Baker Street Capital Management presentation slides on value investing works.
Baker Street Capital Management – Fund Overview
Background
- Baker Street Capital Management , LLC (“BSCM”) is a ~$45mm value partnership founded in Sep. 2009
- Baker Street Capital Management’s objective is to produce above-average returns through conservative and opportunistic investing in underfollowed small and mid-cap equities, with flexibility to pursue other parts of the capital structure
- Baker Street Capital Management has delivered a gross return since Sep. 2009 inception of 73.0% and 59.6% net of fees at the l/lS share class versus a return of 13.6% for the S&P 500 and 15.8% for the Russell 2000
Investment Philosophy
- Modeled after partnerships managed by Warren Buffett from 1956 to 1969
- Only invest in situations with asymmetric risk-reward profiles and value realization catalysts
- Evaluate an investment idea as if buying an entire company, focusing foremost on “price” versus “value”
- Focus on companies with predictable revenue sources and properly incentivized management teams
- Exhaustive bottom-up research and original insight into every investment
- Concentrate effort and assets on a limited number of “best ideas” to minimize risk of capital loss
Positioned for Long-Term Success
- Patient, opportunistic investment process and 12 to 24 month time horizon allows Baker Street to pursue only high conviction ideas with the potential to produce outsized returns over time
- Large discounts to fair value and presence of catalysts reduce reliance on direction of market and economy
Baker Street Capital – Founder’s Background
Vadim Perelman, Chief Investment Officer and Founding Partner
Prior to the founding of Baker Street Capital, Mr. Perelman was a Senior Analyst at Force Capital Management in New York, primarily responsible for idea generation and investment due diligence. Mr. Perelman’s previous experience includes business development at Teknika Group and management consulting at L.E.K. Consulting. Mr. Perelman holds magna cum laude B.A. degrees in Economics and Computer Science from the University of California, Berkeley.
Investment Philosophy – Value Investing Works
1990 Berkshire Hathaway Letter to Shareholders:
- “The most common cause of low prices is pessimism – some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.
2003 Howard Marks Memo to Oak Tree Capital Investors:
- “It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough. . . No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right.
2007 Seth Klarman Speech at MIT:
- “Value investing involves the purchases of bargains, the proverbial dollars for fifty cents. Unlike speculators, who think of securities as pieces of paper that you trade, value investors evaluate securities as fractional ownership of or debt claims on, real businesses. They are evaluated as one would evaluate the purchase of an interest in a business or of the entire business. Buying such bargains confers on the investor a margin of safety, room for imprecision, error, bad luck, or the vicissitudes of economic and business forces. Value investing is a long-term orientated investment approach-never to be confused with short-term speculation-that requires considerable patience, discipline and rigor.
Core Strategy
- Long-biased long/short value-oriented investment partnership
- 50% to 125% net long exposure, expected average gross exposure between 75% and 150%
- Long term, fundamental investing in businesses, not stocks
- Tolerate higher monthly/quarterly volatility in exchange for absolute long-term capital appreciation
- Focus on simple, predictable, underfollowed companies at very attractive valuations:
- Shareholder-oriented managers with incentives in place to maximize shareholder value
- High barriers to entry and returns on equity, with an ability to profitably reinvest capital
- Limited dependence on debt financing, especially short-term, recourse debt
- Free optionality from “hidden” assets (e.g. unencumbered real estate, stakes in private companies, NOLs, etc)
- Avoid politically or technologically unpredictable investments (e.g. high-tech, biotech, China)
- Identify catalysts that can accelerate the market’s recognition of value and mitigate illiquidity risk
- Accelerate catalysts by working with management on recapitalization options (buybacks, dividends, spin-offs)
- Purchase securities at the largest possible discounts to a conservative estimate of fair value
Complementary Strategies
- Selectively invest in special situations to produce returns uncorrelated to the general market:
- Spin-offs, tender offers, post-bankruptcy entities
- Merger arbitrage
See full slides below.
