Disney Podcast

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.

Advertisements

Thoughts On Value Investing

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.”

Technology

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: Opportunity Is There If You Know How to Value Business

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 J. Whitman – Value Investor

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.”

—Marty Whitman

Li Lu – Himalaya Capital

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)

How to Evaluate Businesses

“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.

 

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”

Berkshire Hathaway 2016 AGM

*Updated April 20th.

I will be in Omaha for the 2016 BRK AGM. I will be there from Friday April 29th to Sunday May 1st. I’m planning to leave not to long after the Markel Corp. meeting. If anybody wants to meet up, I will be at some of these events:

Friday, April 29:

  • Noon-3pm: Berkshire Exhibition Hall visiting companies.
  • 3pm: Value Investing Panel at Creighton University
  • 5pm: Yellow BRKers get together
  • Columbia University “From Graham to Buffett & Beyond” dinner????
  • 8pm: Whitney Tilson’s cocktail party

Saturday, April 30:

  • 8am-4pm BRK AGM. I’m watching a 85 and 92 year old take questions for hours.
  • 4pm – YPO has an event with Tom Gayner (Markel), Tom Russo from Gardner Russo & Gardner, and and Tim Vick, author of How to Pick Stocks Like Warren Buffett. Not sure if I will go because I’m not a YPO member.
  • Another event by Whitney Tilson and his friend Chuck Gillman. Whitney won’t be there. It’s a casual get-together immediately following the annual meeting.
  • 5:30pm: I might attend the Nebraska Furniture Mart Cookout. It was a lot of fun last despite the long line to get in. Music, BBQ and Budweisers. BTW  Nebraska Furniture Mart which is the largest furniture shop in the US.
  • There are various investment events Saturday night, not sure where I will end up.

Sunday May 1

  • So far I’m not register for the BRK 5km race. I did it last year. I may or may not go.
  • 10am: Markel Corp. brunch. I really enjoyed it last year. Smaller and more personal than the BRK meeting.

There are various events associated with the BRK AGM, so the schedule is subject to change.

Seth Klarman 1991 Barron’s Interview

Below is a rare 1991 Barron’s interview (pdf) with Seth Klarman from the Baupost Group. He’s also the author of the out of print Margin of Safety, which a copy sells for over $1,000.

Credits to “The Odd Lot” from oddlotinvest.wordpress.com/. For some reason the website is no longer available.

Barron’s 1991 interview with Seth Klarman

Clarke Inc. – Canada’s Activist Value Investor

Latest article on Seeking Alpha. Below is a sample since Seeking Alpha has the rights. The article is free for for a month before the paywall us up. Enjoy!


 

Reposted from Seeking Alpha
By Brian Langis

TSX: CKI

U.S.: CLKFF

Clarke Inc. is primarily traded on the Toronto Stock Exchange under the sticker CKI. Last thirty day trade value is approximately $93k per day.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.3371 Price of 1 USD in CAD as of November 29, 2015.

Part of my writings is to shine the light on companies that deserve more attention. My most successful investments are usually found in places where nobody is looking since this is where you get the best deals. I believe that Clarke Inc. (OTC:CLKFF) is a company that deserves to be on your investment radar. CKI is a company that people will talk about one day after making a huge successful deal and they will wonder why they haven’t heard of it in the past (CKI is too small for analysts and institutional investors).

Clarke Inc. is an investment holding company based out of Halifax, Nova Scotia. Don’t let the Halifax part fool you. After all, isn’t Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) run from Omaha. For the skeptics, CKI has an office in Toronto; it’s where the deals flow in Canada. CKI is company with a ~$155m market cap, trading at ~0.8x book value and provides a 4% dividend yield. Clarke Inc.’s Chairman is George Armoyan, a colorful activist value investor in Canada. CKI describes itself as an activist catalyst investment company with a diversified portfolio of strategic and opportunistic investments. More often, Clarke seeks active involvement in the governance and management of the company which it invests with the goal of improving the underlying company’s performance and maximize the company’s value. For this research, I have not spoken to George Armoyan, but I spoke to Michael Rapps, the CEO.

This is a brief rundown on how Clarke Inc. usually operates. CKI starts accumulating shares of a target company, mostly mid-size companies so far, those with a stock market value of around $50m to $150m. Then when it crosses the 10% threshold that requires CKI to publicly disclose its holding, the company demands seats on the target’s board of directors and input into management. The goal is to gain control and then engineer a turnaround and generate a profit.

A quick look at Clarke Inc.’s investment portfolio is not pretty. It’s not supposed to be. That’s the key to its superior returns. I looked at past Clarke investments and none of it was sexy. Every investment Clarke Inc. made money on in the past didn’t have a sign pointing that’s going to be the next big money maker. It’s still the case today with its current portfolio; it’s not composed of stocks everybody likes to buy. Following the trends that are popular isn’t a formula for success and CKI definitely knows that. If you want a real bargain, you have to look where nobody is looking, where there are problems, and where there’s blood on the street. Most people simply don’t know how to find it and or they simply don’t have the spine to go through with the investment.

Like most stocks, Clarke Inc. took a beating during the recent downturn and now provides an interesting entry point to build a position. CKI was trading at a peak of $12.30 in July to fall where it’s currently trading at now, around $9.90. The slump represents a 20% fall from its peak. The table below is five-year chart of CKI’s stock price. You will notice the stock was mostly flat until late 2013 and had a run-up that more than doubled the share price. There’s a reason for the run-up which is explained below.

(click to enlarge)

Source: Google Finance. CKI 5-Year Chart. CKI is up 136.8% vs. 3.85% for the S&P TSX.

Regarding holding companies, aside Berkshire Hathaway and Power Financial Corp. (OTCPK:POFNF), I don’t own any other investment holding companies even when they trade at a significant discount to book value. I have seen the compelling investment thesis; the sum-of-the-parts are much higher than market value, you get this part of the business for free, it trades for less than cash etc…and despite all the great reasons to own the “cheap” stock, the price barely moves. I find that most holdings companies are asleep and there’s a lack of action to unlock value. There are exceptions and I’m generalizing the sentiment. I have been following many investment holding for years out of curiosity, and most of the time nothing happens, like Power Financial Corp., where the stock price hasn’t gone anywhere in a decade (but at least it distributes a dividend).

Clarke Inc. is a different investment holding. The company is pro-active and cares about its stock price. In the last two years, Clarke has demonstrated that it wants to close the discrepancy between quoted value and intrinsic value, as demonstrated by the run-up in the stock price for that period (see previous chart above). To achieve those superior returns, the team running Clarke have divested the company of some of its private holdings. Turning these assets into cash has helped close the gap between market price and book value. Then the company modestly raised its dividend from $0.06 per share to $0.08, and now $0.10 per share. The current dividend yield of ~4% certainly attracts more investors, such as your income-oriented class. CKI has also been very aggressive at buying back its share, with $40m in repurchase in the first half of 2015 alone. Clarke has fully redeemed its debentures and has eliminated its debt. The company also decided to regularly put out presentations to make the case for investing in its stock. These are some of the different initiatives the company has put together to raise its profile among the investor community. The combination of actions shows that the CKI cares about its stock price.

Here’s Clarke’s mission and business operation:

Clarke is an investment company. Our objective is to maximize shareholder value. While not the perfect metric, we believe that Clarke’s book value per share, together with the dividends paid to shareholders, is an appropriate measure of our success in maximizing shareholder value over time.

We attempt to maximize shareholder value by allocating capital to investments that we believe will generate high returns and reallocating capital over time as needed. In doing this, Clarke’s goal is to identify investments that are either undervalued or are underperforming and may be in need of positive change. These investments may be companies, securities or other assets such as real estate, and they may be public entities or private entities. We do not believe in limiting ourselves to specific types of investments. From time to time, Clarke will invest passively in a security where it believes the security is undervalued and there is no need for change or where it believes the security is undervalued but that the management team in place at the underlying company is doing an appropriate job to reduce the undervaluation.”

I don’t usually buy into these nice scripted mission statements and you shouldn’t either. It’s a given that every company says their objective is tomaximize shareholder value. However, Clarke Inc.’s actions lead me to believe that it stands by what it wrote. The first part of the statement is generic boilerplate statement. It’s the second part that’s retained my attention. In the second part, the key statement is “allocating capital to investments that we believe will generate high returns and reallocating capital over time as needed.” This statement reminded me right away of the excellent investment book by William Thorndike, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. The book demonstrates CEOs who created exceptional long-term value because they excelled at capital allocation. For CKI, as an example, excellent capital allocation decision is buying back shares when it’s trading below book value.

At the moment, being an activist investor is the approach du jour on Wall-Street but not in Canada. Activism is more looked down upon in Canada than the US. The approach of ruffling feathers when things go bad is heavily criticized which fuel the negative perception of activist investing. It seems that all activist investors are being lumped together, good and bad. However, I believed there are two kinds of activist investors, the ones with a long-term approach like ValueAct and Nelson Peltz, which have proven to create shareholder value over time and the ones with a short-term approach, which are usually value destructive because they focus on short-term gain at the expense of the long-run performance. George Armoyan and Clarke Inc. were activist investors before it was a cool word. Mr. Armoyan’s track record has proven that he can work positively with the management team, make changes that are beneficial to shareholders, and have a positive impact on rational capital allocation over time. My point is that he’s not another guy getting on the activist bandwagon. Mr. Armoyan is not a trend.

You can copycat Clarke Inc. by investing in the stocks that the company holds. However, you would enter your position at a higher price than Clarke Inc. did because once it obligated to reveal a position, the herd jumps in and the target company’s stock price shoots upward. The better option is ignore the herd and to buy shares of CKI. At a discount, you will have the same exposure than buying the stocks on your own, benefit from an excellent owner-operator, receive a dividend, and benefit from Clarke Inc. buying back its shares. In the last five years, the latter seemed like a good strategy. I am convinced that Clarke’s underlying businesses have value that far exceeds where the public market values them.

About Clarke Inc.

Clarke Inc. was a family business founded in 1921 and its IPO was in 1998. Today’s Clarke Inc. has nothing in common with the original company. Clarke Inc. used to be in the transportation industry and there’s no more link to the original founding family. Clarke Inc. was an underperforming trucking company that George Armoyan took over in 2003 through his private investment vehicle, GeoSam Investments (named after his two kids, George and Sam). He changed management and redirected cash flow through different investments. Clarke Inc. sold its transportation and logistics service to TransForce in 2013. Clarke Inc. used convertible debentures to fund it buying spree and has since redeemed all the convertible debentures. Below is a graph of the brief corporate history since Armoyan got involved.

(click to enlarge)

Clarke Inc. is patient. The company doesn’t mind sitting on cash until it finds the right target. CKI only deploy capital when it has real conviction that it has found a solid idea. When it doesn’t find interesting ideas, it holds cash.

When I spoke to Michael Rapps, he told that Clarke Inc. will not limit itself to any sectors and it will go anywhere opportunities are. Its mandate is to make money. However, Mr. Rapps told me that they have a “no” list. They don’t invest in mining, tech companies, and pharma among other things. They have a penchant for real assets, such as real estate, things that can be monetized and provide downside protection.

The full article is accessible on Seeking Alpha here.