Waiting for Value: The Art of Holding for Long-Term Returns

During their recent episode, Taylor, Carlisle, and Cunningham discussed Waiting for Value: The Art of Holding for Long-Term Returns, here’s an excerpt from the episode:

Jake: No. I think it was like somebody’s last name was Stein. I can’t remember. But anyway, the point being that you can’t just go buy something at 10 times earnings and expect within three or six months to get it rerated to 15 times earnings, and then you just keep doing that over and over again. It’s just going to take more patience probably to realize your eventual successful outcome. What it may end up looking like instead is, perhaps a good quintessential example of that might be something like the Dillard’s and what that looked like.

Victor: No. Yeah.

Jake: I know, Toby, you posted something today on that. But where it’s like, it’s just going sideways forever, it seems like, “What the hell is going on here? The price does not seem to reflect reality of what’s happening underneath the hood.” And then, the well inflated balloon underwater just gets released and it’s whatever 5, 10 bagger in six months or a year or something.

Victor: Yeah. Seaboard, which Tobias asked about, [laughs] I’ve been following that company for 12 years. You just would buy it under book and just then it would go to one and a half times book and you just keep making money. And now it’s trading at 30% discount to tangible, [laughs] and no one cares. But it’s well capitalized and the book value is growing. So, whether they go private or they do something along those lines, the IRR will probably be pretty good at some point, because it has a complicated capital structure and all that. No one really cares. It’s got no coverage. And so, it just sits there. But it does seem unsustainable.

Look, the people on the other side, the management team, they own a lot of stock themselves. They’re humans, and so either they start selling some assets or doing something to get some marks in the portfolio. We’re very comfortable wading through those situations. But you’re right. If you don’t have that tailwind of these flows, they’re constantly coming. If you look at the shareholder list, the Kahn Brothers brothers remain with us. It’s these old school value people, [laughs] but I like that. But some people don’t. We’ll sit in there and wait and have that happen. It’s funny.

We have another example. It’s our second largest position right now. But that was a company that, as you said, it flatlined for many years. And the revenues were growing at double digit rates every year. And then all of a sudden, they were doing business in renewables and things like that. And then all of a sudden, people started looking at the operating metrics and it’s exploded. But you don’t know when people are going to wake up to the situation. But if you’re willing to just wait it out for three, five years, and the company’s operating at a high level, you’ll get paid at some point. As you said, you need the patience to wait for it to happen.

Tobias: This is my favorite holdings where you hold them for three to five years and they’ve done all right over that period of time, but they’re still at a big discount at the end. So, there’s no pressure to do anything. You can just sit there and let it keep on going. If management’s any good, they’ll capitalize on that under valuation at the same time. So, you don’t need to sell. You just let them do a big buyback or something else to recognize some value there.

Victor: I 100% agree with that.

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