Category Archives: Investing Gurus

CASE STUDY Activist Action on Coke 2014 Proxy

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We are taking up from the last post http://csinvesting.org/2016/07/25/major-analyst-exam-reading-a-proxy-then-assessing-management-and-directors/

This case study teaches us about reading a proxy, management compensation, board governance, and the struggles of activism.

Mr. David Winters of wintergreen_fund_annual_report_2015_1231 has struggled since inception. From inception on 10/17/2005, Wintergreen has returned 68.73% vs. 113.22% for the S&P 500.   Another fund started in 12/30/2011 returned 15.95% vs. 77% for the S%P 500.   Nevertheless, he has done a service for the investment community by pointing out egregious compensation plans in Wintergreen-TheTerrible10-2-web.  Then note the passiveness of the big index funds in terms of protecting their own shareholders, 20150430-Wintergreen-Advisers-BigIndex.

Mr. Winters began his battle with Coke in 2014. KO_VL Jan 2015. Coke has a fine franchise with high returns on capital, but its cost structure (including management’s compensation) may be far too high considering the competitive pressures that incombents are facing.   Coke has had to make pricey acquisitions to diversify out of brown sugary fizz drinks. Also, all incumbents are facing new pressures like DollarShaveClub.com breaching of Gillette’s (P&G) moat–see below

Dollar Shave Club Hurting Gillette

Video:

Analysis of Dollar Shave Adshttps://www.youtube.com/watch?v=cW8S-QBKcq4


As a review: Mr. Winter’s on Wealth Track: https://youtu.be/x6I1B3MaTms

Ok, back to Coke’s Proxy and Wintergreen’s battle to have Coke’s Board rescind the 2014 incentive compensation plan.   See the progression of the battle along with the slide presentations: Wintergreen Faults Coca Cola Management (KEY DOCUMENT TO READ!)

Then view Wintergreen’s presentations along with the articles in the link above:

What do you make of Mr. Winter’s struggle?  How can you explain Mr. Buffett’s actions? I was DISAPPOINTED but not surprised.  What did you learn that would be of help to your investing–the key to anything you spend time on?   Note Mr. Winter’s designation of corporate buybacks as another shareholder expense.   I believe shareholder buybacks are a use of corporate resources (a shrinking of the equity capital) that may either be a waste or a good use of resources depending upon whether the purchase price of the shares is below intrinsic value. Mr. Winters stresses that buybacks simply use corporate funds to mop up shareholder dilution. Regardless, Mr. Winter points out the huge shifting of shareholder property to a management that hasn’t performed exceptionally well.  Coke’s Board had granted exceptional awards for middling performance–now that is a travesty.

When I think of Coke, a great franchise that is not currently super cheap, I think of other “stable” franchise stocks like Campbell Soup or Kellogg’s.  The market has bid these up so your future returns will be low.  Do not misunderstand me, these companies are massive, slow-growth franchises, but if you pay too much, then you may have lower future returns for many years.

CMP Soup

CMP Soup

38630396-An-Open-Letter-to-Warren-Buffett-Kellogg-Company

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Lie with statistics http://tsi-blog.com/2016/07/you-can-make-statistics-say-whatever-you-want/

HAVE A GREAT WEEKEND and KEEP DANCING

MAJOR ANALYST EXAM: Reading a Proxy then Assessing Management and Directors

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You always read the proxies and the notes to the financials. Today you read Coke 2014 Proxy.   

What is your assessment of management and the Board of Directors? What do you notice? Please justify your reply.

If you are struggling, then here is a hint:

You react: https://youtu.be/_YQR36fQ_Xc?t=43s  Why?

Another hint: KO_VL Jan 2015 for context.

Take a few days if necessary.   This is a critical case study that should be taught at every business school!

Lesson: READ WITH A PURPOSE.   Why do you read a proxy?  Unless it is a merger proxy, you focus on who the management and Board of Directors are and how they are compensated.   Go to the heart of the matter, don’t read all 100 pages.


Update: Between Euphoria and Despair.

If you invest in cyclical companies, then you should listen to http://ir.scorpiobulkers.com/Events and SALT-Earnings-Presentation-Q2-2016-Supplemental-Information and SALT 2Q 2016 Q Report

Richard Oldfield: Simple But Not Easy–A Deep Value Investor Speaks

Richard

Simple But Not Easy

“Value investors are born not made.” Richard Oldfield

I am an investor similar to Walter Schloss and Peter Cundhill.

Simple But Not Easy Quotes
“One should invest in equities, which are volatile, only with a long-term perspective, and in the most volatile of equities with an especially long-term perspective – 5 years or more – and only with money which one can be sure of not needing in the next few years.”
“Different meanings of safety to different investors. For someone needing a lump of money in a year’s time, the only safe investment is a cash deposit or a short-term government bond. For someone with no imminent need of the money and a desire to accumulate capital and increase purchasing power in the long-term, it may be safer to invest in equities – volatile but with the historic and likely future characteristic of a high return after inflation – than to put money on deposit with the risk that over the years the real value of the investment will be eroded by inflation.”
“A share looks cheap; you buy it; it goes down and looks cheaper; you buy more; it goes down and down, getting cheaper and cheaper, until it reaches what practitioners call euphemistically the ultimate cheapness – zero. This is what is generally called the value trap.”
“A long-term temperament as well as long-term circumstances A Japanese man went into a bank to change some Japanese notes into sterling. He was surprised at how little he got. “Please explain,” he said to the cashier. “Yesterday I was changing same yen for sterling and I received many more sterling. Why is this?” The cashier shrugged his shoulders. “Fluctuations,” he explained. The Japanese man was aghast. “And fluck you bloody Europeans too,” he responded, grabbed the notes, and walked out. Fluctuations matter if the money could be needed soon. Money invested in equities must not be money which will be wanted in a year or two, or might be urgently wanted at any time, because there is a fair chance that the moment when it is needed will be a bad one for the stock market and the investor will therefore be selling at low prices. If investors think they might need the money soon, the message is clearly stay away: the chance of a minus return is just too great. Even if investors are in a position to allocate a fair amount to equities, they should not necessarily do so. It is not enough that the circumstances are right. Investors need to be temperamentally inclined to the sort of long-term investment which equities are. Long-termness must be subjective as well as objective. The fact that the circumstances of a particular investor might objectively lead to a certain viewpoint does not mean that he or she necessarily has that viewpoint. A baby is in an objective position to take a long-term view, but will not actually look beyond the next feeding-time.”
“The great advantage of the property-centred policy was that in a panic property was very difficult to sell. The British kept their property because they could not do otherwise, and prices always recovered. They were prevented by the illiquidity of property from selling at the bottom.”
Richard Oldfield, Deep Value Investor from the UK VIDEO Worth the view and to be seen with this presentation:
2016_Oldfield  Presentation on March 2, 2016

A Reader’s Question on Modelling (Munger and Buffett’s View)

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A READER’S QUESTION

Just wanted to shoot you a quick email applauding you for putting together the “Ultimate Investor Checklist.”  investment_principles_and_checklists_ordway This may be the most valuable word document I have on my computer.

munger

Quick question, I’m a huge fan of Charlie Munger (currently am reading Poor Charlies Almanack)- In the checklist when he describes being a business owner Charlie says:

      • Ignores modeling forecasts for the next quarter, next year, or next ten years.
      • Ignores forecasting completely.

http://www.mymentalmodels.info/charlie-munger-reading-list/ (Search through this link on Munger’s Mental Models.

If Charlie Ignores modeling and forecasting, how does he go about estimating Intrinsic Value? I know Charlie has said in the past that he has never seen Warren Buffett use DCF, so how do they go about estimating Intrinsic Value?

John Chew: A good question.  First, a model is not reality but a metaphysical description of reality.   You probably should build a simple spread-sheet of sales, capex, taxes, etc. to understand the economic model of the business you are looking at–we are not all geniuses like Buffett or Munger.

But rather than have me say what I think Buffett would say, read the source. Note his analysis of Coke and Sees Candies:

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998  Hope that helps!

Arbitrage by Buffett_Research  (just for Buffaholics)

Course on Buffett-Style Investing from NYU

revealed-why-you-will-never-be-able-to-invest-like-warren-buffett

Hi John,

New York University’s School of Professional Studies is offering an online class focused on the time-honored techniques of value investing, as practiced by the world’s most legendary investor, Warren Buffett. We thought you might be interested in knowing more about this class, and perhaps in sharing this information with your readers.

By examining case studies of Buffett’s acquisitions, students will explore the real-world principles that Buffett uses to pick companies. The class starts April 2nd and is open to the public for registration.

For more information, please see the attached press release.

Thanks so much,

Details: Fundamentals of Buffett-Style Investing_PR2016 (3)
Email with questions: jgb4@nyu.edu


Alisa Koyrakh
Assistant to James Berman

JBGlobal LLC
212.388.9873
41 East 11th Street, Fl 11
New York, NY 10003

 

Berkshire Letter_2015   The Recent Buffett Letter

John Chew (Editor, csinvesting.org) I am not endorsing this class per se because I don’t know the professor or the details of the course material, but for those of you who seek a more structured learning experience then perhaps this class is for you.  Let me know if you take the class, so I can share your experience with others.  Also, remember that if you use the search box at csinvesting.org, you can find dozens of Buffett case studies for FREE.

Just remember that trying to copy Buffett will NOT work, but applying the Buffett principles of investing to YOUR OWN methodology will help you.   Be the BEST YOU can be not a second-rate copy of another. 

http://www.businessinsider.com/warren-buffetts-investing-strategy-2013-12

More reading of interest:

 

Peter Cundill, Deep Value Investor

Your main job as a net/net buyer is to elminate the possibility of bankruptcy.–Peter Cundill

Peter Cundill’s Reading List

Peter Cundill: Background & bio

Peter-Cundill

The Canadian born investor, Peter Cundill, plunged into the world of financial markets while he was still at McGill University, which he  graduated from in 1960 with a degree in Commerce.Cundill earned the designation of Chartered Accountant and then Chartered Financial Analyst before moving from Montreal to Vancouver  to become the President of AGF Investment management; he worked at the company for four years from 1972 till 1975.

During that time he was also a partner in the company called the Vanan Financial Management Ltd. which in 1975 took over the All-Canadian Venture Fund. In 1977, Cundill established his very own Vancouver-based firm named Peter Cundill & Associates Ltd. and renamed the All-Canadian Venture Fund to Cundill Value, when the fund became the flagship of his newly established firm. Peter Cundill & Associates, now named Mackenzie Cundill Value Series A after a strategic partnership of PCA with Mackenzie Financial Corporation, best epitomizes the bottom-up value investment outlook of Peter Cundill.

The Cundill Value Fund was launched in December 1974 and immediately lost money during 1975. However, after this dismal start, the star fund manager recovered quickly and reported few losing years after 1975.

From 1974 through to 1988 the fund returned 22% per annum. Over its 35 year history to 2010, the Cundill Value Fund achieved a CAGR of 13.7%, which is especially impressive when you consider the fact that the market was still recovering from the financial crisis when this figure was calculated.

Peter Cundill was awarded the Analysts’ Choice Career Achievement Award for the best mutual fund manager of all time in 2001. At the award ceremony which recognized his  35 plus years of contribution and expertise as a fund manager and value investor, he was referred to as the ‘Indiana Jones of the Canadian Money Managers’, a title which was acknowledged by Cundill with great pleasure. Cundill’s expertise even gained  recognition from Warren Buffet, who claimed Peter Cundill had the traits of a good successor and possessed the kind of credentials required that would be suitable for Berkshire Hathaway’s next chief investment officer.

Observing the multi-dimensional personality of Peter Cundill, it is evident that he enjoyed life to the fullest. By no means did he limit himself from challenges or new experiences. He had an innate child-like curiosity and explored various aspects of his interests. His love for travelling turned him to one of the best global investors, and his rapacious reading habit lead him to the writings of the great Benjamin Graham. Cundill also enjoyed and challenged himself with various sports such as handball, rugby, skiing and hiking; being a dedicated marathon runner, at the age of over 40 he was capable of completing 22 marathon races including ‘Sub 3 hour’ (running the marathon under three hours).

His contribution was not limited to the financial world, but to the world of academia and literacy. Being a philanthropist, in 2008, he founded the Cundill Prize at McGill University to recognize the non-fiction publication for authors who have a great impact on literary, social and academic fields.

Despite of his recent death on 23rd January 2011 due to a rare neurological disease, the legacy and investment philosophy of Peter Cundill is kept alive by the firm he founded in 1975 and the numerous contributions made by him in the world of finance and academia.

Peter Cundill: Investment philosophy

Like many value investors, Cundill’s style of investing can trace its roots back to Benjamin Graham; Cundill liked to buy $1 for $0.40. What’s more, Cundill liked to buy stocks that were generally ignored and rejected by the general public, giving his approach a contrarian style.

Unlike Graham, who brought as many companies as he could, as long as each company met his strict criteria, Peter Cundill only considered companies with strong balance sheets and an upcoming catalyst that could unlock value for investors. It’s often the case that deep-value investments languish for years before acatalyst unlocks value. By investing only when a catalyst was upcoming, Cundill increased his risk of success. Peter usually scrutinized each company’s balance sheet to discover off balance sheet financing and assess the company’s true debt load.

Contrarian Investing (Part II)

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“Bull markets are born on pessimism,” he declared, they“grow on skepticism, mature on optimism, and die on euphoria.” –John Templeton

John Templeton paid attention to the emotion of the stock market. The first half of his philosophy was “The time of maximum pessimism is the best time to buy.” When everyone else was selling, he bought low during the Depression and in 1939 at the onset of World War II . . . and he made millions.

The second half of his philosophy was “the time of maximum optimism is the best time to sell.” He sold high during the Dot.com boom when everyone else was still buying. Founded in the 1950s, his Templeton Growth Fund averaged 13.8% annual returns between 1954 and 2004, consistently beating the S&P 500.

I think there are a few ways to make many times (10x to 100x +) your money over a long period of time.   The first would be to own emerging growth companies that have owner-operators who are both excellent operators and capital allocators who grow the company profitably at a high rate over decades.   The business generates high returns on capital while being able to deploy capital into further growth. Think of owning Wal-Mart in the early 1970s or Amazon after its IPO or 2001.   There will be a post on 100 to 1 baggers soon. I prefer this approach.

Wal-Mart 50 Year Chart_SRC

The second way would be to buy distressed assets and then improve those assets or create efficiencies by creating economies of scale. Carlos Slim, Mexican Billionaire, would be an example of this type of investor. Think activist investing. Note that Carlos Slim has operated at times as a monopolist in a government protected market.  Most of us do not have his options.

The third way would be to buy deeply-distressed, out of favor, cyclical assets and then resell upon the top of the next cycle. Gold mining is a difficult, boom/bust business, for example–see Barrons Gold Mining Index below. All businesses are somewhat cyclical, but commodity producers are hugely cyclical with long multi-year cycles due to the nature of mining-it takes years and high expense to reopen a mine and even if I gave you $2 billion and several years, you and your expert team may not be able to find an economic deposit. Note the five-to-ten year cycles below.

gold mining bgmi

We are focusing on the third way, but in no way do I suggest that this is for you. You need to be your own judge.  There is a big catch in this approach, you need to choose quality assets and/or companies with managements that do not over-leverage their firms during good times or overpay for acquisitions during the booms (or you could choose leveraged firms but be aware of the added risk and size accordingly becasue when a turn occurs, the leveraged firms rise the most). You also need to seek out a period of MAXIMUM pessimism which is difficult to do. How do you know that the market has FULLY discounted the bad news?  Finally, YOU must be prepared to invest with a five-to-ten year horizon while expecting declines of over 50%. That concept alone will make you unique.   Probably most will turn away from such requirements.

We pick up from http://csinvesting.org/2015/12/14/contrarian-dream-or-nightmare/.  Before we delve into the technical aspects of valuing cyclical companies, think about what it FEELS like to have the CONVICTION.  Here is an example:

We last studied Dave Iben, a global contrarian investor, in this post: http://csinvesting.org/tag/david-iben/.   You should read, Its Still Rock and Roll To Me at http://kopernikglobal.com/content/news-views and listen to the last few conference calls at the right side of the web-page.   Note Mr. Iben’s philosophy, approach, and Holdings. His portfolio is vastly different than most money managers or indexers. But being an contrarian takes fortitude and patience. Kopernik Global performance since inception:

koper spy

Next preview the readings below.

First you need to understand Austrian Business Cycle Theory to grasp how massive mal-investment occurs. Why does China have newly built ghost cities? Distortion of interest rates causes mal-investment (the boom) then the inevitable correction because the boom was not financed out of real savings.

Why is the bust so severe for mining/commodity producers?   Read Skousen’s book on the structure of production.  Think of a swing fifty feet off the ground and 200 feet long.   If you are sitting near the center of the swing’s fulcrum (nearest the consumer), then the ups and downs are much less than being on the end of the swing furthest from the consumer (the miners and commodity producers).

4 files were sent to you.
Read Ch. 19 Security Analysis.pdf
Boom/Bust Austrian business cycle theory.pdf
Damodaran Valuing Cyclical Commodity Companies.pdf
Must Read Structure-production.pdf

Sorry: here is the Hooke book (chapter 19 on resource companies)

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File Icon Business Valuation Methods – Jeffrey C. Hooke.pdf Download
Your file will expire on February 25, 2016

Even if you are an expert in valuation, investing in a cyclical company can be lethal: Vale: Go Where it is darkest (Damodaran)

ValeBig Vale

Then Throwing in the towel on Vale. I am not picking on Prof. Damordaran because we all make mistakes, and he graciously has provided a case study for us.  Study the posts and the comments.

Can you think of several research errors he made (BEFORE) he invested?

Remember in the prior post, the long-term chart of the CRB index showing commodities at 41-year lows since the CRB Index is below 175 or back to 1975 prices?  Then why, if gold is a commodity,  doesn’t gold trade at $200 or at least down to $500 to $700 as the gold chart from that time shows?monthly_dollar

Why, if gold is money, doesn’t gold trade in US Dollars at $15,000 or the estimated price to back US Dollars by 100% in gold?  You can change the amount to $10,000 or $20,000, but you get the idea.gold monetary base

 

Gold during the boom of 1980 rel. to Financial Assets in 1980 the price of gold at $800 per ounce allowed for the US gold holdings to back each US dollar then outstanding.

Try thinking through those questions.  Can we use what we learned from gold to value oil?

I will continue with Part III once readers have had several days to digest the readings and at least three readers try to answer at least one question.  Until then……………………….be a contrarian not contrary.

Update on 21/Dec. 2015 http://fortune.com/2015/12/21/oil-prices-low/

Carl Icahn Warns While Wall Street Ridicules

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Carl Icahn and Danger Ahead

Today he warns:

I’ve seem this before a number of times. I been around a long time and I saw it ’69, ’74, ’79, ’87 and then 2000 wasn’t pretty. A time is coming that might make some of those times look pretty good… The public, they got screwed in ’08. They’re gonna get screwed again. I think it was Santayana that said, “those who do not learn from history are doomed to repeat it,” and I am afraid we’re going down that road.

How do you know Carl Icahn is right?

Wall Street’s Ridicule

http://thefelderreport.com/2015/10/02/mr-market-to-carl-icahn-danger-ahead-lol/

Risking dollars to make pennies

http://thefelderreport.com/2015/12/10/owning-stocks-today-is-risking-dollars-to-make-pennies/

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The Valeant Saga, Part III; Master Class in Deep Value Investing by Icahn

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Part II on Valeant  Let’s pretend you are asked to evaluate the situation for Mr. Ackman.  He is in deep #$%^& and has brought in fresh eyes to advise him. Pershing Square has had to install two hotlines–Hotline 1: for investor suicide calls and Hotline 2: for investors who wish to phone-in death threats.

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All bad joking aside, you have a huge pile of information to present the critical issues.  Do you advise Mr. Ackman to buy more, sell immediately, sell down to a “more reasonable amount,” or hold?  Use reason not opinion or emotion to guide you.

Step back and ask what are the important issues?  What is Valeant worth? Can you know that?   Pretend you are an investigative journalist trying to uncover the story.

You can start here with company documents:

What does Valeant do?  Does Valeant have assets or a business method that gives the company a higher sustainable return on capital?   What roll-ups/acquisition firms have been very successful in the past and how was success achieved?

Then you can read all the rumours and commentary swirling around Valeant, but be quick to focus on what you determine to be important.  There are several links in the documents for you to follow further.

If anyone has other information to share please post in the comment section.

Also follow the links to the prior posts on Valeant to read the comment sections.

In a week, we will go through this exercise.   Now YOU have the chance to do the work.

Good luck and have a great weekend!

Excellent Video of Carl Icahn below.

http://greenbackd.com/2015/11/05/icahns-masterclass-on-deep-value-and-activism/

The Ongoing Saga of Valeant Part II

Dead Cat

Post 1 on Valeant is here

Is Valeant the Next Enron–NYT

  1. Bronte Capitals Comments on Valeant Conference Call  The Bronte posts will give you a thorough background on the controversies surrounding Valeant and Philidor.
  2. Valeant and its captive pharmacies-Bronte Capital
  3. Simple Proof that Philidor has shipped drugs where not licensed

A torrent of SeekingAlpha articles:

You can follow the reactions of investors and analysts at Seeking Alpha.

Hedge Fund Herding  The psychological aspects of following others and the pressures of the short-term performance derby. Lesson: Never cease to do YOUR own thinking and analysis.

Ackman down 16% and will hold CC on Valeant this Friday (Oct . 30th)  Below are charts of Ackman’s portfolio. The sharks front-run the potential liquidation as Ackman’s investors go queasy.

Ackman Portfolio

Ackman Blowup?

Link to CC on this Friday at 9 AM EST

Readers should share if they believe there are actionable lessons here for investors in terms of psychology, portfolio management and analysis.  Time is precious so we need to learn the important lessons.

My take-away so far.

First, Valeant’s Low Valuation and Rip Roaring Growth (Aug. 20th 2015 by Barrons  Note the author’s focus on growth–but IF that growth is not sustainable within a franchise (protected above the cost of capital profit margins) then  cause this: changed investor expectations:

VRX

And that ladies and gentlemen is called a permanent loss of capital IF investors paid too much for growth in a company doing roll-ups of commodity-like products (generic drugs) at unsustainable retail prices (competition and insurer push-back will cap price gains).

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Meanwhile, investors face the second most overvalued equity market in history (Source: Hussman Funds).