Value interviews.part one
This is the first part in a new ten part series from ValueWalk on value interviews. Over the past three years, ValueWalk has conducted exclusive interviews with some of the best value managers around. These value interviews contain some highly insightful nuggets of information for value investors, as well as ideas, portfolio management tips and some advice on what not to do.
Throughout the value interviews ten part series, I’m going to pick out some of the most insightful value interviews giving a link back to each full interview if you’re interested in finding out more.
All of the interviewees are managers of investment partnerships, some of which are modeled around Warren Buffett’s original partnerships. All of the partnerships invest with a value slant.
All of these interviews are at least several months old, but the information contained within is timeless. However, if you're looking for more up-to-date interviews and ideas, you should take a look at ValueWalk's exclusive quarterly magazine, Hidden Value Stocks. Each issue contains two value interviews with managers as well as four stock ideas and a detailed Q&A session on each idea. Click here to find out more today.
Value Interviews: Finding Value – The Process
Value interviews with Curtis Jensen, former CIO of Third Ave. Management
What are the qualities you believe investors should be looking for when trying to identify the best value companies?
- "The Amazon/Google Of Hedge Funds" Warns Of Investing Minefield: looking To Hire More Macro Analysts
There are a few keys ways to lose money in investing:
- Buy a buggy whip business (i.e., one where obsolescence, substitution or competitive forces permanently change the economics);
- Too much leverage (business risk ought to vary inversely with financial risk);
- Overpay (paying too much exposes your downside, particularly where business values stagnate);
- Position size (may stem from overconfidence or poor process).
I am trying to identify companies with a strong competitive position, a presence of high-quality assets or where management has a credible plan and the incentives to improve the operations or capital allocation, but where temporary issues have depressed the share price. The company’s balance sheet ought to afford ample financial flexibility such that it can survive a difficult business environment.
Value interviews with John Khabbaz of Phoenician Capital
What are the qualities investors should be looking for when trying to identify the best companies?
The best companies are those that; take care of their customers’ needs better than anyone else, have a large and unaddressed market, have managements that demonstrably think and act like owners, and produce significant returns on invested capital. Great businesses tend to surpass expectations over and over again, yet few investors ever hold them for the long term. Value investors sometimes do not understand the exceptional value of what they own and trade down for a lower quality business that looks cheaper. It is difficult to acquire the discipline of active patients.
Value interviews with Zeke Ashton of Centaur Capital Partners
How do you approach valuation?
This is a subject that requires a whole book, because the craft of valuing businesses is effectively a career-long journey. I find that one never really becomes a master because every stock and every industry is different. I like to say that every stock has a story to tell and a lesson to teach.
In order to keep my answer to a reasonable length, I will simply offer two insights that experience continues to pound into me. One is very simply that valuing any company requires a certain familiarity with and a decent understanding of the business. The idea that an investor can just slap a multiple to earnings or stated book value is a highly superficial notion – though of course it does sometimes work. The better you understand a specific business and the industry that business competes in, the better the valuation work is likely to be. That said, some businesses are easier to understand than others, and there are many businesses that simply can’t be valued with much precision. That’s a difficult concept, I think, for sophisticated investors to accept. There is a temptation to believe that every business can be valued with enough informational input, but we’ve found that for us there is a good percentage of the investable universe that really and truly belongs in the “too hard” pile.
The other insight I will offer is that at least in our experience, the further we drift from true cash flow profitability as a starting point in our valuation work, the more difficulty we have. What does this mean? To me, it means that using EBITDA is far less trustworthy than true cash flow. GAAP or adjusted net income is far less reliable than true cash flow. And when you find yourself running DCF models where most of the cash flow is expected to materialize many years out into the future and you are discounting that back to today at some arbitrary rate, let’s just say there are lots of ways for that to go wrong. We almost always use a DCF at some point in our valuation work, especially to help us with scenario analysis, but we have to remind ourselves that a DCF model isn’t gospel. DCFs are very useful as a sanity check and thought experiment, but shouldn’t be a substitute for a more complete valuation exercise.
Value interviews With Old West Investment Management
How do you go about finding potential opportunities, where do you think the best ideas come from?
We find potential investment opportunities in a number of ways. We read a lot of industry periodicals, we look at special situations, we talk to our network of business leaders from varying industries and we talk to other like-minded and value oriented investors. However, I have found that our best ideas are sourced from Form 4 filings and 13-D filings. We monitor every purchase or sale of stock by insiders, every day. If a CEO and/or several directors purchase millions of dollars of their own stock in the public markets, we will print out the proxy statement to determine if we too think it might be an attractive investment. Once the proxy is printed, we will look at total stock ownership by management, study how that ownership was accumulated, and most critically, seek to understand total stock ownership as it relates to compensation.
What do you look for in a prospective investment, what makes you say, “yes we want that” or “no we don’t”?
We look for undervalued and/or misunderstood investments that can ideally earn high returns on capital, and for investments where we can invest alongside great and proven owner/managers as silent partners. The process by which business value will grow is a direct function of management’s approach to capital allocation, and we spend a lot of time trying to understand the various capital allocation levers at management’s disposal.