Value Investing in Emerging Markets: Opportunities in Uncertainty

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and special guest Juan Torres discussed Value Investing in Emerging Markets: Opportunities in Uncertainty. Here’s an excerpt from the episode:

Juan: Do you guys think that many successful investors start their career looking for the cigar butts on the very deep value side of the spectrum? But as they grow old, they move in that spectrum to the more quality compounding side. Do you think that’s because they have been burned a lot by the cigar butts, or is that as you grow old, your risk appetite declines to the point that you are not willing to take the cigar butt, or is there something about understanding the fact that compounding works better, if you get it right on the good ones?

Jake: I think there’s different paths there that all lead to out of cigar buttville. I would say one, you run into capital constraints. If it works for you and you build up a decent enough size, you really can’t deploy it. The strategy is constrained. Two, if you’re hanging around the investment game for long enough, you might start to recognize some privileged businesses and you might then realize like, “Wow, if I paid up even a little bit for this, it could work out pretty well.” So, you get a little bit more confidence, perhaps, in your ability to bet on special businesses that you wouldn’t do otherwise. And then, yeah, three, you flame out, and disappear, and we never hear from you again.

[laughter]

Tobias: What do you think, Juan?

Jake: Yeah. What do you think, Juan?

Tobias: Do you still find cigar butts in EM land? Is that something that you invest in in EM land?

Juan: EM, it has everything. Em is very much associated with cyclical bad companies because it has a lot of materials, metals, commodities.

Jake: Commodities.

Tobias: Cyclicals.

Juan: Cyclicals, in general. But in the context of EM, you have 25 countries in very different stages of development. And in each specific country, you will have things– In every specific country, there will be fear and uncertainty. Where there is fear and uncertainty, you should find value, and you find everything. You find special situations. You find growth that no one’s paying attention to. You find companies that were good, but now they’re going through a rough patch. You find companies that are facing a structural decline. You find cyclical companies. The opportunities that tends to be very broad. And again, it tends to be inefficient, because there is less competition, because people fear the uncertainty that comes with the lack of either information, or availability of accounts, or the language, or whatever that is, the geopolitical spectrum, whatever that is.

So, I think that in the context of EM, you can still do very well with the cigar butts. But that’s a question that I’ve had in my mind lately, whether a lot of the value investors that did very well out of their careers doing the value, eventually, as they grew old, they migrated and you’re finding that with a lot of people, I guess.

Tobias: I’ve done that study where I just buy and never sell, and the things that work become gigantic parts of the portfolio, and the things that don’t wither away into nothing. So, just like, you look at the end and the portfolio looks like it’s Kelly bit weighted into the good stuff that’s worked.

Jake: You’re a genius.

[laughter]

Tobias: Yeah, and you’ve bought all the compounders. But prospectively, they might not have looked that way. How do you fee–? [crosstalk]

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