NYSSA Conference – The NYSSA had an all star panel today for their Ben Graham Conference. ValueWalk attended the conference and below are our informal notes, Enjoy! At the bottom of this post are more notes on the Ben Graham NYSSA Conference for 2016.
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NYSSA Conference: Tom Russo – Keynote Speaker
Munger’s three words that keep him out of trouble: “and what’s next?”
In Brexit, seemed a lot of that there. Always think about what the long term “and then what?” and what that leads to. The members of the UK seem to have forgotten to ask this question.
Up until the past 3-4 months, I didn’t have a new investment since 2010. The ability to do nothing with a portfolio is vastly undervalued. For all those at bats you swing at, you have to pay the government 35% – or more in NYC! One of my main takeaways from Graham and Buffett was this ability – the ability to be inactive.
Capacity to suffer. We love family-owned businesses – ones that don’t bow to the demands of Wall Street who demand constant profits. 60% of our businesses are family owned. I love finding properly-aligned companies like this. They have a time horizon like ours – forever. This is because they’re multi-generational, they have no interest in activists. Buffett made his success on businesses like this – ones that can take bets others can’t take.
We also love businesses we can follow and understand – ie why a consumer would choose Jack Daniels vs Jim Beam. Makes it easy for us to do due diligence and help us understand pricing power.
Emerging market reach is another criteria. Ones that can reach growing parts of the world, favorable population demographics, GDP growth
Historically we’ve owned non-US businesses. “Americans often don’t have a clue” – (Russo asks the room how many people follow cricket – no hands go up) – “Local players have a big advantage here. Cricket has 1.7 billion fans!” 75% of the assets I see are in non-US companies.
Globalization is starting to go the other way. I had this as a tailwind for my career. Now you have Syria, Russia/Ukraine, Brexit – it feels like things are changing – it used to be that new markets would open up, new competition was welcome, initiatives like the EU blossoming… not the same feeling anymore
Q: How do you think about FX risk?
A: “We don’t seek out currency risk in making investments. We think over time as more capital and commerce goes into emerging markets their currency will strengthen.
Q: Thoughts on Buffett/3G?
A: Businesses don’t get as cheap as they used to because of 3G – they have a big cash cannon. Every company we’re involved in is nervous for the potential of 3G coming along. It affects the multiples we’re paying.
Q: Sell discipline?
A: “I sold several companies in 2006 – all family controlled, but they lacked reinvestment. H&R Block, International Speedway. Powerful franchises but they couldn’t go beyond our shores. In some cases, it was too late – they’d already made very bad decisions – I pulled back and redirected the capital to businesses that I think have limitless reinvestment. Global ones. Sometimes a business we own advances sharply and we sell it down to rebalance the portfolio.”
NYSSA Conference – Second panel: “Never Lose Money” – David Poppe, John Levin
To never lose money requires that you have the right basis in your stocks. And so you have to be patient. Most of us don’t have the patience to wait a year to buy a stock. You need an investor base that is ready for long periods of inactivity punctuated by bursts of activity. Many of us don’t have that – the average investor wouldn’t be happy to go two years without a single investment.
Sole decision maker model can be powerful but also can take you down the wrong path. Consistency of process and clarity of expectations is crucial to having a high-functioning team.
We try not to incentivize people based on how many of their stock picks get into the portfolio. Sometimes the right thing to do is to have less.
There’s a lot of smart people doing this now – way more than there used to be. We try and be humble about what our edge is. Expert networks have taken away a lot of the informational edge that firms like ours enjoyed. We spend a lot more time on qualitative factors than quantitative. Key example: runway for reinvestment. How long is it? This matters a lot more to us than what the firm’s P/E ratio is. If a firm has powerful brands then this generally is conducive to a long runway.
“Never lose money” is a process. As public investors we buy companies with incomplete information and so from time to time you will lose money. It’s about consistency of process. Know whether you’re a growth or a value investor. Buffett stuck to his knitting and was congruent with himself. Long-term capital is another significant competitive advantage.
The rate of disruption is picking up. Long term investing has gotten more difficult as a result. Any company’s competitive advantage can erode much faster than ten or twenty years ago.
NYSSA Conference – Third Panel – “Margin of Safety” – Leon Cooperman, Jason Karp,
Risk is the probability of losing money. I’ll take a volatile 15% return any day over a straight line 10%.
We have a stock selection committee – three senior people. They need to approve any idea. If the stock takes out the downside risk target – then the “cesspool committee” – yes, this is an actual thing – takes over and grills the analyst. Do we want to double down or sell? Usually if you like a stock at 10, you should like it more at 9 and even more at 8. Sometimes circumstances change though – we try and drill down and see if anything has changed. We look for 3:1 risk reward ratio.
Stocks are the new bonds. 65% of the S&P now yields more than bonds. In 1958 – that was the year of the yield reversal. Before that, stocks yielded more than bonds. In 1958 they started buying into total return. The market got repriced. Today we can find so many companies with decent yields and growth prospects – far superior to bonds. Market is fully valued but there’s a lot to do.
This is not a market where you earn 10-15% in stocks. 6-7% is fair. Play it safe. Stocks are still the cleanest shirt.
Income disparity is a huge issue. 45% of jobs in today’s economy will be replaced by automation
“Wall Street is in the midst of a very serious downturn”
“Every investment committee in America is meeting to redeem out of hedge funds.” Inevitable downward pressure on fees. But everything is cyclical. This all happened in 1970 – see Carol Loomis article “Hard times come to hedge funds.”
This will all change in the next bear market. Hedge funds will shine and people will realize the downside of passive management.
Buying bonds here is like walking in front of a steamroller to pick up a dime. You might get away with it but its very risky. Inflation benefits stocks far more than bonds – companies can adjust operating cost into their selling price. Bonds can’t do that. I think inflation is coming and rates will be higher three years from today.
Multiple kinds of risk: analyst risk, volatility risk, market risk. Analyst risk: most often used but least reliable…estimation of fundamental downside. Company XYZ should never trade below 10x this – and having lived through many cycles, your excel sheets are useless in times of volatility. It’s the lowest weight. Market risk – what has the stock done? Any stock that’s gone down 25% twice in the past 18 months…it’s common sense you need to respect that, clearly 10% downside isn’t a realistic estimate for market risk. You also need to respect option pricing and what that means for vol (vol risk = the third kind)
Analysts tend to overestimate upside and underestimate downside
In the markets – the last 12 months have changed a lot. I began as a quant. We have three quants at the firm. Their job is to find things that traditional fundamental analysts won’t find. We’ve widened our range of outcomes – as in, how much can this thing move while we wait for our fundamental thesis to play out?
Running high gross and high leverage is extremely dangerous right now. Stocks are having insane moves on little or no news.
All these funds and systematic quant funds are dangerous – they’re all linked to the same thing – vol. So they all take down gross at once and that exacerbates vol and it feeds on itself.
In the end, stocks do converge with their fundamentals, but the linkage in the short to medium term is very cloudy.
Example: we’ve been long AMZN vs. short big box retailers for 4 years. “My mom could’ve thought of this trade” – but the volatility over the past 4 years shook a lot of people out.
Our interview process – we take a close look at people’s pasts – CIA interview process. We want people who have faced adversity. The markets constantly tell you that you’re wrong and stupid and adversity is good training for that.
Demographics: most hedge funds don’t pay attention to these because you can’t make money on a 1-2 year horizon off them, but they are very obvious and easy to follow. And they are poor for most developed countries right now.
“Social media is the most dangerous influence on society today. Look at Brexit. This is helping Trump’s campaign and explains why he’s getting so many votes.”
Also more extensive notes on Leon Cooperman which is a NOT WORD FOR WORD transcription of his speech.
I’d like to make an observation to help every body… I think it’s probably more relevant to most of us in this room. When I look at the room, I see youngsters that are coming into the business, I see some senior citizens that pray they’re lucky enough to have retired…I see a number of practitioners.
I’m going to share with you just a thought— I’m very focused on income disparity. I’m one of these kids who made it big in the South Bronx…
Six months ago, I went to a seminar and the seminar was nothing to do with the investing business, but the entire seminar was called ’closing the gap.’ It was one hundred percent focused on income disparity and how to deal with it.
At the seminar, they had a futurist speak. Before I tell you what he said: I’ll quote Warren Buffett who said: ‘The forecaster of the future will tell you more about the forecaster than they’ll tell you about the future.’ The futurist said— his opinion was the biggest problem facing the economy in the next decade was that 45% of jobs being performed in the economy were going to be replaced by automation and there would be no alternative work for the displaced workers.
I went home that night and I thought about it— I recognized the potential significance for our industry. OK. And the significance is… passive asset management turnover rate is 3% a year. Active asset management turnover is approximately 30% per year. So if more money goes passive versus active, liquidity in the market is going to diminish because there’s less trading. And the available pool of commission dollars to support Wall Street firm is going to diminish…
Then you turn to the money management side, if active management is 1% or some variation of 2-and-20% within the hedge fund community and you get the index for 3 basis points, 4 basis points, if you’re an institution, maybe 20 basis points in you’re Vanguard, if you’re an individual.. there’s going to be tremendous downward pressure on fees.
Maybe some of the young people should look into going into different industries to go into because I think our industry is in turmoil. It’s very ironic because you’ve got [Hillary] Clinton and [Bernie] Sanders crapping all over us and they don’t realize Wall Street is in the midst of a very serious downturn.
And I think what’s happening in my industry, you know, right now, I have this perception, maybe it’s an exaggeration, but… every investment committee in America is meeting to redeem out of hedge funds.
The industry is breaking down into two categories
One you got he way of these quant traders, algorithmic high frequency traders. I’m not as knowledgable as I should be, but I’m generally in the view that it’s a giant case of front-running, in some cases.
Well, let me explain why I say that: I’m not shooting from the hip there. There’s a lot of good value added— these algorithmic guys are very smart people. The New York Stock Exchange allows these high frequency traders to co-locate next to the stock exchange to give them a split-second advantage over the execution of the public sectors’ orders. I asked a question of the president of the NYSE whose response wasn’t very comforting which was: ‘If we don’t do it, someone else will.’ Rather, than taking the position that it’s morally wrong and it shouldn’t be done.
One part of the industry that’s apparently really successful, which I’m too old and it’s not my skill set is high frequency algorithmic trading.
The other is to be a serious long term investor a la Warren Buffett, Ben Graham, and you guys. The problem with that if you’re running a hedge fund and you’ve got monthly, quarterly, or semi-annual liquidity to deal with, it makes you reluctant to go into things that are less liquid.
I’ve got a little bit of a luxury because 40% of our capital is inside GP capital.
The industry is undergoing a major change. The market that we grew up in, is not the market today— volker rule, dodd frank, discouraged brokers to carry inventory. specialist system demised, can’t understand for the life of me… eliminated the uptick rule enabled .. if it ain’t broke don’t fix it. sec not paying attention to deal with it in my option.
gotta be an investor today or a very astute trader.
I’m basically of the view that everything is cyclical. My fear is—I read an article , reread it, reread it. hard times come to hedge funds written by carol loomis. if you look closely .. written jan 1970. largest hedge fund was michael steinhardt..
The golden period
“The golden period for hedge funds was 2000 to 2007. They became the cocktail party talk. ‘What hedge fund are you in?’ ‘What hedge fund are you in?’ They were outperforming other forms of active managers…Then, all the sudden, 2008 arrives. In my opinion, hedge funds largely lived up to their representation.” the sp down 34, av down 16. down less than half the market.
a lot of withdrawals. hf industry shot themselves in the foot by gating capital.
more scary— hedge funds was not honor a high water mark, asset of the investor. for you to say i’m retiring. that was in 2008. if you’re running a hedge fund it’s very hard to keep up with an index. hedge funds have underpreforme.d my guess is its going to all change in the next bear market…may take a bear market to damage all this passive indexation.. people who say .. hedge funds will shine again
NYSSA Conference Center
Available as: Live Session
Categories: Conference, Programs for Members, Value Investing
In this conference, we honor the legacy of Benjamin Graham, the founder of NYSSA. The theme of this year’s conference will be Margin of Safety and Risk Management and subtopics will include research process and portfolio management in volatile markets.
Please join us on June 29th to hear some of world’s leading value investors discuss these timeless topics. Portfolio Managers representing more than $80 billion will speak at the conference.
Moderator: Michael Oliver Weinberg, CFA
Moderator: Elliot Trexler