When we read annual reports and shareholder letters we are searching for good businesses, cheap assets and excellent operators and capital allocators.
From the Preface of The Outsiders: In assessing performance, what matters isn’t the absolute rate of return but the return relative to peers and the market. You really only need to know three things to evaluate a CEO’s greatness: The compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (S&P 500)
Context matters greatly–beginning and ending points can have an enormous impact, and Welch’s tenure coincided almost exacly with the epic bull market that began in late 1982 and contiued largely uninterrupped until early 2000. During this remarkable period, the S&P 500 averaged a 14 annual return, roughly double its long-term average. It is one thing to deliver a 20 percent return over a period like that and quite another to deliver it during a period that includes several severe bear markets.
A baseball analogy helps to make this point. In the steroid saturated era of the mid-to-late 1990s, twenty-nine nome runs was a pretty medicore level of offensive output (the leaders consistently hit over sixty). When Babe Ruth hidid it in 1919, however, he shattered the prior record set in 1884 and changed baseball forever, ushering in the mdoern power-oriented game. Again, context matters.
The other important element in evaluating a CEO’s track record is performance relative to peers, and the best way to assess this is by comparing a CEO with a broad universe of peers. As in the game of duplicate bridege, companies competing within a industry are usually dealt similar hands, and the long term difference between them, therefore, are more a factor of managerial ability than expernal forces.
When a CEO generages signifiantly better returns than both his peers and the market, he deserves to be called “great,” abnd by this definition, Welch, who outperformed the S&P 500 by 3.3 times over his tenure at GE, was an undeniably great CEO.
He wasn’t even in the same zip code as Henry Singleton:
Seeing as though we have such a passionate investors in John’s group, and we’re in annual report season, I wondered if everyone could nominate their top 5-10 “must read” shareholder letters. I will collate the results and re-post the top 10 back to you all when done (hopefully by the coming weekend). I think the idea here is for us all to hear about a few undiscovered names, rather than the obvious ones… so there is nothing too small or obscure as long as you think it conveys something meaningful and insightful.
Please reply with “shareholder letter” in the title as it will make this a little easier for me. Also… we can all assume Berkshire is an annual must read, so lets leave this on one off the list. I’m curious to hear what people have to say. Let me start off seeing as though I have put forward the idea.
About Skagen: We search for companies that are priced significantly lower than our estimation of the value of the underlying operations. Our ideal investment is a company which is Undervalued, Under-researched and Unpopular, and that has potential triggers which could make hidden values visible and therefore create excess returns for our clients.
“Value investing is about praying on the emotions of the seller,” McElvaine said, noting that he loves to be a buyer of un-loved securities when their owners need out at any cost.
McElvaine pointed to a Globe and Mail headline about beat-up mining stocks being great tax-loss sale candidates this past December. He bought up shares in Sprott Resource Corp and Anglo American recently for trading at considerable discounts to NAV (more info at chat.ceo.ca/mcelvaine).
Six years into the global bull-market and McElvaine’s funds are about 25% in cash to provide an opportunity to buy assets if prices return to Tim’s liking.
Is the US bull-market over? McElvaine talked about what could go right in the United States, and suggested that a great way to stimulate the US Economy would be to wipe out student loan debt, which is $1 trillion of $1.3 trillion owned by the US Government, according to McElvaine. That move could put $1 trillion back in the hands of the most aggressive consumers.
There was a brief moment before Tim’s speech that my dad and I got to share a word with him, and I asked how do they know if a cheaply priced security represents a value gap, meaning it’s undervalued and going higher, or is it a value-trap, as so often cheap stocks get cheaper.
“You don’t know,” Dad and McElvaine agreed, which reminded me of something Tim taught me 6-7 years ago:
“You’ve got to kiss a lot of toads in this business to find your prince.”
Take the time to read his annual reports and transcripts, then go the extra mile and look at the annual reports of the companies he mentions–do you see what he sees? For example, in the chat of his presentation for 2014 (see bold index and then the link) he mentions that Sprott Resource Corp is trading for about $1.00 Cdn while its NAV is above $3.00 or “It’s not pretty, but it’s cheap.” Can you learn from his approach and analysis? What would you do differently? You have to be a contrarian with a calculator to buy what is hated.
Tomorrow: I will post a reader’s list of great annual reports.
I love reading Warren Buffett’s letters and I love contrasting his words with his actions…I love how he criticizes hedge funds, yet he had the first hedge fund,” Mr. Loeb said. “He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself. – Business Insider LINK
I have been too busy to do another lesson but be ready next week! For those attending the Berkshire Hathaway Meeting in Omaha enjoy the experience. Flash your Deep-Value Group card for up to 95% discounts.
On pages 56 to 59 of this chapter the author discusses the case for a checklist. Atul Gawande in his book The Checklist Manifesto: How to Get Things Right argues for a broader implementation of checklists. The author believes that in many fields, the problem is not a lack of knowledge but in making sure we apply our knowledge consistently and correctly.
The Quantitative Value Checklist
Avoid Stocks that can cause a permanent loss of capital or avoid frauds and financial distress/bankruptcy.
Find stocks with the cheapest quality.
Find stocks with the cheapest prices.
Find stocks with corroborative signals like insider buying, buyback announcements, etc.
As students may know, I throw A LOT of information at you to force a choice on your part. You have to focus on what material can be adapted to your needs. In the three books above, you will find many interesting ideas that may be helpful in learning how to build your own list.
The more experienced you are, then the shorter the checklist. The point of a checklist is to be disciplined and not overlook the obvious while freeing up your mind for the big picture. Yes, you check off if there is insider buying, but if insiders are absent, but the company has a strong franchise and the price is attractive, then those factors may be overwhelmingly positive. You may ask, “Do I understand this business?” Then it may take weeks of industry reading to say yes or no.
Checklists are helpful, but only if you adapt them to your method.
Next, we will be reading Chapter 3, Eliminating Frauds in Quantitative Value.We are trying to improve our ability to build a margin of safety.
The Problem with Investor Time-frames
Note the dark line in the chart above representing the returns of the Goodhaven Fund. Two analysts/PMs split off from Fairholme and started in mid-2011. They had a big inflow in early 2014 and then some of their investors panicked as they vastly “underperformed the market.” I don’t know if these managers are good or bad but making a decision on twelve to twenty-four months of data is absurd unless the managers completely changed their stripes (method of investing). Therein lies opportunity for those with longer holding periods like five years or more.
In short, Maier is contending that advice Cramer was giving the public under the guise of helping them manage their savings (“SmartMoney“) was actually being driven by Cramer’s need to dump his own positions without cratering the market. When a trusting public acted on Jim’s tip and bought shares, he dumped his shares onto the public. The only lesson Cramer learned from the “four orphans” incident, Maier claims, was that he, Cramer, had the power to move stocks through the press.
I am a first year MBA student in XXXX. I am from a background of (being) a software engineer and an equity researcher in China. I was very interested in Value Investing and tried to apply it to personal investment in past 8 years. Currently, I am exploring career opportunities in the Investment Management area and see that you have been working and teaching in this area for a long time. I would learn more about your experience in this area and get some advice from you.
I would write-up investment ideas within your circle of competence to show fund managers your critical thinking skills and approach to investing. Or if you have a great understanding of a particular industry or company that is public you can present your ideas to the fund managers who own the company. Show your past investment results. Why did you make the decisions you made? Try to sell your ideas to the appropriate money managers. But only you can determine what your strengths particular interests. Your reports should meld your interests with your skills.
Our activist friend, Carl Icahn’s High River LP, Icahn Partners LP and Icahn Partners Master Fund LP collectively bought 6.6 million Chesapeake shares on March 11 at $14.15 each, bringing the investor’s total stake in the company to 11 percent, according to a filing on Monday. Prior to the purchases, Icahn controlled about 9.9 percent of Oklahoma City-based Chesapeake. That compares with an 11.11 percent stake owned by Southeastern Asset Management Inc. as of Dec. 31, the largest holding according to the latest filings.