Value Investing

Paul Sonkin – Investors Get Into Trouble Because They’re Undisciplined

One of the things we love at The Acquirer’s Multiple is value investors. One of my favorite value investors is Paul Sonkin.

Sonkin is a portfolio manager at GAMCO Investors/Gabelli Funds. He’s co-Portfolio Manager of the TETON Westwood Mighty Mites Fund, a value fund which primarily invests in micro-cap equity securities and he has over 20 years of experience researching small, micro and nanocap companies.

Sonkin was also the portfolio manager of The Hummingbird Value Fund and the Tarsier Nanocap Value Fund and an analyst and portfolio manager at Royce & Associates, Inc. He’s been an adjunct professor at Columbia University Graduate School of Business where he’s taught courses on security analysis and value investing and he was a member of the Executive Advisory Board of The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School.

As if that wasn’t enough, he co-authored the book, Value Investing: From Graham to Buffett and Beyond, with Bruce Greenwald.

One of my favorite Sonkin interviews was one he did with The Manual of Ideas in 2009. It’s a must read for all value investors.

Here’s an excerpt from Sonkin’s interview with The Manual of Ideas:

MOI: What was the genesis of your firm, and how would you describe your investment approach?

Paul Sonkin: I started in December of 1999, so we’re coming up on ten years. I had worked at Royce and then I had worked at First Manhattan. First Manhattan did large cap value, and I really wanted to get back to what I had done at Royce—which was micro cap value—because that’s what I really love. I met with Mario Gabelli and said I wanted to manage his micro cap fund. He had this guy who worked for him who had started a partnership, and he said, Why don’t you start a hedge fund and I’ll give you some money and own a piece of your management company? So that was how I really got the start at Hummingbird. It’s just old-school, Graham-and-Dodd-type value investing.

We’ve pushed the envelope a little bit—Bruce Greenwald talks about doing an asset value based on replacement cost, and then an earnings power value and an earnings power value with growth. The asset value is really Graham’s “net nets.” The earnings power value would be the low P/E. The earnings power value with growth is where you may be paying a full price for the current earnings power but you are getting all the growth for free. We tend to stay in the first two categories, although we have gotten into situations where we are paying for earnings that we firmly believe will materialize, but they haven’t materialized yet—and then we’re getting a lot of growth on top of that for free.

That’s evident in a lot of the positions we have.

MOI: Seth Klarman put it well when he said that he invests from the bottom up but he worries from the top down…

Sonkin: Exactly. What Seth Klarman does is that he is always looking to overlay insurance on the portfolio and is always looking for cheap insurance. He happened to be in a lot of credit default swaps because they were really cheap. It was great disaster insurance. Inflation protection now is—or was—really cheap, so you’re able to put that on. So what he is doing is overlaying on his portfolio disaster insurance. He is worrying from the top down, and that’s he was able to have such a good year last year.

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To read the full Sonkin interview with The Manual of Ideas, you can find it here.

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