Value Invest

VID September 2020

Value Investor Digest

Issue 49 – September 2020

The September edition of VID features a Value Investor Digest interview with Edouard Mercier and Jean-Charles Tisserand of Ascender Capital who discuss Proto Corp and KEPCO subsidiary KPS.

The issue also features other articles and videos including a Ruffer webcast, a Michael Mauboussin podcast, an article from James Montier of GMO, Seth Klarman's Baupost letter plus 10 other articles.

VID Interview: Ascender

"Another good example is Proto Corp. Proto Corp is a classifieds business which specialises in the sale of used cars in Japan. The car sales market is quite specific in Japan in the way that the proportion of new cars is 3x as high as it is in Western countries and a lot of used cars are scrapped - making the second hand market relatively small in comparison to what it is in the UK, for example. Proto Corp is a dominant player with a 40% market share - it is operating effectively in a duopoly...It currently trades at 4-5x EBIT and a PE of less than 10x."

View VID Interview

Ruffer Zoom Replay: "Grabbing the Bull by the Horns"

“With Land Securities, for example, you could assume that all of their retail properties are worth nothing. You could assume they negotiate lower rents to compromise with all of their tenants - by 20 odd percent - and the stock would still comfortably yield 3 or 4%."

(Password is Ruffer2020! and the link expires 25th September)


James Montier: Reason's Not To Be Cheerful

"The U.S. stock market looks increasingly like the hapless Wile E. Coyote, running off the edge of a cliff in pursuit of the pesky Roadrunner but not yet realizing the ground beneath his feet had run out some time ago. Investing is always about making decisions under a cloud of uncertainty. It is how one deals with the uncertainty that distinguishes the long-term value-based investor from the rest. Rather than acting as if the uncertainty doesn’t exist (the current fad), the value investor embraces it and demands a margin of safety to reflect the unknown. There is no margin of safety in the pricing of U.S. stocks today."

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Seth Klarman - Baupost Q2 Letter

“Before the pandemic struck, retail properties in the U.S. were already under threat. The U.S. had become over-stored – the country had four times more retail real estate per capita than Europe. Online shopping has been growing by double-digit percentages every year since 2009, taking market share from brick and mortar retail."

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Michael Mauboussin - Great Migration: Public to Private Equity

"We know that a lot of investments that are made are intangible. The key from a valuation point of view is they typically show up on the income statement. One task would be for us to take that off the income statement and put it on the balance sheet. There was a paper that came out in Management Science…they said hey, maybe we should segregate S,G&A in to a component that’s maintenance, the S,G&A we need to run the business, and investment S,G&A - and they use that technique and they go back to 1970 and they demonstrate that there’s been this huge upswing in intangible investments. When people lament that companies aren’t investing anymore and they’re hollowing out their businesses and using the money to buy back stock and so forth, they’re missing a huge component of this which is intangible investments - and if you reckon for that not only have investments not gone down, they’ve actually gone up quite materially."

Listen to Podcast + Morgan Stanley Report

Monetary Policy Gone Wild: A Lost Generation of US Growth?

“The duct tape holding the façade together today is 2021 earnings estimates off of which markets are theoretically trading. Investors are looking past a full year of a bloodletting at the bottom line and that’s a best-case scenario. For context, in 2008, there was no shutdown of the US economy and earnings fell 69%. In the 2015–2016 industrial recession, S&P 500 earnings slumped by 15%. All things considered, it’s fantastical to accept that full year 2020 earnings will only be down 21.5%."

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Did Buffett Really Change His Mind on Gold?

"They’ve bought a gold mining equity, which, to me, is entirely consistent with their mandate. It’s not surprising to me that they’d buy a gold mining company."

Listen to Podcast

FT: Tesla Is Nuts, Will It Ever Crash?

"But anyway, it’s plain old dumb to be discussing fundamentals here when Tesla, with just $800m of free cash flow over the past twelve months, is valued higher than Johnson & Johnson ($17.5bn of free cash flow), Walmart (23bn of free cash flow), and Visa ($11.5bn of free cash flow). Dot-comedy, it seems, has returned to the market. And an end to it doesn’t seem to be in sight. We’ll leave you with this stat: if Tesla rises another 12.5 per cent today, it will overtake Berkshire Hathaway to become the seventh-biggest company in the whole of the US stock market."

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Visual Capitalist: The Most Popular Website Since 1993

This fascinating video-chart provides a historical rundown of the most popular websites since 1993, showing how much the internet has evolved since the early ’90s.

Watch Video-Chart

StockViews: Managing Portfolio Risk in the “Golden Age of Fraud”

"A decade long, central bank driven, bull market (pre-Covid) along with high levels of retail participation, Silicon Valley’s fake-it-till-you-make-it approach, Trumpian post-truth #fakenews and lax regulation led famed investor Jim Chanos to recently opine during an FT interview that the current point in time is: “a golden age for fraud [and] a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time."

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Powell's Three-Wheeler Doesn't Need a Speed Limit

“By the same token, the Fed's announcement that it will let inflation go a bit above 2% if necessary sounds like wishful thinking...the fed's announcement that it might let the economy "run hot" and allow inflation to hit 3% or more looks about as relevant as a 100mph speed limit would be for Reliant Robin drivers."

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Kopernik Perspective: Are Uranium Stocks Radioactive?

"The uncertainties with respect to secondary supply, and slow changes in this market, makes the timing of any uranium price recovery uncertain. However, we believe that over the long term the price will need to get to the incentive cost of bringing on new capacity unless we are way off in our demand outlook. This incentive cost is probably in the range of $60-90 per pound of U3O8 and we would not quibble with any estimate within this range. With spot prices in the $30s, this suggests that there is way more upside than downside in the commodity. "

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I Can’t Believe I’m Saying This, But I’m Passing on Seth Klarman

“We’re walking away,' says one capital allocator...Seth is running Baupost more like a wealthy person might run their personal money than like the aggressive hedge fund manager that he’s been over the years...He has pretty considerable net worth and all of his money invested in that firm. Other people’s fees are paying for him to run his personal money. If you want to come along, come along.”

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Ray Dalio: Long-Term Debt Cycle

“To review, in the long-term debt cycle, holding debt as an asset that provides interest is typically rewarding early in the cycle when there isn’t a lot of debt outstanding, but holding debt late in the cycle when there is a lot of it outstanding and it is closer to being defaulted on or devalued is risky relative to the interest rate being given. So, holding debt (e.g., bonds) is a bit like holding a ticking time bomb that rewards you while it’s still ticking and blows you up when it goes off. And as we’ve seen, that big blowup (i.e., big default or big devaluation) happens something like once every 50 to 75 years."

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A Robot Tried to Fix Value Investing and Ended Up Buying Amazon

"It’s the rallying cry for many remaining proponents of value: The factor isn’t dead, it’s simply plagued by outdated accounting rules that treat intangible investments such as research as expenses rather than capital. As a result, knowledge-intensive firms end up with much lower book values and higher costs, which make them look more expensive than they actually are."

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FT: Goodbye to the ‘Pret Economy’ and Good Luck to Whatever Replaces It

"Pret’s branches are now ubiquitous in the capital city. There are as many on London’s Borough High Street as there are in Wales. The rise of Pret has mirrored the rise of London and, until recently, they both seemed unstoppable."

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GQG Partners: (Still) Waiting for Mean Reversion

"Again, if you cannot outperform on the upside, and cannot hold up on the downside, what is the purpose of the exposure? In our view, this seems like something is fundamentally broken. However, hope springs eternal, and just as time heals all wounds, maybe if enough time passes, value will reassert itself. After all, it is not as if mean reversion is an unknown phenomenon."

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Quote of the Issue - VID 49
(from our collection of investment quotes)

“Cash combined with courage in a time of crisis is priceless.

Warren Buffett

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