Category Archives: Search Strategies

The Qualities of a Good Analyst; 100-to-1 Master Class

Confidence vs. Humility

1Q17 | Bill Nygren Market Commentary (Abridged)

see: http://1Q17-Bill-Nygren-Market-Commentary

March 31, 2017

At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.

Oh Lord, it’s hard to be humble, when you’re perfect in every way.  It’s Hard To Be Humble by Mac Davis, 1974

What Makes a Good Oakmark Analyst?

I also like March because it is the month I get to speak to investment students at my alma mater’s Applied Securities Analysis Program and Bruce Greenwald’s value investing program at Columbia.  Typical topics include how I got interested in investing, my education and career path, and what makes Oakmark unique. Without fail, the aspiring investment professionals will eventually ask about the characteristics we look for when we hire analysts at Oakmark or, more generally, What do you think makes a good investment analyst?  Perhaps the answer might give some insight into how we think at Oakmark.

When I served as director of research, I used to joke that every analyst search we conducted started with the same list of requirements: A high GPA from a good university, a major in finance or accounting, intuitive math skills, strong oral and written communication ability, three to five years’ related work experience, intense competitive drive, and activities demonstrating leadership. MBA or CFA required.  Yet almost every hire was somewhat outside that box. We hired some analysts with low GPAs, some with different degrees and some from second-tier colleges. We hired some with over 10 years’ experience, and others with no experience at all. Some had neither an MBA nor a CFA. What we realized was that our search criteria, though representative of our typical hires, was not really defining the candidates we were looking for. Those criteria defined the candidates most investment firms are looking for, but didn’t at all get to what makes Oakmark unique.

Team Player
There are three additional characteristics that we believe are necessary to succeed at Oakmark that we either don’t think we can teach or don’t want to teach, so we require them to be present before we hire an analyst.  First is being a team player.   At many investment firms, analysts have a one-on-one relationship with portfolio managers.  They develop their stock recommendations and present them to a portfolio manager who decides whether or not the stocks will be purchased. If analysts pick good stocks, they will be paid well and their careers will progress. In that setup, it doesn’t really matter whether the analyst is a team player or not.  Oakmark is different.

Oakmark analysts succeed by helping the team succeed. Yes, we expect them to find good stocks to purchase, but that effort is collaborative. An analyst who begins working on a new buy idea seeks input from the rest of the investment team before the idea is finalized. When the work is presented, it is the job of every investment professional at our company to attempt to find flaws that would prevent us from investing. Throughout the time we hold a stock, the analysts will challenge each other as to whether or not our sell target correctly incorporates all the new information we’ve seen subsequent to our purchase. When the stock is sold, it is treated as a victory for the team if it went up, and a team defeat if it did not. We all understand that we do well financially when our shareholders do well financially. That’s in part because a major factor in our compensation review is how well an analyst helps improve the team’s stock selection.

We know that anyone who puts their personal success over Oakmark’s success will not last long at our company. So, we look for clues in resumes such as a history of playing team sports or other activities where accomplishments by a group are more important than by an individual. We know that we can’t teach someone how to be a team player.

Value Investor
More than 30 years ago, Warren Buffett wrote an article that has become a value investing classic: The Superinvestors of Graham and Doddsville (Fall 1984, Hermes’ the Columbia Business School Magazine). If you haven’t read it, or haven’t read it recently, it is well worth the time. In that article, Buffett explained the futility of trying to convert investors to a value investing philosophy:

It is extraordinary to me that the idea of buying dollar bills for 40c takes immediately with people or it doesn’t take at all. It’s like an inoculation. If it doesn’t grab a person right away, I find you can talk to him for years, and show him records, and it just doesn’t make any difference. They just don’t seem able to grasp the concept, simple as it is.  I’ve never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn’t seem to be a matter of I.Q. or academic training. It is instant recognition or it is nothing.

We 100% agree with Buffett. Everything we do at Oakmark is based on value investing. We don’t know how to teach someone how to think like a value investor. You can’t succeed at Oakmark without practicing value investing. Therefore, we will only hire analysts who have developed a value philosophy prior to joining our team.

Humility
There are some characteristics for successful analysts that are simple more is better traits. Intelligence, curiosity, communication skills all are more is better.  Then you have the continuums where, like NCAA basketball teams, a strength carried to the extreme becomes a weakness. We want discipline, but we also want creativity. We demand patience, but don’t want stubbornness. We want thoroughness, but require decisions based on incomplete information. Success requires striking an appropriate balance between these traits that sound like opposites. Being at one extreme or the other is a recipe for failure.

(CSInvesting: reading the Nicomachaen Ethics by Aristotle would teach you to seek moderation.) http://classics.mit.edu/Aristotle/nicomachaen.html

One of the most important continuums for us is confidence versus humility. It is especially important for a value investor to have the confidence to take a position when the vast majority of investors are on the opposing side. But without humility, one loses the ability to admit a mistake. I’m reminded of the early 1980’s TV show Happy Days with the super-cool Fonzie who could never say the words I was wrong. Fonzie would have been an awful investor.

In a book many in our research department have enjoyed, Superforecasting: The Art and Science of Prediction, Philip Tetlock and Dan Gardner state:

The humility required for good judgment is not self-doubt, the sense that you are untalented, unintelligent, or unworthy. It is intellectual humility. It is a recognition that reality is profoundly complex, that seeing things clearly is a constant struggle, when it can be done at all, and that human judgment must therefore be riddled with mistakes.

What we are looking for in Oakmark analysts is confidence paired with the humility to remain open to evidence that shows they are wrong.

One of my investing heroes, former hedge fund pioneer Michael Steinhardt, said, “The balance between confidence and humility is best learned through extensive experience and mistakes.” Unlike being a team player or a value investor, with time, almost every investor develops humility. But it is an expensive lesson to learn. We want analysts who developed their humility by losing money somewhere else.

I can’t count the number of resumes I’ve seen or conversations I’ve had with students where they excitedly state that their personal portfolio returned X percent last year. And of course, X is always some number that is astoundingly high relative to the market or to Oakmark returns. That record is almost always accompanied by scorn for incompetent professional investors and the offer to teach us the secrets of their success. I smile as I mentally mark off the box needs to be humbled by losing money.  Then I wish them great success in their job search and suggest they check back with us in a few years.

Master Class in 100 to 1 Investing (Chris Mayer).

Sure a marketing tool, but perhaps some can learn more about patience.   I am not affiliated, but thought I would share the link.  All Mayer is doing is talking about the Phelp's book, 100 to 1 Investing.

100-baggers Analysis       and     100Baggers

 

Free masterclass: The Mayer Method: The breakthrough new formula for identifying tomorrow’s biggest stock market winners today.

As you’re about to see, you’ve made a great decision..

Because I’ll be sharing a few simple investment strategies with you that will show you how to take advantage of one of the greatest “hidden” opportunities I see in the market.

This is completely different from anything we’ve shared with you before…

Here’s the link to video #1 to get you started: The big change coming in the market

In this series of short videos, I’m going to walk you through exactly what this opportunity is… why it’s happening now… and then I’ll show you how I’m taking advantage of it and give you the tools you need to take advantage of it, too…

By signing up for this training, you’re already ahead of the curve on this.

Remember, I’m going to limit the first of these videos to short 10-minute segments. And then, finally, on Thursday night, I’ll show you how to put it all together in a webinar, where I’ll give away the names of six stocks I recommend you watch.

Get started with the first video by clicking here.

 

A Tontine!


                        A Tontine

is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th centuries. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases.

It sounds gruesome, but essentially, it is a liquidating trust with no-or-few expenses.    See a 1995 report on the TPL trust that turned out to be prescient.

Texas Pacific Land Trust TPL CRR May95

TPL Annual Report 2016  Go to last page to see acreage map. Use Google Earth to go view the terrain, then search for oil and gas activity in the area(s)

More annual reports: http://www.tpltrust.com/annual-reports.html

Texas Pacific Land Trust discussion

MAP: http://www.tpltrust.com/fullmap.html

Part of my search strategy is to look for the quirky, weird stuff.

 

“The one who follows the crowd will usually get no further than the crowd. The one who walks alone, is likely to find himself in places no one has ever been.” — Albert Einstein

What do YOU think?

PS: Weekend Reading

OMC_Omnicom_Singular_Diligence   I wish for more brevity!

http://www.gannononinvesting.com/blog/2017/5/11/all-27-avid-hog-issues-are-now-available-at-focused-compounding

The World is Cyclical; Valuation in a World of Zero Interest Rates


Cyclical Markets

 

 

 

 

 

 

 

 

 

 

The NASDAQ bubble showed the highest P/E ratios in stock market history due to low or no earnings technology companies.

Kopernik 1Q 2017 – Conference Call – Final  Worth a read–note high and low market cap sectors of the market (see page 9)–a proxy for expensive and cheap.  A search strategy.

Time in a Bottle – Final A good discussion of valuation methods in an era of distorted interest rates.

Join https://microcapclub.com/

http://tsi-blog.com/2017/04/are-rising-nominal-interest-rates-bullish-or-bearish-for-gold/  A discussion of how to understand interest rates and gold.  Note the analysis using data going back 90 years.   Do not use a small smaple size.

Also, see ETF Weapons of mass destruction FPA 1Q2017 Commentary

https://youtu.be/bZfPJCAVQg0   Recent Greenblatt talk at Google.


Search for value in high-priced stocks; Shorting; Gold Stocks; James Dimon Letter

Hunt for value in high priced stocks: http://otcadventures.com/?p=1912

 

Indexing Madness or An Indexing Bubble

A must see discussion of today’s index investing distortions

http://horizonkinetics.com/market-commentary/4th-quarter-2016-commentary/   What will turn the tide for active investors. Or read commentary : Q4-2016-Commentary_Final

https://vimeo.com/209940152/f2154e4d3d Grant’s Conference Presentation

Kinetics_Market_Opportunities_11.02.2016

Q2 2016 Commentary FINAL (See section on ETFs vs. Individual Stocks)

Articles of interest:

A Resource Investor: Tom Kaplan

 

 

 

 

 

 

 

 

 

 

 

In all seriousness, whether you agree with his thoughts on gold and resource investing, he has the proper attitude for an investor.

See the letter to shareholders from Tom Kaplan: NG_AR_2016 (pages 5-7)

and NG_AR_2015 (pages 2-10)

NovaGold may not be the cheapest long-dated option on the market because of the partnerships that they have with Barrick and Teck.   Also, even if the grade of gold to tonnes of earth/rock is double the average resource, there are many other costs to consider when comparing projects.

Another long-term investor in a long-dated option (Seabridge might be sold for $0 to a major copper miner and then take back a gold royalty stream in return for the project to be developed) to read: SA_2015_Ann_Rep

What sets the gold price: A lesson in flawed logic.

What sets the Gold Price

 

A Strategy for Resource Stocks; Investing Course

A Strategy for investing in highly volatile, cyclical stocks

Once again, gold, silver and their mining stocks are selling off for whatever reason: risk-on as money floods into the stock market, rising nominal yields, 95% certainty of a (meaningless) 0.25% interest rate hike, momentum–take your excuse. The main point is to know your companies (valuation) and wait for sales like you do at the grocery store.   This week we are having a sale on some miners.

As Sprott’s Rick Rule often says, “If you are not a contrarian in the resource sector, you are a victim.  The above video is provided to show a particular investing strategy when your quality miners are selling off to prices where you estimate a margin of safety.  However, it doesn’t mean you predict THE exact bottom.  If your holding period is three-to-five years, you can occasionally pick up cheaper merchandise. Use prices to your advantage, not disadvantage.  I also wouldn’t be surprised to see the miners sell-off further because of their highly volatile nature–huge operational and asset-based leverage–when gold or silver goes up or down, both the price of their product goes up or down and the value of their reserves.  Never expect exact timing–a fool’s game.  Also, miners are impacted by the cost of their inputs, so a rising gold/oil ratio is a positive, for example.

What about the gold price in my assumptions?   I am assuming gold is money (“All else is credit”–JP Morgan) and thus I can benchmark it against world currencies. Gold has been THE strongest money relative to all other currencies for the past 20 years, 30 years, 40 years, 50 years, 100 years.  Gold is THE only money and store of value that can’t be created out of electronic bits like FIAT MONEY.  The stability of available supple is what makes gold the premier money. Of course, due to LEGAL TENDER LAWS, gold is not a currency in the U.S., except that may be changing in some states like Arizona: http://planetfreewill.com/2017/03/09/Ron-paul-testifies-support-arizona-bill-treat-gold-silver-money-remove-capital-gains-taxes/.

In fact, gold (originally silver) is the only Constitutional money allowed–http://www.heritage.org/constitution/#!/articles/1/essays/42/coinage-clause

You can get a historical overview of gold’s‘ price history below. Notice a trend?


http://www.macrotrends.net/1440/hui-to-gold-ratio Now view the miners in perspective.

P.S. Let me know if anyone wants to see a NPV case study on a miner.

Designing an analyst course

My goal is to organize a comprehensive analyst course using the best investors’ teachings and lectures. For example, Buffett, Munger, Graham, Fisher, Tweedy Browne, Walter Schloss, Klarman, and many others etc.  Why not use original sources of the best practitioners?  This is the course I wish I had twenty years ago.  It will be Buffett and Munger teaching not me.

The course would cover search, valuation, portfolio management, and you (how to improve decision-making).   There would be different modules continuing articles, case studies, videos from Columbia Business School and others. We would go from DEEP VALUE to FRANCHISE INVESTING.   Valuing assets to assessing franchises. Understanding reversion to the mean and slow reversion to the mean.  You need to understand that when a moat is breached-watch out! Note Nokia in cell phones.

I would have to make it a private web-site because of copy-right.   This would be more of like a private study place, library, and discussion area for learning.   There could be a in-person value class in some convenient location depending upon interest once folks have had a chance to go through the modules.

For example, putting ebitda into perspective might be a mini-module on a sub-set of cash-flow: http://csinvesting.org/placing-ev-and-ebitda-into-perspective-case-studies/   Now, if you scroll down to the last link, you can see that it was taken down.   With a private web-site, you would see this: http://csinvesting.org/wp-content/uploads/2012/09/placing-ebitda-into-perspective.pdf

Let me know your thoughts because this would be a huge project to complete.  What focus do YOU want?   How would YOU design and make the course.

Have a great weekend!

A Deep-Value Canadian Grahamite Teaches His Process

Tim McElvaine explains his simple but effective process.

2016-05_conference_transcript_McElvaine Fund An excellent tutorial on Graham-like investing. Note his simple four-pronged approach.   Read more below:

Other Blogs/Websites to Read; The Meaning Crisis

http://wertartcapital.com
Argonaut Capital
Bargain Magazine
Bristlemouth
Bronte Capital
Clark Street Value
Damodaran
Farnam Street
Keep on track
Marathon Reviews
Swiss financial markets commentary
valueandopportunity
https://foragerfunds.com/bristlemouth/value-traps-media-sector-nzme/#comment-7353

I downloaded several excellent articlues on the Capital Cycle from Marathon Reviews.    Search for and find other good sources, then let others know at the Deep-Value discussion board–go to http://csinvesting.org/2015/01/14/deep-value-group-at-google/

READING:

11 THINGS WE’RE READING OR WATCHING THIS WEEK
  1. Savvy owners, savvy investors? – Larry Sarbit
  2. The great unbundlingBen Thompson
  3. Amazon is eating the retail worldBen Carlson
  4. Aurelius on business, investing, lifeRavi Nagarajan
  5. Pabrai’s market-beating approach – Preston Pysh
  6. Cassandra’s songJohn Hussman
  7. President Obama on booksMichiko Kakutani
  8. Restaurant industry bubbleKevin Alexander
  9. A chat with Daniel Kahneman – Morgan Housel
  10. Knowing your investment boundaries – John Huber
  11. Letters: AnabaticArquitos | Askeladden | BronteD&C | Greenlight | GreenWoodJDPLMMOakmark | Pershing | VltavaWedgewood

The Meaning Crisis for College Students

Where to Search

cu-ctbfumaewdsb

helped by ultra-easy-money

us-dollar-cover

selling-stock-insiders

buying-stocks

us-dollar-divergencegold-open-interest-dec-4-2016Specs liquidating at a furious pace in gold.   US Dollar on the cover of the Economist, insider selling in stocks–all lend support to real asset undervaluation.

Who wants gold?

gold-oi

dow-vs-fiatThe Dow in dollar terms (yellow) and the Dow in gold terms.

Remember that you don’t have a good contrarian trade UNLESS this happens: