Howard Marks Favorite Ideas: Value Investor Conference

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Howard Marks at the Value Investor Conference, Omaha.  Nebraska.

Howard Marks Favorite Ideas: Value Investor Conference

Notes by Ryan DeVitt

First up…. Jeff Matthews- price is what you pay, value is what you get

Ram Partners LP

Secrets in Plain Sight, Business and Investing Secrets of Warren Buffett

The Warren Buffett CEO – Miles – unique insights

No. 1 Secret – ignored everyday by most investors

Learned in Omaha – 45B BNSF acquisition – Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) stock did not react at all – Quality shareholders is key

Learned personally during crisis – didn’t take institutional money, wanted individual investors

Hedge funds went under because shareholders were scared and withdrew – Matthews was fortunate because his investors were friends – “Hey are you okay- how are the kids?”

Think about who your investor is- what and why you are doing what you’re doing – free to fail or succeed on your own merit

“How I spent My Summer Vacation”

Soft drink- Waco TX 1885 – dr pepper

Public co.

1979 – started on wall st. – Shah of Iran was disposed – oil prices tripled – hostage – interest rate – economic crisis

Buying General Foods while everyone was buying oil stocks- Brands=shelf space – cheap price- bought

2 down years out of 48 years – buffett

Charlie Munger: Gift to UM – “Buffett Sidekick”

Ivan Martin-Aranguez

Santander Asset Mgmt- 150B euros under mgmt.


Global Asset manager- South America, Europe, UK, Japan,

55% of market share in Spain – 20% share in Spain

Has managed 11 years personally- Spanish Global Fund – beaten index handily – Read Security analysis etc in 2001 and opened value based fund soon after

Klarman quote about inherently inefficient markets – even if all became securities analysts and attended Buffett meetings – would still be attracted to momentum strategies and hot ipos/fads – inherent behavioral aspect to investing

Structural Factors Re: Euro Value Inv

Lower average analyst coverage per company

High Concentration of indices in few large co’s

Euro asset mgmt. business controlled by large fin inst. Banks, and insurance co’s

Culture of benchmarking and low tracking error

Capital structure (holdings, family controlled co’s)

Current Euro Crisis factors

Eurozone crisis in an apparent non ending worsening spiral

Equities in Eurozone suffering

Euro periphery suffering most

Argues easier to achieve alpha in Euro vs US

40~% vs. 22% of funds beating index in Euro vs US

Extremely low coverage of companies in Spain

Culture of low index tracking error

Strong divergence between countries in Eurozone=opportunities going forward

Best business to own is one that can invest capital at high rates of return over time

50% of IBEX trading below book value

Semapa – Portugal based company – 76% of revenue outside Port.

Paper Producer – Portucel – Best in class paper producer


Gas Natural

Gas and electricity integration – 25 countries – 20 mil customers – 20 % ROIC

Gas supply and transport – Has contract with Cheniere for 5 bcm of Shale Gas –one of the few contracts in US to export gas rewarded to date

Elec business- regulated – stable ROIC 5%~ in euro, 10% + in Latam

Potential 66% upside

Baron de Ley

Distrivutes Rioja wines domestic and overseas

World class rioja brand- margin 44%, roCE 13.5%

FCF 25 million euro – market cap 245 mil

60 million in cash – 25% market cap

40% of co is owned by chairman and CEO

heavily repurchases and amortization of treasury stock – 40% over last ten years

VIC Thursday

Global Value Investing – Tom Russo

Most interested in the ability to reinvest funds into companies – long horizon

Focus on consumer

Type of Value Investor

International Business Machines Corp. (NYSE:IBM) vs Intel Corporation (NASDAQ:INTC) share purchases – margin of safety was small in intel (50 M) – versus 12B in International Business Machines Corp. (NYSE:IBM) – business with a competitive franchise

70% in non US companies – 60% invested in businesses that have family control

“Capacity to Suffer”

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)

GEICO – high persistency and low claims – NPV of $1500 per policy holder – 10.5 million policy holders

Equity Index Put Options – reporting paper losses but end up making handsome fortune – too much focus on quarterly earnings for most firms to take such risk – preference on wealth and not earnings

Extraordinarily cautious short term deposits, fiscal year 2007

Nestle- 35 year planning horizon – gives you capacity to reinvest – has owned since 1987 – mid teens compounded since 1990s

Capacity to reinvest:  Consumer: Sustenance to Chivas Regal

Product/Brand Portfolio – consumers reluctant to switch – can build on that loyalty

Russian Ruble Crisis- 1998


China and India


Novartis Payment/DiGiorno Acq.

2011 Chinese acq in confectionary and beverage

Pernod Ricard – CDS swap mayhem

SABMiller emerging market beer specialist

Invest for Long Term

White space

Position capital globally

Currency gains

Circle of Competence

Tax efficiency

Virtues of low expectations!

Concentration – few great ideas

Market volatility is long term investor’s friend

Smaller bev co’s vs multinationals?

Larger footprint for multinationals – much more valuable than regional dist. – smaller co’s struggle to get listed on shelves

High End Consumer Brands

Owns Richemont – family owned business – China’s growth declared “anemic” at 7.7% – Asian consumerism – those markets remain strong over time

Italian Luxury

Bulk of remaining is in soft goods vs hard goods- Ferragamo

VIC Friday

Howard Marks

Overestimating what you now about the future creates great risk

The I know vs I don’t know school

I know: invest for one outcome concentrate lever heavily target maximum gains

I don’t know: hedges against uncertainly, diversify, avoid or limit leverage

Oaktree Capital Group LLC (NYSE:OAK): if we avoid the losers, winners take care of themselves

Single scenario investing – difficulty of seeing future events as a range of possibilities

Risk means more can happen than will happen

Variability introduces risk into investing

View the future at best as a probability distribution – smartest are those who understand distribution better than others

Most people think in terms of the average or the norm and ignore the outliers – never forget 6 foot tall man who drowned crossing stream that was 5 feet deep on average

Not sufficient to survive on average- must survive worst days

In particular, most investors ignore the possibility of extreme outcomes – “Black Swan”

Taleb’s 1st book – most important badly written book to read

Deal with fact that world is uncertain, dist. Of possibilities, randomness plays great role in outcome

Anybody can be right once in a row

Twin impostors – short term outperformance and short term underperformance

Investors are right/wrong all the time for the “wrong reason”’ – correctness of a decision can’t be judged from the outcome randomness alone can produce just about any outcome – “fooled by randomness”

Non Appreciation of alternative histories – the difficulty of seeing past events as a range of possible things that could have happened and thus the reduced significance of what actually did happen

The difficulty of getting timing right – “should” isn’t the same as will

“markets can remain irrational longer than you can remain solvent

Pitfalls of investment bureaucracy

“active mgmt. strategies demand unistitutional behavior from institutions, creating a paradox that few can unravel”

Most inst. Investors expend extraordinary effort and often make decisions for the purpose of avoiding embarrassment

In many ways, the forces that influence investors push them to mistakes – obvious appeal, easily understood, popular, doing well

All things that apply to the herd – elevated prices, limited return, substantial risk

Most times bargains are found in doing things others won’t do, not things described above

Efficient market hyp – tells us market operates smoothly to incorporate info into prices, so that no indvidiaul can consistently do much better.

In fact “inefficiencies” – investing crowd’s mistakes 0 arise all the time arnd are superior to investors

Oaktree’s investment philosophy

-controlling risk


involvement in less efficient markets

high degree of inv specialization

No reliance on macro projections

No raising of cash for market timing

Common threat running through the tenets of philosophy is a recognition of and respect for the limitations imposed by real-world considerations

Not a time to be aggressive – move forward with caution

How has Marks learned through time: to observe whats going on around me in terms of investment behavior – heed market signals – less prudent others are the more prudent we should be

Most things are in favor – rarely give you best bargain – out of favor sectors: shipping, Europe, real estate – us commercial real estate – not buildings in any city


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