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.

Other Books

Forbes: Contrary To Popular Belief, Value Investing Is Not Dead

Johnny HopkinsValue InvestingLeave a Comment

Here’s a great article at Forbes discussing the recent performance of value investing saying:

“However, a hundred years worth of data says value investing works. One cycle doesn’t change that.”

Here’s an excerpt from that article:

Many people think value investing is dead. It’s not.

Style leadership rotates across cycles. Also, adjusting how you measure ‘value’ can make a huge difference.

Style leadership is dynamic

Traditional value investing has endured a lost decade.

Growth stocks like Amazon and Netflix have been star performers in the recent bull market, while value stocks (i.e. statistically cheap shares) have risen at a more tepid pace. The chart below compares performance of the Russell 3000 Value and Growth Indices since 2009.

Russell 3000 Growth Index vs. Russell 3000 Value Index (2009 – 2018) SILVERLIGHT ASSET MANAGEMENT, LLC

But if we look a little further back at these same indices, we see that in the previous cycle, it was value that outperformed growth. Cumulative performance over the combined cycle is nearly a draw.

Russell 3000 Growth Index vs. Russell 3000 Value Index (2000 – 2018) SILVERLIGHT ASSET MANAGEMENT, LLC

If one style outperformed all the time, everyone would pursue it, and the edge would vanish. That’s why investing styles will always rotate in and out of favor.

One tailwind for growth stocks in recent years has been the economic environment. Specifically, low interest rates have persisted for longer than normal. That benefits firms with strong earnings growth, because future earnings are more valuable at a lower discount rate.

Fed is raising rates 3x slower than normal. SOURCE: FEDERAL RESERVE, HIDDENLEVERS

Sector biases also play a role. Banks are the highest weighted value sector in the past 10 years, and they’ve struggled as lending margins have compressed.

However, the macro environment is ever-changing. There’s less slack in the U.S. economy now, which could foreshadow rising inflation pressure over the intermediate-term. That shift would change the interest rate dynamic and help lay a foundation for a value turnaround.

There are different ways to define value

Whether or not value investing still “works” also really depends on what kind of value investor you are.

If your portfolio is overweight low price-to-book firms, for example, you probably haven’t done well lately. But if your primary value compass is the amount of free cash flow a firm generates in proportion to enterprise value, chances are you’re doing much better. That metric has worked this year, and comes out on top over the last 15 years.

Here is how an assortment of value metrics have historically performed. Notice there’s quite a bit of variance.

Net long-short quantile spreads. Data source: Bloomberg L.P. SILVERLIGHT ASSET MANAGEMENT, LLC

P/E ratios and dividend yields are probably the most well known value metrics. Free cash flow yield is less well known, but it’s an important measure to be aware of if you invest in individual stocks.

Many professional investors prefer to use free cash flow over net income as an earnings proxy. Cash flow is more objective, whereas earnings-per-share numbers are easier for management to manipulate with discretionary accounting techniques.

Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business.”

– Warren Buffett

It’s easy to forget what owning a stock really means. It means being part-owner of a business. And owners are entitled to the future cash flow a business generates.

To bring it down to an even simpler level, think back to the board game Monopoly. In the game, players compete to acquire and develop properties. The player who collects the most rent ultimately wins.

The premier asset in the game is Boardwalk. What makes Boardwalk so valuable?

It’s not the $400 price tag. Rather, it’s the $50 rent owners are entitled to in proportion to the $400 price.

Boardwalk is the best value in the game, because it sports a superior cash flow yield of 12.5% ($50/$400). That beats the heck out of Mediterranean Ave. ($2 rent/$60 price = 3.3% yield).

If you can understand this basic concept from Monopoly, you can see why free cash flow yield is an intuitive measure of value.

If value investing makes sense to you, don’t abandon ship

In the late-1990s, rumors of value investing’s demise were widespread. Then value rebounded big-time from 2000 – 2007.

The bottom-line is there are many ways to invest. Whether you’re a growth investor, value, or something in-between, what matters most is finding a style well-suited to your personality so you can stick with it.

Morgan Housel put it well in a recent post:

My theory is that most investment models maximize for risk-adjusted returns, but in the real world every investor wants to maximize for sleeping well at night and being proud of themselves in a complicated world.”

Traditional value investing is psychologically difficult. It involves adopting lonely opinions. It can also mean having to grit your teeth during long periods where value is out of favor.

However, a hundred years worth of data says value investing works. One cycle doesn’t change that.

You can read the original article at Forbes here.

Peter Lynch: 27 Timeless Investing Lessons

Johnny HopkinsInvesting Strategy, Peter LynchLeave a Comment

We’ve just been re-reading Peter Lynch’s classic book – One Up On Wall Street. In it, Lynch provides 27 timeless investing lessons. Here’s an excerpt from the book:

  1. Sometime in the next month, year, or three years, the market will decline sharply
  2. Market declines are great opportunities to buy stocks in companies you like. Corrections—Wall Street’s definition of going down a lot—push outstanding companies to bargain prices
  3. Trying to predict the direction of the market over one year, or even two years, is impossible
  4. To come out ahead you don’t have to be right all the time, or even a majority of the time
  5. The biggest winners are surprises to me, and takeovers are even more surprising. It takes years, not months, to produce big results
  6. Different categories of stocks have different risks and rewards
  7. You can make serious money by compounding a series of 20–30 percent gains in stalwarts
  8. Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail
  9. Just because a company is doing poorly doesn’t mean it can’t do worse
  10. Just because the price goes up doesn’t mean you’re right
  11. Just because the price goes down doesn’t mean you’re wrong
  12. Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have outperformed the market and are overpriced are due for a rest or a decline
  13. Buying a company with mediocre prospects just because the stock is cheap is a losing technique
  14. Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique
  15. Companies don’t grow for no reason, nor do fast growers stay that way forever
  16. You don’t lose anything by not owning a successful stock, even if it’s a tenbagger
  17. A stock does not know that you own it
  18. Don’t become so attached to a winner that complacency sets in and you stop monitoring the story
  19. If a stock goes to zero, you lose just as much money whether you bought it at $50, $25, $5, or $2—everything you invested
  20. By careful pruning and rotation based on fundamentals, you can improve your results
  21. When stocks are out of line with reality and better alternatives exist, sell them and switch into something else
  22. When favorable cards turn up, add to your bet, and vice versa
  23. You won’t improve results by pulling out the flowers and watering the weeds
  24. If you don’t think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money
  25. There is always something to worry about
  26. Keep an open mind to new ideas
  27. You don’t have to “kiss all the girls.” I’ve missed my share of tenbaggers and it hasn’t kept me from beating the market

Jeremy Grantham: 4 Books That Every Investor Should Read

Johnny HopkinsInvesting Books, Jeremy GranthamLeave a Comment

We recently started a series called – Superinvestors: Books That Every Investor Should Read. So far we’ve provided the book recommendations from:

Together with our own recommended reading list of:

This week we’re going to take a look at recommended books from superinvestor Jeremy Grahtham. Taken from his writings, interviews, lectures, and shareholder letters over the years. Here’s his list:

1. The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World (Charles Mann)

2. Dirt: The Erosion of Civilizations (David Montgomery)

3. Immoderate Greatness: Why Civilizations Fail (William Ophuls)

4. The End of Normal: The Great Crisis and the Future of Growth (James Galbraith)

$500 Off Boyar’s Forgotten Forty Report: Special Offer for Acquirers Multiple Readers

Johnny HopkinsBoyar's Forgotten Forty ReportLeave a Comment

Each year, Boyar Research publishes their Forgotten Forty Report featuring the forty stocks that they believe have the greatest potential for capital appreciation in the year ahead due to a catalyst they see on the horizon.

To give you an example, Boyar have provided our readers with sample reports from last year’s Forgotten Forty:

Click here to get last year’s free sample reports 

What Is The Forgotten Forty

Every stock profiled in The Forgotten Forty has a one page write-up highlighting Boyar’s investment thesis (including the company’s valuation and potential catalysts for value realization). While the Forgotten Forty contains one page reports on each stock, readers should be comforted to know that Boyar Research has previously published a full-blown research report on every company featured.

The Forgotten Forty has outperformed the S&P 500 by approximately 214 bps over the past 15 years, 216 bps over the past 10 years and 185 bps over the past 5 years.*

Every December, for over two decades, Boyar Research publishes The Forgotten Forty, which features one page reports on the forty companies that we believe have the greatest potential to outperform the leading indices in the year ahead due to a catalyst that we see on the horizon. All companies featured in The Forgotten Forty have been previously analyzed in full length research reports in our flagship subscription research publication Asset Analysis Focus.

BFF-vs-S&P-v4

(*Past performance is no guarantee of future results. These figures are not audited.)

Potential Catalysts Could Include:

  • The potential initiation of either a dividend or meaningful stock repurchase program reflecting a company’s strong balance sheet with excess cash or meaningful financial capacity (e.g. low leverage levels).
  • The potential for a company to announce/pursue a separation or spin off, which we believe makes economic sense and would help surface shareholder value.
  • Management changes, acquisitions, macro themes (e.g. demographics, housing recovery, etc.) and prospects for improved operating performance due to business investments or changing industry/competitive dynamics.

40 One-Page Snapshots:

  • 40 one-page snapshots detailing our investment theses and valuation for each company profiled.
  •  All companies featured in The Forgotten Forty have been previously analyzed in full length research reports in our flagship subscription research publication Asset Analysis Focus.

$500 Off Boyar’s Forgotten Forty Report: Special Offer for Acquirers Multiple Readers

Boyar is offering Acquirer’s Multiple readers a $500 discount off this year’s Forgotten Forty Report:

Click on this link for the $500 discount.

More about The Forgetten Forty from Mark Boyar:

(Source: YouTube)

The Forgotten Forty on CNBC:

(Source: CNBC)

The Forgotten Forty Features in Barron’s 2018:

Five Value Stocks Set To Beat The Market

Click on this link for the $500 discount.

TAM Stock Screener – Stocks Appearing in Greenblatt, Price, Griffin Portfolios

Johnny HopkinsStock Screener1 Comment

Part of the weekly research 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 Warren Buffett, Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from their latest 13F’s (dated 2018-9-30). This week we’ll take a look at:

Westlake Chemical Corporation (NYSE: WLK)

Westlake Chemical Corp is a vertically integrated manufacturer and marketer of basic chemicals, vinyls, polymers and building products. Its products are used for flexible and rigid packaging, automotive products, coatings, water treatment, refrigerants, residential and commercial construction and others. The company operates in the business segments of Olefins and Vinyls. The Olefins segment manufactures and markets polyethylene, styrene monomer and various ethylene co-products. The Vinyl segment manufactures and markets polyvinyl chloride, vinyl chloride monomer, ethylene dichloride, chlor-alkali, chlorinated derivative products, and ethylene. It sells the products across the United States and around the world, of which a majority of the revenue is derived from the United States.

A quick look at the price chart below for Westlake Chemical Corp shows us that the stock is down 30% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 7.03 which means that it remains undervalued.

(Source: Google Finance)

Superinvestors who currently hold positions in Westlake Chemical Corp include:

Cliff Asness – 1,853,189 total shares

Jim Simons – 576,300 total shares

Chuck Royce – 264,727 total shares

Michael Price – 91,800 total shares

Ken Griffin – 76,357 total shares

Steve Cohen – 51,182 total shares

Joel Greenblatt – 46,320 total shares

John Hussman – 25,900 total shares

Jim O’Shaughnessy – 17,443 total shares

Murray Stahl – 4,718 total shares

This Week’s Best Investing Reads 12/14/2018

Johnny HopkinsValue Investing NewsLeave a Comment

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

Why Small Habits Make a Big Difference (Farnam Street)

Normal Accidents in the Stock Market (A Wealth of Common Sense)

Mind the Gap (Humble Dollar)

CNBC’s full interview with Paul Tudor Jones (CNBC)

Asset Owners Are Falling Out of Love With Index Funds (Institutional Investor)

Rational vs. Reasonable (Collaborative Fund)

3 Things To Learn From Market Speculator Victor Niederhoffer (Forbes)

A Mostly Random Walk Down Wall Street (The Irrelevant Investor)

Buffett and Cooperman Agree Luck is Key to Investing Success (Validea)

The Best White Papers 2018 (savvyinvestor)

Lecture Presentation and Notes: Surviving the Investing Game (Safal Niveshak)

Why A Defensive Rotation May Not Work So Well This Time (The Felder Report)

The perils of trying to time the market (The Economist)

5 hot posts I’m reading today (The Reformed Broker)

Slow Down (MIcroCapClub)

What You Can Learn From How Warren Buffett’s Investment Process Evolved (Behavioral Value Investor)

The Greatest Barrier to Entry (Intelligent Fanatics)

Humans vs. Machines: The Stress Management Edge (CFA Institute)

2019 S&P 500 Price Targets By Wall Street Strategists Are Mostly Bullish (Financial Samurai)

My Favorite Investment Writing of 2018 (Of Dollars & Data)

Is There A Behavioural Premium for Illiquid Investments? (Behavioural Investment)


This week’s best investing research:

ETFs Have NOT Screwed Up Correlations, Liquidity, and Alpha Opportunities (Alpha Architect)

Arctic Trails, Winter Gales, And Gold’s Secret Tales (Palisade Research)

Don’t Ignore The Yield Curve (The Macro Tourist)

Yield Curve Inversion Can Cause A Crisis Through Reflexivity (UPFINA)

The Counterproductive Nature of Annual Forecasts (Pragmatic Capatilsm)

Imminent Death Cross in S&P 500 (Price Action Lab)

Synching Lower (Advisor Perspectives)

The Risk in the Risk-Free Rate (Flirting with Models)

Yield Curve Impact on Asset Prices – Evidence Does Not Provide Simple Answers (DSGMV)

The ETF liquidity question: Can the passive universe hold up in the event of a market crisis? (13D Research)


This week’s best investing podcasts:

Top Investment Podcasts – 2018 (Meb Faber)

Animal Spirits Episode 59: Late Cycle (Ben Carlson & Michael Batnick)

[i3] Podcast – MarketFox Interview with James O’Shaughnessy (Daniel Grioli)

Winning at the Great Game: My Interview with Adam Robinson (Part 1) (Shane Parrish)

TIP220: Lessons from Billionaire Oprah Winfrey (Stig Brodersen & Preston Pysh)

Bryan Krug – High Yield Credit Investing (Patrick O’Shaughnessy)

Brent Beshore – Micro Buyout Adventur.es (EP.79) (Ted Seides)

Charlie Munger: I Made Four Or Five Hundred Million Dollars From Two Decisions, With Almost No Risk

Johnny HopkinsCharles Munger, Investing StrategyLeave a Comment

In this short interview Charles Munger explains how he made four or five hundred million dollars from just two decisions:

“I talked about patience. I read Barron’s for fifty years. In fifty years I found one investment opportunity in Barron’s. I made about $80 Million, with almost no risk. I took the $80 Million and gave it to Li Lu who turned it into four or five hundred million dollars. So I have made four or five hundred million dollars from reading Barron’s for fifty years and following one idea. Now that doesn’t help you very much. I’m sorry, but that’s the way it really happened.”


(Source: YouTube)

Shareholder Activism Is On The Rise: Caution Required

Johnny HopkinsActivist InvestingLeave a Comment

Here’s a great article at Forbes about a new generation of activist shareholders:

Historically, large institutional investors pursued purely financial strategies and kept a low profile in governance. This may no longer be the case. In a manner vaguely reminiscent of the corporate raiders of the 1980s, a new generation of activist shareholders is on the rise.

And these players are big fish. Some of the biggest institutional activists include BlackRock, with more than $6 billion in assets under management, followed by the Vanguard Group, with $5 billion. Institutional funds – such as pension funds, insurance companies, endowments, banks, and hedge funds – have initiated public campaigns to leverage their influence on firms and pressure management for change.

Activists vocalize their concerns by engaging in conversations with management and meeting the board directly. If consensus is not reached, they may make their demands public through open letters, white paper reports, shareholder proposals and proxy contests.

Their agenda typically involves issues related to corporate governance, such as replacing management, dividend payouts, new director appointments and executive compensation. However, increasing numbers of activist campaigns seek influence within the strategy domain, which was traditionally the prerogative of executives.

According to a 2018 report by Activist Insight, the number of companies around the globe receiving governance-related proposals from activists has steadily increased, with growth averaging about 11% for the last four years and campaigns targeting 805 companies worldwide in 2017. The pool of funds deployed in these campaigns is expanding, reaching over $200 billion in 2016, up from just $47 billion in 2010. The movement is also expanding geographically: approximately twenty percent of total activist shareholder funds are now deployed outside the English-speaking world – and national campaigns have been launched in various European countries, including France, Germany, Switzerland, Italy and Spain.

Large institutional funds, whose participation in shareholder activism was previously considered atypical, are now getting into the game. The California Public Employees’ Retirement System (CalPERS) pioneered this strategy by pressuring companies it invests in to adhere to norms of corporate governance. Through its list of governance and sustainability principles, CalPERS actively endorses the appointment of independent directors, the formation of board committees, CEO succession initiatives and the appointment of non-executive chairs.

These changes received considerable exposure in the media and many companies changed their governance approach after CalPERS acquired part of their stock. The CalPERS strategy has been accompanied by positive financial returns (about seven percent for the past twenty years), prompting other institutional funds to follow suit. Favorable regulatory changes aimed at empowering minority shareholders have put the movement in the mainstream among medium-sized investors, including hedge funds.

Whether large or small, underperforming or a market leader, no firm can immunize itself from becoming a target of activist investors. Large hedge funds, such as those managed by Carl Icahn, Nelson Peltz, Dan Loeb and Bill Ackman, are publicly agitating and generating media buzz by confronting the boards of iconic global companies such as Apple, PepsiCo, Rolls-Royce, Nestlé and Danone.

The recent appointment of Peltz, the founding partner and CEO of Trian Fund Management, L.P., to the board of P&G exemplifies a turning point in what is said to be the biggest proxy fight in history. Ever since his fund’s decision to acquire a $3.5 billion stake in P&G in 2016, Trian has been lobbying to include a representative on the company’s board – a move that the management and directors have actively resisted.

While the P&G board initially managed to block Peltz’s bid for directorship, he challenged the decision. After both sides spent millions of dollars on proxy battles, including Trian publishing an extensive 94-page white paper detailing proposed strategic changes for the company,

Peltz declared victory by a slim margin. Yet only time will show the magnitude of the anticipated shake-out. During its earlier campaign at PepsiCo, Trian managed to win board appointment through a proxy fight, lobbying for the need to split Frito-Lay from the Pepsi beverage division.

Only a year after gaining the board seat, the fund divested its stake in the company without waiting for the implementation of the key goal of their campaign, making a fifty percent return on its investment.

Following the example of US-originated activist campaigns, European activist hedge funds have mushroomed. The Swedish firm Cevian Capital has driven public battles in flagship Nordic companies such as Erickson, Volvo and Danske Bank. Despite market volatility, the fund has become one of the best performers in Europe with 19.4% returns in 2016.

Previously dormant pension funds are now looking zealously at the large profits that activist hedge funds have generated in the bull market. Similar to CalPERS, the Norwegian sovereign wealth fund Government Pension Fund Global recently approved a list of governance guidelines that emphasized “good” governance principles for companies receiving its funding.

Although the activist agenda may sound appealing to shareholders, existing research has not managed to confirm a positive effect of shareholder activism on long-term firm value. While the view of shareholder activists as corporate visionaries is becoming increasingly dominant, those who have studied this subject carefully do not necessarily agree.

For instance, research on companies targeted by shareholder activists shows that activist investors can both increase and destroy firm value. Factors such as the state of the target firm and the objectives and influence of the investors can play an important role in explaining the effects of activist campaigns on corporate outcomes.

While markets generally react positively to activist involvement, critics of the movement raise concerns about the skewed interest of activist initiatives. This is because activists may not wait to see through the promised changes, instead capturing the momentum of media exposure followed by positive reactions from the stock market and choosing to divest their shares before their proposed strategy is implemented, as Trian did with PepsiCo.

Should minority shareholders be on the alert when an institutional investor enters the firm? Shareholders should strive to maximize the positive impact of entry – better control of managerial discretion – while being ready to prevent any value-destructive strategies.

Corporate shake-outs can make firms leaner and are powerful tools for increasing managerial efficiency. However, they should not be a tool for squeezing out short-term financial gains at the expense of long-term development and profit. Thus, shareholders must carefully examine the value enhancement potential of a firm targeted by activists. As with any mechanism of corporate governance, shareholder activism is not without its flaws, but when used appropriately, it can have a significant positive impact.

You can read the original article here – Forbes – Shareholder Activism Is On The Rise: Caution Required.

Aswath Damodaran: The Inverted Yield Curve: Is There A Signal In The Noise?

Johnny HopkinsAswath Damodaran, Investing StrategyLeave a Comment

Here’s a short presentation by Aswath Damodaran on the recent inverted yield curve and whether there is a signal in the noise. He writes:

On December 4, 2018, the yield on a 5-year US treasury dropped below the yields on the 2-year and 3-year treasuries, causing a portion of the US treasury yield curve to invert.

Since inverted yield curves have predicted recessions almost perfectly for the last six decades in the US, it was viewed as a big reason for the market’s drop that day. In this session, I start with the impressive track record that inverted yield curves have had as recession predictors, posit that this may be because they are stand-ins for the “Fed” effect (on the economy) and then look at the data over the last 56 years.

I find that it is the short end (2 yr vs 1 yr), not the more common used long end (10 yr vs 2 yer), of the yield curve that offers predictive power, and even that power is limited. I also find that the post-2008 data yields very different results than the pre-2008 data, suggesting that the crisis may have reduced investor faith in the powers of the Fed and consequently altered any predictive power that the yield curve may have had prior to the crisis.

You can watch the short presentation here:

(Source: YouTube)

Jeremy Grantham: Investing Was So Much Easier 40 Years Ago

Johnny HopkinsInvesting Strategy, Jeremy GranthamLeave a Comment

Here’s a great podcast with Jeremy Grantham chatting to Barry Ritzholt at Boomberg. When asked about the difference between investing forty years ago compared with today he said:

“The world was so straight forward forty years ago. There was such a limit on the talent in the business. If you showed up and used your brains, you were likely to do pretty well. You didn’t need any help. Now, when I’ve learned all my lessons, the market is so difficult, so full of talent. You need lots of help.”

You can listen to the podcast by clicking on the play button below:

(Source: Bloomberg)

James Montier: How To Protect Yourself From Wall Street’s ‘Self-Serving’ Biases

Johnny HopkinsInvesting Strategy, James MontierLeave a Comment

In his book – The Little Book of Behavioral Investing, James Montier wrote a great passage on how investors can identify and protect themselves from becoming victims of Wall Street’s self-serving biases.

Here’s an excerpt from that book:

So much for nature. Nurture also helps to generate the generally rose-tinted view of life. Psychologists have often documented a “self-serving bias ” whereby people are prone to act in ways that are supportive of their own interests. But, as Warren Buffett warns, “Never ask a barber if you need a haircut.”

Auditors provide a good example of this bias. One hundred thirty-nine professional auditors were given five different auditing cases to examine. The cases concerned a variety of controversial aspects of accounting. For instance, one covered the recognition of intangibles, one covered revenue recognition, and one concerned capitalization versus expensing of expenditures. The auditors were told the cases were independent of each other.

The auditors were randomly assigned to either work for the company or work for an outside investor who was considering investing in the company in question. The auditors who were told they were working for the company were 31 percent more likely to accept the various dubious accounting moves than those who were told they worked for the outside investor. So much for an impartial outsider—and this was in the post-Enron age!

We see this kind of self-serving bias rear its head regularly when it comes to investing. For instance, stockbroker research generally conforms to three self-serving principles:

Rule 1: All news is good news (if the news is bad, it can always get better).

Rule 2: Everything is always cheap (even if you have to make up new valuation methodologies).

Rule 3: Assertion trumps evidence (never let the facts get in the way of a good story).

Remembering that these rules govern much of what passes for research on Wall Street can help protect you from falling victim to this aspect of self-serving bias.

The most recent financial crisis provides plenty of examples of self-serving bias at work, the most egregious of which is the behavior of the ratings agencies. They pretty much perjured themselves in pursuit of profit. The conflicts of interest within such organizations are clear; after all, it is the issuer who pays for the rating, which, as with the auditors above, makes the ratings agency predisposed to favoring them.

In the housing crisis, they seemed to adopt some deeply flawed quant models which even cursory reflection should have revealed were dangerous to use. But use them they did, and so a lot of sub-investment grade loans were suddenly transformed, as if by financial alchemy, into AAA rated securities.

George Soros: Q32018 Top 10 Holdings

Johnny HopkinsGeorge Soros, Portfolio ManagementLeave a Comment

One of the best resources for investors are the publicly available 13F-HR documents that each fund is required to submit to the SEC. These documents allow investors to track their favorite superinvestors, their fund’s current holdings, plus their new buys and sold out positions. We spend a lot of time here at The Acquirer’s Multiple digging through these 13F-HR documents to find out which superinvestors hold positions in the stocks listed in our Stock Screeners.

As a new weekly feature, we’re now providing the top 10 holdings from some of our favorite superinvestors based on their latest 13F-HR documents.

This week we’ll take a look at George Soros (9-30-2018):

The current market value of his portfolio is $4,558,278,000.

Top 10 Positions

Stock Symbol Shares Held Market Value
Liberty Broadband Corp Class C LBRDK 7,290,838 614,618,000
Vici Properties Inc VICI 21,498,926 464,807,000
Caesars Entertainment Corp CZR 34,498,395 353,609,000
Altaba Inc. (Yahoo) AABA 2,674,619 182,195,000
Intelsat SA I 2,441,581 73,247,000
Aetna Inc AET 339,489 68,865,000
Tribune Media Company TRCO 1,600,000 61,488,000
Microsoft Corp. MSFT 482,500 55,184,000
Pinnacle Foods inc PF 551,290 55,053,000
Ishares MSCI Emerging Index Fund EEM 1,278,500 54,873,000

Ray Dalio: 20 Books That Every Investor Should Read

Johnny HopkinsInvesting Books, Ray DalioLeave a Comment

We recently started a series called – Superinvestors: Books That Every Investor Should Read. So far we’ve provided the book recommendations from:

Together with our own recommended reading list of:

This week we’re going to take a look at recommended books from superinvestor Ray Dalio. Taken from his writings, interviews, lectures, and shareholder letters over the years. Here’s his list:

1. The Lessons of History (Will Durant, Ariel Durant)

2. River Out Of Eden: A Darwinian View of Life (Richard Dawkins)

3. Endurance: Shackleton’s Incredible Voyage (Alfred Lansing)

4. Thinking, Fast and Slow (Daniel Kahneman)

5. Incognito: The Secret Lives of the Brain (David Eagleman)

6. The Hero with a Thousand Faces (Joseph Campbell) 

7. The Spiritual Brain: A Neuroscientist’s Case for the Existence of the Soul (Mario Beauregard, Denyse O’Leary)

8. Security Analysis (Benjamin Graham, David Dodd)

9. Leadership the Outward Bound Way: Becoming a Better Leader in the Workplace, in the Wilderness, and in Your Community (Outward Bound USA)

10. Einstein’s Mistakes: The Human Failings of Genius (Hans Ohanian)

11. The Power of Habit: Why We Do What We Do in Life and Business (Charles Duhigg)

12. Beyond Religion: Ethics for a Whole World  (Dalai Lama)

13. Welcome to Your Brain: Why You Lose Your Car Keys but Never Forget How to Drive and Other Puzzles of Everyday Life  (Sandra Aamodt, Sam Wang)

14. A Whole New Mind: Why Right-Brainers Will Rule the Future (Daniel Pink)

15. A Magic Web: The Forest of Barro Colorado Island (Christian Ziegler, Egbert Leigh)

16. From Bacteria to Bach and Back: The Evolution of Minds (Daniel Dannett)

17. Sapiens: A Brief History of Humankind (Yuval Noah Harari)

18. The Undoing Project: A Friendship That Changed Our Minds (Michael Lewis)

19. The Upside of Inequality: How Good Intentions Undermine the Middle Class (Edward Conard)

20. The Serengeti Rules: The Quest to Discover How Life Works and Why It Matters (Sean Carroll)

TAM Stock Screener – Stocks Appearing in Greenblatt, Hussman, Fisher Portfolios

Johnny HopkinsStock ScreenerLeave a Comment

Part of the weekly research 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 Warren Buffett, Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from their latest 13F’s (dated 2018-9-30). This week we’ll take a look at:

Chico’s FAS, Inc. (NYSE: CHS)

Chico’s FAS Inc (Chico’s) is an apparel retailer with a portfolio of private-label brands that sell women’s clothing and accessories. Brands include Chico’s, White House/Black Market, Soma Intimates, and Boston Proper. The brands generally target women over 35 years old with moderate to high income levels. The company sells direct to consumer through its retail stores, websites, and telephone call centers. All stores are leased and in North America. The company sources most of its product from foreign manufacturers and distributes all products from its distribution center in Georgia.

A quick look at the price chart below for Chico’s shows us that the stock is down 42% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 4.24 which means that it remains undervalued.

(SOURCE: GOOGLE FINANCE)

Superinvestors who currently hold positions in Chico’s include:

Jim Simons – 4,924,864 total shares

Cliff Asness – 1,459,432 total shares

John Hussman – 200,000 total shares

Ken Fisher – 146,965 total shares

Joel Greenblatt – 97,026 total shares

Lee Ainslie – 65,590 total shares

This Week’s Best Investing Reads 12/7/2018

Johnny HopkinsStock Screener, Value Investing NewsLeave a Comment

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

Love, Happiness, and Time (Farnam Street)

The Market Right Now Doesn’t Care How Fantastic Your Stocks Are (Vitaliy Katsenelson)

The 80-Hour Workweek (A Wealth of Common Sense)

Facebook Is Undervalued (Base Hit Investing)

The Law of Large Numbers (The Irrelevant Investor)

Why Smart People Are Vulnerable to Putting Tribe Before Truth (Scientific American)

Google’s “Other Bets” (The Reformed Broker)

Alexa, How Can I Get Rich? (Safal Niveshak)

The Tranches of History (Jamie Catherwood)

On Writing Better: Becoming a Writer (Jason Zweig)

When Things Stop Working (Of Dollars and Data)

Grab the Roadmap (Humble Dollar)

Ian Cassel: Investing is Hard (Validea)

Leon Cooperman – There’s No Sign of Recession (CNBC)

Jamie Dimon Says Trade War Behind Market Crash [Full CNBC Transcript] (ValueWalk)

Investing Whiplash: Looking for Closure with Apple and Amazon! (Aswath Damodaran)

John Bogle is Wrong About Index Funds (Pragmatic Capitalism)

A Bond Yield Table Makes It Clear Which Duration You Must Choose (Financial Samurai)

Maximizing Diversification (Flirting With Models)

When Community and Business Come Together (Intelligent Fanatics)

Afterpay: A Regulator View (Bronte Capital)

Drip, Drip, Drip (Collaborative Fund)


This week’s best investing research:

ETF Flows Show a ‘Regime Change’ Amid the Volatility (Bloomberg)

The Inverted Yield Curve: Sign of Trouble Ahead? (Advisor Perspectives)

To Time or not to Time Factors? (i3-invest)

Mixed trend signals between equity indices and bonds (DSGMV)

Can Widely Followed Indicators Make You Money? (UPFINA)

‘Poker Face’: The Yield Curve Inverts As Investors Call The Fed’s Bluff (Palisade Research)

How to Use Trend Following within a Portfolio (Alpha Architect)

“Death Cross” Means “Loser” (Price Action Lab)

Private Equity: The Emperor Has No Clothes (CFA Institute)


This week’s best investing podcasts:

Animal Spirits Episode 58: The Sellers Are in Control (Michael Batmick & Ben Carlson)

Episode #132: Radio Show: Since 1989 80% of Stocks Had a Collective Return of 0%… A Goldman Bear-Market Indicator at Its Highest Point in Decades… and Listener Q&A (Meb Faber)

Erik Townsend On The Intersection Of Distributed Ledger Technology And Global Macro Investing (Jesse Felder)

Maureen Chiquet – Leadership Through Hard Conversations (Patrick O’Shaughnessy)

TIP219: US & China – Stocks, Bonds, Currencies, & Commodities w/ Luke Gromen (Preston Pysh and Stig Brodersen)

Tom Bushey – Launching a Hedge Fund (EP.78) (Ted Seides)

Daniel Kahneman: The Trouble With Confidence

Johnny HopkinsDaniel Kahneman, Investing PsychologyLeave a Comment

Here’s a great little video by Daniel Kahneman on the trouble with confidence. Kahneman makes the point that from a societal perspective confidence is generally very good, but from an individual’s point of view confidence is typically not always good.

Here’s an excerpt from the video:

Society rewards overconfidence. We want our leaders to be overconfident. If they told us the truth about the uncertainty we would discard them in favor of other leaders who sort of give an impression that they know what they’re doing.

We want overconfidence. We support it, we sustain it and there is an awful lot of it.  Most of what we read in the paper is overconfidence. Sometimes it’s catastrophic. Just about every war that you see, I think that’s a general rule, there are optimists among the generals and there are optimists on both sides and that is true for a lot of litigation as well.

So a lot of conflict is fed by overconfidence. There is an interesting story here of two biases that work in opposite directions. So one familiar, you can call it bias, but is what we call loss aversion. People put a lot more weight on negative events than on positive events. On loses than on gains.

So that’s one principle. If people are to gamble many on the toss of a coin and they stand to lose $100 they will demand more than $200 to accept the gamble which is in some ways is ridiculously risk-averse. So people are loss averse. On the other hand they’re optimistic, and so many of the decisions that people make especially in starting new businesses. That is where it’s been studied most extensively. People think they will succeed.

They open a restaurant because they think they will succeed. But in fact less than 1/3 of small businesses survive for five years. So clearly overconfidence is rife and overconfidence and loss aversion seem to be acting in opposite directions.

You have to distinguish the perspective of the individual from the perspective of society. I think for society it is probably very good that we have a lot of optimistic entrepreneurs who think they will succeed, although most of them fail. Most of them really do not know the odds.

It is not true that they know the odds and they take the risks willingly but many of them, most of them probably do not know the odds.

From the point of view of the individuals it is not always good to be optimistic. For example I have no interest whatsoever in my financial advisor being an optimist. I don’t care for that. For an entrepreneur it may be a good thing to be an optimist because it will make him or her persevere more.

We know that being an optimist is useful under some conditions. It is not always useful in making decisions.

You can watch the video here:

Seth Klarman Protege – David Abrams: Q32018 Top 10 Holdings

Johnny HopkinsDavid Abrams, Portfolio ManagementLeave a Comment

One of the best resources for investors are the publicly available 13F-HR documents that each fund is required to submit to the SEC. These documents allow investors to track their favorite superinvestors, their fund’s current holdings, plus their new buys and sold out positions. We spend a lot of time here at The Acquirer’s Multiple digging through these 13F-HR documents to find out which superinvestors hold positions in the stocks listed in our Stock Screeners.

As a new weekly feature, we’re now providing the top 10 holdings from some of our favorite superinvestors based on their latest 13F-HR documents.

This week we’ll take a look at Seth Klarman’s protege, David Abrams (9-30-2018):

The current market value of his portfolio is $3,783,170,000.

Top 10 Positions

Security Current
Shares
Current Value
($)
TEVA / Teva Pharmaceutical Industries Ltd. 19,522,372 420,512,000
SHPG / Shire Plc. 2,247,133 407,338,000
WU / Western Union Co. (The) 21,165,498 403,414,000
ORLY / O’Reilly Automotive, Inc. 883,194 306,751,000
ESRX / Express Scripts Holding Co. 3,192,304 303,301,000
BEN / Franklin Resources, Inc. 9,945,023 302,428,000
YHOO / Yahoo! Inc. 3,769,842 256,802,000
UHAL / AMERCO 576,045 205,446,000
AET / Aetna, Inc. 823,555 167,058,000
WLTW / Willis Towers Watson Public Limited Company 1,183,287 166,772,000

Charles Munger: Why Did Ben Graham’s Net Nets Disappear

Johnny HopkinsBenjamin Graham, Investing StrategyLeave a Comment

Just been re-reading Charles Mungers’ classic speech – A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business. In it Munger provides some great insights into what happened to the net net stocks popularized by Ben Graham.

Here’s an excerpt from that speech:

The second basic approach is the one that Ben Graham used—much admired by Warren and me. As one factor, Graham had this concept of value to a private owner—what the whole enterprise would sell for if it were available. And that was calculable in many cases.

Then, if you could take the stock price and multiply it by the number of shares and get something that was one third or less of sellout value, he would say that you’ve got a lot of edge going for you. Even with an elderly alcoholic running a stodgy business, this significant excess of real value per share working for you means that all kinds of good things can happen to you. You had a huge margin of safety—as he put it—by having this big excess value going for you.

But he was, by and large, operating when the world was in shell shock from the 1930s—which was the worst contraction in the English-speaking world in about 600 years. Wheat in Liverpool, I believe, got down to something like a 600-year low, adjusted for inflation. People were so shell-shocked for a long time thereafter that Ben Graham could run his Geiger counter over this detritus from the collapse of the 1930s and find things selling below their working capital per share and so on.

And in those days, working capital actually belonged to the shareholders. If the employees were no longer useful, you just sacked them all, took the working capital and stuck it in the owners’ pockets. That was the way capitalism then worked.

Nowadays, of course, the accounting is not realistic because the minute the business starts contracting, significant assets are not there. Under social norms and the new legal rules of the civilization, so much is owed to the employees that, the minute the enterprise goes into reverse, some of the assets on the balance sheet aren’t there anymore.

Now, that might not be true if you run a little auto dealership yourself. You may be able to run it in such a way that there’s no health plan and this and that so that if the business gets lousy, you can take your working capital and go home. But IBM can’t, or at least didn’t.

Just look at what disappeared from its balance sheet when it decided that it had to change size both because the world had changed technologically and because its market position had deteriorated.

And in terms of blowing it, IBM is some example. Those were brilliant, disciplined people. But there was enough turmoil in technological change that IBM got bounced off the wave after “surfing” successfully for 60 years. And that was some collapse—an object lesson in the difficulties of technology and one of the reasons why Buffett and Munger don’t like technology very much. We don’t think we’re any good at it, and strange things can happen.

At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up and those real obvious bargains disappeared. You could run your Geiger counter over the rubble and it wouldn’t click.

But such is the nature of people who have a hammer—to whom, as I mentioned, every problem looks like a nail that the Ben Graham followers responded by changing the calibration on their Geiger counters.

In effect, they started defining a bargain in a different way. And they kept changing the definition so that they could keep doing what they’d always done. And it still worked pretty well. So the Ben Graham intellectual system was a very good one.

You can read Charles Mungers’ classic speech here – A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business.

Seth Klarman: One Of Society’s Most Vexing Problems Is The Relentlessly Short-Term Orientation That Manifests Itself In Investing

Johnny HopkinsInvesting Strategy, Seth KlarmanLeave a Comment

We’ve just been reading Seth Klarman’s latest speech at the Harvard Business School. During the speech Klarman provides some great insights into the problems with a short-term orientation in investing.

Here’s an excerpt from the speech:

Consider corporate time horizons. It’s a choice to attempt to maximize corporate results over the very short run and a different and sometimes harder decision to take a longer-term view.

I’m convinced that one of society’s most vexing problems is the relentlessly short-term orientation that manifests itself in investing, in business decision making, and in our politics. Educational and philanthropic endowments, for example, with institutional time horizons that necessarily span centuries, invest their funds with monthly performance comparisons.

Jeremy Grantham (MBA 1966), cofounder of the global investment firm GMO, recently observed in the context of governmental inaction on climate change, “We face a form of capitalism that has hardened its focus to short-term profit maximization with little or no apparent interest in social good.”

Many feedback loops reinforce today’s short-term business and financial-market orientation. Louis Gerstner Jr. (MBA 1965), former CEO and chair of IBM, has written that you always get more of whatever you measure. Certainly, the constant measurement of professional money managers pressures them to perform well over the shortest measurement horizons.

The more pressure you put on money managers for near-term performance, the more short term their focus becomes. And the more pressure Wall Street puts on corporate America to deliver strong short-term performance, the more myopic the underlying businesses become.

A big part of leadership is deciding, and good decision-making benefits from intelligence, thoughtful deliberation, and experience, but also, as i hope you agree, from sound values.

No one in the investment business wants to be fired for poor performance (what Jeremy Grantham calls “career risk”). No money manager wants to lose their clients. No corporate CEO wants to be terminated. And as a result, few are willing and able to invest for the long run, to make long-term-oriented decisions, to put aside the short-term performance pressures and personal career or compensation considerations to do the right thing for the business. With excessive short-term pressure, even the wisest and most capable fiduciaries can bend and even break.

As human beings, we experience time quite differently from the institutions we create, populate, and lead. Even when we want to do the right thing, there are bosses, clients, and markets overtly or subliminally pressuring us to take the short view.

As John Maynard Keynes famously noted, “In the long run we are all dead.” It might be tempting to believe that the long run is simply a series of short runs, but the reality is that immediate pressures can overwhelm the long-run view, and even cause us to take actions that are the opposite of what a truly long-term orientation would produce.

We must all be more aware of the distortions and outright mistakes that can arise from too much focus on the near term. But simply extending your focus to the temporal horizon is insufficient. Have you really inoculated your decision-making just by shifting from short-term greedy to long-term greedy? David Brooks was on the right track when he observed: “The things that lead us astray are short term. …The things we call character endure over the long term––courage, honesty, humility.”

You can read the entire speech here – Seth Klarman, HBS Speech – Hard Times