Interview: Investing With A Margin Of Safety

I was honored when the Editors of Seeking Alpha asked me if I would like to be interviewed for their PRO Weekly Digest. PRO is Seeking Alpha’s research platform for serious investors looking to get better ideas. The interview was far ranging and discussed such topics as: business valuation and the CBV, my investment approach, past mistakes, and a review of old and new stock ideas.

To read the interview at its original source, please click here.

It’s also up on the blog, here.

Below is a copy of the interview:

PRO Weekly Digest: Investing With A Margin Of Safety With Brian Langis

Summary

  • Being a Chartered Business Valuator, why having a high IQ is not enough and how to find underfollowed foreign companies are topics discussed, and he makes the bullish case for ECN Capital.

Welcome to the latest issue of the PRO Weekly Digest. Every Saturday for Seeking Alpha PRO subscribers and Sunday for all other Seeking Alpha users, we publish highlights from our PRO coverage as well as feature interviews and other notable goings-on with SA PRO. Comment below or email us at pro-editors@seekingalpha.com to let us know what you think. Find past editions here.

Feature interview

Brian Langis, a long-time Seeking Alpha contributor, manages a private investment company and is a Chartered Business Valuator (CBV). He employs a contrarian/value strategy with notable calls including Moleskine, NTELOS (NASDAQ:NTLS) and Dollarama (OTC:DLMAF). We emailed with Brian about the extra work (and reward) of international investing, the first place he looks when researching a company and how losing money can be the best education.

Seeking Alpha: Can you discuss your work as a Chartered Business Valuator (CBV), the designation itself and how this expertise applies to your personal investing?

Brian Langis: I was always interested in business and how the world functions. I like history, psychology, economics, science and so on. These interests led me to investing. And in investing, it’s all about figuring out the intrinsic value of an asset and its relation to price. So I had to learn how to value different businesses and assets. I like Warren Buffett’s style of valuation. That’s played into the idea of completing the CBV.

As you mentioned I’m a CBV and a lot of readers are probably unfamiliar with this three letter designation. The CBV designation is the premier credential for professional business valuators in Canada. There’s a national body (the CICBV), a code of ethics and professional standards to follow. It’s been around since the 1970s, when the capital gain tax was introduced in Canada. As a CBV, I have the knowledge to quantify the value of a business or assets. I’m trained to put a value not only on business tangibles, but also the intangibles such as intellectual property and key patents, which is taking more and more space on the balance sheet. With publicly traded equities, it’s much easier to determine the value of a company, but in the private-equity sector it’s more complicated. I worked in the investment business, but most CBVs find themselves working in corporate finance, taxation, valuation for financial reporting, or litigation. Also a CBV is very practical if you are involved in M&A.

Everybody can learn business valuation, but for me having credibility is important. It can take 3-4 years of studying on top of a four-year degree to get it done. The CBV is very specialized and very useful. The CBV is more about learning valuation procedures than finance theory. If you want to get very deep into equity valuation, the CBV is a good designation. If people are interested in completing the CBV, having some background in accounting would definitely make life easier. Some work experience would also help.

In Canada the CBV is well respected. However the CBV lacks recognition outside of Canada. Unlike the CFA, the CBV is not well known outside of Canada. The business valuation practice is fragmented by countries. The U.S., U.K., and Australia each have their own designation, governing body and practice standards vary widely. But there’s currently a process to harmonize and to implement universally accepted standards for the valuation of assets across the world.

SA: To follow up, which valuation methodologies do you find most/least useful or is the usefulness determined by the type of asset you are valuing?

BL: Unfortunately, there’s no “best” method of valuing a business. There’s no secret formula. There’s no one-size-fits-all investment strategy that I can give you. Trying to come up with a satisfactory formula that would identify undervalued shares in the stock market with a reasonable degree of safety and consistency will lead you down a series of blind alleys. Knowing what an asset is worth and what determines that value is more an art than science. It’s not supposed to be easy. If it was easy everybody would be rich doing it, right? I made and lost money buying companies trading at 6x P/E and 25x P/E. It turns out that stocks trading at 6x P/E can go down to 4x P/E. Continue reading “Interview: Investing With A Margin Of Safety”

The Wall On The Canadian Side Is Now Complete

The wall on the Canadian side is now complete.

canadian-wall

On Market Valuation

Below are my comments in an email on recent market valuation:

Are stocks expensive, yes. Is it a bubble no. Will there be a correction? Of course. When? Who knows. We are in the 8th year of a bull market rally. In the past there was a correction every 18 months on average. Look where we are today. Nobody predicted that. No one. The stock market reached a new high yesterday, again making a mockery of what savvy economic commentators though they know about the world. It’s absolutely ridiculous. Consider how things looked one year ago. The world economy seemed hopelessly trapped in a cycle of low growth and inflation. Markets recoiled at the mere possibility that the Fed would raise interest rates. Now, interest rates and inflation forecasts have risen substantially from last year; financial markets are shrugging off — or even rallying at the possibility of — imminent Fed rate increases; and it is all taking place during the Trump’s presidency. Now there are signs that the “new normal” will become the “old normal”. Good luck trying to make sense of all that.

Now back to market valuation. The famous Shiller CAPE ratio chart is often brought up to explain the next crash. Bears like to cited this chart when predicting the next big crash. The last two times CAPE ratio was this high was 1929 and 2000. You know how that ended. It’s true and it’s a powerful chart that really sinks in. Well there’s a few things that are not mentioned.
1) The Shiller ratio has been a record high for a few years now. It’s been brought up to predict the next crash but still waiting. There’s a popular saying in the business: “I predicted 9 of the last 5 recessions”.
2)Back in 1929 and 2000 the the risk free ratio was at least 5%. That mean a treasury bond, the safest investment of all, would guarantee you least 5%. Today you are getting nothing, or negative return because of inflation. The reason why the stocks are persistently expensive is that there’s no other option to park your money. Where else are you going to put your saving? Bonds are  on the block to get slaughtered if interest rate ever normalized. Why would I loan money at somebody for less than 1% or even negative rates? Then you have gold. Very speculative and how to you value gold? It looks good on your wife what else are you going to do with? The return on gold since 1800 is 0.5%, on stocks 6.7%, and 3.5% for bonds. These numbers are from Professor Jeremy Siegel are Wharton. Because of persistently low interest rate, people are stuck with stocks.
3) The CAPE is backward looking. It divides the S&P with the last 10 years of earnings. It would be more accurate if you divide it with the expected earnings. I know it’s predicting but you can have a range. It would come down a bit.
4) Professor Robert Shiller said he would still buy stocks because interest rates are super low. He also said that you are not looking at the chart correctly. It wasn’t met to be a marking timing mechanism. You have to look at it like its continual.The lesson there is that if you combine that with a good market diversification, the important thing is that you never get completely in or completely out of stocks.
But to hell with all that, too much explanation, let’s just tell people that it’s doom time again. If you are managing money, I think you need to explain a little bit more. You owe that to your clientele.
Charts has the tendency to over simplifying things. You can’t just wait there until it comes down to PE 6x or something. Stocks just don’t drop because the chart said so. You need a catalyst. A recession would do it but it looks like the U.S. is doing well and that should help Canada. My money is on rising interest rates. Rates will need to go above 2% or more for people to get out of stocks. People are sitting on dividend yield of 3% for now, so why get out. My worried is how are we going to pay all that debt back once interest rate rise? We have taken on a lot of debt but its costing nothing. But that can’t last forever. All that need will need to be renewed one day and it might be a much higher rate. Budgets are already strained and nobody is asking how are we going to pay it back. But again, what do I know.
Right now stocks are on fire because of Trump. Which has me worried. It seems like the market only listened to the good stuff Trump had to say and ignore the bad stuff. The good stuff: tax cuts, regulation cut, and massive infrastructure spending. The bad stuff: possible trade war, protectionism policy, disrupting diplomacy etc…. And Trump’s personality is very volatile. But he has a good business team in board so that’s reassuring.

Stocks could be high for a while.The last couple major dips (5-10% drop), like in August 2016, Jan-Feb 2016, Brexit…was only a blip on the radar. The stocks came roaring back. there are too many specialized funds that take advantage of the dips. While you are trying to make sense of what’s happening stocks are back up. The best move was doing nothing.
The market anticipates very big things from the Trump administration. However market anticipations are often wrong. Trump will not get everything he wants and the market could take it the wrong way. But there is also some real improvement in the economic data underneath the shifts, reflecting economic forces that have been underway for years. And this resetting of expectations is evident in market data beyond the always erratic stock market.
Every decade or so there’s a massive storm like in 2000 and 2008. This is the key to real returns. It’s to buy when nobody wants everybody is selling. When there’s “blood on the street”. That’s easy to say (or write). You need nerve of steel to do that. It wasn’t evident in 2008-2009, after stocks were down 50% that the smart thing to do was to buy stocks. After weren’t we on the brink of a financial collapse? There will be another downturn one day to profit from.

Uber Part Trois

This is my 3rd post on Uber. You can read part 1 here and part 2 here.

This isn’t much of a post but instead a link to Business Insider. They have a great piece on Uber’s finance with tables and charts. It appears that they pieced together a bunch of leaks from various sources. It’s not complete and there are holes in the data but it pretty much confirm a lot about we thought about Uber’s financial state, which is aggressive growth combined with mega losses.

Anyway here’s the piece:

 Uber’s leaked finances show the company might — just might — be able to turn a profit

Find credit to value investor François Denault.

“Sorry hunny, I’m skipping Subway today for Wendy’s, I want to eat healthy today”

subways-soy-sandwich
Subway’s Soy + Other Stuff Sandwich

Let’s say you are on the road and you need a quick, healthy, fast meal. If you had to choose between A&W, McDonald’s, Wendy’s,  Tim Hortons, and Subway, you would probably hop for the last one. Subway has always positioned itself as a healthier alternative. So all the time that you went to Subway because you though you were making a healthier choice, well you are in for a slap in the face. It turns out that the chicken in your Subway chicken sandwich might not contain very much chicken meat at all.

Trent University and the CBC’s marketplace conducted a DNA analysis of the poultry in several popular grilled chicken sandwiches and wraps found at those popular fast food joints. The study revealed that in the case of two popular Subway sandwiches, the chicken was found to contain only about half chicken DNA. In testing, Subway’s oven roasted chicken and the chicken strips in its Sweet Onion Chicken Teriyaki sandwich clocked in with just 53.6% and 42.8% chicken, respectively. The results stood up after extra rounds of sampling.

So it looks like chicken, might taste like chicken, but it’s not chicken. So what is it? An unadulterated piece of chicken from the store should come in at 100 per cent chicken DNA. Seasoning, marinating or processing meat would bring that number down, so fast food samples seasoned for taste wouldn’t be expected to hit that 100 per cent target.

Here are the results:

fast-food-chicken
Source: Trent University/CBC

In the tests, most of the meat from Subway’s competitors was shown to contain 85 to 90% chicken DNA.“Subway’s results were such an outlier that the team decided to test them again, biopsying five new oven roasted chicken pieces, and five new orders of chicken strips,” CBC News explained. Surprisingly, A&W and Wendy’s topped the chart. Now I didn’t expected that. McDonald’s and Tim Hortons did well. So if you are limited in your options, you know you are getting at least 85% chicken. McDonald’s has been working very hard at cleaning its reputation in the last few years. I wish they did the study 10 years (I’m sure its out there) to compare the progress they made.

Naturally, Subway disagree with the results. Subway claimed to use only 100% white meat chicken in their chicken products, they did admit to using soy as a stabilizer. They are going to check with their suppliers. I wonder if A&W and Wendy’s are going to ride high with the results with some kind of marketing campaign. Wendy’s is delicious, but its delicious for all the wrong reasons. You committing a sin eating there, but it’s a sin that makes you feel good (well just at first when you are eating). Now the quality of their chicken is superior to Subway!!??? “Sorry hunny, I’m skipping Subway today for Wendy’s, I want to eat healthy today”. I smell class action lawsuit for misleading consumers…

Subway’s chicken also caused a stir in late 2015 following a study by the environmental group Friends of the Earth, which awarded the franchise an F for using antibiotics in their meat. In response, Subway announced that they would be removing poultry raised with antibiotics from its 27,000-plus of its U.S. locations by the end of 2016.

Sources:

What’s in your chicken sandwich? DNA test shows Subway sandwiches could contain just 50% chicken

The chicken challenge: Testing your fast food (Video)

Company responses: Chicken

 

One of the Best Trump Political Cartoon

The New Yorker probably has the best political cartoon of Trump I’ve seen in a while. The only reason Trump hasn’t bashed the New Yorker it’s because the articles are too long for him to read.

tom-toro-daily-cartoon-for-wed-feb-22
“It lets you hold the President’s attention for a few extra seconds before he wants to change channels.”

Trump is reputed for watching a lot of TV and a very short attention span. Just think of the people he has attacked on Tweeter seconds after they said something he didn’t like on TV.

Refreshing Climate Talk from Exxxon’s New CEO

The first blog post by ExxonMobil’s new CEO and Chairman Darren Woods is refreshing. Mr. Woods advocates a nationwide carbon tax to discourage use of polluting fuels. Exxon also endorsed the Paris Agreement. Actually, former CEO and now Secretary of State Rex Tillerson wasn’t a climate denier unlike his predecessors. Rex Tillerson said that climate change is real, but downplayed humanity’s responsibility for raising the global thermostat. Tillerson was also favor of a carbon tax. The fact that Mr. Woods is repeating these commitments  is encouraging. He doesn’t want to start his term labelled a climate denier. 

Exxon and other energy companies are facing huge challenges. The Company needs to meet growing demand for energy while managing the risk of climate change. The neutral carbon tax would promote greater energy efficiency and the use of today’s lower-carbon options, avoid further burdening the economy, and also provide incentives for markets to develop additional low-carbon energy solutions for the future. Woods’ view continues the corporate policy implemented during Tillerson’s reign at Exxon.

I occasionally visit the East Coast, the Gaspé peninsula on the Atlantic ocean, where I’m from.  That region is a front row seat to climate change. Scientists’ warnings that the rise of the sea would eventually imperil the coastline is no longer theoretical. In Gaspé they are seeing increasing severity of extreme weather, floods and heavy rain in the summer. Because the Gulf doesn’t freeze as often it used too in the winter,  tidal floods increasingly inundate the roads that are too deep to drive through. Certain roads are disappearing beneath the sea several times a year. These things didn’t happen when I was a kid. Now its a few times a year.

It is a good sign that we are starting to move away from discussions about whether climate change is real, and talking about solutions. Let’s see if these nice words can translate into action.

 

2016 Baupost Group Annual Letter Part 2

My publication of the 2016 Baupost Group Annual Letter was taken down. I wasn’t supposed to published it, as clearly stated at the bottom of every page in the letter. I felt a little guilty publishing it. At the same time I felt like I was doing the right thing. Let me explain.

In the letter, Seth Klarman, the legendary value investor running Baupost, stated that the letter is addressed to the limited partners only (his investors). However, after reading the letter, which is available all over the Internet, it’s clear that he wrote it for a larger audience. It’s obvious by the content of the letter that he expected non-investors and the media to study and analyze every line. He wanted people to read it. A good portion of the letter is on Trump.  Klarman warn us about a Trump presidency. He knew his thoughts would end up in the New-York Times and Wall-Street Journal. You don’t write that kind of stuff without expecting it to go public. His shareholder letters are not like reading a personal email he sent to somebody. Publishing something like that would clearly be in violation of privacy and other rights.

I also think he didn’t make his letter public on purpose. Seth Klarman obviously understands basic psychology; as soon you can’t have something you create a desire for it. If he didn’t understand that he wouldn’t be the legend he is at investing. Since “you are not supposed” to read his letter, now you want to read it. Just like his book, Margin of Safety, one of the most sought after value investing book, was never reprinted and now sells for over $1,500 a copy (Imagine the price crash if a reprint is ordered). He knew that his letter was going to be leaked.  His letter are up there with Warren Buffett’s annual letters. Imagine if Buffett didn’t make his shareholder letters public, it would become of the most pirated document ever.

Why did I think I was doing the right thing? In his letter he share his thoughts on the current state of the market and investment philosophy. You can learn a lot and will make you a better investor. Again, that’s something Klarman intended to accomplished since he is one of the most successful and influential investor.

As mentioned his letter got taken down on this blog. But somehow, the New-York Times among others, published large section of the letter in numerous posts and it’s legal. I guess they know the legal tricks to get around the “ban”. From what I understand, if I copy and paste sections of the letter, it’s fine, but if I publish the document (the source), it’s wrong. Not sure how that makes it legal. So don’t take my legal advice. Anyway, people who want to read his letter will find it and read it.

Baupost Group has a reputation for being extremely private. I like that and I respect that. But it’s also strategic. Klarman has long kept a low public profile. But when he comes out in the media, it creates an impact. People listen because it’s a rare event.

What Investors Really Want

We want high returns from our investments, but we want much more. We want to nurture hope for riches and banish fear of poverty. We want to be number 1 and beat the market. We want to feel pride when our investments bring gains and avoid regret that comes with losses. We want the status and esteem of hedge funds, the warm glow and virtue of socially responsible funds, and the patriotism of investing in our own country. We want good advice from financial advisors, magazines, and the Internet. We want financial markets to be fair but search for an edge that would let us win, sometimes fair and at other times not. We want to leave a legacy for our children when we are gone. And we want to leave nothing for the tax man. The sum of our wants and behaviors make financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and other times popping them.

Source: What Investors Really Want by Meir Statman and Ben Carlson from awealthofcommonsense.com

Baupost Group 2016 Annual Letter

**February 24, 2017 Update Here.


Here’s a copy of Seth Klarman’s 2016 annual letter. As always, very insightful, a must read if you want to become a better investor. The letter also provides his take on Trump.

Baupost 2016 Annual Letter

Bonus:

Seth Klarman Baupost Group Letters 1995-2001

 

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