If Value Investing Was Easy, Everyone Would Be Doing It! – Jean-Marie Eveillard

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Jean-Marie Eveillard is an investing legend. He’s widely recognized as one of the first truly global value investors.

Eveillard became a senior advisor to the First Eagle Investment Management Global Value team in March 2009 and now serves as board trustee to First Eagle Funds. From 1993–2004, Eveillard was the lead portfolio manager for all of First Eagle Investment Management Global Value investment strategies.

Prior to his brief retirement in 2004, Eveillard led the First Eagle Global Fund to a 15.8% average annual return – compared to 13.7% for the S&P 500 (according to Morningstar). Jean-Marie Eveillard’s strict investment discipline and outstanding investment returns earned him a Morningstar Lifetime Achievement Award in 2003.

If you’re a value investor then he’s one guy you should follow.

I recalled an interview that Eveillard gave to Graham and Doddsville back in 2007/2008 called,  “Staying Power: Jean-Marie Eveillard”.

It’s a great opportunity to better understand his investing philosophy and what’s made him so successful over the years.

Let’s take a look…

This is an excerpt from the interview that Eveillard gave to Graham and Doddsville back in the Winter 2007/2008 Graham and Doddsville Newsletter.

Of particular interest are his thoughts on how to find value opportunities, what it takes to have a value investing mindset and, why value investing works.

Here’s what he had to say…

Q: What are the characteristics that draw you to an investment and how do you go about finding new ideas?

JME: Well, in terms of hunting grounds, in general, we don’t do screens because we like to check the accounting carefully and make our own adjustments. To take an extreme example, take a look at an American forest products company. If they still own timberland, as is the case of Weyerhaeuser, which they acquired about a century ago, they continue to carry it on the balance sheet for about $1 an acre.

Today, it is more like $1,000 an acre or more in the south and $2,000 an acre in the Pacific Northwest. So a screen would not help you in any way in that respect. The way we go about it is that if we decide to look into a particular investment idea we have to do most of the work in-house, hence the extreme importance of the in house research department.

This is because sell-side research is directed towards the 95% or so of professional investors who are not value investors, so their time horizon is usually more along the lines of six to twelve months as opposed to five or more years for us. The work, of course, starts with public information – running numbers.

Sometimes, we make adjustments to the reported numbers, which is particularly important today because every chief financial officer in this country, and even some outside the U.S., seems to be trying to show the highest possible reported earnings without going to jail. In order to do so, they have to make sure that they observe the letter of the regulation, but they don’t hesitate to betray the spirit of the regulations.

So, we run the numbers coming from public information, and it’s not a matter of having fifteen pages of numbers. I like the idea that the important numbers have more or less to fit on a single page or two pages at the most. Then, there is the qualitative side, which is of course judgmental and has a lot to do with trying to figure out the three, four or five major characteristics of a business.

For instance in the early 1970’s, Buffett figured out that the major characteristics of the newspaper business had to do with the fact that many newspapers had a quasi-monopoly. Buffett determined that what was important was not the fact that already in the 1970’s circulation was not growing much, if at all, but that the local department store automatically advertised in the local newspaper.

On top of that, it was not a capital intensive business. It was a service business with higher margins, not that they could charge any price, but they were the advertising instrument of choice for local businesses. Wall Street was entirely focused on the fact that they were not growth companies, presumably because circulation was not going up.

This fits in with Buffett’s idea that value investors are not hostile to growth. Buffett says that value and growth are joined at the hip – value investors just want profitable growth and they don’t want to pay outrageous prices for future growth because, as Graham said, the future is uncertain.

And also, what is probably more important from Buffett’s point of view is to identify the extremely small number of businesses where, after doing a lot of homework and exercising judgment, you come to the conclusion that the odds are good that the business has a ‘moat’, the business has a competitive advantage, and that business will be as profitable five or ten years down the road as it is today.

This is opposed to simply extrapolating 20% or 25% annual growth observed over the past three years. There is a very limited number of businesses that can continue that type of growth. In any case, Buffett never insisted on 20% – 25% growth.

I think he even said something to the effect that a profitable business that is not growing is not a business that has no value. A business can have value even if it is not growing. In that sense, value investors tend to think like private equity investors – we are looking for stable and profitable businesses – sometimes in what appears to be mundane areas.

The analysts here keep track of what we own but in our case, most of the work is done before we start buying a stock.

Afterwards, it is just a matter of updating and we don’t spend any time trying to figure out the next quarter. So our nine analysts keep track of the securities we own, they investigate the ideas that the portfolio manager may have which, at least in my case, usually comes from reading newspapers or flipping through some sell-side research and saying “hmmm, maybe we should look at this.”

Of course, for a value investor the devil is in the details, so sometimes the analyst investigates an idea for a few days or for a few weeks and comes back to me and says “Sorry, but this is not a very a good idea and here are the reasons why.” This is fine with me.

Third, we always make sure the analysts have enough time left to initiate and develop their own investment ideas. They come to me first, but it is very rare for me to tell them that I think they are barking up the wrong tree, wasting their time for such and such reasons. It very seldom happens.

So the analysts go out, run the numbers according to public information, and make the adjustments to the numbers as necessary. For instance, for quite a while, we had to make the adjustments for the issuance of stock options because there were many companies that until they were forced to do it, just didn’t do it.

The analysts try to figure the 3 – 5 major characteristics of the business. I don’t ask them to write about this, but it comes in the conversation that we have after we look at the numbers. Then there is the back and forth between me and the analyst.

Many years ago, when our younger daughter was six or seven years old, somebody at school must have asked her, “What does your father do?” She was embarrassed because she didn’t know. And so that evening, when I came home, she asked “What do you do at the office?” I thought, rather than trying to explain what money management is to a six year old, I said, “I spend half of my time reading and half of my time talking with my colleagues.”

My daughter said: “Reading? Talking? That’s not work!” But in fact, that is what I do! I spend a considerable amount of time talking with the analysts, looking with them at the various angles, trying to make sure that they have properly estimated the strengths and the weaknesses of the business – then they go back and investigate further.

We invest, if in the end, we agree with them from an analytical point of view. In other words, we think we understand the business, we think we like the business, and we think investors are mis-pricing the business. For value investors, the edge is seldom in unusual information which the rest of the market doesn’t have.

There is a fine line between unusual information being obtained by regular means or by ‘not so regular’ means. It is more in the interpretation of the information. It is more figuring out the major characteristics of a business. Buffett didn’t know more than Wall Street knew about the newspaper business. He just decided that looking at the advertising power of the newspaper was more important that the flat circulation numbers.

Q: You have often been quoted as saying you have a five-year time horizon vs. Wall Street’s six-to-twelve month time horizon – When do you think about selling a stock? Especially given that your performance is measured against other mutual funds, how do you have the staying power to remain disciplined?

JME: That is a key question – to answer the second question first – if you are a value investor – you are a long-term investor. Warren Buffett did not become very rich trading securities.

If you are a long-term investor, you accept in advance that you are making no effort whatsoever to keep up with your benchmark or your peers on a short term basis. So you know in advance that every now and then you will lag. We lagged sometimes in the 1980’s, in the early 1990’s we lagged as well, but then in the late 1990’s we lagged terribly for several years.

We were still producing absolute returns, but relative to our benchmark and to our peers we were lagging terribly because I had declined to participate in technology, media and telecom, together with many other value investors. In less than 3 years, between the fall of 1997 and the spring of 2000, our Global Fund, which I had run since early 1979 and had a long term record, lost seven out of ten shareholders.

One has to live with that because a mutual fund is open to subscriptions and redemptions every day. You don’t get to choose your investors. You take whoever is sending the check. You try in your sales effort to explain very clearly what you are trying to do, so that you don’t get the wrong type of investors. But there are many investors who will either not understand what we’re trying to do or will understand what we’re trying to do, but if we lag for a year or two, they will forget about it.

There is impatience among investors. Ideally, if you run money professionally on a long-term basis, you would want shareholders in your fund to be long-term investors, but that’s not always what happens. Incidentally, not only does value investing make sense, at least to me, but it works.

In that respect, you are probably familiar with the piece written by Buffett – “The Superinvestors of Graham and Doddsville” – and then 20 years later, the piece written by Louis Lowenstein (“Searching for Rationality in a Perfect Storm”).

Buffett himself considered another nine value investors. So then the question arises – why are there so few value investors if it makes sense, if the approach makes sense and it works? I think the answer is truly psychological, and that is what I was referring to when I said that if you are a value investor, you have to accept in advance that you will lag. And if you lag, you suffer.

Yes, you say to yourself, I’m a long-term investor so my day will come, but if it goes on too long, it is not only the doubt, but there is a genuine suffering associated with lagging, and human nature shrinks from pain. Sometimes, there are non-value investors who tell me, well I would love to do what you do, but, if I did it and start lagging, either my boss or my shareholders will fire me.

Of course, the answer is you have the wrong boss or wrong shareholders or both!

Q: On the topic of temperament – Buffett has said that he is “wired” a certain way. Do you think temperament is something you are born with or a trait that can be learned?

JME: One way to view it is in the U.S. and also now in Europe, some people go too easily to the psychiatrist, because if they do so, it shows that there is an expectation that they should be happy every day. Of course, it is true at the other extreme. You have people who tend to believe too easily that life is a valley of tears and that one can only be happy in the eternal.

The truth is in between, one has to accept the fact that one is not happy every day. One is not entitled to be happy every day and I think that as an investor it is the same idea that we don’t need to win every day. We just need to win over time. Maybe the people who say, well, I cannot afford to be a value investor because my boss or shareholders will fire me, maybe they are right. But I think there is also the idea that I just don’t want to suffer.

I remember there was a movie about baseball called “A League of Their Own” where at some point a woman says to Tom Hanks, who plays the coach, “Baseball is too hard.” Tom Hanks replies something to the effect of “Of course it’s hard. If it was not hard then everybody would be doing it.” It is the idea that everything in life that is worthwhile comes hard.

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