New book out now! The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

Tobias CarlisleAmazon, Tobias Carlisle1 Comment

From Amazon

The Acquirer’s Multiple is an easy-to-read account of deep value investing. The book shows how investors Warren Buffett, Carl Icahn, David Einhorn and Dan Loeb got started and how they do it. It combines engaging stories with research and data to show how you can do it too. Written by an active value investor, The Acquirer’s Multiple provides an insider’s view on deep value investing.

The Acquirer’s Multiple covers:

  • How the billionaire contrarians invest
  • How Warren Buffett got started
  • The history of activist hedge funds
  • How to Beat the Little Book That Beats the Market
  • A simple way to value stocks: The Acquirer’s Multiple
  • The secret to beating the market
  • How Carl Icahn got started
  • How David Einhorn and Dan Loeb got started
  • The 8 rules of deep value

The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market provides a simple summary of the way deep value investors find stocks that beat the market.

Excerpt

Media

(If you’d like to schedule an interview, please shoot me an email at tobias@acquirersmultiple.com)

Buy The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market is out now on Kindle, paperback, and Audible.

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This Week’s Best Investing Reads

Johnny HopkinsValue Investing NewsLeave a Comment

Here is a list of this week’s best investing reads:

My Berkshire Hathaway Reflections (Farnam Street)

The U.S. Stock Market’s Impressive Outperformance May Be Coming To An End (The Felder Report)

More Than Never. Less Than Always (A Wealth of Common Sense)

The Most Hated Tax Cut Ever? (The Reformed Broker)

The What-Ifs (The Irrelevant Investor)

Buffett at his Best (csinvesting)

Some Things I’m Pretty Sure About (Collaborative Fund)

My Interview with Farnam Street’s Shane Parrish (Safal Niveshak)

Whirlwinds of Speculation (H/T Jason Zweig on Twitter)

The Facebook Feeding Frenzy: Time for a Pause! (Musings on Markets)

The Marketing Genius of the Toothpick King (H/T Ian Cassel on Twitter)

Why All My Books Are Now Free (aka A Lesson in Amazon Money Laundering) (Meb Faber)

Protect & Participate: Managing Drawdowns with Trend Following (Flirting with Models)

Why 2018 in Markets Feels So Awful (Bloomberg)

Peter Kaufman on The Multidisciplinary Approach to Thinking (Latticework Investing)

Six precepts every investor should remember (The Economist)

Common Misconceptions About Investing (Momentum Investing)

How Marty Whitman Beat the Market (Barron’s)

Detailed Presentation on Rescuing and Revitalizing Xerox (Carl Icahn)

Lump-Sum Investing Is the Best Strategy, Except Now (Bloomberg)

In the Land of the Lost (Of Dollars and Data)

Business Lessons from Mark Leonard (Constellation Software) (25iq)

Bill Miller Q1 2018 Market Commentary  (Dataroma)


This week’s best investing research reads:

Assessing Value in the Digital Economy (CFA Institute)

Two of the Most Important Investing Paragraphs We Have Ever Read (Advisor Perspectives)

Bond Investing: Reach for Safety (Alpha Architect)


This week’s best investing podcasts:

Some Things We Learned (Ben Carlson & Michael Batnick)

Reality Check? The Case for Stocks (Adventures in Finance)

Radio Show: The “Stay Rich” Portfolio… A Senator Wants to Ban Share Repurchases… and Listener Q&A (Meb Faber)

Shark Tank with Thatcher Bell and Taylor Greene (Patrick O’Shaughnessy)

Value Traps and How To Avoid Them (Geoff Gannon & Andrew Kuhn)

The Benefits of ESOPs for Business Owners and Investment Advisors (Wes Gray)

The Bitcoin Debate (part 2) w/ Tuur Demeester & Erik Townsend (Preston Pysh & Stig Brodersen)

Acquirer’s Multiple Stocks Appearing in Pzena, Simons, Grantham Portfolios

Johnny HopkinsStock ScreenerLeave a Comment

One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2017-12-31). This week we’ll take a look at one of the picks from our Large Cap Stock Screener:

Triple-S Management Corp. (NYSE: GTS)

A quick look at the price chart for Triple-S shows us that the stock is up 54% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 5.98 which means that it remains undervalued.

(Source: Morningstar)

Top investors who currently hold positions in Triple-S include:

Richard Pzena – 1,701,200 total shares

Cliff Asness – 525,744 total shares

D E Shaw – 424,359 total shares

Israel Englander – 410,540 total shares

Anthony Bozza – 401,498 total shares

Jim Simons – 311,900 total shares

Ken Griffin – 109,806 total shares

Charles Brandes – 79,061 total shares

Paul Tudor Jones – 27,520 total shares

Jeremy Grantham – 10,100 total shares

Daniel Kahneman: The Illusion of Stock-Picking Skill

Johnny HopkinsDaniel Kahneman1 Comment

For the majority of stock pickers successful investing is thought to be based on some degree of skill. The truth is however that successful stock picking for most amateur and professional investors is due mainly to ‘luck’ not skill.

Evidence of this can be found in Daniel Kahneman’s book – Thinking Fast and Slow. Kahneman is a psychologist notable for his work on the psychology of judgement and decision-making, as well as behavioral economics, for which he was awarded the 2002 Nobel Memorial Prize in Economic Sciences (shared with Vernon L. Smith).

Following is an excerpt from that book which discusses what Kahneman calls – The Illusion of Stock-Picking Skill:

In 1984, Amos and I and our friend Richard Thaler visited a Wall Street firm. Our host, a senior investment manager, had invited us to discuss the role of judgment biases in investing. I knew so little about finance that I did not even know what to ask him, but I remember one exchange. “When you sell a stock,” I asked, “who buys it?” He answered with a wave in the vague direction of the window, indicating that he expected the buyer to be someone else very much like him. That was odd: What made one person buy and the other sell? What did the sellers think they knew that the buyers did not?

Since then, my questions about the stock market have hardened into a larger puzzle: a major industry appears to be built largely on an illusion of skill. Billions of shares are traded every day, with many people buying each stock and others selling it to them. It is not unusual for more than 100 million shares of a single stock to change hands in one day.

Most of the buyers and sellers know that they have the same information; they exchange the stocks primarily because they have different opinions. The buyers think the price is too low and likely to rise, while the sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong. What makes them believe they know more about what the price should be than the market does? For most of them, that belief is an illusion.

In its broad outlines, the standard theory of how the stock market works is accepted by all the participants in the industry. Everybody in the investment business has read Burton Malkiel’s wonderful book A Random Walk Down Wall Street. Malkiel’s central idea is that a stock’s price incorporates all the available knowledge about the value of the company and the best predictions about the future of the stock. If some people believe that the price of a stock will be higher tomorrow, they will buy more of it today. This, in turn, will cause its price to rise. If all assets in a market are correctly priced, no one can expect either to gain or to lose by trading. Perfect prices leave no scope for cleverness, but they also protect fools from their own folly. We now know, however, that the theory is not quite right. Many individual investors lose consistently by trading, an achievement that a dartthrowing chimp could not match. The first demonstration of this startling conclusion was collected by Terry Odean, a finance professor at UC Berkeley who was once my student.

Odean began by studying the trading records of 10,000 brokerage accounts of individual investors spanning a seven-year period. He was able to analyze every transaction the investors executed through that firm, nearly 163,000 trades. This rich set of data allowed Odean to identify all instances in which an investor sold some of his holdings in one stock and soon afterward bought another stock. By these actions the investor revealed that he (most of the investors were men) had a definite idea about the future of the two stocks: he expected the stock that he chose to buy to do better than the stock he chose to sell.

To determine whether those ideas were well founded, Odean compared the returns of the stock the investor had sold and the stock he had bought in its place, over the course of one year after the transaction. The results were unequivocally bad. On average, the shares that individual traders sold did better than those they bought, by a very substantial margin: 3.2 percentage points per year, above and beyond the significant costs of executing the two trades.

It is important to remember that this is a statement about averages: some individuals did much better, others did much worse. However, it is clear that for the large majority of individual investors, taking a shower and doing nothing would have been a better policy than implementing the ideas that came to their minds. Later research by Odean and his colleague Brad Barber supported this conclusion. In a paper titled “Trading Is Hazardous to Your Wealth,” they showed that, on average, the most active traders had the poorest results, while the investors who traded the least earned the highest returns. In another paper, titled “Boys Will Be Boys,” they showed that men acted on their useless ideas significantly more often than women, and that as a result women achieved better investment results than men.

Of course, there is always someone on the other side of each transaction; in general, these are financial institutions and professional investors, who are ready to take advantage of the mistakes that individual traders make in choosing a stock to sell and another stock to buy. Further research by Barber and Odean has shed light on these mistakes.

Individual investors like to lock in their gains by selling “winners,” stocks that have appreciated since they were purchased, and they hang on to their losers. Unfortunately for them, recent winners tend to do better than recent losers in the short run, so individuals sell the wrong stocks. They also buy the wrong stocks. Individual investors predictably flock to companies that draw their attention because they are in the news. Professional investors are more selective in responding to news. These findings provide some justification for the label of “smart money” that finance professionals apply to themselves.

Although professionals are able to extract a considerable amount of wealth from amateurs, few stock pickers, if any, have the skill needed to beat the market consistently, year after year. Professional investors, including fund managers, fail a basic test of skill: persistent achievement. The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of investors and funds will vary erratically and the year-to-year correlation will be zero. Where there is skill, however, the rankings will be more stable. The persistence of individual differences is the measure by which we confirm the existence of skill among golfers, car salespeople, orthodontists, or speedy toll collectors on the turnpike.

Mutual funds are run by highly experienced and hardworking professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of every three mutual funds underperform the overall market in any given year.

More important, the year-to-year correlation between the outcomes of mutual funds is very small, barely higher than zero. The successful funds in any given year are mostly lucky; they have a good roll of the dice. There is general agreement among researchers that nearly all stock pickers, whether they know it or not—and few of them do—are playing a game of chance. The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are no more accurate than blind guesses.

Warren Buffett: The Prototype Of A Dream Business

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Warren Buffett has often spoken about the importance of a business moat. In a presentation to the MBA students at the University of Florida Buffett said:

“I want a business with a moat around it. I want a very valuable castle in the middle… and then I want the Duke who’s in charge of that castle to be honest and hardworking and able… and then I want a big moat around the castle and that moat can be various things.

If you’ve got a wonderful castle… there are people out there going to try and attack it… and take it away from you… and I want a castle that I can understand… but I want a castle with a moat around it.”

In his 2007 Berkshire Hathaway shareholder letter Buffett illustrated how to identify these types of businesses by provided the following real-life prototype of a dream business:

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business.

In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

(Source: YouTube)

You can read the entire 2007 Berkshire Hathaway shareholder letter here.

Charlie Munger Can Be Merciless If He Believes He Has Caught Someone In An Act Of Silly Self-Deception

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One of the most commonly used terms in the world of investing is – Cost of Capital. According to the Harvard Business Review website: – “The cost of capital is simply the return expected by those who provide capital for the business”. Warren Buffett provides his own explanation for the cost of capital in his Berkshire Hathaway owners manual as:

“We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.”

With this in mind, following is a great interaction between Charlie Munger and Professor William Bratton of the Rutgers-Newark School of Law. Munger is quizzing Bratton on his definition of cost of capital. This discussion highlights why you had better know what you’re talking about when discussing investing topics with one of the sharpest minds in investing – Charlie Munger. The interaction is taken from the book – Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger:

Charlie Munger often quotes the late Nobel laureate physicist Richard Feynman, who said the first rule is to not fool yourself, and you are the easiest person to fool. Munger can be merciless if he believes he has caught someone in an act of silly self-deception.

Pity the poor professor who gets caught up in a debate with Munger on the academic treatment of investment policy. Such was the case at The Benjamin Cardozo School of Law in New York City in 1996 when, due to the death of a close friend, the scheduled moderator was unable to attend. Charlie Munger was asked to step in.

Charlie told the audience: “The accidents of mortality have given you a Baptist bumpkin suddenly put in charge of a bunch of Catholic archbishops who are going to debate revisions of the Catholic mass, in Latin. But I figure I could moderate such a convention.”’

It was the panel’s assignment to discuss the research of Professor William Bratton of the Rutgers-Newark School of Law, which dealt with the corporate decision to pay dividends to shareholders rather than reinvest profits. Munger soon nailed Bratton with what he considered a flawed assumption in the research.

Munger: I take it that you believe that there is no one-size-fits-all dividend policy and that you’re with the professor (Jill E. Fisch of Fordham University School of Law) who said yesterday that there wasn’t any one-size-fits-all scheme for corporate governance?

Bratton: On that simple proposition I am entirely in concord with Professor Fisch.

Munger: But you say there is some vaguely established view in economics as to what is an optimal dividend policy or an optimal investment?

Bratton: I think we all know what an optimal investment is.

Munger: No, I do not. At least not as these people use the term.

Bratton: I don’t know it when I see it … but in theory, if I knew it when I saw it this conference would be about me and not about Warren Buffett. I Laughter from the audience]

Munger: What is the break point where a business becomes suboptimal in an ordinary corporation or when an investment becomes suboptimal?

Bratton: When the return on the investment is lower than the cost of capital.

Munger: And what is the cost of capital?

Bratton: Well, that’s a nice one ]Laughter] and I would …

Munger: Well, it’s only fair, if you’re going to use the cost of capital, to say what it is.

Bratton: I would be interested in knowing, we’re talking theoretically.

Munger: No, I want to know what the cost of capital is in the model.

Bratton: In the model? It will just be stated.

Munger: Where? Out of the forehead of job or something?

Bratton: That is correct. I Laughter]

Munger: Well, some of us don’t find this too satisfactory. [Laughter]

Bratton: I said, you’d be a fool to use it as a template for real world investment decision making. [Laughter] They’re only trying to use a particular perspective on human behavior to try to explain things

Munger: But if you explain things in terms of unexplainable subconcepts, what kind of an explanation is that? [Laughter]

Bratton: It’s a social science explanation. You take for what its worth.

Munger: Do you consider it understandable for some people to regard this as gibberish? [Laughter]

Bratton: Perfectly understandable, although I do my best to teach it. [Laughter)

Munger: Why? Why do you do this? [Laughter]

Bratton: It’s in my job description. [Laughter]

Munger: Because other people are teaching it, is what you’re telling me. [Laughter]

The audience laughter points are essential in this exchange, lest it sound like a food fight at a junior high school cafeteria. The bantering was done in a good-natured tone, but the point of the exchange was quite serious. Later, to make sure his comments were not misunderstood, Munger made amends:

I don’t want my remark about the cost of capital to be interpreted as meaning that I think the great bulk of Professor Bratton’s paper is wrong. I think it’s profoundly right. When he talks about agency costs in corporations and the discipline caused by levels of debt and the discipline caused by dividend conventions, I think he is profoundly right. And to the extent that those are the conventional academic explanations, I think it’s wisdom he’s giving. It’s just the cost of capital thing that always makes me go into orbit. [Laughter];

Although he did not say so then, Munger has his own idea of how the cost of investment capital should be measured. Buffett has explained that at Berkshire, the cost of capital is measured by the company’s ability to create more than $1 of value for every $1 of earnings retained. “If we’re keeping $1 bills that would be worth more in your hands than in ours, then we’ve failed to exceed our cost of capital,” Buffett said.

Seth Klarman: “Most Investments Are Dependent On Outcomes That Cannot Be Accurately Foreseen”

Johnny HopkinsSeth KlarmanLeave a Comment

Much has been written about the best way to calculate the present and future values of a business for investment. But as Seth Klarman points out in his book – Margin of Safety, the reality is:

“Even if the present could somehow be perfectly understood, most investments are dependent on outcomes that cannot be accurately foreseen.”

Klarman goes on add there are three safeguards that investors can put into place to protect against decreases in the value of potential investments:

It would be a serious mistake to think that all the facts that describe a particular investment are or could be known. Not only may questions remain unanswered; all the right questions may not even have been asked. Even if the present could somehow be perfectly understood, most investments are dependent on outcomes that cannot be accurately foreseen.

Even if everything could be known about an investment, the complicating reality is that business values are not carved in stone. Investing would be much simpler if business values did remain constant while stock prices revolved predictably around them like the planets around the sun. If you cannot be certain of value, after all, then how can you be certain that you are buying at a discount? The truth is that you cannot.

The possibility of sustained decreases in business value is a dagger at the heart of value investing (and is not a barrel of laughs for other investment approaches either). Value investors place great faith in the principle of assessing value and then buying at a discount. If value is subject to considerable erosion, then how large a discount is sufficient?

Should investors worry about the possibility that business value may decline? Absolutely. Should they do anything about it? There are three responses that might be effective.

First, since investors cannot predict when values will rise or fall, valuation should always be performed conservatively, giving considerable weight to worst-case liquidation value as well as to other methods.

Second, investors fearing deflation could demand a greater than usual discount between price and underlying value in order to make new investments or to hold current positions. This means that normally selective investors would probably let even more pitches than usual go by.

Finally, the prospect of asset deflation places a heightened importance on the time frame of investments and on the presence of a catalyst for the realization of underlying value. In a deflationary environment, if you cannot tell whether or when you will realize underlying value, you may not want to get involved at all. If underlying value is realized in the near-term directly for the benefit of shareholders, however, the longer-term forces that could cause value to diminish become moot.

This Week’s Best Investing Reads

Johnny HopkinsValue Investing NewsLeave a Comment

Here is a list of this week’s best investing reads:

EVERYTHING You need to understand Markets (csinvesting)

First Principles: The Building Blocks of True Knowledge (Farnam Street)

Why We May Be Headed For Another ‘Minsky Moment’ (The Felder Report)

Here We Go Again? (The Irrelevant Investor)

Will it hold? (The Reformed Broker)

How the Bear Stearns Meltdown Wrecked Something More Valuable than Money (Jason Zweig)

First Eagle Investment Management: Income Builder through Value Investing (feim.com)

Situational Awareness (A Wealth of Common Sense)

An Art Leveraging A Science (Collaborative Fund)

Quantitative Analysis Of The Balance Sheet: When The Rubber Hits The Road (ValueWalk)

We Crush Stock Indexes, Yale Claims (Institutional Investor)

Come easy, go easy: The Tech Takedown! (Musings on Markets)

What Iconic Investor Are You Like? (Investopedia)

Ask Yourself Why (Of Dollars And Data)

A Guide to Getting Good at Dealing with Stock Market Chaos (Safal Niveshak)

Why Most Financial Media Hinders, Rather Than Helps, Investors (Evidence Investor)

The Evolution of Moat Analysis (Intrinsic Investing)

When Knowing What Will Happen Isn’t Enough (Alpha Baskets)


This week’s best investing research reads:

The corporate bond market sends a clear message (13D Research)

Tail Risk Hedging: An Alternative Approach to Risk Management (Alpha Architect)

In Practice Summary: Effect of Market Reclassifications on Share Prices (CFA Institute)

Gettin’ Tighter: Financial Conditions’ Effect on Stocks (Advisor Perspectives)


This week’s best investing podcasts:

The False Breakdown (Ben Carlson & Michael Batnick)

Nikhil Kalghatgi – Moonshot Investing (Patrick O’Shaughnessy)

Paul Merriman, “The People That Have Come Out Ahead Are the People Who Have Put Their Trust in the System Over the Long-Term” (Meb Faber)

The Bitcoin Debate (part 1) w/ Tuur Demeester & Erik Townsend (Preston Pysh & Stig Brodersen)

Acquirer’s Multiple Stocks Appearing in Greenblatt, Simons, Gabelli, Paulson, Portfolios

Johnny HopkinsStock ScreenerLeave a Comment

One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2017-12-31). This week we’ll take a look at one of the picks from our Large Cap Stock Screener:

Viacom, Inc. Class B (NASDAQ: VIAB)

A quick look at the price chart (below) for Viacom shows us that the stock is down 31% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 8.16 which means that it remains undervalued.

(Source: Google Finance)

Top investors who currently hold positions in Viacom include:

Cliff Asness – 7,663,422 total shares

Sarah Ketterer – 4,462,334 total shares

LSV Asset Management – 4,266,845 total shares

John Rogers – 3,397,206 total shares

NWQ Managers – 2,097,710 total shares

Mario Gabelli – 1,204,838 total shares

John Paulson – 1,000,000 total shares

Ken Griffin  – 808,427 total shares

Joel Greenblatt – 762,856 total shares

Jim Simons – 542,500 total shares

Pioneer Investments – 459,011 total shares

Murray Stahl – 302,105 total shares

Robert Olstein – 288,935 total shares

Steven Cohen – 231,827 total shares

Donald Yacktman – 34,150 total shares

Jeff Auxier – 28,095 total shares

David Dreman – 9,581 total shares

Active Managers Shifting To Smaller, More Focused Portfolios To Achieve Outperformance

Johnny HopkinsValue Investing NewsLeave a Comment

Here’s a great article at Bloomberg that discusses the changing landscape for active investors. The article reports that more and more active managers are moving to smaller, more focused portfolios. The logic behind the shift is that a smaller, more focused portfolio is more likely to achieve outperformance as it deviates away from the so-called ‘benchmark hugging’ style portfolios which are filled with a much large number of holdings.

Here is an excerpt from that article:

In a world where almost nothing seems capable of halting the spread of passive investing, active managers are looking for a lifeline.

Their solution: smaller, more focused portfolios.

Institutional investors are raising their allocations to so-called focused strategies — defined as portfolios holding 50 names or fewer — and distributors are increasingly recommending them to clients, according to a study released by Greenwich Associates in conjunction with Fred Alger Management Inc. Plus, for both large- and small-cap funds, they overwhelmingly believe this is the optimal way to deliver performance.

“It’s indisputable that passive has gained momentum in the marketplace,” said Jim Tambone, Alger’s chief distribution officer. “Passive has essentially created a floor for returns. In other words, you must beat passive or you don’t survive.”

Total assets in index-based passive strategies in mutual funds and exchange-traded funds have swelled to $6.8 trillion from $2.7 trillion five years ago, according to Morningstar. Roughly a third of U.S. assets are now invested this way, but the percentage is rising fast as cash increasingly flows out of active funds and into passive vehicles. That growth has become a looming shadow over active managers, who are pressured to beat benchmarks and cut costs.

Take a look at the numbers in the Greenwich-Alger study, which was conducted from September to November of last year. Of the 91 “key decision makers” questioned, more than half of the institutional investors said they’d increased their allocations to focused strategies in the previous 18 months, and the same amount expected their interest to grow over the next two years. For intermediaries, about a third upped their contributions to smaller strategies, and more than 60 percent expect their enthusiasm to rise.

The logic behind the shift is that these tightly focused portfolios hold the stocks the investment managers most believe in, which will induce outperformance. In addition, these smaller groups should deviate further away from indexes than so-called benchmark huggers, which have large holdings that all but match the index they’re chasing. If the strategies are more differentiated — what asset managers call “active share” — they also should have a better chance of outperforming passive indexing. Or so the thinking goes.

“Your probability of outperforming the market is going to be much greater with 10 stocks than with 1,000, because once you’re at 1,000 you’re essentially the market,” Tambone said. “I want high conviction, and I need to have high active share, and if I have high conviction and high active share, there’s a better probability I’ll have a tracking error that I’m looking for. And when I combine those three data points, I improve the probability that I’ll have high alpha.”

You can read the entire article at Bloomberg here.

Seth Klarman: Mainstream Investing Has It Backwards

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Some years ago Seth Klarman gave a fantastic speech at the MIT Sloan Investment Management Club. During his speech Klarman suggested that the mainstream approach to investing has is backwards saying:

“Right at the core, the mainstream has it backwards. Warren Buffett often quips that the first rule of investing is to not lose money, and the second rule is to not forget the first rule. Yet few investors approach the world with such a strict standard of risk avoidance. For 25 years, my firm has strived to not lose money—successfully for 24 of those 25 years—and, by investing cautiously and not losing, ample returns have been generated. Had we strived to generate high returns, I am certain that we would have allowed excessive risk into the portfolio—and with risk comes losses.”

He went on to discuss how you can successfully exploit opportunities by remaining calm, cautious and focused in the manic world of investing. Here is an excerpt from that speech:

As the father of value investing, Benjamin Graham, advised in 1934, smart investors look to the market not as a guide for what to do but as a creator of opportunity. The excessive exuberance and panic of others generates mispricings that can be exploited by those who are able to keep their wits about them.

For three quarters of a century, this advice has helped a great many value investors become very rich, not quickly, but relentlessly, in good markets and in bad. After 25 years in business trying to do the right thing for our clients every day, after 25 years of never using leverage and sometimes holding significant cash, we still are forced to explain ourselves because what we do—which sounds so incredibly simple—is seen as so very odd.

When so many other lose their heads, speculating rather than investing, riding the market’s momentum regardless of valuation, embracing unconscionable amounts of leverage, betting that what hasn’t happened before won’t ever happen, and trusting computer models that greatly oversimplify the real world, there is constant and enormous pressure to capitulate.

Clients, of course, want it both ways, too, in this what-have-you-done-for-me-lately world. They want to make lots of money when everyone else is, and to not lose money when the market goes down. Who is going to tell them that these desires are essentially in conflict, and that those who promise them the former are almost certainly not those who can deliver the latter?

The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions. Success in the market leads to excess, as bystanders are lured in by observing their friends and neighbors becoming rich, as naysayers are trounced by zealous participants, and as the effects of leverage reinforce early successes. Then, eventually, and perhaps after more time than contrarians would like, the worm turns, the last incremental buyer gets in, the last speculative dollar is borrowed and invested, and someone decides or is forced to sell.

Things quickly work in reverse, as leveraged investors receive margin calls and panicked investors dump their holdings regardless of price. Then, the wisdom of caution is once again evident, as not losing money becomes the watchword of the day. Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.

You can find the entire speech here:

Howard Marks: “Extreme Predictions Are Rarely Right, But They’re The Ones That Make You Big Money”

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One of the best resources for investors are Howard Marks’ annual memos. They provide a number of valuable investing insights for investors. One such example can be found in the 1993 missive titled – The Value of Predictions, or Where’d All This Rain Come From?. In this memo Marks discusses a number of aspects of market forecasting. With particular emphasis on the difficulty of forecasting, the timing of forecasts, and more importantly how accurate forecasting doesn’t necessarily correlate to significant change in a company’s share price.

The key to forecasting, Marks says, is:

“Extreme predictions are rarely right, but they’re the ones that make you big money”.

Here’s an excerpt from that memo:

At least twenty-five years ago, it was noted that stock price movements were highly correlated with changes in earnings. So people concluded that accurate forecasts of earnings were the key to making money in stocks.

It has since been realized, however, that it’s not earnings changes that cause stock price changes, but earnings changes which come as a surprise. Look in the newspaper. Some days, a company announces a doubling of earnings and its stock price jumps. Other earnings doublings don’t even cause a ripple — or they prompt a decline. The key question is not “What was the change?” but rather “Was it anticipated?” Was the change accurately predicted by the consensus and thus factored into the stock price? If so, the announcement should cause little reaction. If not, the announcement should cause the stock price to rise if the surprise is pleasant or fall if it is not.

This raises an important Catch 22. Everyone’s forecasts are, on average, consensus forecasts. If your prediction is consensus too, it won’t produce above-average performance even if it’s right. Superior performance comes from accurate non consensus forecasts. But because most forecasters aren’t terrible, the actual results fall near the consensus most of the time — and non-consensus forecasts are usually wrong. The payoff table in terms of performance looks like this:

The problem is that extraordinary performance comes only from correct nonconsensus forecasts, but non-consensus forecasts are hard to make, hard to make correctly and hard to act on.

When interest rates stood at 8% in 1978, most people thought they’d stay there. The interest rate bears predicted 9%, and the bulls predicted 7%. Most of the time, rates would have been in that range, and no one would have made much money.

The big profits went to those who predicted 15% long bond yields. But where were those people? Extreme predictions are rarely right, but they’re the ones that make you big money.

You can read the entire 1993 memo here.

Joel Greenblatt: You’re Not Likely To Be The Next Buffett Or Lynch. Figuring Out Which Businesses Are The Great Ones Is The Tough Part

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One of the best investing books ever written was – You Can Be A Stock Market Genius, by Joel Greenblatt. It’s a must read for all investors. There’s one passage in particular in which Greenblatt discusses the difficulty of making investment decisions like Warren Buffett or Peter Lynch saying:

“The problem is that you’re not likely to be the next Buffett or Lynch. Investing in great businesses at good prices makes sense. Figuring out which are the great ones is the tough part.”

With that said, Greenblatt says you can still increase your chances of outperformance by investing only in what you know and understand.

Here’s an excerpt from the book:

Applying some lessons from the masters, at the very least, should help when the investment decisions become a bit more taxing. At most, since picking your spots is one of the keys to your success, following the basic principles of these investment greats should keep you focused in the right places.

All right, already. Where are these secret hiding places? Don’t worry. You don’t have to look under Love Canal or get shot down spying over some secret Russian military base. It’s not that straightforward. The answer is: stock-market profits can be hiding anywhere, and their hiding places are always changing.

In fact, the underlying theme to most of these investment situations is change. Something out of the ordinary course of business is taking place that creates an investment opportunity. The list of corporate events that can result in big profits for you runs the gamut—spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales, distributions. And it’s not just the events themselves that can provide profits; each such event can produce a whole host of new securities with their own extraordinary investment potential.

The great thing is, there’s always something happening. Dozens of corporate events each week, too many for any one person to follow. But that’s the point: you can’t follow all of them, and you don’t have to. Even finding one good opportunity a month is far more than you should need or want. As you read through this book, in example after example, in lesson after lesson, you may wonder “How the hell could I have found that one?” or “I never would have figured that out!” Both are probably true. But there will be plenty of others that you do find and can figure out.

Even after you learn where to look for new ideas, the notion that you can cover even one-tenth of these special corporate events is a pipe dream. On the other hand, making incredible profits over your lifetime from the ones you do work on, isn’t. The old cliche holds true: “Teach a man to fish. . . .”

What about all the other ways to get rich? There are no flaws in the investment methods of Warren Buffett or Peter Lynch. The problem is that you’re not likely to be the next Buffett or Lynch. Investing in great businesses at good prices makes sense. Figuring out which are the great ones is the tough part. Monopoly newspapers and network broadcasters were once considered near-perfect businesses; then new forms of competition and the last recession brought those businesses a little bit closer to earth. The world is a complicated and competitive place. It is only getting more so. The challenges you face in choosing the few stellar businesses that will stand out in the future will be even harder than the ones faced by Buffett when he was building his fortune. Are you up to the task? Do you have to be?

Finding the next Wal-Mart, McDonald’s, or Gap is also a tough one. There are many more failures than successes. Using your own experiences and intuition to choose good investments is excellent advice. It should be applied in every investment you make. You should invest only in what you know and understand. It’s just that Peter Lynch is an especially talented individual. It’s likely that he knows and understands more than you when it comes down to making the tough calls.

This Week’s Best Investing Reads

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Here is a list of this week’s best investing reads:

Break the Chain: Stop Being a Slave (Farnam Street)

Yeah I said it (The Reformed Broker)

The Limits to Data (The Irrelevant Investor)

The Stock Market’s Most Popular ETF Puts In A Long-Term ‘Spinning Top’ (The Felder Report)

How to Talk to People About Money (Collaborative Fund)

Jimmy John’s & Warren Buffett’s 10 Rules (ValueWalk)

Regression to Lumpy Returns (A Wealth of Common Sense)

When Keynes Played Art Buyer (Jason Zweig)

Stream On: An IPO Valuation of Spotify! (Musings on Markets)

Of Bad Businesses, Unethical Managers, and Stock Market Volatility (Safal Niveshak)

Pay the Price (Above The Market)

Things That Fund Managers Don’t Say Enough (Behavioural Investment)

Chuck Akre: Bad at Market Predictions, Good at Investing (WSJ)

David Einhorn is sticking to his guns despite one of the worst quarters ever for his hedge fund (CNBC)


This week’s best investing research reads:

Pulling the Goalie: Hockey and Investment Implications (Cliff Asness)

How to Perform Investment Sentiment Analysis on Twitter (Alpha Architect)


This week’s best investing podcasts:

TIP184: Momentum Investing w/ Dr. Richard Smith (The Investors Podcast)

Elroy Dimson, “High Valuations Don’t Necessarily Mean That We’re Going to See Asset Prices Collapse” (Meb Faber)

Animal Spirits Episode 24: The Lump Sum (Ben Carlson & Michael Batnick)

Acquirer’s Multiple Stocks Appearing in Marks, Dalio, Druckenmiller Portfolios

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One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2017-12-31). This week we’ll take a look at one of the picks from our Large Cap Stock Screener:

Vale SA (ADR) – (NYSE: VALE)

A quick look at the price chart for Vale shows us that the stock is up 30% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 7.89 which means that it remains undervalued.

(Source: Morningstar)

Top investors who currently hold positions in Vale include:

Ken Heebner – 19,300,000 total shares

Jim Simons – 9,757,959 total shares

Howard Marks – 9,411,396 total shares

Cliff Asness – 5,772,844 total shares

Ken Griffin – 2,516,470 total shares

Jeremy Grantham – 1,708,232 total shares

Stanley Druckenmiller – 1,666,600 total shares

Lee Ainslie – 430,110 total shares

Ken Fisher – 386,900 total shares

Bill Miller – 309,720 total shares

Ray Dalio – 229,438 total shares

Michael Burry: “Ick” Stocks Provide Fertile Ground For Rare Neglected Deep Value Situations

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One of our favorite investors here at The Acquirer’s Multiple is Michael Burry, founder of Scion Capital. His annual letters provide some great insights for value investors. One such example can be found in his 2001 letter in which he discusses two important concepts.

The first is a mistake that investors make, which he terms – “upgrading ones portfolio”. Upgrading means investors dump their illiquid/ignominious stocks in favor of more well known companies that are trading at a discount.

The second is a method for discovering undervalued opportunities using what he terms – “ick” investing. Ick investing means taking a special analytical interest in stocks that inspire a first reaction of “ick.”

Here is an excerpt from that letter:

One reason that several of the Fund’s illiquid common stocks fell during the quarter is that many value managers, who might hold similar stocks, saw the opportunity to “upgrade” their portfolios during mid-late September. That is, acting on the fact that larger, well-known companies were recently trading at steep discounts to historical prices, portfolio managers dumped their illiquid, ignominious stocks and rushed into these more popular but depressed stocks. The phrase “I am upgrading my portfolio” became one I heard frequently among fellow portfolio managers as September came to a close.

In order to apply this technique to the Fund’s portfolio, the existing securities and the securities to which one might upgrade, would have to come to some sort of equilibrium in terms of value offered. This most certainly has not been the case, at least not on any widespread basis. Indeed, the very fact so many investors acted rather eagerly to upgrade has recently pushed the value differential that much further in favor of current portfolio holdings. As a result, the time to exit such positions is certainly not the present.

Another issue I have with this sort of thinking is probably best summarized by the word “Ick.” Ick investing means taking a special analytical interest in stocks that inspire a first reaction of “ick.” I tend to become interested in stocks that by their very names or circumstances inspire an unwillingness – and an “ick” accompanied by a wrinkle of the nose – on the part of most investors to delve any further. In all probability, such stocks will prove fertile ground for the rare neglected deep value situations that could provide significant returns with minimal risk, and minimal correlation with the broad market. Occasionally, well-known stocks fall into the “ick” category, and it is at those times that I become interested.

Finally, I suspect that many who are actively upgrading their portfolios are doing so because they fear missing either a major market rally or the next bull market. With stocks in general having come down fairly far, the feeling a bottom is near may be fairly pervasive. The optimal way to participate in a market rally, by definition, is to buy the better-known stocks that either are in the major indices or are comparable to those that make up the indices.

However, doing so exposes one to the risk that one is wrong on the direction of the market. To my knowledge, such a hazard has proven notoriously difficult to avoid. In any case, the goal, always, of intelligent investing is not to mimic the market but rather to outmaneuver the market.

This is not to say that I am not a fan of larger, well-run businesses with fantastic economic characteristics and durable competitive advantage. I have a list of about eighty or so stocks that represent businesses with very decent and predictable long-term business characteristics.

At the right price, I would like to include any one or more of these stocks in the Fund. Of course, what I consider the right price seems ridiculously low given where most of these stocks have been priced in recent years. When these stocks come to my prices, then I will consider adding them to the Fund. But only because they represent absolute value, and not because of any desire to “upgrade the portfolio” into either more palatable or more market responsive stocks.

Also on this subject, I should note that recently, as many well-known companies saw their stocks fall drastically, a select few made it to my buy prices. Those that did were added to the portfolio on the sole criterion of absolute value. The vast majority of popular stocks continue to be valued as popular stocks rather than as real businesses. Certainly, in the broader market, many stock prices overestimate the permanence of the underlying businesses.

Summary

As I have noted in previous letters, I will always choose the dollar bill carrying a wildly fluctuating discount rather than the dollar bill selling for a quite stable premium. This will often result in surprising quarterly results. To the extent prudent, I will attempt to explain surprising results when they occur. During the third quarter we saw an attempt to buy a cheap security become a process of averaging down into what is now, apparently, the most undervalued security available on any exchange. We saw investors start to dump illiquid small capitalization stocks using an order process that may be summarized as “Just get me out of this stock!” And to top it off, we saw a human tragedy of rare proportion directly and negatively impact the market values of several of the largest portfolio holdings of the Fund – with surprisingly little offset.

Thus, a confluence of happenings seems to have knocked the Fund for a decent price decline in just three months time. However, my entire net worth resides alongside your investment in the Fund, and I neither bemoan these recent short-run declines nor fear long-term impairment of my net worth. On the contrary, I am enthused that the market is offering up values on a scale not seen previously during the Fund’s existence. Moreover, the Fund holds significant cash and sources of cash to put to work in such an environment.

You can find the entire 2001 letter here. (Courtesy of csinvesting.org)

Mohnish Pabrai: “The good thing about getting wealthy is we don’t need to understand a lot of things!”

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Here’s a great recent video of Mohnish Pabrai’s presentation at the Peking University (Guanghua School of Management) in December, 2017.

The presentation is full of a number of value investing insights but there’s one part in particular in which Pabrai provides a great example on how investing can be made much simpler if you’re patient and wait for opportunities. While at the same time reducing your risk by staying within your circle of competence.

Here’s an excerpt from the presentation:

We have to do what I would call anomalies, we have to look for strange things that show up once in a while. They don’t show up all the time. We have to be scanning the horizon and doing that, once in a while something will show up that makes a lot of sense, and then you act on it.

I’ll give you an example. A few years back someone sent me a write-up on a steel company. The kind of economics of this company was that the stock price was I think around $40 a share or $45 a share. They had $15 a share in cash, no debt, and they have contracts where their earnings are $15 a share for the next two years.

So between the cash and the next two years of earnings you’re paying $45 you get the $45 back in two years. But you still have the company or the plants and everything else. After two years there’s no visibility into what’s gonna happen. It’s a cyclical business, so I said okay we’re going to make the investment. We’re going to keep it for two years and see what happens. Because I take in the cash and at that point I got all the cash back so I bought the company for $45.

One year goes by and they say another two years [earnings] at $15 a share. So one more year is set. The stock is now at $75. So now it’s $60 for $15 [cash] plus three years [earnings at $15 a share] equals $60. We are now above our cost. Then they announced one more year $15 [a share earnings]. Now the stock is at $90. It’s doubled and then I’m thinking I should sell and whatnot, then they announce someone is buying them for $150. I don’t even wait for the deal to close. The stock goes to $150. I sell it. So I don’t need a lot of horsepower to figure that out. It was easy to figure out but it doesn’t happen every day.

Charlie Munger says, there’s a friend of his. He’s a billionaire. He lives near Stanford University. John Arriaga only invests in real estate within one mile of Stanford University. From having no money forty years ago he’s a billionaire.

All he did was he never put on a lot of debt and when things went down he bought and when everyone got euphoric be sold. That’s all he did. What is John Arriaga’s circle of competence? Is it real estate? No! Is it U.S real estate? No! Is it California real estate? No! Northern California real estate? No! Only real estate around Stanford. His circle of competence is this small.

The good thing about getting wealthy is we don’t need to understand a lot of things!

You can watch the entire presentation here:

14 Of Charlie Munger’s Funniest Quotes

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Charlie Munger is known for his quick wit and sense of humor, and one of the best sources of Munger’s humorous quotes is Poor Charlie’s Almanack. Here are fourteen of Munger’s funniest quotes from the book:

1. I’d rather throw a viper down my shirt front than hire a compensation consultant.

2. When asked at a cocktail party whether he played the piano, Charlie replied, “I don’t know, I’ve never tried.”

3. I always like it when someone attractive to me agrees with me, so I have fond memories of Phil Fisher.

4. It is, of course, normal for self-appraisal to be more positive than external appraisal. Indeed, a problem of this sort may have given you your speaker today.

5. When you mix raisins and turds, you’ve still got turds. [Comparing the benefits that the Internet and technology are providing to society versus the evils of stock speculation in these sectors.]

6. In the corporate world, if you have analysts, due diligence, and no horse sense, you’ve just described hell.

7. It’s been so long since we’ve bought anything that [asking us about our market impact when we’re trading] is like asking Rip Van Winkle about the past twenty years.

8. When I first moved to California, there was a part-time legislature that was controlled by gambling interests, racetrack owners, and liquor distributors, who wined and dined the legislators, supplied them with prostitutes, etc. I think I prefer that to today’s full-time legislature.

9. [On the book Deep Simplicity], it’s pretty hard to understand everything, but if you can’t understand it, you can always give it to a more intelligent friend.

10. If you rise in life, you have to behave in a certain way. You can go to a strip club if you’re a beer-swilling sand shoveler, but if you’re the bishop of Boston, you shouldn’t go.

11. I think the people who are attracted to be prison guards are not nature ‘s noblemen to begin with.

12. You don’t want to be like the motion picture executive who had many people at his funeral, but they were there just to make sure he was dead. Or how about the guy who, at his funeral, the priest said, “Won’t anyone stand up and say anything nice about the deceased?” and finally someone said, “Well, his brother was worse.”

13. [Responding to a question at the 1999 Berkshire Hathaway annual meeting about the year 2000 compliance issue, Munger replied:] I find it interesting that there is such a problem. You know, it was predictable that the year 2000 would come.

14. Ben Franklin was a very good ambassador, and whatever was wrong with him from John Adams’ point of view [I’m sure] helped him with the French.

This Week’s Best Investing Reads

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Here is a list of this week’s best investing reads:

On The One Hand… (A Wealth of Common Sense)

Sometimes This Sucks (The Irrelevant Investor)

Transition (The Reformed Broker)

It’s Not Just LIBOR Pointing To Rising Financial Stress (The Felder Report)

So Two Stoics Walk Into a Bar… (Farnam Street)

Why We Listen To Bad Forecasts (Collaborative Fund)

How Warren Buffett makes money: Berkshire Hathaway business model (Financial Express)

What’s Cheap? A Factor Perspective (Factor Investor)

A Debt Crisis On The Horizon (Washington Post)

Peak Quality (albertbridgecapital.com)

How Can You Tell When A Factor Stops Working? (behaviouralinvestment.com)

Nobel-Winner Robert Shiller Warns Of An ‘Economic Crisis’ From Trade War Threats  (CNBC)


This Week’s Best Investing Research Reads:

Momentum Everywhere, Including in Factors (Alpha Architect)

The Case for Further Stock Market Gains (CFA Institute)

You Are Not a Monte-Carlo Simulation (Flirting With Models)

The Largest Company In Every State By Revenue (Visual Capitalist)

Top 20 Whitepapers of March 2018 (Savvy Investor)


This Week’s Best Investing Podcasts

Animal Spirits Episode 22: Horizontal Support (Ben Carlson & Michael Batnick)

TIP183: The Dollar Decline, China, Gold & Crypto Currencies w/ Luke Gromen (The Investor’s Podcast)

Live EP.01 – Peter Attia, M.D. [Invest Like the Best] (Patrick O’Shaughnessy)

Episode #99: Radio Show: Meb’s Bullish on Emerging Markets… Strategies for Limited 401K Options… and Listener Q&A (Meb Faber)

Acquirer’s Multiple Stocks Appearing in Soros, Einhorn, Greenblatt Portfolios

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One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2017-12-31). This week we’ll take a look at one of the picks from our Large Cap Stock Screener:

Gap Inc (NYSE: GPS)

A quick look at the price chart for Gap Inc shows us that the stock is up 30% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 8.12 which means that it remains undervalued.

Top investors who currently hold positions in Gap Inc include:

Pioneer Investments – (2,500,013 total shares)

LSV Asset Management – (2,246,634 total shares)

Jim Simons – (1,664,400 total shares)

George Soros – (998,391 total shares)

Cliff Asness – (861,150 total shares)

T Rowe Price – (820,011 total shares)

Ken Griffin – (391,148 total shares)

Joel Greenblatt – (321,224 total shares)

Louis Moore Bacon – (250,000 total shares)

David Einhorn – (176,600 total shares)

Steven Cohen – (43,550 total shares)

O’Shaughnessy Asset Management (41,171 total shares)

Todd Combs: The Billionaire Whisperer

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Here’s a great article at Bloomberg about Todd Combs titled – The Billionaire Whisperer Who United Bezos, Buffett and Dimon. The article provides some great insights into Combs, the young hedge fund manager who runs a significant portion of Berkshire’s investment portfolio, and is being heavily touted as Buffett’s successor.

Here is an excerpt from the article:

Todd Combs spends most of his days reading in a quiet office in Omaha, where he’s an investment manager at Berkshire Hathaway Inc. But one day last year he found himself on a flight to Seattle with an unusual mission: Pitch Jeff Bezos on a bold idea for wringing costs out of the U.S. health-care system.

Two of the biggest corporate chieftains in America—his boss, Warren Buffett, and Jamie Dimon, who runs the largest bank in the country—had already signed on. But they wanted the Amazon.com Inc. chief executive officer on board as well.

Combs, 47, a former hedge fund manager who has no experience in the health-care industry and likes to keep a low profile, was both an odd and an obvious choice as the CEOs’ emissary. He had won Buffett’s confidence at Berkshire, where he sparked the company’s largest acquisition, and he’d impressed Dimon so much when the banker visited Omaha that he was invited to join the board of JPMorgan Chase & Co. in 2016.

The outreach to Bezos worked. In late January the three billionaires announced they were teaming up to form a company, free from “profit-making incentives,” that would seek to lower the cost of covering their hundreds of thousands of employees. Details were scarce, but health-care stocks promptly plunged. Some of the smartest minds in business were about to try fixing a notoriously wasteful industry—one that costs America some $3.3 trillion annually.

For Bezos, Dimon, and Buffett, it was another splashy headline in careers that have pushed boundaries. Behind the scenes, though, Combs largely spearheaded the effort, according to a person familiar with the matter. For months, Combs shuttled among the CEOs to get them to commit to doing something about a problem they’d discussed informally for years, the person says.

This was probably just how Combs wanted it: involved in the action but out of the spotlight. The Florida State University graduate was a virtual unknown in investing circles when Buffett hired him in 2010 to manage a portion of Berkshire’s vast stock portfolio. At the time, one of the few photos that news outlets could find of him was a boyish high school yearbook shot. Since then the world hasn’t gotten to know Combs much better. (He declined to be interviewed for this story.)

This much is clear: Over the past seven years, Combs has become an influential figure at Buffett’s conglomerate. In addition to investing a slug of Berkshire’s money, he was behind the $37 billion purchase of Precision Castparts Corp., a supplier to the global aerospace industry, and worked on well-publicized trades that saved hundreds of millions of dollars in taxes.

Combs is already in line to manage a huge swath of Berkshire’s investments when Buffett, 87, leaves the scene. But his ever-growing portfolio has led some shareholders and analysts to speculate that he could one day become CEO as well. “Everybody else is a slave to attention, and Todd seems indifferent to it,” says Steve Wallman, a longtime Berkshire investor and money manager in Wisconsin, who’s met Combs. “This is just the kind of behavior you want to see in someone who’s lined up to succeed Warren.”

Combs is also a talented networker who has used his smarts and drive to win the confidence of powerful men, according to interviews with a dozen people who know him. Most asked that their name not be used, even when they had positive things to say, for fear of jeopardizing their relationship with someone who values his privacy. Many of these people say they were surprised to learn about his involvement in the health-care initiative, given his lack of background in the industry.

What Combs does know is financial services. A native of Sarasota, Fla., he graduated from college in 1993 and took a job with the state’s banking regulator. From there he went on to Progressive Corp., working in a group that studied risk and determined what to charge for auto policies.

In 2000, Combs started his MBA at Columbia Business School. It was a chance to learn securities analysis in the same halls where Buffett had long ago learned the craft from Benjamin Graham, the father of value investing.

His first encounter with Buffett came during a talk that year. The Berkshire CEO told students that one thing they could do to get ahead was to read 500 pages a week, Combs recalled in a 2014 interview with CNBC. The billionaire’s point, he said, was that an investor could compound knowledge and get better over time.

Richard Hanley, a hedge fund manager in New York, was an adjunct professor in the MBA program back then. Combs, he says, had a deep drive to get ahead and the mental flexibility to come up with smart ideas. One assignment Hanley gave his students was to devise a trade that would have the best performance over the next several months. Unlike his peers, Combs decided to short the stock he picked. Hanley forgets the company Combs bet against, but his idea beat everyone else’s. “Todd was very intense, very focused,” Hanley says.

Buffett’s advice about reading stuck with Combs as he started his investment career, first as a financial-services analyst at Copper Arch Capital and later at Castle Point Capital Management, the hedge fund in Greenwich, Conn., he started in 2005. Combs’s approach was a race against the clock to consume information, says one person familiar with his strategy during that period. At Castle Point he’d get to the office early and leave late. If he wasn’t in a meeting with his analysts or taking a break to exercise, he was reading, three people say.

He was fascinated by psychology and the sorts of biases that drive decision-making. Books such as Talent Is Overrated and The Checklist Manifesto have become staples in the hedge fund world, where money managers are constantly looking for an edge. But Combs was interested in those ideas well before they became trendy, one person says. Every month or so, he’d pick a book and get together with his analysts to discuss it.

In early 2007, Buffett said in his annual letter to Berkshire shareholders that he was looking to hire at least one younger money manager who would be able to succeed him as the company’s chief investment officer. Résumés poured in, and Combs threw his own into the mix. But it didn’t stand out.

Castle Point’s mandate was to invest in financial-services stocks. His company had done well but not exceptionally so. It was also relatively small, overseeing about $400 million. Combs’s big accomplishment was navigating the 2008 financial crisis relatively unscathed. His fund ended down 5.7 percent that year, while the S&P 500 plunged 37 percent, according to a letter to investors.

In 2010, Combs asked Buffett’s longtime business partner, Berkshire Vice Chairman Charles Munger, for a meeting. Soon after, the two met for lunch at the California Club in Los Angeles and ended up having a conversation that stretched for hours, according to an article at the time in the Wall Street Journal. Afterward, Munger suggested to Buffett that he meet the young money manager. Beyond his apparent smarts, Combs had the sort of personality that was a “100 percent fit” for Berkshire’s culture, Buffett told the newspaper. Mark Nelson, chairman of investment manager Caledonia in Sydney, who had encouraged Combs to reach out to Munger, says he was surprised by how quickly Berkshire acted. Combs enjoys digging into complex financial companies and tearing apart the accounting, Nelson says. “They probably saw a kindred spirit.”

Combs joined Berkshire early in 2011 and eventually moved his family to Omaha from Connecticut. Ted Weschler, the other investment manager Buffett hired to pick stocks at Berkshire, chose to stay in Charlottesville, Va. People familiar with the two men’s arrangements say Combs’s decision to relocate means Buffett leans on him more. In public, however, the billionaire has tried to treat both equally, saying that Combs and Weschler have been great additions to the company and have “Berkshire blood in their veins.”

Sitting next to Buffett has had other benefits for Combs, who now manages about $12 billion for Berkshire. Dimon was introduced to Combs by the Omaha billionaire, which led to the young investment manager joining the JPMorgan board.

In some respects, Combs’s life hasn’t changed much from his days running a hedge fund. “I read about 12 hours a day,” he told the Florida State alumni magazine last year in a rare interview. “Warren and I will usually catch up once or twice a day on stuff that’s going on­—deals, stocks, stuff with our companies. Sometimes our managers reach out or a banker calls with an idea, but that’s about it.”

There’s also travel for board meetings. In addition to JPMorgan, Combs is a director of a few Berkshire subsidiaries, including Precision Castparts and Duracell, the battery maker Berkshire purchased from Procter & Gamble Co. in a tax-saving stock swap Combs negotiated.

Less well-known is the time Combs spends hobnobbing with people at the top of the business world. In January he was with Buffett at a Washington luncheon hosted by Vernon Jordan, the Democratic power broker, before the annual Alfalfa Club dinner, a black-tie event where billionaires and politicians mingle. U.S. Secretary of Commerce Wilbur Ross and Dimon were also there, according to a person who attended.

If Combs has settled on an approach for the new health-care venture, he’s remained tight-lipped about it. People who know him speculate that the company could initially focus on squeezing costs from middlemen who take a cut of prescription drug sales. But the ambitions are clearly wider. “It would be very easy, I think, to go in and shave off 3 or 4 percent just by negotiating power,” Buffett said on CNBC in late February. “We’re looking for something much bigger than that.”

The U.S. health system has powerful incumbents, including hospitals and drug-benefit managers. Years of efforts to curb costs haven’t accomplished much. Bezos, Buffett, and Dimon have united around a common cause, but their plan could run aground if the needs of their wildly different businesses aren’t met.

For now, the focus of the group is to find a CEO to run the new venture, a process that Combs is working on with deputies at JPMorgan and Amazon. One person says Combs may end up being the health-care company’s nonexecutive chairman, given how much work he’s put in so far. Were that to pass, it would be a way for him to stay involved—but remain comfortably in the background. —With Hugh Son and Spencer Soper.

You can read the full article at Bloomberg here.