior management team. We then invest the capital necessary in order to achieve our goal of generating the highest possible returns on our equity investment. This is a strategy that’s been successful for us, and it’s the one that initially led us to explore the energy sector.
Let’s go back to 1975, when there was a building boom in supertankers, brought about by relatively low oil prices that had caused large increases in oil demand. A few years later, in the late ‘70s, there was an oil embargo and resulting oil price hike, which drastically reduced the amount of oil coming out of the Persian Gulf – much less oil, but still lots of tankers, now just bobbing in the water. It was soon afterward, in the early ‘80s, that we started thinking about buying tankers. We had seen from reading newspapers that the worldwide supply of tankers was vastly overbuilt; according to quoted estimates, the market required only 30% of the ships that were afloat. As a result, ships were trading at scrap value. That’s right. Perfectly good seven-year-old ships were selling like hamburger meat – dollars per pound of steel on the ship. Or, to put it another way, one was able to buy fabricated steel for the price of scrap steel. We had confidence that with continued scrapping of ships and increased oil demand, one day the remaining ships would be worth far more than their value as scrap. We were sure of three other things: First, by buying at scrap value, there was very little downside. Second, we knew that the ships would not rust away while we waited for the cyclical market to turn. And third, we knew that no one would build more ships with existing ships selling at a 90% discount to the new build cost. We were confident that the demand for oil, particularly from the Persian Gulf, would ultimately increase with worldwide economic growth and so the remaining tankers would ultimately be worth much more than their scrap value.
So we did the logical thing -- we took out the yellow pages, looked under “Brokers comma Tankers,” and from there, made our way to Scotland to get a first hand look and “kick the tires” of some of these big ships that are almost four football fields long. And on board one of these massive vessels was formulated the James Tisch $5 Million Test. And what is the Jim Tisch $5 Million Test, you may ask? While on the ship you look to the front and then you look to the rear – then take a look to the right and then to the left –then you scratch your head and say to yourself – “Gee! You mean you get all this for $5 million?!” Just to give you some perspective, these ships, capable of hauling 2-3 million barrels of oil, had been built eight years earlier for a cost of over $50 million.
In all, we purchased six tankers in the early 80’s, all by using the James Tisch $5 Million Test. By 1990, the market had turned, as – you guessed it – too many ships were scrapped and the volume of oil coming out of the Persian Gulf increased. And, as good capitalists, when this happened we sold a 50 percent interest in our ships for 10 times the valuation of our initial investment.
Fast-forward to 1997 when opportunity knocked again. We witnessed a set of conditions similar to those of the mid-‘70s – little construction of new oil tankers despite increased production of oil from the Persian Gulf.
That year we decided to build four new ships in reaction to the distinct lack of new building. We sold those ships about a year and a half ago – relying on the same principles applied as before, except in reverse. Oil prices were going up, but then, so was the supply of ships. We could sense that the increased prices for oil would negatively affect demand for oil, and ultimately ships, and therefore bring down the value of our ships. We sold -- probably a year too soon -- but in this business, I would prefer to be early rather than late.
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