The Heilbrunn Center for Graham and Dodd Investing created a video titled ‘Legacy of Ben Graham,’ which contains bytes from some of his students, such as Warren Buffett and Irving Kahn, on how Graham’s teachings changed their lives.
Here’s a great video by Joel Greenblatt, author of You Can Be a Stock Market Genius, with less than 3,000 views. In a segment, he talks about how outside influence, or “group think” affects our judgment, and basically on how we price stocks.
Below are the updated links to Seth Klarman’s investment wisdom. You can find the full archive at the Investment Resources.
You can also buy one of the most famous book ever on investing, Margin of Safety by Seth Klarman, for $7.58 on the Kindle. Hard copies are going for $500 to $1000 each. Of course you don’t get the joy of holding a hard copy of this rare book in your hands, but you get access to its treasured wisdom.
Seth Klarman (Baupost Group)
- Book: Margin of Safety (cheap on Kindle)
- Seth Klarman – The Value of Not Being Sure (PDF)
- The Collec
- Investor Is More Worried Than Ever (WSJ)
- Seth Klarm
- ted Wisdom of Seth Klarman (Santangel’s Review)
- Legendaryan OID Interview March 2009 (PDF)
- Harvard Business School Interview with Seth Klarman
- The Oracle of Boston (The Economist)
- 1991 Barron’s Interview (Transcript) or Klarman Barrons 1991 Interview – Value Hunter
- Why Value Investors Are Different by Seth Klarman (Barron’s)
- Opportunities for Patient Investors – Seth Klarmanm and Jason Zweig (PDF)
- Don’t Be a Yield Pig (PDF)
- On Running a Fund Interview (CSInvesting)
- Why Most Investment Managers Have It BackwardsWhy Most Investment Managers Have It Backwards (CSInvesting)
I recently found out that one of my article was the subject of a podcast
I wrote an article on Disney that received a lot of reaction (may or may not be behind a paywall, SA’s policy often changes). In the article I share my thoughts and insights on the future of Disney. Interestingly, the editor of SA picked up my article for their latest podcast. I didn’t know they did this and I’m not in it. But it’s a good extension to my article.
I frequently hear some members of the value investing community complain that “value investing no longer seems to work”. In my view, paying less than something is worth will always work. I guess what these investors may mean is that paying low multiples for mature, easy to understand businesses no longer seems to work.
Value investing has for reputation of paying a low multiple for a business and wait for the market to recognize its true value. But if you tried it, it doesn’t seem to always work that way. I have seen companies trading at 5x price-to-earnings (P/E) dropped to 2x P/E. The idea of only trading stocks on a low multiple of earnings is absurd. That would be too easy and it’s not supposed to be easy. If it was the case everybody would be rich doing that.
All businesses are worth the cash that they generate between now and eternity, discounted at the appropriate rate. The path that different companies’ cash generation takes can vary enormously. Some businesses may have outlived their useful purpose and be in liquidation. Others may have reached maturity and the current level of cash flow might be expected to continue indefinitely. Still others may have negative cash flow today as they invest to build growing cash flow in the future. At an appropriate price, each of these companies can be considered value investments. Only the size and the duration of the future cash flow relative to the price can tell you if it’s cheap. “There are no bad assets, just bad prices”.
I’ve own stocks with a P/E ratio that many money managers would label as high. I try to find out the free cash flow per share the company is generating, and I value the business based on that rather than GAAP P/E numbers. You need to ask yourself what are the fundamentals of the business in relation to its price? If you paid 20 times for a business that was compounding the economic value per share in the mid-teens and have some level of confidence it is likely to do that for a reasonable period of time, you should do all right. Here’s a stock tip: when Warren Buffett analyze a stock (which is a partial interest in a real business not a piece of paper) they discount the cash flows, not the P/E ratio.
Graham’s Net-Net Stocks
“Heavy ideology is one of the most extreme distorters of human cognition.” – Charlie Munger
Hardcore disciples of Graham and Dodd wouldn’t probably agree with my post. But have you tried investing in “net-net stocks”; companies trading below its net working capital. Of course I would love buying a company for less than its cash but there’s a reason why these companies are cheap. First, to do that, you really need to know what you are doing and it’s a lot of work. Maybe with a small amount of money you can make it work. However I doubt the risk and potential returns are worth the headache. True net-nets are hard to find and the one that comes off a filter are of dubious quality. Thomas Hobbes described the life of mankind as “nasty, brutish and short.” This is what you get on the list that typically pass the Ben Graham net-net working capital screen. Investors are much more efficient today than during Graham’s era. Let’s just say there are better alternatives, like buying a high quality company.
You need to keep learning. You need to adapt. You need to evolve. You need to be mentally flexible. Nobody demonstrates this better than Buffett. Buffett evolved from the cigar-butt approach he learned under Graham to being the largest investor in Apply. He’s been at it for over fifty years and his style has evolved many times.
One might think that Buffett buying 140 million shares of Apple would dispel the notion that value investing as an analytical style is about buying “cheap stocks.” Quality is a key part of value and may not be reflected in current price creating a bargain or a margin of safety. The point is some bargains are only visible if you understand qualitative factors. I guess the holy grail of investing is buying a high quality company in high growth market with negative capital need at a discounted price.
Buy and Hold
Many also say that buy-and-hold investing no longer beat the market the way it did in the past. Buy and hold shouldn’t be your philosophy. What I want to do is own businesses that are exceptional until they are no longer exceptional. It’s a nuance on the notion of buy and hold. But it’s easy to call it buy and hold. There’s a saying in the investment world: “let your winners run, and cut your losers.” One of my greatest mistakes was selling my winners way too early. Peter Lynch said that “selling your winners and holding your losers is like cutting the flowers and watering the weeds.”
Historically value investors eschewed the tech sector because 1) its outside the circle of competence and 2) the tech sector is too fast moving. For long-term investors, basing investment decision on cash generation into the future, the sector was un-investable. Clearly, companies like Google, Apple or Amazon are far two entrenched in our modern, Internet-driven economy to be considered un-investable for the above reason. The change brought about by the Internet, mobile, and soon AI is fundamentally changing the economic basis of nearly every established business (look what Uber did to the taxi industry). A refusal to engage intellectually with these changes not only means that you miss out on the investment opportunity they throw up, but it blinds you to the fundamental changes taking place at every “easy to understand” business. It’s important to expand your circle of competence. In the past P&G or Coca-Cola were easy to understand branded consumer products. Today Apple is the modern-day incarnation of branded consumer goods company.
To conclude, what is within and what is beyond our circle of competence must continue to evolve over time. Risk comes from not knowing what you are doing, so it is wise to stay within your circle of competence. As for value investing, over time you need to keep re-calibrating the definition of value investors. The beauty of some systems is that they have the ability to evolve so as to adapt to new conditions. Value investing evolves over time and keep an open mind on what constitutes value.
Greenblatt discusses active versus passive investing and some of the reasons why he still believes active investing is the better option saying:
“I was asked to give a speech at Google last year and I started it this way… I said even Warren Buffett says that most people are better off just indexing and I said I agree with him… I didn’t stop my lecture there. I said… but then again Warren Buffett doesn’t index and neither do I don’t… how come? It’s because the opportunity is there if you know how to value businesses. Which most people do not… To take advantage of the fact that the market is emotional over the short term… often!
Martin Whitman, an incredible value investor and teacher, passed away at 93 years old (Business Wire). Below are a short compilation of links on the value investing legend. The shareholder letters are great. I learned a lot from Martin. You can more investment wisdom by other great investors archived here.
“The financial world is so complex and unpredictable that a fair amount of our analyses will prove to have been flawed…. A dirt-cheap price is an anchor to windward against misperceiving current situations, or being unable to make accurate forecasts.”
- Shareholder Letters – Third Avenue Management
- Free Book: Dear Fellow Shareholders…
- Book: Distress Investing: Principles and Technique
- Book: Modern Security Analysis: Understanding Wall Street Fundamentals
- Book: The Aggressive Conservative Investor
- Having the Last Laugh – Barrons (PDF/Barron’s)
- A Dozen Things I’ve Learned from Marty Whitman/Third Avenue about Investing (25iq)
- Marty Whitman Still Dives Deep For Value (PDF/Barron’s)
- Enduring Values, Enduring Value (PDF/Barron’s)
- The Big Money in Busted Bonds (Fortune)
- Remembering Famed Value Investor Marty Whitman (Morningstar)
Here’s the latest addition to my investment collection of useful resources. Li Lu manages Charlie Munger’s money and one of the candidate to manage part of the Berkshire Hathaway’s portfolio. He’s a very interesting investor to follow.
Li Lu (Himalaya Capital)
- Li Lu —Know What You Don’t Know (Graham & Doddsville)
- Foreword to the Chinese Edition of Poor Charlie’s Almanack (PDF)
- Li Lu – The Prospects for Value Investing in China (PDF)
- Li Lu – From Tiananmen Square to Possible Buffett Successor(PDF)
- Li Lu’s Talk at Columbia 2006 (PDF)
- Li Lu’s 2010 Columbia Lecture (PDF)
- Reflections On Reaching Fifty (ValueWalk)
- Video: Li Lu’s 2006 Columbia Lecture (Youtube)
- Video: Li Lu’s 2010 Lecture at Columbia (Youtube)
- Video: Li Lu’s Presentation at the FAME Student Investment Conference (Part 1, Part 2, Part 3)
- Book: Moving the Mountain
- Book: Poor Charlie’s Almanack (Chinese Edition)
“So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand one business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.” -Li Lu
Li Lu is the only guy that manages Charlie Munger’s money. And he has an incredible story about his up bringing. Twenty-one years ago, Li Lu was a student leader of the Tiananmen Square protests. Now a hedge-fund manager possibly one of the successor to he is in line to become a successor to Warren Buffett at Berkshire Hathaway.
His book seems rare and hard to find. There’s a copy on Amazon: Moving the Mountain. He’s expensive so it’s probably one of these rare books that you might find by accident somewhere. Li Lu also wrote the foreword to the Chinese version of Poor Charlie’s Almanack.
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
- 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 firstname.lastname@example.org to let us know what you think. Find past editions here.
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”