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In the 54th issue of Value Investor Digest we relaunch the London Value Investor Conference 2022 and also confirm the date of the upcoming Quality-Growth Investor Conference as 16th June 2022.
The issue also features the Baupost year-end letter, a Consilient Observer research paper by Michael Mauboussin and Dan Callahan, our video interview with Andrew Hollingworth, a Jeremy Grantham article titled ‘Let the Wild Rumpus Begin’, Jonathan Ruffer’s recent investment review plus the latest memo from Howard Marks – in addition to eight other articles.
“We see today’s market as characterized by stretched valuations, deep complacency, and a host of looming risks. But we also know how hard it is to make macro forecasts. While we have significant concerns, we can also make a case that the U.S. economy will remain strong for some time, since corporate, consumer, and financial institution balance sheets are healthy. Bonds at today’s yields provide scant returns, so equities remain the only game in town…Top-down, we are seriously concerned. But bottom-up, looking at our holdings investment by investment, we see an attractive upside as well as a reasonably protected downside.”
“I’ve been writing about EDLP (every-day-low-price) businesses plus flywheel businesses for a very long time. I’m sure some of your watchers will be familiar with the Nick Sleep letters that became widely available this time last year – and he talked about those businesses but he called them ‘scale economy shared’ businesses and in all truth I think his definition is better than my flywheel one because scale-economy-shared is a better way to understand exactly what these sorts of businesses do.”
“A company’s prospects for growth may be dimmer than you believe if it is spending more on maintenance than you think. In Lewis Carroll’s novel, Through the Looking- Glass, the Red Queen says, ‘Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!’ Estimating maintenance capital expenditures provides insight into how fast a company has to run just to stay in place.”
“The experience also makes it easy for me to sympathize with the view that bearish advice in bubbles always comes from old fogeys who ‘just don’t get it,’ because I received that old fogey advice back then and just didn’t listen. I doubt speculators in the current bubble will listen to me now; but giving this advice is my job and possibly the right thing to do. So, once more unto the breach, dear friends.”
“We believe the tide is coming in for inflation, brought about in a series of waves of increasing severity. It is important to remember what happens on the shoreline as the tide comes in – hour on hour it advances along the coastline, but there are countless moments, between the waves, when the sea appears to retreat. So it will be with inflation: not a straight line, but plenty of what the French call the reculer pour mieux sauter.”
“This reminds me of the time I once visited Malibu with a friend and mentioned that the Rindge family is said to have bought the entire area – all 13,330 acres – in 1892 for $300,000, or $22.50 per acre (It’s clearly worth many billions today). My friend said, ‘I’d like to have bought all of Malibu for $300,000.’ My response was simple: ‘you would have sold it when it got to $600,000.’ The more I’ve thought about it since writing ‘Liquidity’, the more convinced I’ve become that there are two main reasons why people sell investments: because they’re up and because they’re down. You may say that sounds nutty, but what’s really nutty is many investors’ behavior.”
“Larry’s leadership on sustainable investing was cemented in 2018, when in his annual letter to the CEOs of the world’s largest corporations, this time titled ‘A Sense of Purpose,’ he introduced the idea that successful companies needed to serve a social purpose. As Andrew Ross Sorkin put it in The New York Times, Fink informed business leaders that companies needed to do more than make profits — they need to contribute to society as well if they want to receive the support of BlackRock’…Soon after, Larry became in some ways the de facto leader of a new worldview that purpose and profits are not in conflict and that companies need to serve society rather than just their shareholders in order to prosper.”
“Shares of coal miner Arch Resources more than doubled in 2021, and a Spanish value investor sees more gains. Madrid-based Azvalor Asset Management, which manages about $2 billion in assets, acquired 292,902 more Arch (ticker: ARCH) shares to lift its stake to 1.06 million shares, a 6.9% stake, as of Jan. 10”
“We recently came across an article in the FT decrying the UK market as the land of income ‘dinosaurs’, full of ‘moribund’ companies exhibiting ‘financial decadence’ by having the temerity to pay a dividend. Long-term supporters of our funds will know we are not shy of a controversial opinion, but this article has, to be polite, somewhat overstepped the mark. This outlook is not an attempt to refute each point the article makes (to do so would be too churlish even for us) but is a defence of the UK market, it’s dividend credentials, and why we are optimistic on the UK’s prospects.”
“The good news is there is stuff to catch in that bucket – we and others have observed that stock markets look expensive in aggregate but they are not uniformly expensive….it’s really those most expensive companies that have gotten ‘off the charts’ richer in valuation – leaving an awful lot of companies trading at levels that still look pretty reasonable and pretty appealing.”
“The business is on fire. It’s a fantastic business, which I definitely want to talk about. I don’t know if it’s true. I read in my research, 1994, SC Johnson offered your family a lot of money to buy the company. Instead, you decided to buy Scotts, which was six times the size of Miracle-Gro. It got about half the value, but you took it in equity and warrants. Obviously, things turned out more than fine. Looking back at it, was this a crazy decision?”
“What’s puzzling about the current backdrop is not that it is one defined by low expected returns – markets are cyclical and these environments will occur – but the investor response to it. We might anticipate a rational reaction to be an increased interest in out of favour areas with more appealing valuations, but that’s not what happens. Instead, we keep buying the most expensive assets. When confronted with lower expected returns we buy more of the asset classes and funds that are likely to have the lowest future returns.”
This is a very useful resource from the Capital Employed podcast. Users can find links to episodes which cover stocks and be taken to the appropriate episode.