John Huber – The MicroCap Conference Philadelphia 2016

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John Huber - 3 Paths To Finding Value Stocks

John Huber Brief Bio

  • Founder, Portfolio Manager at Saber Capital Management, LLC
  • Author of the Blog BaseHitInvesting.com, where I discuss my investing ideas
  • Saber is a Registered Investment Advisor (RIA) that manages separate accounts for clients using a value investing approach
  • Saber emphasizes aligned incentives (John Huber invests alongside clients)

Saber’s Investment Strategy

Saber’s strategy is to make investments in high-quality, well-managed businesses at attractive prices.

Qualities I Look For:

  • Businesses I Understand
  • Growing Intrinsic Value (High ROIC)
  • Durability (Predictable Cash Flow)
  • Shareholder-friendly Management
  • Margin of Safety (Value)

A Common Sense Approach to Investing

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards -- so when you see one that qualifies, you should buy a meaningful amount of stock…

“...Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

-Warren Buffett, 1996 Shareholder Letter

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3 Paths to Finding Value

Three ways to locate value in stocks:

  1. Information Advantage
  2. Analytical Advantage (Thinking Differently)
  3. Time Arbitrage

Path #1: Information Advantage

Information Advantage: Finding information that others don’t have

  • This was how Buffett made a sizable amount of money in the 1950’s
  • Spinoffs/Special Situations (Joel Greenblatt made 50% annual returns in special situations using information he located that others didn’t have)
  • Small-caps (“hidden gems”)
  • However, it is now much easier to uncover information in today’s world (thus minimizing this advantage)

Buffett’s advantage in the early years was simply looking for bargains that others weren’t:

  • Western Insurance - Good Business valued at less than 1 P/E (see pg 185 of Snowball)
  • http://basehitinvesting.com/buffetts-early-investments/ (When Buffett found it, it had $16 of earnings and stock price that traded between $12 and $20 per share)
  • Buffett was up 75% in 1951, mostly because of GEICO. He put 65% of his small portfolio and the stock roughly doubled. He sold to buy Western Insurance, which also went on to double.

Path #2: Thinking Differently

Taking the same information and interpreting it differently:

  • There is no piece of information about Apple that isn’t freely available
  • Yet it traded at 90 in January, 110 in March, 90 in May, 110 in September
  • Two various potential interpretations of its high margins:
  1. One view: Apple is commodity hardware manufacturer that will see its margins erode
  2. Alternate view: Apple is a consumer brand which is the reason it has achieved high margins to begin with
  • Market does a poor job at judging long-term probabilities
    • Great compounders like WMT, WFC, SBUX, FAST, BRK, HD, GOOG, AMZN, PCLN all remained undervalued for a decade or more (many compounded at 20% annually for decades)
    • Even after they were widely accepted to be great companies with outstanding competitive positions, high returns on capital, attractive unit economics, and a long runway, the market still priced them “cheap” (i.e. allowed shareholders to invest at prices that subsequently yielded outstanding results, even as P/E ratios appeared high).
  • Why does the market often undervalue great businesses?

Two key reasons:

  • Market is better at analyzing short-term data points than it is when it comes to analyzing long-term fundamentals (the focus on the next few quarters deemphasizes what is important about the next 5 years; e.g. all the best engineers want to work at Google or Facebook, not Yahoo)
  • People often interpret the same set of information in very different ways

See the full slides below.