Monday, March 8, 2010

My Trip To The The Value Investing Congress.

When considering making a trip to either California or New York to attend the Value Investing Congress, it is important to gauge the returns that you will get from this potential investment. As many of you know, I recently ventured to NYC for the previous Value Investing Congress. Simply put, I thought that the experience was great, full of useful information, and of course, was a great excuse to take a much undeserved vacation. As a side note, I would like to personally thank all the people at Seeking Alpha that were able to score me free admission to the event. Thanks a million!

Various memories of the congress still stick out to me: I met some new people, and also had good conversations with old acquaintances. David Einhorn's speech was great (as I am sure many of you have read) but the Q&A was even better. Bill Ackman espoused enough knowledge to make an intelligent lay man feel as simple as Glen Beck. Whitney Tilson highlighted how we are not out of the woods with housing, but that the markets may not tank as a result, while John Paulson was as informative as ever.

For this, I will merely do a brief write up on every presenter... While I will certainly downplay some of the good speakers, and give too much airtime to some of the lesser, I think that it will give an overall good synopsis of the event. In advance, I will say that the experience was great, and any writing that I do, will certainly not be able to pass on a shred of the info I actually heard at the congress. While a lot of it was typical value investing babble, you can get a ton out of it; provided that people are willing to think about things from different perspectives, there was a TON to take in!

Day 1:

David Bierenberg of the D3 Family Funds: Noted that the last year had been challenging, as 3 of his 9 positions traded below net cash, while others ended up trading at ~2 times cash flow. Fortunately, most of his investors have a lock up on their funds.

The talk mainly was about corporate governance, as the fund generally buys 10-15% of a company's common stock, doesn't take a board seat, and may or may not attempt to influence management. One of the interesting concepts that he mentioned was "Founderitis"; a disease that often effects founders of companies, generally, manifesting in the boardroom, when public companies used to be private. There are certain behaviors that are acceptable as a private firm, that are not when taking place in a public firm.

In addition, he pointed out that corporate boards "should be able to raise your kids", which, seemed to be a different spin on what Warren Buffett has talked of forever. He also warned of the dangers (much like Bogel) about blindly voting alongside proxy advisory firms.

Stock idea: Heartland Payment Systems.

Sean Dobson of Amherst Securities: Dobson seemed to me, to be in the top realm of data analysis (right behind T2). With what seemed to be a near infinite amount of data and slides, there was a ton of good information to take in in his presentation titled 'Fishing in a Poisoned Pond'. He threw out a ton of terrifying statistics: 8 million are not paying their mortgage; 2/3 of sub-prime loans ultimately failed; 80-90% of Alt-A mortgages are expected to default; presently, 17.5 % of loans are delinquent.

He also noted that homes are quite affordable, relative to incomes and interest rates.

David Einhorn of Greenlight Capital: Einhorn's presentation, was without a doubt, one of my favorites. In spite of this, I think that the statements he made were the most overblown and misconstrued of the conference. Within a few hours of is speech, news sources and blogs were proclaiming that he had made a 'huge' bet on gold and that he was betting against a falling dollar. Honestly, I wonder how the new sources could get it so wrong; while one could come to such a conclusion from simply reading/hearing his presentation, in the Q&A, he certainly downplayed the investment... and he had many chances to; most all of the questions addressed the issue.

As I recall, he said that it was a way that he was investing his CASH... as in, the stuff that sits idle, waiting to be deployed into ridiculously cheap securities. Personally, I would be shocked if 8% of Greenlight was in gold; sizable, but not a huge betting the farm sort of gamble either.

Aside from gold, noted several things, such as the fact that since 2001, the CPI isn't up 200%, as gold is. He also stated that he thought that gold was neither an inflationary or deflationary bet, but rather a bet on monetary policy being stupid. He talked about the current government interventions were simply creating an oligopoly in the 'to big to fail' banking industry.

My favorite question of the conference, which I think to Einhorn of guard, was asking if his gold holdings were in bullion and if it was located in the US- since the US government seized almost all of the country's gold in the 30s (for the record, his gold is in a vault in NYC).

My favorite quote of the whole time was this:

"Like teenagers with their parents away, financial institutions threw a wild party that eventually tore-up the neighborhood. With their charge arrested and put in jail to detoxify, the supervisors were faced with a decision: Do we let the party goers learn a tough lesson or do we bail them out? Different parents with different philosophies might come to different decisions on this point. As you know our regulators went the bail-out route. But then the question becomes, once you bail them out, what do you do to discipline the misbehavior? Our authorities have taken the response that kids will be kids. “What? You drank beer and then vodka. Are you kidding? Didn’t I teach you? Beer before liquor, never sicker, liquor before beer, in the clear! Now, get back out there and have a good time!”

Joel Greenblat
of Gotham Capital: Talking about his 'Magic Formula', he gave more detailed results and spoke of the new trading product that is being offered, based on the formula. He quipped that if he knew a formula that worked better than the magic formula, he wouldn't tell anyone about it this time!

In his speech, he went through all of the Magic Formula stocks, and satirically gave reasons why you shouldn't buy them (Weight Watchers is negative growth, Decker's makes Uggs, which are a fad, Game stop just opened a store down the street from his house- where no business has ever survived, etc.)

Julian Roberston
of Tiger Management: Many of you will know about Robertson's reputation as a great investor. To me, he littered his presentation (that was really just a Q&A) with humor, and reminded me of a stereo typical grandfatheresque figure passing along his life learned lessons. My favorite lesson (a baseball metaphor): When investing, you are paid by your batting average. When in baseball, you are only paid in the major leagues. as such is the case, when investing, you need to stay in the minors.

He believes that over time, alternative energy will hurt oil prices. In regards to China, he said that it had the makings of a bubble and that they wouldn't pull us out of the recession.

When asked about his 2 years off, he quipped that he went to New Zealand to write a novel, but became a house husband.

When questioned about gold, he admitted that he was an 'anti-gold bug', stating that none of it has every been used for anything since it was discovered. He joked that when a person buys gold, they really buy Peter Palmedo. He also said (which is something that I have noticed) that many gold bugs are certifiably crazy... and that like him, they are scared of inflation.

He seemed to really like Visa, Mastercard, and Intel.

Lloyd Khaner of Khaner Capital: Khaner gave a really interesting presentation on turnarounds. In this, he gave a list of points that you should look for, including: reduction of headcounts, SG&A, and operating expenses; restructuring of debt covenants, high and achievable goals; etc. even with some of the more restrictive guidelines that he gave, I am happy to say that Steak 'n Shake met every single one!

Stock idea: Starbucks; a great turnaround in progress.

Candace King Weir and Amelia F. Weir
of Paradigm Capital Management: With their fund up 60% for the year, they mentioned Steinmart, and how they go about talking to managements. I was surprised about the amount of conversations that they allude to having with management; sometimes, multiple times a quarter!

The also mentioned that their approach was completely bottom up, that they invest in 1 stock at a time, but are agnostic to the sector (they could end up owning several retailers).

Stock idea: Wet Seal

Paul Isaac of Cadogan Management: Did a presentation strictly on Waste Management.

One idea that he pointed out, was that they have a decent moat, as individual can not start a landfill in their garage. With this said, it seemed that he presented the idea with the attitude of 'well, I know that no one will agree with this, so, I am going to present it'. Quite frankly, I didn't see much of a margin of safety.

Day 2:

Jason Stock and William Waller of the M3 Funds: A young duo that analyze and scrutinize smaller banks. In describing their method of researching banks, I was happily surprised that they do preform scuttlebutt by actually going to the towns in which the banks operate. For example: if they see a ton of vacancies at a strip mall complex, they will do research and find out what bank loaned money to the developers; they will then ask management of competing banks what they think about the bank that loaned the developer money... sometimes, with interesting results.

Kian Ghazi of Hawkshaw Capital Management: A fund manager who believes you should know virtually everything about the companies that you own, he always asks himself "what could cause this stock to go down by 30% and make us NOT want to buy more?" Still true to Ben Graham, he likes to see tons of cash and monetizable assets.

Stock Idea: Core-Mark (CORE), a distributor to convenience stores and gas stations (think 7 Eleven types), which competes with a subsidiary of Berkshire Hathaway (McLane). The products are generally habit forming, such as beer, cigarettes, caffeine, and salty foods. Presently, while the company has low returns on capital, they are making strides to sell more fresh items, such as sandwiches and fruits, which come with significantly higher margins. Ghazi feels that the stock has 50%-70% upside.

Eric Sprott of Sprott Asset Management: Very bearish on the financial sector. He did a lot of talking about metals. For example, he doesn't invest in rare earth metals, because there is lack of a market. He noted that there are rumors of some gold bars containing tungsten- which to me, is a symptom that screams 'bubble'.

He was very bullish on natural gas, since there is little in the way of drilling and exploration and we are getting ready to exhaust a decent bit of production.

Alexander Roepers
of Atlantic Investment Management: Specializes in firms with a market cap of $1-$20 billion. He layed out his quantitative approach better than any other speaker... Things such as low inside ownership (for take over bids), avoiding interest that is more than 25% of c/f, avoiding commodity dependency. He won't go activist, but will certainly 'rattle the cage'. He did a presentation of J.M. Smucker. , in which he noted his thesis for why he bough in.

Whitney Tilson & Glenn Tongue of the T2 Partners: Tilson was able to scare the piss out of me; especially when they pointed out that when a person misses just 1 mortgage payment, that they have a 72% chance of eventually loosing the house and that ~10% of mortgages are delinquent... Furtermore, by their calculations, there will be a glut of inventory coming onto the housing market over the next 5 years, which are not reflected by many stats.

The glimmer of hope? The mortgages that are going to be defaulted on were not securitized like the now infamous sub-prime loans which had to be marked to market; with loans that are on the books, there is a very gradual write down of the impaired asset.. Therefore, the banks should be able to earn their way out of the problem, since money is basically free.

Stock Idea: Short home builders and go long Iridium. Of all the stock ideas, this one certainly was the most convincing to me; if I would have to buy part ownership in any firms mentioned in this article, going only on the info recieved at the conference- it would be Iridium.

Zeke Ashton of Centaur Capital Partners: Zeke did an interesting presentation that only focused on his stock ideas- mainly, MVC Capital stood out to me as the most intriguing presentation, especially since it is hard to come up with a value for. After all, it would be pretty hard to figure out the cash flows of ALL of their businesses; to correlate it to a giant, how would one get an accurate number for the cash flow of Justin Boots- owned by Berkshire Hathaway?

Stock Ideas: MVC Capital, Lab Corp America, Alleghany

Bill Ackman of Pershing Square: While I was quite familiar with Ackman's fight with Target (TGT), I had little other knowledge of him. I thought that they certainly saved the best for last, as his presentation was riddled with jokes and insight. The presentation was without a doubt the most casual of all the speakers and was as interesting as informative. Honestly, I felt kind of dumb after hearing him speak. :)

Stock idea: Corrections Corp, which he quipped 'With he SEC cracking down, is good hedge for your money management business... I shouldn't joke about that'.

Without a doubt, the VIC was a great experience that I would suggest to anyone that has the means to go; quite frankly, if you are managing a significant amount of money which can justify the purchase of a ticket (from a ROIC perspective), I suggest that you do so. Don't expect to get any ideas that are Paul Sonkin small, though (which are generally my favorites). :) I walked away with an entire legal pad full of notes that I will keep and reflect on for quite sometime. The VIC also does a good job of getting all of the presenters' presentations online (with user name a password) so that you can access them. Certainly, if investing is the sort of thing that gets you up in the morning, the VIC is a good way to spend your money.

Disclosure: I received free admission to the Congress via Seeking Alpha to do a write up on it. I own (and have owned) none of the securities mentioned in this article, other than Steak 'n Shake (SNS). This is not investment advice. Do your own research before doing anything related to this article.

1 comment:

Jae Jun said...

great summary.
I was most interested in what Lloyd Khaner had to say about turnarounds.

Do you have some more detailed notes on his talk?