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Bogumil Baranowski on Outsmarting the Crowd

April 15, 2018 in Podcast, The Zurich Project, The Zurich Project Podcast, Transcripts

In an episode of The Zurich Project Podcast, presented by MOI Global, John Mihaljevic speaks with Bogumil Baranowski about his highly recommended book, Outsmarting the Crowd.

Bogumil Baranowski has a Master’s degree in Finance and Strategy from Institut d’Etudes Politiques de Paris (Sciences Po), and a Master’s in Finance and Banking from Warsaw School of Economics. He has over 12 years of investment experience. Before joining Sicart Associates, LLC, he worked at Tocqueville Asset Management L.P. as a portfolio manager and senior equity analyst. With a European background, his special focus is on consumer sectors, and the broadly defined New Economy. He is the author of Outsmarting the Crowd – A Value Investor’s Guide to Starting, Building and Keeping a Family Fortune (2015). His articles are frequently published on Seeking Alpha. He is an active member of Toastmasters International.

Bogumil is a participant in The Zurich Project.

The Zurich Project Podcast is on iTunes, Soundcloud, and Stitcher.

An edited transcript of the conversation is available to members of MOI Global.

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MITIMCo’s Advice to Aspiring Superinvestors

April 14, 2018 in Building a Great Investment Firm, Featured, The Manual of Ideas

We interviewed the investment team of the MIT Investment Management Company, based in Cambridge, Massachusetts for The Manual of Ideas, the flagship publication of MOI Global, in 2014.

We had the privilege of getting a glimpse into the decision-making process at one of the world’s finest allocators of capital, the MITIMCo. In this exclusive Q&A, President Seth Alexander and global investment team members Joel Cohen and Nate Chesley share their process for identifying and partnering with exceptional investment managers. The team also provides invaluable lessons to emerging managers who aspire to become the superinvestors of tomorrow.

In their mission to deliver outstanding long-term investment returns for MIT, Seth, Joel, Nate and the rest of the MITIMCo team seek to cultivate an ecosystem of enduring partnerships with no investment manager being “too small, too young, or too ‘non-institutional’.”

The MITIMCo team’s perspective and advice are timeless and truly invaluable for emerging managers looking to build a great investment firm. Enjoy!

MOI Global: How did you get interested in investing?

“My early professional experience at an investment consultancy was influential in my desire to invest for the benefit of an extraordinary institution like MIT, where the capital we manage is reinvested in world class scholarship, research, and global problem-solving” —Nate Chesley

Nate Chesley: I didn’t grow up with a lot of exposure to the stock market but was always inclined to view the world through an economic lens. I studied finance and economics in college where I came to appreciate the role of the capital markets as a sort of circulatory system for the global economy. My early professional experience at an investment consultancy was influential in my desire to invest for the benefit of an extraordinary institution like MIT, where the capital we manage is reinvested in world-class scholarship, research, and global problem-solving.

Seth Alexander: I took a course on endowment management taught by David Swensen and later went to work for him. He is both a wonderful investor and a wonderful teacher so it was a very fortunate experience. I think I was initially drawn in by the quality of the people at the Yale office and later by the breadth of the business.

Joel Cohen: Similarly, my interest in MITIMCo came first and my passion for investing came after I started working here. In my job search during my senior year of college, no one else came close to what MITIMCo could offer in combining interesting and challenging work, a real commitment to investing in every member of its staff no matter how young, and an incredible mission.

Within a few months after I joined MIT as a 22 year old, I realized that investing was actually an even better fit for my interests and personality than I thought. I’ve always been intellectually curious and enjoyed reading widely – I was a philosophy major in college in addition to econ, after all. So when we read Hagstrom’s Investing: The Last Liberal Art, it clicked for me why I found it fascinating: investing is an ongoing quest to integrate mental models from a variety of disciplines into a framework for understanding the world and making decisions. I feel very lucky to have joined an organization that thinks about investing that way.

MOI: Which people and/or experiences have shaped your investment thinking?

Seth Alexander: It is honestly a little hard to pinpoint the exact source of what has influenced our thinking most. We gather thoughts and ideas from lots of different places and try to amalgamate them into what makes sense for us. Probably our best source of investment thinking comes from conversations with managers in our portfolio. There are lots of challenges they face – how to build an organization, how to size positions, how to structure a typical day, when to hold cash, and so on – that are analogous to challenges we face and so we have been influenced a lot through those discussions.

For example, we restructured the organization a few years ago to make everyone generalists based on what had worked well with some of our managers. We also read a great deal. We have an internal book club that covers science and history and other subjects to help us generate ideas from outside the investment world. We are very happy to borrow ideas so we do that liberally and work to fit them into our frameworks.

MOI: How have you gone about building the organization and team?

Seth Alexander: We have tried to find the best athletes with a passion for investing, not necessarily the most experienced investors. We also look for people who get excited about the ways MIT contributes to cancer research and alternative energy research and other efforts. We started early on with a vague organizational chart and eventually eliminated it altogether to make it clear we wanted people with all levels of experience to come in and contribute as investors and partners.

We do not try and hire someone every year or anything like that. Instead, we hire opportunistically. If two great people came along in the same week who would both be a great fit, we would hire them. We are always looking to hear from passionate investors about working here and really encourage people to reach out to us.

MOI: What is similar/different in the skillset required to successfully invest in securities versus investing in managers?

“Our approach to underwriting investment managers is quite similar to the way a stock-picker might analyze a company’s management…” —Nate Chesley

Nate Chesley: We avoid drawing too bright a line between our approach and direct investing because there are more similarities than differences. We have a culture and mindset of thinking like owners and focusing on the micro that is motivated by Graham’s sentiment that “investing is most intelligent when it is most businesslike.” That leads us to focus a lot of our time understanding how our capital is invested bottom-up in the specific companies, properties, and other securities we own through our managers.

One similarity between the two skillsets is the emphasis on evaluating people. Our approach to underwriting investment managers is quite similar to the way a stock-picker might analyze a company’s management: an intense focus on integrity, a track record of outstanding judgment, and a clear alignment of interests. Also, for every investment decision we make we evaluate the margin of safety, the range of potential outcomes, and the associated probabilities – just as one would do when investing directly in a security.

One difference might be our generalist approach. Each member of our investment team has the flexibility to cover the entire waterfront, whereas many investors are intensely focused on a very specific niche, such as biotechnology stocks or early stage consumer technology companies – or at least one particular asset class or geography.

The Process of Identifying and Partnering with an Investment Manager

MOI: You have stated that you “aim to establish investment management relationships that last decades.” What are the key implications of such a mindset on how you go about doing business and what managers you look for?

Joel Cohen: MIT, which hopefully will continue to be a leader in education and research hundreds of years from now, is one of few market participants for whom even decades are a comparatively short time period. We think this creates an enduring competitive advantage in a market where three years passes for long term. Thinking about partnering with managers for decades naturally leads us to ask a lot of questions to understand the trajectory they are on and what they are trying to accomplish. For example – how do you define success? How are you building an organization around that goal? Which investors do you hope to emulate? What are you doing to become an even better investor 10 years from now than you are today?

Another implication of this multi-decade mindset is we have a willingness to engage with managers earlier in their careers. These managers can have decades of compounding ahead of them. Will the 25 year old manager we just hired still be compounding our capital half a century from now? We are excited that it is even a possibility!

MOI: How do you categorize investment managers?

“The more we thought about it, the more we realized that perhaps exceptional investors by definition could not be easily classified.” —Seth Alexander

Seth Alexander: The biggest way we categorize managers is whether or not they fit into our comfort zone. For example, in looking at public markets investors we have defined our comfort zone as long-term oriented, fundamentals-based, value investors that pursue strategies we can understand and underwrite. This narrows the field quite a bit, as macro, quant, momentum/trading, and benchmark-driven strategies tend to fall out.

Beyond that, we actually try pretty hard not to categorize managers. We tried for a while but every time we came up with a classification scheme, we would come across an interesting manager that did not fit. The more we thought about it, the more we realized that perhaps exceptional investors by definition could not be easily classified. Once we got comfortable without having classifications and just focused on finding great investors, we were much happier.

MOI: What is your process for evaluating managers to find the ideal manager? Does that process differ depending on the type of manager, and if so, how?

Nate Chesley: Our process deemphasizes asset class distinctions in favor of a manager-centric approach, so our process is generally consistent across all types of strategies. However, we have accumulated a variety of mental models for different strategies that provides a framework through which we hone-in on the key risks and areas of potential exceptionality across investment strategies. This manifests in a sort of internal lexicon that allows the team to evaluate a wide range of opportunities with the same process, but more nuanced understanding. For example, we’ve developed an appreciation for equity strategies that are unusually long-term in nature. It occurs to us that there are huge inefficiencies when you to try understand what a business could look like five or ten years from now. This is not easy, but we’ve studied investors who have pursued this approach and have developed our own understanding of the attributes a manager might have to succeed with this style of investing. Jeff Bezos talks about this, saying that on a three-year time horizon, you’re competing against a whole lot of people. But if you’re willing to really lengthen your time frame, there is a fraction of the competition because so few people are willing to do that.

We focus on evaluating opportunities that are within our circle of competence, which is bounded by our core investment principles. The nature of our research really boils down to: developing conviction in the quality of an investor’s judgment; understanding the risks to which our capital is exposed; and ensuring that the right structure and alignments exist to serve as the foundation for a long-term partnership. On a practical level, we spend our time conducting in-person meetings; reading any relevant materials, such as letters, investment case studies, or company materials; conducting reference calls; and analyzing historical data.

MOI: You have stated on your website that “since exceptional judgment is crucial to virtually all investment strategies, a critical element of our due diligence process is to evaluate historical decision points.” What are some examples of such decision points and how do you go about evaluating them?

Joel Cohen: I’ll give an example from a manager we recently underwrote. In the mid-2000s, he stumbled across a small, sleepy community bank that had earned high ROAs and ROEs for decades. He thought to himself, how on earth do they do that? As he explored further, he discovered that there were quite a few others as well, and eventually it became clear that these were gems of businesses if they had certain characteristics. Of course, banks at the time were very overvalued because it was a boom time for the financial industry. Nonetheless, he knew the industry was prone to the occasional crisis so he did his work and identified a handful he would love to own – at one-third the valuation, of course. Four years later the financial crisis hit, and these great banks were babies thrown out with the bathwater, so he got the chance to participate in their high rates of internal compounding at discounts to book.

Now, what does this tell us about the manager’s judgment? First, he correctly identified these banks as quality assets. Second, he had the discipline and patience to wait four years before touching them. Third, he had the stomach to buy them in the midst of a financial and economic panic. These things are all as unusual as they are impressive.

MOI: How do you define a manager’s investment record and how important is it in your overall due diligence? What do you look for in a track record?

“Over time, we have learned that great investors tend to be more focused on process than on outcomes.” —Joel Cohen

Joel Cohen: Over time, we have learned that great investors tend to be more focused on process than on outcomes. So, we try to follow this principle as well. The idea goes that if the process is correct, results will take care of themselves over the long term. Of course, a track record, if presented over a long period of time, is an important check on whether what should work is working. But we have to be cautious about this, as even great managers have multi-year periods of meaningful underperformance – there is a great Eugene Shahan article from 1985 about how plenty of investors with great long-term track records looked mediocre in any given year and underperformed for three or more years in a row in many cases. If our own investment process works well we should be able to identify great investors even when their backward looking track records temporarily look mediocre – and I think developing conviction in their processes is the way to do that. A number of years ago, we hired a health care focused manager who had earned essentially market-like returns over the prior seven years, but we understood the reasons for their performance and had enormous conviction in their process and judgment. Subsequent returns have more than justified our decision.

MOI: How do you make decisions throughout the stages of the process? What are some instances that make decision-making especially difficult/easy?

Seth Alexander: For every new investment opportunity, we form underwriting teams of two to four people. They work together to establish a due diligence plan with appropriate checkpoints to keep the rest of the team informed. If we want to proceed forward on something, we put our thoughts on paper into an investment memo that describes the investment manager, our reason for investing, our concerns, our sizing calculus, our due diligence, and anything else that might be relevant. This is important because we want to have a very transparent process that provides plenty of opportunities for the rest of the team to give feedback, ask questions, and debate points of disagreement. Ultimately though, it is the underwriting team alone that makes the final decision to make sure we avoid group-think. I meet every manager, usually near the end of process, and technically can veto the underwriting team’s selections but that does not happen very often. The underwriting teams have imposed a pretty rigorous process on themselves to ensure that the things that make it through our process are compelling.

Honestly, we do not seem to have a lot of easy decisions. That may be because there are shades of grey in every decision for us to argue about. Even if we don’t argue about the soundness of the decision itself, we can still argue about the sizing of the decision or what red flags to watch out for or the appropriateness of the fee structure. The other thing that adds complexity is that we tend to focus on managers earlier in their careers so there is less evidence to examine and we are always going to have to make a judgment call on the future potential of the people involved. For example, of the last twelve managers we’ve hired, eight founded their firm in the last two years.

MOI: What are the attributes of exceptional managers/firms?

“If you define an exceptional firm as one which achieves outstanding returns over a very long period of time, one trait they all seem to have is that they view investing less as a job and more as a vocation or a form of self-expression.” —Joel Cohen

Joel Cohen: We try to be humble about thinking that we can crack the code of what makes a firm exceptional, even though we will spend our whole working lives trying to do it. We have developed our own, constantly evolving, always imperfect view of what constitutes an exceptional investor based on many years of working at it. If you define an exceptional firm as one which achieves outstanding returns over a very long period of time, one trait they all seem to have is that they view investing less as a job and more as a vocation or a form of self-expression. There are a lot of nice side effects that you often see from people who come to investing this way. First, they tend not to take a cookie cutter approach to investing or try to cater to what they think allocators want, but instead spend more time tailoring their methods to their own personality and what works for them. For example, with the manager I mentioned earlier who studied small community banks, he realized that the intellectual engagement of identifying great assets regardless of price, adding them to his list of things to follow, and then waiting for a crisis felt natural to him, and leveraged the skills he has that are most uncommon. Second, if investing is someone’s passion, they are going to be thinking about it in the shower, on the subway to work, etc.. Most importantly, their efforts are going to be sustainable. Time spent working is not a sacrifice, but an indulgence. Those who pursue investing for intrinsic reasons seem to keep performing at a high level for long after those who were in it for the money.

MOI: Seth Klarman is quoted as saying, “Value investing is simple to understand, but difficult to implement. The hard part is discipline, patience, and judgment.” How do you define these elusive traits—discipline, patience, and judgment—and how do you recognize them in a manager?

“Once invested, our primary objectives are continued learning, relationship building, and trying to help our managers achieve their goals.” —JOEL COHEN

Joel Cohen: These traits are hard to define, and if you asked different people on the team I’m sure you’d get different answers. To me, discipline means a willingness to keep one’s standards incredibly high across an organization – in hiring people, making investments, and making business decisions. Patience is a willingness to forgo activity today in order to end up with better results over the long term. Judgment is the ability to conquer the behavioral side of investing, think clearly in terms of probabilities, identify the key variables, and weigh difficult tradeoffs.

Given the amount of time we spent with managers analyzing their historical decisions and talking about companies, there is generally a good body of qualitative evidence to make a reasonable judgment along these lines. One thing to look for is whether the manager has worked to create an environment, structure, and set of routines that enable them to be patient, disciplined, and to exercise good judgment. The great investors seem to design their whole operation with these things in mind – from the people that they partner with, to the way they spend their time, to the things they focus on in their letters, to the way they set the organization’s culture and habits.

MOI: You have talked about the need to “identify and underwrite the competitive advantages that allow sustained outperformance” of a manager. What are some examples of such advantages?

“Larry Pidgeon of CBM Partners is an example of an investor we really admire whose competitive advantage came from a long string of small advantages.” —NATE CHESLEY

Nate Chesley: Bill Miller’s categorization of competitive advantage is a sound framework. He offers three with which you are most likely familiar: informational, analytical, and behavioral. I might add to that list “structural”, which serves to reinforce an investor’s ability to leverage their behavioral advantage. For example, access to stable capital is a huge tailwind to an investor’s ability to be patient and disciplined. I’d also note that competitive advantage may be derived from the accumulation of many small advantages thoughtfully linked together and executed well. This is in contrast to what you might find with an exceptional company that operates with one big competitive advantage – for example, a cable operator that benefits from a regional monopoly resulting from the local ownership of privileged physical assets. Larry Pidgeon of CBM Partners is an example of an investor we really admire whose competitive advantage came from a long string of small advantages. Before starting his partnership Larry worked with Lou Simpson at GEICO. He was someone whose many years of experience had given him a deep reservoir of accumulated knowledge and wisdom about businesses, which complemented his even temperament, thoughtful and methodical nature, and instinct to behave in a highly principal-oriented way, as if all the capital in the fund were his own. None of these may seem so unusual in isolation, but together they create a powerful advantage.

MOI: Do you prefer generalists or specialists among your managers?

Seth Alexander: It really depends. We try to think carefully about where the competitive advantage might be. Sometimes the generalist has the competitive advantages and sometimes the specialist has the advantage. If I think about the biotechnology sector, I am pretty sure I want to work with a specialist because the industry is complicated enough that focused expertise and analysis can be of real benefit. For a distressed debt manager, on the other hand, we would typically favor the generalist because this opportunity set is created by distress and fear that could arise in any industry anywhere in the world and there would be a benefit to being able to allocate across a very wide universe.

MOI: How do you approach your manager relationships?

Joel Cohen: Once invested, our primary objectives are continued learning, relationship building, and trying to help our managers achieve their goals. On the first point, while we aim to do most of our work upfront, we tend to find that great investors evolve in interesting ways and so we continue to learn a lot – both from them and about them – after we invest. A lot of this is work we can do on our own – for example, by learning about companies they own, or by reading the books the manager recommends to us. In terms of relationship building, we are working to build the kind of trust and open dialogue that can help the partnership withstand difficult times. The emphasis on helping our managers achieve their goals in any way we can is another implication of our multi-decade partnership mentality, because we believe that working really hard to be great partners can expand our managers’ moats and make a difference to their long-term performance in a modest but meaningful way. This can be anything from using the MIT network to help a manager solve a problem to structuring our interactions differently in order to minimize disruptions to their productivity or thought process. Usually of course the best way we can add value is if we just get out of the way and let a manager do their thing, and we’re happy to do that too.

MOI: How do you decide when to part ways with a manager?

“We tend to find that great investors evolve in interesting ways and so we continue to learn a lot – both from them and about them – after we invest.” —Joel Cohen

Nate Chesley: This is a very difficult part of our process, but an important one if we are to fulfill our duty of producing truly exceptional returns for MIT over the long run. Our ideal outcome is to partner with a manager for decades, but this isn’t always the case. First, we make mistakes. We have to be brutally intellectually honest with ourselves in recognizing our mistakes and seeking to learn from them. We have an internal culture of transparency and open debate in which the entire team has exposure to all managers across the portfolio and can identify where we may have weaknesses so we can have an open debate about them and take action if need be. Firms also can evolve. Our ongoing relationship and monitoring efforts evaluate an investment’s evolution relative to the expectations we established during our initial underwriting. Competitive advantages can erode, key people can depart, small stresses can develop into considerable issues, and incentives can change. We are mindful of these shifts and must create sufficient pressure on ourselves such that we are always raising the bar of exceptionality within the portfolio. In a recent example we parted ways with a manager because AUM had more than tripled since we invested, and we felt their competitive advantage depended on being small and nimble.

Advice to Emerging Managers

MOI: What is the best preparation a manager can have before starting to manage other people’s money?

Seth Alexander: One perhaps obvious thing that we have noticed is that it is helpful for people to have a good mentor. Good mentors are thoughtful people who are motivated by a desire to help you grow and succeed, and generally don’t have a vested interest beyond that. This makes them likely to give honest feedback and invest time in helping you.

Some people start naturally with a mentor because that is how they were introduced to the business but others have to proactively search them out. From our vantage point it seems like the people who have spent the time to find a good mentor have found the effort involved to be very worthwhile. In some cases, we have been able to provide introductions of experienced investors to younger managers to help create a relationship.

MOI: What are some common mistakes you see emerging managers make?

Nate Chesley: The most common mistake we see is when an investor makes small compromises in the early days of the partnership in ways that limit future success. These seemingly small compromises at the outset compound over time into considerable stresses, which are prone to fracturing at the least opportune times. People compromise on the quality of their LP base, unwilling to turn away the wrong investor. Start-up managers sometimes have the misguided view that they need to be all things to all potential sources of capital and compromise by adjusting their strategies to investor demands. We also see investors give away economics in their business in seed deals in order to scale-up as quickly as possible. We’ve observed that almost all the very successful and established firms we work with turn away large amounts of capital – they even did so when they were small, by the way – because they understand the need to apply the same high bar to their choice of partners as they do their choice of investments.

MOI: What is the biggest misconception emerging managers have in terms of attracting institutional capital, including from MITIMCo?

“The most common mistake we see is when an investor makes small compromises in the early days of the partnership in ways that limit future success.” —Nate Chesley

Nate Chesley: One thing that many people remark on when they meet us the first time is that we are very different from their conception of what a traditional institutional investor would be. They are surprised to hear we spend a lot of time meeting with managers in their 20s and 30s, that we are frequently the first or only institutional investor in a firm, that a meaningful number of our firms are one- and two-person shops, and that we are very content with unconventional firms and strategies. We have made a deliberate effort to invest in un-institutional firms because many investors with exceptional long-term track records have been unconventional and un-institutional. So I think there is an interesting misconception here that all institutional capital thinks the same way.

MOI: What advice do you have in terms of structuring the fund?

Nate Chesley: First, there is no one-size-fits-all solution. There are many aspects of a partnership’s terms and conditions that should be thoughtfully tailored to the strategy’s objectives. The foundation starts with a long-term vision of success that is shared by both the manager and the investors. We think a lot about alignment of interests over the life of the partnership and want terms that serve that purpose. Ultimately, we’re really aiming to create structures where managers are rewarded for producing exceptional results for their partners. Our intent is not fee minimization – we want to create incentives for the manager to attract and retain talent and to do extraordinarily well if they produce outstanding returns.

A while ago we came across a group of stockpickers with one of the best structures we’ve seen in terms of aligning the whole operation around the compounding of capital. First, the management fee was budget based rather than a percentage of assets, which removes the strong incentive to grow AUM. Second, the performance fee was tied directly to long-term performance (in this case, 5 years) over a 6% hard hurdle, and a significant portion of the performance fee was held in a reserve against future poor performance. This removes the temptation for the either the manager or their LPs to focus on annual results. So, the structure was very well aligned, which served the manager just as well as it did their investors – it helped them attract a group of very high quality partners, generate one of the best records we have seen out there, and create significant personal wealth too.

MOI: Managers who are just starting out often take the view that as long as they take care of the investment side (i.e. achieve a good 3 or 5-year track record), the business side of the firm will take care of itself (i.e. allocators will come knocking). What’s your view?

Joel Cohen: Broadly, I think we subscribe to the view that if you have a compelling value proposition, it is hard to imagine you will not attract attention over time. I would not agree though with the idea that the business side does not deserve attention in the early years. First, it can take a lot of work to figure out how to set up a fund with a cost structure that doesn’t force you to go out and raise a lot of early capital from the wrong partners. Second, just because you are not spending time on marketing does not mean you should not be investing in building your business, for example by creating a roadmap for building your firm and in creating the materials you can use to communicate to prospective investors later on. Even something as simple as an “owners’ manual”—like Buffett did for Berkshire Hathaway—can help clarify your thinking for yourself and share your thinking with prospective partners when they arrive.

MOI: What are some resources you would recommend to emerging managers?

Joel Cohen: There are a lot of great books out there whose insights can be helpful to the up and coming investment manager. Charles Ellis has a paper called “The Characteristics of Successful Investment Firms” that is great food for thought. There is also the Eugene Shahan article we mentioned earlier that is worth sharing with all of your partners to make it clear that short-term underperformance is not inconsistent with meeting your long-term goals. Built to Last is an enjoyable read with plenty of insights for anyone building an organization—consider pairing it with The Halo Effect for another point of view.

“We would recommend that a new manager write down on a piece of paper what their definition of success is and… make sure that everything is aligned to reaching that goal.” —Seth Alexander

In terms of generally good reads, I’d recommend The Art of Learning by Josh Waitzkin, Different by Youngme Moon and some well written business histories like Built from Scratch, Made in America, and Nuts! I imagine most people have read Daniel Kahneman’s Thinking Fast and Slow but I mention it because it is so good and because it is a great book to be reading as you are designing decision making processes.

MOI: If there is one thing an emerging manager should ask himself or do after reading this interview what should that be?

Seth Alexander: We would recommend that a new manager write down on a piece of paper what their definition of success is and then systematically go through everything they can control—their business structure, who they let in their fund, how they spend their time, what fees they charge, and so on—and make sure that everything is aligned to reaching that goal.

Of course, the other thing that an emerging manager should do after reading this is give us a call! We are always looking for good investors to partner with. If something resonated in this interview, we can be reached at www.mitimco.org [or via MOI Global].

MOI: Thank you very much for your insights.

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Words of Wisdom and Advice for Aspiring Value Investors

April 14, 2018 in Featured, Interviews

Albert Einstein reminded us some time ago to “strive not to be a success, but rather to be of value.” In the world of money management, there are many successful people managing large pools of capital. However, few of them are of value to their investors. Warren Buffett and Charlie Munger are exceptions to the rule, not only because they have delivered superior investment returns to Berkshire Hathaway shareholders, but also because they have been of value to all of us as teachers on investing and life.

Below, we are pleased to share selected words of wisdom and advice to aspiring investors excerpted from our conversations with some of the more experienced value investing practitioners in our community. We hope these words will be of value to aspiring investors and, in the process, contribute to our shared global value investing community.

Jean-Marie Eveillard, Senior Adviser, First Eagle Funds

“When our younger daughter was six or seven years old somebody asked her at school, what does your father do? And Pauline didn’t have the answer. So that evening when I came home she said she was embarrassed, so she said, hey what do you do? And I didn’t feel like particularly at the end of the day, I didn’t feel like explaining to a six-year old money management, so I said Pauline, I will tell you how I spend my time.

And I said to Pauline, half of my time is spent reading, because I had read or heard that Warren Buffett was a voracious reader, which he is. So I said to myself I don’t have his skills but if I read voraciously maybe it will help me too, which it did I believe. And the other half of my time I spend talking with my in-house analysts. And Pauline said, reading, talking, that’s not work. So I said sorry, Pauline but that’s just what I do.”

Chuck Akre, CEO, Akre Capital Management

“I’ll tell you a quick anecdote. There is a financial writer who used the nom de plume of Adam Smith years ago, his name is Goodman I think. And back in the 1980s, he interviewed Warren Buffett and he said, well, what advice can you give somebody who wants to be a good investor? Warren said, well, just learn about all the public companies. So he said, oh, you couldn’t possibly mean that? There must 7,000 public companies. Warren says, well, just do what I do, start with the As.

Most of us are not blessed with the kind of mind and capability that he has, and so I would just say, it’s been hugely important to me to be curious and passionate about it. And if you go back and read…of things that Warren Buffett suggested that one had to have to become a successful investor. And among them were things like control greed and so on.

Be curious and read everything you can get your hands on and try to identify the people who’ve been winners and then try to identify why they have been winners. What it is about what they’re doing that causes them to be successful? I mean that’s all I’ve ever done, and try to create a system that works for the way I’m wired and allows me to get along in the market. That’s all there is to it, be curious, interested and uninhibited.”

Brian Bares, Founder, Bares Capital Management

“Conceptually, from an investment process and philosophy standpoint, obviously the Berkshire Hathaway annual reports going back and even his partnership letters are a great source for understanding the concept of viewing a stock as a business, fundamentally, and understanding that to be successful in the stock market, you need to be successful in owning businesses that compound high rates over time. I think that’s the fundamental tenant that I took away from the Buffet/Munger philosophy.

I think the more Munger influence of buying high-quality business over time that compound because of that convergence between stock price and intrinsic value is probably even more of a fundamental tenant of our process. I think anything by the two of them is great. All of the books that have been written about them I devoured in my early investing career.

I like business biographies. Business biographies tend to just show how passionate people who live and breathe their business have created something out of nothing, such as the Sam Walton biography. I recently read a biography of In and Out Burger on the west coast, which I thought was really great. So, anything that you can get your hands on, modern business biographies have been extremely beneficial in understanding the characteristics of management teams that are exceptional, especially because they all don’t look identical but there are some common personality characteristics.

I think the McKinsey book on valuation was very helpful in constructing our original DCF models. I think more than reading the entire finance section at Barnes and Noble, a better approach would probably be to start reading as many annual reports that you can get your hands on because that’s what’s really happening in American publically-traded small businesses. You start to get a feel for what exceptional looks like by doing that.

Everybody in our office, oddly enough, even though it’s kind of an individual investor tool, reads Value Line cover to cover every week, the paper edition. It’s just mental weight lifting for us to get a sense for what returns on capital, returns on sales, and common-size financial statements look like for particular industries over time, and you can sort of see that “Hey, the precision instrument industry has really delivered fantastic results for investors over time” and “Hey, look the airline space has really done the exact opposite,” and you can start figuring out what industries and sectors are doing really well and which ones aren’t, and that can help hone your investment process a little bit and focus your time and energy on the right places.”

Rupal Bhansali, Chief Investment Officer – International Equities, Ariel Investments

“For someone who’s starting out, they should try to absorb a lot of information because you do need to have an antenna. Insights are developed when you connect the information, when you process the information, when you interpret the information. So that will come with experience and acumen and know-how. But it does not obviate the need for collecting that information. So it’s not easy.

They should read and learn from someone who’s been in the profession as up close and personal as they can. So the first thing they should do is try to find a job with someone who actually has a great long term investment track record because you learn from others. That’s why it’s like osmosis. You see people, how they process information, how they interpret it and it sort of gets into your DNA and your consciousness. It’s almost subliminal.

And you will form your own rhythm, and you’ll apply that know-how and knowledge at your own way because this is a very creative exercise but at least you will have learned from someone so that will speed up your process of creativities, as I like to think about it, as opposed to constrain it.”

Charles de Vaulx, Chief Investment Officer, International Value Advisers

“Besides the classics, Ben Graham, of course, I think Berkshire Hathaway annual reports. One has to not only read them, but re-read them. I’m very fond of Vladimir Nabokov, the writer of Lolita. He said, “a good reader is a re-reader”. I think some of the books that are a must would be Peter Bernstein’s book about risk, Against the Gods: The Remarkable Story of Risk.

I believe that awareness of history, in particular, economic history, financial history, history of how technological improvements and technological breakthroughs have impacted the world, and history of geography — are important, so I think some history books are a must. Financial history, there’s a wonderful historian who passed away a year or two ago, Charles Kindleberger, who many people know. One of his most famous books is Manias, Panics and Crashes, but he also wrote more in-depth books. One is called, The Financial History of Western Europe, and there are other books that are a compilation of many of his essays, and I think these are very valuable. There is a great book by David Kynaston called City of London. It goes back 300 or 400 hundred years and basically walks through the financial history of the world through what happened in the city of London.

Some reading that delves into behavioral finance and psychology can be very interesting. Daniel Kahneman’s books should be read along with Poor Charlie’s Almanack, which has transcripts of many of the speeches that Charlie Munger has made over the years.

Otherwise, for anyone who begins as an investor, I would recommend books by John Train. Some 20 or 30 years ago he wrote, The Money Masters, where you have a chapter on Ben Graham, one on Philip Fisher, one on Warren Buffett and so forth ,and then ten years later John Train wrote, The New Money Masters, with Peter Lynch, Mario Gabelli, and so forth. The advantage of those books is that you have one chapter on one money manager, and that book helps the reader understand that there are many ways, many recipes to invest money, and each of these ways has its own internal logic and own set of rules. If someone who starts as an investor reads the book, he or she will appreciate that there are many ways to do it, many ways to cook, and he or she will probably be able to, based on his or her temperament, identify and find some affinity with one of those investment styles, whether it’s George Soros or Paul Tudor Jones or Ben Graham with the cigar butts, or Philip Fisher. I think The Money Masters and The New Money Masters are great books to read to begin in our business.”

Tom Gayner, Chief Investment Officer, Markel Corporation

“I read endlessly. John Wooden, the basketball coach at UCLA during their dynasty is a hero to me. General Grant is a hero. Warren Buffett is a hero. Pick some good heroes and read everything you can about them.

I also like reading about history, psychology, and human nature, technological progress and scientific thought. The world is a fascinating place and you will never run out of rich material if you want to keep understanding more and more.

I think I saw a recent interview with Seth Klarman where he said something like, “value investing is the marriage of a contrarian and a calculator.” Some books, like Twain’s, the histories and biographies help you with the human nature and contrarian side of that equation. Some books, like the ones about science and technological developments, along with the accounting homework I did a long time ago, help you with the calculator side. Both elements are essential. Each is severely limited without appropriate balance and understanding from the other side.”

Robert Hagstrom, Chairman, SAM Investment Management Committee

“As students of the Buffett methodology, we’re becoming well-versed in the mechanics of it, well-versed in the procedures if you will. But we need to be spending a little bit more time on the issue of rationality. Buffett not only has the process and the mechanics down perfectly, but he has the rationality, the temperament that allows him to apply it and not get thrown off course.

And the mistakes that people make as they adopt the Buffett methodology is they get thrown off course by the emotional aspects of it. The irrationality of it all. We need to spend more time talking about that.”

Paul Lountzis, President, Lountzis Asset Management

“Greg Alexander [at Ruane, Cunniff & Goldfarb] once said to me: ‘You really learn from your mistakes’ and he’s so right. And so I try to reflect on ideas over the years that I’ve done right and especially those that I’ve done wrong: What could I have done better? What could I have known? What could I have not known?, and I find that very, very helpful to assess your performance and assess the exercising of your judgment. And that’s how you learn.”

Atticus Lowe, Chief Investment Officer, West Coast Asset Management

“For somebody that wants to get into the business, especially a younger crowd, interning is great, multiple internships to get different senses of different types of experience. We have an active internship program here at West Coast. And reading is a great resource whether it’s reading books on investments or just reading 10-K’s, annual reports, proxies – things of that nature, the more the better. We all have a passion for that, learning about businesses.”

Howard Marks, Chairman, Oaktree Capital Management

“I keep going back to what Charlie Munger said to me, which is none of this is easy, and anybody who thinks it is easy is stupid. It is just not easy. There are many layers to this, and you just have to think well. I can’t tell you how to think well. Some people get it, some people don’t.”

“There is no secret method for any of this stuff. You just have to be aware of concepts, smart in their application, and it helps to be an old man, or an old woman, so that you have the experience that helps.”

David Nierenberg, Founder, The D3 Family Funds

“And so, what would you say to someone other than the fact that you want them to read and think extensively, and at the very same time that they do it broadly, to drill a “T.” So that in the vertical part of the “T” you also build substantive expertise in a far narrower domain where you can establish true competitive advantage relative to what other investors might know. If you do both of those things and you keep doing it and you keep learning, you’re going to be fine even if you don’t have a Yale degree.”

Lisa Rapuano, Portfolio Manager, Lane Five Capital Management

“You can practice this craft anywhere. I don’t think that if you’re young and you know you’re a value guy, but you’re stuck in a growth shop or you know you’re an Asia guy and you get stuck in the Europe shop or whatever, I think you can learn anywhere. Too many people spend too much time needing a defined path and this is a very fluid business. You have to just sort of go with the flow sometimes. It’s also really hard to get a job so sometimes you just have to take what you can get and do your best wherever you are.

But I don’t think your job defines your philosophy necessarily, unless you get to run your own shop. Then you get to define your philosophy. But everyone works for someone, I work for my clients, everyone works for someone and so you’re always going to be able to be differentiate between what you are expected to do for your job and what you want to do for yourself, and you have to sort of figure out how to balance those things.

Too many people hold out for the perfect thing, and too many people have very, very strident views when they’re too young to have strident views. You need to develop and you need to learn. You can learn from anyone, anyone who has been successful in his business has something to teach you. Even the technician, even the momentum guy, even an economist, there’s something to learn from all of these people.

So I think that it’d be great to end up with the perfect match, with the perfect place that’s perfect for you. But in fact, unless you’ve started it, it’s not going to be perfect. So go with the flow, learn what you can, figure it out. Be glad that you’re somewhere and try to find the best from whoever it is that you’re working with.”

Robert Robotti, President, Robotti & Company

“As I always say…I’m not smarter than the average guy, I’m not more connected than the average guy, I’m not any of those things. And if I can be successful at investing, that means you can be successful at investing.

Therefore, the capabilities are within most humans to be successful, if you have an idea of what are businesses, how do they run, what are the drivers in terms of future economics and can you identify businesses that the market isn’t looking at properly. And that’s easy enough to do in certain cases because the market does have a very short term focus. And so by having that longer term focus, it’s not so hard to identify a couple of companies that the market isn’t getting right.”

Tom Russo, Partner, Gardner Russo & Gardner

“Stretch out your time horizon. Think five years and not five minutes. When you are presented with ideas always ask critically about the prejudice that may be expressed by the source of an idea. That came to me from the study of history. And the quick answer there is to say whenever someone says “Truth,” say, “Who says?” Understand the bias of a person who tells you something. It’s very good for critical thinking.”

Larry Sarbit, Chief Investment Officer, Sarbit Advisory Services

“It comes down to one good place to start and that is read Benjamin Graham, read Warren Buffett’s annual reports to shareholders which are easily accessible on the web. They weren’t accessible on the web because there was no web when I started investing back in the 1980’s. Read those, and read them all, and then reread them because he presents the most rational, the most logical, and the most business-like approach to investing.

That’s where I learned to invest was reading Buffett, reading Graham, or many other people who have written in this fashion and understand the power of this investment philosophy. That’s the place to start. If you get off in the right foot in this business and once you grab that concept that Buffett’s talking about and Graham’s talking about, it’ll guide you for an investment lifetime.

But as Buffett says grabbing the concept of value and behaving in a rational business-like fashion is like an inoculation. It either takes you immediately or never takes you. It either grabs you or it will never grab you. It’s not something you learn gradually, it’s not something you pick up on a slow basis. You either get it or you don’t. So read that stuff and read it early. The earlier you read it the more likely it is to grab your mind, and it’s the right way to go in my estimation.”

Kenneth Shubin Stein, Portfolio Manager, Spencer Capital Management

“It’s very important to do something you’re passionate about. Life is highly unpredictable. We have no idea about our future health, our future wealth and a lot of things in life are just hard to predict. Therefore, it makes all the sense on the world to do things that we’re passionate about now and today.

Suffering for a long period of time in the hope of some future payoff is generally not a good idea. One needs to do that to some degree to follow trades or professions and we all have to get through the grunt work to learn our crafts whether it be doctors, lawyers or investors. But it’s really important to follow passion I believe. Oftentimes, there’s a way to learn how to follow passion profitably. That’s not always the case but it’s often the case.

With students, I always suggest that they go into fields they care about and they enjoy because it’s just much more fun if you enjoy the process. I love what we do, I love what I do. I really enjoy being part of my company, I love being part of Columbia and overall it’s all great. It’s a lot of work but I really enjoy it. If I did not enjoy it, it would just be torture because it is a lot of work.

My first advice would be enjoy what you do.  In terms of becoming a professional investor, one, I would say most people don’t need to. You can learn to be a very good investor and invest very profitably over your whole life without doing this professionally. Everybody needs to handle their retirement accounts and their savings accounts. These are very useful skills for everybody including just knowing you don’t want to be an active investor, and a very smart decision is for a lot people to say I’m not going to try to pick individual stocks and bonds. I’m going to go into index funds and you’re guaranteed to outperform more than half the professional money managers in the world if you just do that.

Just understanding how this works is important. It’s very competitive. If you can do something else profitably and enjoy it, there are a lot less competitive areas to go into. And if you do still want to pursue being a professional investor, and try to outperform the market over a long period of time then it’s very important to be a lifelong learner, to have a passion for learning.

Learning comes in all sorts of places. There’s experiential learning. There’s didactic learning. There’s a host of ways to acquire wisdom. Something Munger has talked a lot that I appreciate the longer I do this is this is not a business of who’s the smartest. There are a lot of very smart people that don’t end up doing well in our business. Being smart always helps if one is as smart as Buffett and Munger, I’m sure that’s fantastic but most of us are not.

It is a business of acquiring some worldly wisdom and I believe all of us can acquire worldly wisdom over time by trying to get better at this and trying to think better. A book that greatly impacted me was Poor Charlie’s Almanack, along with the essays of Warren Buffett or his annual letters, and a lot of what Ben Franklin wrote. Poor Charlie’s Almanack pulls a lot of this together in one book. I’ve read and reread that book several times and each time I do, I seem to get something else useful out of it, some other nugget or pearl of wisdom. For me, that’s what’s been helpful.”

Michael van Biema, Managing Partner, Van Biema Value Partners

“Certain people have, for lack of a better term, I will call funny ways of thinking about the world. They naturally think in an off-colored or contrarian, or whatever you want to call it way. It’s both fun and fascinating to listen to these people and listen to how they perceive various situations and various companies. They perceive them in a different light, and where the rest of us may see a very standard manufacturing company they will see something that actually is quite different, intriguing and should be valued in a completely different way…

The way we think about the world is basically a manager has two skills. He has the skill of being a stock picker or a good stock analyst, company analyst, and that skill is reasonably easy to identify and reasonably easy to document over time. The much more difficult skill is can he, does he know how to run a good portfolio and will that portfolio generate good returns over the long term?

We have certainly had managers who are great stock analysts and lousy portfolio managers, and therefore generated poor to mediocre investment returns. It’s unfortunate because they have half the skillset there but they don’t have the entire skillset. You got a guy who has a lot of raw talent but not in the right places necessarily. He’d do better if he wasn’t quite as good an analyst than he was a better portfolio manager.”

Amit Wadhwaney, Portfolio Manager, Moerus Capital Management

“It is important that anybody who goes down this path be aware of a few things. Know yourself. There’s certain kinds of things that value investors do which are not fun. Fun in terms of patience, fun in terms of due diligence. This is grunt work, this is hard work, it’s very unglamorous.

I would tell you growth investors have a far more glamorous life. That’s the fun end of the business. Their companies are always growing, they always look good, they have high ROEs. It’s always wonderful. We’re at the other end of the spectrum. We do the unpleasant stuff, we deal with these terrible companies, terrible countries, companies facing difficulties, companies which may need recapitalized. There’s all sorts of stuff. So know what you want to do. Value investing may or may not be for you. That’s item number one.

But notwithstanding that, if you really think value investing is for you, there’s a lot of stuff that’s been written about value. Books that come to mind – again, this is in no particular order – obviously Marty [Whitman]’s first book, his original copy of The Aggressive Conservative Investor was, to me, a great book. As I said before and I will say without being bashful, the book’s a damn turgent read. It’s a deadly read but it’s a very bright book. It’s full of a lot of ideas. Then, of course, are the other books that he’s written, namely Value Investing, A Balanced Approach. Those will get you going. And then, of course, Seth Klarman’s book, The Margin of Safety which also came out, I believe it was in the early ‘80s, if I recall. Seth’s book was a fabulous book, a great book. It’s a much more user friendly book. So there is that.

Then, of course, if you enjoy special situation investing, there’s Joel Greenblatt’s book [You Can Be a Stock Market Genius: (Even if You’re Not Too Smart!)], it’s got a very odd title. It’s actually a very bright book. I think it’s a very clever book. Again, I’m not a fan of mechanical investment formula. If that’s what you do Joel has another book about that. Most recently there’s Howard Marks’ book. Howard Marks is a great writer. The book is a very nice, easy summary of what we do, what he does. There’s no question there’s lots of wisdom encapsulated in Howard Marks’ book, which is a really worthy read.

So if you’ve made it through all that stuff and you actually read Graham and Dodd’s book, you really want to pursue it, the only way to do it is by doing it. Doing it is, I believe, a process of some degree of apprenticeship with somebody who is going to actually teach you. You can learn generalities. There’s an art of recognizing these things. There’s an art of not being freaked out by these things and these auctions where they’re staring you in the face. There’s an art of recognizing things that are sometimes very subtle, things that could hurt you. That’s very important. You can only learn that by doing and you do it by ideally working with an experienced person. I mean, it’s obviously easier said than done, finding the right person who’s actually looking for somebody, or the right temperament to be a mentor. But that’s probably the way to do it.”

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The Evolution of Value Investing Since Graham-Newman

April 12, 2018 in Commentary, Featured, Full Video, History of Value Investing, Interviews, Transcripts

We had the great pleasure of sitting down with Brett Reiss, senior vice president of investments at Janney Montgomery Scott, to discuss the evolution of value investing since the time of Graham-Newman, the investment partnership founded by Benjamin Graham.

Brett Reiss on how value investing has changed, and what remains the same:

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Rosetta Stone: Transforming to a Far More Valuable Business Model

April 12, 2018 in Ideas, Letters

This article by John Lewis is excerpted from a letter of Osmium Partners.

Rosetta Stone Inc. (RST; $13.20)1, together with its subsidiaries, provides technology-based learning products in the United States and internationally. It operates through three segments, Enterprise & Education, Literacy and Consumer. The company develops, markets, and supports a suite of language-learning, literacy, and brain fitness solutions consisting of software products, Web-based software subscriptions, online and professional services, audio practice tools, and mobile applications. Rosetta Stone’s current market capitalization is approximately $297 million. The company generated $192 million in sales for the LTM ending September 30th, 2017. (RST is a holding across all funds.)

We were very impressed with Rosetta’s 4th Quarter 2017 results.

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Certain factual and statistical (both historical and projected) industry and market data and other information contained herein was obtained by Osmium Partners from independent, third-party sources that it deems to be reliable. However, Osmium Partners has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained herein reflect the belief of Osmium Partners, which belief may be based in whole or in part on such data and other information. The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Osmium Partners concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any materials herein. Actual results may vary materially from the estimates and projected results contained herein. Past Osmium performance is not indicative of future results. Osmium Partners disclaims any obligation to update this letter. A portion of the Partnership’s assets may from time to time be invested in securities that have limited liquidity. The Partnership’s investment strategy is to make concentrated investments in what it views as its best ideas. The Offering Memorandum and Limited Partnership Agreement offers a comprehensive overview of the risk factors involved in investing with Osmium Partners. The information contained herein is provided for informational purposes only. This is not an offer to sell, or a solicitation to buy, limited partnership interests in Osmium. An investment in Osmium is not suitable for all investors. Stocks mentioned in the newsletter do not constitute a recommendation to buy or sell the individual securities.

Highlights from Asian Investing Summit 2018

April 10, 2018 in Asia, Diary, Equities, Ideas

The following idea snapshots have been provided by the respective instructors or compiled by MOI Global using information provided by the instructors. For the full investment theses, please review the in-depth slide presentations and replay the hour-long conference sessions.

The following is provided for educational purposes only and does not constitute a recommendation to buy or sell any security.

RAJEEV AGRAWAL, MANAGING PARTNER, DOORDARSHI VALUE ADVISORS

JAMMU & KASHMIR BANK (NSE: J&KBANK) has 60+% market share in the geography in which it operates, Jammu & Kashmir (J&K) state in India. The bank lost its way over many years by venturing into areas in which it had no competitive advantage. The bank appointed a new CEO one-and-a-half years ago. The CEO has cleaned up the books and re-focused operations on areas in which the bank possesses competitive advantage. This, along with improvement in economy, resolution of stressed assets, and government support, positions the bank well going forward. As provisions subside and earnings show through in the coming years, the shares may be revalued by investors. According to Rajeev’s fair value analysis, based on 9% asset growth and 0.9% ROA assumptions, the bank may trade at more than twice the recent stock price (after dilution of 25%) by the end of fiscal year 2021.

BENJAMIN BENECHE, SENIOR INVESTMENT MANAGER, PICTET ASSET MANAGEMENT

JD.COM (Nasdaq: JD) is the second-largest player in the Chinese e-commerce, with 27% share of a market we envision to grow at a double-digit rate over the next decade. Unlike the largest player, Alibaba, JD follows an asset-heavy approach more similar to that of Amazon. This involves spending on logistics, which has given JD a clear advantage in delivery (~80% same or next day delivery). The company has the industry’s highest growth in users (~292 million) and gross merchandise value (+33% y-y). Whereas the unit economics are favorable, with between 5-15% gross margins, the current business is only breakeven due to upfront investments in logistics and other initiatives such as O2O, finance, groceries, and cloud computing. Over time, Ben expects mix shifts between categories and the development of third-party businesses, coupled with greater scale economies, to deliver a 5% operating margin. Unlike the competition, JD benefits from negative working capital, with a cash conversion cycle of negative 20 days. On this basis, Ben sees the stock on 10x normalized free cash flow in 2020. Furthermore, option value exists in both JD finance and JD logistics, which were recently valued at $7.2 billion and $13.4 billion, respectively, in private funding rounds. Taking into account a driven owner-operator CEO in Richard Liu and strategic partners/shareholders in Tencent and Walmart, Ben views JD as a compelling long-term investment opportunity.

MEHUL BHATT, MANAGING PARTNER, OYSTERROCK CAPITAL

MAJESCO LIMITED (NSE: MAJESCO) serves the insurance vertical. It develops insurance software and has a well-received cloud platform. Majesco was a part of Mastek prior to a de-merger. The company offers end-to-end implementation and support, unlike some competitors who rely on systems integrators. Insurers depend on technology but their core IT systems are aging rapidly, causing problems. Insurers spend roughly $25 billion annually on IT products, platforms, and services. Majesco’s product suite includes a cloud offering, big data, and analytics. While revenue is still modest at $122 million (2017), the company has made inroads into the Insurance space and is recognized by Gartner as a top three player in insurance-related IT products, alongside DuckCreek and Guidewire. Mehul views Majesco’s deal with IBM and MetLife as a “game changer”. Majesco has announced a five-year partnership with IBM to jointly offer a cognitive, cloud-based platform to insurance carriers. MetLife has joined the collaboration, paving the way for product innovation. Mehul believes that Majesco’s recent market quotation understates value. Most of the investments in insurance products have been made upfront, and Majesco spends $15-20 million annually on R&D. The enterprise is attractively valued at less than 2x FY17 revenue (peer Guidewire trades at ~10x).

NAVEEN CHANDRAMOHAN, FOUNDER, ITUS CAPITAL

MAX VENTURES AND INDUSTRIES (NSE: MAXVIL) was created from a three-way demerger of the parent company Max India, founded by Analjit Singh in 1982. The company was set up to house the operating entity, Max Speciality Films (MSF), which has been in business since 1990, producing biaxially oriented polypropylene (BOPP) films for the packaging and storage industries. Max Ventures’ subsidiary, Max Estates, has ventured into real estate development and private, unlisted investments. At the recent market cap of 500 crores, an investor gets (i) a packaging company (of which Max Ventures owns 51%, having sold 49% to Toppan Printing for 200 crores), which has expanded capacity to support an increase in revenue by 50% over the next three years; (ii) a real estate business that owning 650 crores in assets, which are being developed; and (iii) 80 crores in private equity investments in two businesses, which are growing revenue by ~30% but are not yet profitable. The optionality embedded in the recent market valuation of Max Ventures provides for upside potential of 3x, with protection on the downside. The most significant risk is management execution.

ROHIT CHAUHAN, PORTFOLIO MANAGER, RC CAPITAL MANAGEMENT

MANAPPURAM FINANCE (NSE: MANAPPURAM) is the second-largest gold loan company in India, with a twenty-year history of growing profitably. The company makes short-term loans to low-income borrowers, with gold acting as the collateral. The company has grown 30+% annually over the last ten years and has earned ROEs of 20+%, with minimal loan losses. The company continues to gain share in this unorganized sector and has additional growth drivers in the form of new products, such as vehicle loans, home loans, and micro finance. The company should be able to maintain the past level of growth and profitability due to the large market opportunity and a strong competitive position in the gold loan business. Despite above-average profitability and growth, the company continues to sell at 12x earnings, compared to >20x earnings for comparable financial services firms. The stock has upside potential as growth continues and the valuation discount narrows.

RAVI DHARAMSHI, MANAGING DIRECTOR, VALUEQUEST INVESTMENT ADVISORS

SMALL FINANCE BANKS IN INDIA (SFBs): The largest financial inclusion program in the world has brought 300+ million people under the formal banking system in a short period of time. The business models of SFBs are broad-based, with entry into verticals such as micro, small and medium enterprises. Housing finance lends sustainability. Growth prospects in microfinance have improved after the crisis caused by de-monetization. SFBs also benefit from value migrating away from PSU banks as they struggle with bad loans. SFB models combine the profitability of the NBFC model (ROA of 2+%) and the regulatory protection of the banking model. SFBs’ access to low-cost funds has increased, and borrowing rates have come down from 11-12% to ~8%. Over the next 2-3 years, Ravi expects SFBs to grow at a CAGR of 25+%, with ROA of 1.5+% and ROE of 15%. SFBs are evolving to combine stable business models with long profit runways. Industry participants include AU Small Finance Bank (NSE: AUBANK), Ujjivan Financial Services (NSE: UJJIVAN), and Equitas Holdings (NSE: EQUITAS). Unlisted players that may go public over the next 18-24 months include Suryoday Small Finance Bank, Janalakshmi, and ESAF Small Finance Bank.

MAX HU, PORTFOLIO MANAGER, TYEE CAPITAL GROUP

KEYENCE CORP (Tokyo: 6861) is the world’s leading factory automation business. Principal products are sensors embedded in devices and equipment ranging from detection and measurement controllers to automation measuring instruments. Keyence, with its unique fabless manufacturing and direct-sales model, monopolistic economics with unmatched profitability (60% operating margin), is the highest-quality business in the global industrial automation space. Keyence should benefit significantly from China’s long-term plan to upgrade its manufacturing base as well as from global shifts toward artificial intelligence and industrial automation. The shares recently traded at a P/E of 30x for 2018E. The company should be able to grow earnings by 25+% for the next few years. While the stock is not cheap, Max believes that Keyence constitutes an underappreciated opportunity and a unique way to gain exposure to the themes of Chinese growth and factory automation.

ANKUR JAIN, REGISTERED INVESTMENT ADVISOR

NOCIL (NSE: NOCIL): With 45% market share in rubber chemicals in India, Nocil has an exceptional mesh of competitive advantages around it. The advantages range from having the best technology (patented), large capacities driving economies of scale, a position of the supplier of choice to its customers, and world-class products. With structural change occurring in China, the supply chain has been disrupted and competitive intensity has weakened. Customers also want to reduce their dependence on one source country. A combination of these changes is providing Nocil with remarkable opportunities to grow. The balance sheet is robust, with zero debt and ~$46 million in cash. Net of cash, the business sells for ~$450 million or ~19x FY18 estimated after-tax profits. Managed by one of the best promoter groups in India, Nocil has a long runway of growth ahead.

ANISH JOBALIA, PRIVATE INVESTOR

KARUR VYSYA BANK (NSE: KARURVYSYA), based in South India, is a regional bank that started its journey in 1916 in Karur, a textile town in Tamil Nadu. KVB primarily started as a small and medium enterprise (SME) bank. It continues to position itself as a comprehensive player that caters to the needs of SME customers. KVB’s core philosophy of nurturing customers through times “thick and thin” has earned it respect over its hundred-year existence, resulting into a sticky customer base. The bank has traditionally enjoyed a high average ROA profile of ~1.7%, as observed from 1999 to 2013. ROA has recently shrunk to 0.6% due to high credit costs resulting from exposure to chunky corporate loans. There has been a management change with the hiring of P. Seshadri, a highly competent CEO. IIM Bangalore alumnus Seshadri is a senior banker with 25+ years of experience at Citibank. In a recent clean-up drive, Seshadri increased the watchlist of stressed assets from INR 650 crores to INR 1200 crores. According to management, this is the tail end of reserving for stressed assets. The bank’s strategy going forward is to granulize the portfolio by shunning large-ticket corporate lending and focusing on low-ticket SME, retail loans, and corporate loans. The incremental slippage ratio and provisions are expected to come down. Credit costs should revert to their long-term average of ~1% across all cycles. KVB has historically traded at 1-2x price to adjusted book value on a forward basis. It recently traded at INR 100, a multiple of ~1.3x.

STEVE JOHNSON, CHIEF INVESTMENT OFFICER, FORAGER FUNDS MANAGEMENT

MACMAHON HOLDINGS (Australia: MAH) is an ASX-listed mining services company with a large and growing business in South East Asia. The stock has rightly been punished for the sins of the past, but the new management team and a solid order book are underappreciated by the market. Based on Steve’s estimates, the shares trade at an enterprise value multiple of 6x 2018E EBIT. Steve expects EBIT to continue growing in 2019 and beyond.

DEEPAK KAPUR, INVESTOR, TAPAKS CAPITAL MANAGEMENT

GMR INFRASTRUCTURE (India BSE/NSE: GMRINFRA) is a play on India’s fast-growing airport sector. It is one of the largest infrastructure companies in India, owning and operating assets in the following segments: energy (power plants and coal mines), transportation (airports and highways), and property development (commercial property and special investment regions for industrial development). The thesis is based primarily on the growing value of GMR’s cash-generating airport and allied businesses, growing at 15+% (aero revenues are based on assured return on equity, and non-aero business has reasonable operating leverage). GMR is the largest private sector airport operator in India. It owns and operates the Delhi International Airport as well as the Hyderabad International Airport under the public-private partnership model. It recently also won the mandate to build and operate a greenfield airport at Goa. Apart from India, GMR has airport development and operating interests in the Philippines and Greece.

In the last few years, the energy and highway businesses have been a drag, as their leveraged balance sheets and suboptimal operations led to large losses and increasing debt. The suboptimal performance was due to issues such as inadequate fuel supply for power plants, lack of long-term power purchase agreements from buyers, lack of environmental clearances leading to stuck projects, excess capacity in the industry, poor realizations, and inadequate toll collections.

The stock has languished in a narrow band for the last six years and is down 85% from its 2007-2009 peak during the infrastructure craze in India. However, asset monetization (sold a stake in its energy business), fund raising (QIP and rights issues), refinancing as well as debt restructuring and asset disposal initiatives of recent years, supported by a pick-up in the economy, have lent some stability to the balance sheet. The worst times seem to be behind the company. Looking ahead, GMR aims to sell the highway projects, restructure its energy operations, and shift the growth focus to airport, property, and EPC businesses.

The complexity of the operations and holding structure, the negativity surrounding the debt on balance sheet, certain regulatory issues, and various ongoing litigations have kept the valuation depressed. The recent market cap of INR 106 billion represents at least a 40-50% discount to underlying value and provides reasonable downside protection for the long-term investor, even after considering dilution risk. An unpleasant regulatory surprise for the airport business remains the biggest risk to the investment thesis.

KOON BOON KEE, CHIEF INVESTMENT OFFICER, HIDDEN CHAMPIONS CAPITAL MANAGEMENT

HOSOKAWA MICRON (Taiwan: 6277) is the global leader in powder and particle processing equipment and high-performance plastics thin-film blowing manufacturing equipment, with clients in the pharma, cosmetics, food and beverage, auto, and other industries. Hosokawa has a strong reputation for world-class technology and advanced technical capabilities. Hosokawa has five R&D centers and eight test centers, enabling it to launch new products that meet customer needs quickly. Since current CEO Yoshio Hosokawa took over in 2014 to rationalize the business, financial performance has improved significantly. Yoshio has made difficult decisions, such as divesting the loss-making confectionery equipment segment in 2015. CFROA (operating cash flow divided by assets) of 13% is one of the best in the industry (Alfa Laval 8%, GEA 5%, John Bean 8%, IDEX 13%, Marel 14%). Yet, the market quotation of EV/CFO of 6x, EV/EBIT of 8x, and EV/EBITDA of 7x represents a discount to comparable companies. Hosokawa implemented shareholder-friendly actions in 2017, including a share buyback. Hosokawa has the potential to grow operating profits by 50-80% in the next 3-5 years to $70-83m, and spur an upward valuation re-rating based on EV/EBIT 15x towards a 95-134% rise in market cap from its present $534m to cross $1.04-1.25bn in the next 3-5 years, or a share price of JPY 13,800 to 16,600 from its present JPY 7,090.

Koon Boon Kee also presented an investment thesis on TOCALO (Tokyo: 8035).

PETER KENNAN, MANAGING PARTNER, BLACK CRANE CAPITAL

MMA OFFSHORE (ASX: MRM) is a leading operator of offshore supply vessels. The company is headquartered in Perth, Australia, with key operations in Australia, Southeast Asia, and the Middle East. The company has recently been recapitalized and has a strong balance sheet to wait out the industry downturn. Peter’s firm, Black Crane, played a key role in the recapitalization process, including assisting in defending the company from an opportunistic attack by another major shareholder. The fleet has been reduced in scale following a successful non-core vessel disposal program and now comprises 30 niche, specialized vessels. Net tangible asset value is A$0.36 per share based on recent market values of vessels. The upside is north of A$0.60 per share as the sector rebounds. MMA shares recently traded at A$0.23 per share.

AMEY KULKARNI, FOUNDER, CANDOR INVESTING

ASHIANA HOUSING (NSE: ASHIANA) is a real estate developer with a long growth runway in a country with 1.3 billion people, including 275 million families. Ashiana is a conservatively financed, well-run real estate operation in a country that is rapidly urbanizing, with a housing shortage in urban areas estimated at 18 million units. Ashiana is run on a business model similar to that used by Mohammed Yunus to build the Grameen Bank in Bangladesh: “First check what the industry peers do and then go and do the exact opposite.” Given that construction is financed by advances from customers, the company requires little external capital, except during a severe cyclical downturn. Ashiana, with average pretax ROIC of 25+%, is available at an earnings yield (five-year average pretax cash from operations to enterprise value) just below the ten-year government bond yield.

RASHMI KWATRA, CHIEF INVESTMENT OFFICER, SIXTEENTH STREET CAPITAL

EDELWEISS FINANCIAL SERVICES (India: EDEL), a secular growth story in Indian financials, was co-founded by Rashesh Shah and Venkat Ramaswamy in 1995. Founded as an investment banking and advisory services firm, it has consistently allocated capital well, using bear markets to invest in its people and incubate new businesses. Edelweiss is now a diversified financial services company. It plans to shift the mix of its credit business from 39% retail-focused (FY17) to 70% retail-focused (FY20). There is potential for Edelweiss’ credit business to re‐rate given its strong ROE of 18% (retail segment), two‐year growth of 57% CAGR, and planned segment mix shift to retail. Rashmi projects a loan book CAGR of 40% from FY18-20 for the retail book, driven by strong macro conditions for affordable housing and SME financing (and a low base for Edelweiss) and a muted corporate loan book growth of 13.5% in the same period. Edelweiss has shown significant traction in the wealth/asset management business to become the third-largest player in wealth management in India. The firm is also seeing growth in the asset reconstruction business. Based on Rashmi’s conservative estimates, Edelweiss was recently available at a fair price, and should compound capital at a significant rate in the long term.

GEORGE KURIAN, PORTFOLIO MANAGER, RARE INFRASTRUCTURE

BHARTI INFRATEL (India: BHIN) is the second-largest wireless tower company in India. The investment case is a classic example of time horizon arbitrage. While the market seems focused on the ongoing carrier consolidation, it ignores the normalized earnings power of the company. Over the next couple of years, Infratel could become the second-fastest growing tower company in the world on an EBITDA basis, yet the it was recently priced at the lowest EV/EBITDA tower multiple in the peer group. Moreover, with many companies safely levered in the mid-single digit net debt-to-EBITDA multiple range, Infratel has a net cash balance sheet. It also owns 42% of the largest tower company in India, Indus, and has a right of first refusal to buy the remainder of Indus. The board of Infratel has asked management to evaluate the Indus acquisition, which, if done at reasonable terms, could improve the growth prospects of Infratel, provide synergies, and lower the weighted-average cost of capital. Infratel could be the classic “double play” for long-term investors due to a potential uplift in earnings and valuation multiples.

CHAN LEE AND ALBERT YONG, MANAGING PARTNERS, PETRA CAPITAL MANAGEMENT

Korea is no emerging market; Korea is home to the world’s most successful companies with leading technologies, skilled labor, and highly educated management. So-called “Hallyu” has been a blessing for Korea, its businesses, culture and country image; Korea has become one of the world’s coolest brands. Many competitive Korean companies are ready to break out and expand outside of Korea benefiting from the soft power developed through the increasing popularity of the “Korean Wave”.

SM ENTERTAINMENT (Korea: 041510) is Korea’s best entertainment agency/music studio company, founded by Mr. Soo-man Lee, a popular artist in Korea of the 1970s and 1980s. The company has the best farm system to develop K-pop artists who have become superstars in Asia. It benefits from the growing popularity of Hallyu worldwide. SM Entertainment should create value from its entry into the Chinese entertainment market by forming a strategic partnership with Alibaba Group. The market’s overreaction to the THAAD (Terminal High Altitude Area Defense) deployment issue which has provided a contrarian buying opportunity. Despite the recent stock price rally, the market price does not fully reflect the Company’s brand power and long-term growth prospects in Asia.

COM2US (Korea: 078340) is one of the top mobile game developers in the world, generating ~80% of revenue from outside of Korea. The company has experienced continuous success and strong recurring earnings from its flagship game, Summoners War. Com2uS should continue to benefit from the growing popularity of Korean online games. The company has a strong pipeline of new games over the next twelve months. The shares offer a margin of safety in net cash and an investments balance of ~700 billion Won, which can be used to buy back shares or deploy in accretive acquisitions. Despite the recent stock price rally, the market price is substantially undervalues the company.

JAMES (SUNG YOON) LIM, SENIOR RESEARCH ANALYST, DALTON INVESTMENTS

MERITZ FINANCIAL GROUP (Korea: 138040) is a financial holding company that owns 52% of Meritz Fire & Marine (#5 in size and #1 in ROE in South Korean non-life insurance business) and 43% of Meritz Securities (#6 in size and #1-2 in ROE). Since the appointment of talented new management a few years ago, Meritz Fire & Marine has improved ROE from 9% to 20% and Meritz Securities from 4% to 14%. Meritz Fire & Marine is seeing high growth in new premiums (#2) due to a competitive sales commission rate, based on low fixed costs and relationship building with general agencies, which have displayed strong growth. Meritz Securities has become a dominant player in the real estate financing business, with strong risk management, and is now going after large-scale deals and foreign deals. The shares recently traded at 1x P/B, 6x P/E, and a dividend yield of 3.4% despite a payout ratio of only 20%. The main shareholder owns 68% of the equity, and the talented co-CEOs each have a $10 million base of stock options while most of their performance-based bonuses get paid out over ten years and linked to share price performance, inducing long-term thinking and strong alignment of interests with minority shareholders. The group has a merit-based culture (thus the name Meritz) and stands out from the conservative, rigid, and rather bureaucratic Korean financial industry.

ANDREW MACKEN, PORTFOLIO MANAGER, MONTGOMERY GLOBAL INVESTMENT MANAGEMENT

PRADA (Hong Kong: 1913) is the pure Italian style, family-run luxury brand of more than one hundred years. Andrew believes the business is turning the corner after a challenging five-year period. During the last five years, the business underwent significant investment in its Asian distribution platform. At the same time, Prada – like all luxury goods businesses – faced an unprecedented headwind stemming from the Beijing corruption crackdown. In 2015, Andrew was short the stock. As of this writing, he was long the stock. Prada is a high-quality brand, well-positioned in a structurally growing Asian luxury space, and can be acquired in the marketplace at a price that implies a set of expectations that are unreasonably conservative. Significant recent investments into the brand’s new digital strategy are starting to bear fruit. After years of negative same-store-sales growth, Prada has commenced 2018 with comparable sales growth of 7+%. This is the only instance of Andrew owning a stock he had previously been short.

RAJEEV MANTRI, EXECUTIVE DIRECTOR, NAVAM CAPITAL

RELIANCE INDUSTRIES (India NSE: RELIANCE) is India’s largest private sector company, with revenue of Rs 3,500+ billion ($54 billion) and a market capitalization of Rs 5,902 billion ($90 billion). Reliance is a sprawling conglomerate, with business units in oil refining and marketing, petrochemicals, oil and gas exploration, retail, digital technology and media. Reliance’s core businesses of oil refining and petrochemicals (generating 80+% of revenue and profit) have been robust performers and significant cash generators. The company has used this capital to invest heavily in Jio, a new digital technology business. The market continues to view Jio as a telecom services provider and is, therefore, under-rating the embedded optionality to provide consumer digital services to India’s billion-plus population. From a standing start in September 2016, Jio has acquired 160+ million customers, achieving growth by expanding the addressable market of mobile data consumers through innovating offerings, as well as by taking share from incumbents. By providing mobile data access at rock-bottom prices, Jio has weakened incumbents and forced industry consolidation. Reliance trades at 18x trailing earnings, with 3x net debt / EBITDA. The company is well-positioned to grow the Jio business by offering Jio’s large user base a mix of subscriptions and advertising as a digital consumer-centric business rather than an industrial oil and gas enterprise.

SIDD MEHTA, PRINCIPAL, BEACONSFIELD INVESTMENT MANAGEMENT

HONMA GOLF (Hong Kong: 6858) is a leading golf club manufacturer based in Japan. The company is known for quality and craftsmanship. Honma went bankrupt more than a decade ago and was purchased by golfing enthusiast and businessman Liu Jianguo from China. The books were cleaned up and the company delisted in Hong Kong two years ago. While sales and earnings are growing nicely, the shares recently traded at a deep discount to peers.

VIRAJ MEHTA, FUND MANAGER, EQUIRUS LONG HORIZON FUND

APL APOLLO TUBES (NSE: APLAPOLLO) is the largest manufacturer of electric resistance welded (ERW) pipes in India. It has an installed capacity of 1.8 million tons per annum (MTPA) and is expanding it to 2.5 MTPA in two phases. APL Apollo is fastest-growing ERW pipe company in India and is more than double the size of the closest competitor. It has consistently grown market share, from 3% to 13% over a decade. It has strong competitive advantages, including lowest cost of production, lowest cost of conversion, along with lowest cost of fixed capital formation. Viraj considers those advantages to be sustainable over a long period. APL Apollo has a pan-India presence. It has one of the largest distribution networks in the industry, adding to the company’s competitive position.

JAMES MORTON, CHIEF INVESTMENT OFFICER, SANTA LUCIA ASSET MANAGEMENT

ERAJAYA (Indonesia: ERAA), the market leader in mobile phone wholesale and retail in Indonesia is roughly 2x the size of the second largest competitor. Since mid-2017, the government has been cracking down on illegal imports. ERAA is the biggest beneficiary of this and recently cemented its leadership position with exclusive representation of Xiaomi. Erajaya trades at 10.5x historic earnings versus over 20x in 2012-2013, and at about book value versus a high of 4x. Expansion into related services of insurance and microfinance should add a material new source of income in 2019, and that is not yet in analyst forecasts.

PURADELTA LESTARI (Indonesia: DMAS), owns the largest land bank in the country zoned for industrial use with its main asset less than 40 km from Jakarta. Puradelta is the only operator with enough hectares to sell large blocks. A strong balance sheet with net cash supports a trailing yield over 7%. Earnings forecasts put the business on a current P/E of 9.5x compared to potential 20% earnings growth. The current valuation is only 25% of our internal estimate of its Marked to Market Net Asset Value.

CLIPAN FINANCE (Indonesia: CFIN), is the multi finance subsidiary of the Panin Group. After several years of balance sheet stagnation and earnings decline, the company got new management and a new strategy in Q4 2016 : notably all the new car finance business from its parent. That business lost money last year but should break even in 2018, and make a hefty profit in 2019. Loans grew over 60% and operating profit over 30% in 2017. A historic P/E of 5.4x should fall close to 4x this year. Meanwhile its Price to Book of 0.32x compares to peers at over 1x and the sector leader at 2.5x.

PEMBANGUNAN PERUMAHAN PERSERO (Indonesia: PTPP), is the second largest contractor in Indonesia, a country with a shortage of infrastructure where investment has a positive multiplier. The company has the strongest balance sheet in the industry (net cash) so is best placed to take on new projects. The current backlog of over IDR 63 trillion secures 3 years of revenue. Its P/E ratio has fallen from a peak over 40x in 2014 to less than 10x current year’s expected earnings against medium term annual growth in the high teens. The stock also trades at a discount to the Sum Of its Parts as it unlocks value by spinning off property and earth moving subsidiaries into separate listed entities, with another spin off expected in 2018.

BANK CIMB NIAGA (Indonesia: BNGA), the local subsidiary of Malaysian group, CIMB, is the fifth largest bank in Indonesia and second largest private bank. After suffering from the commodity collapse, the bank cleaned house, got rid of most bad debts and adopted a strategy of focusing on premium clients. Since 2016 Niaga has reduced NPLs, cut costs and automated, closing branches and becoming a local leader in digital and mobile banking. This is a recovery story with 2017 net income up 40% over 2016 but still below its profit in 2011 to 2013. Niaga trades at a current year P/E below 10x versus expected earnings growth in the mid-teens and at less than 0.8x book compared to the sector average of 2.6x.

RAHUL SARAOGI, MANAGING DIRECTOR, ATYANT CAPITAL ADVISORS

BANK OF BARODA (India: BOB) is a top five government-owned bank in India, with 5,500 branches and a growing retail franchise. The bank has conservative accounting and is likely overprovisioned. It has strong management and culture. Pre-provision ROIC has consistently exceeded 18%. The bank is available at an attractive valuation despite strong growth ahead. Rahul believes that the risk of government interference is overblown and that excessive dilution risk and uneconomic consolidation risk are now behind the bank. According to Rahul, the bank has a “bulletproof” liability franchise, with a cost of 5.3%. The bank is adequately capitalized and ready for the credit cycle. The equity market cap recently amounted to $5.8 billion, as compared to book value of $6.6 billion. Rahul expects book value to double over the next three years. Assuming a price/book multiple of 1.75x, the shares could yield a 4x return over three years.

MANUEL SCHLABBERS, CHIEF EXECUTIVE OFFICER, ACCUDO CAPITAL

MING FAI (Hong Kong: 3828) is a leading supplier of amenity products to high-end hotels and airlines with more than thirty years of history. It exhibits a low valuation for a growing, cash-generative core business with “activist” potential around the excess cash. 40+% of the recent market cap of HKD 910 million is in net cash. Management has been closing points of sale for the loss-making retail business. Manuel believes that in the next one to two years we will see those losses eliminated as management exits the business. Based on his FY17 estimate, the shares trade at a P/E of ~6x for the core business (core P/E ex-cash of less than 4x). This appears attractive for a cash-generative core business that Manuel expects to grow by 5-10% annually over the next five years. Management recently entered the Indian market. They are in the process of diversifying the production base to Cambodia. The management team has executed well from a corporate governance perspective in recent years (examples include the closing of loss-making business lines; selling investment property in Hong Kong and paying out some of the proceeds; not renewing the employee option scheme but implementing an employee trust instead). Capital allocation could be significantly improved as they sit on excess cash – something that has drawn the attention of activist shareholders in the past.

HENGDELI (Hong Kong: 3389) is the holding company for two luxury watch retail chains, Hengdeli and Elegant Watch & Jewelry, which operate shops in Hong Kong and Taiwan. The company transformed in 2017 when it sold its mid to high-end watch retail business in mainland China (Xinyu), together with a low-end watch and jewelry business in Hong Kong (Harvest Max), for RMB 3.5 billion to the controlling shareholder. The company used the proceeds to pay a special dividend and retire USD-denominated debt. At less than 0.4 HKD per share, the shares recently traded at a 25% discount to net cash and at one-third of tangible book value. For a business in an industry that is seeing operational improvements (it almost broke even in H1 2017), this seems attractive. The shareholder base includes business partners such as Swatch Group and LVMH, which mitigates some of the corporate governance concerns around the large cash position.

ISAAC SCHWARTZ, PORTFOLIO MANAGER, ROBOTTI & COMPANY

HALYK SAVINGS BANK OF KAZAKHSTAN (Kazakhstan Stock Exchange: HSBK) is the largest bank in Kazakhstan, controlling 37% of Kazakhstan’s deposit base, bearing Central Asia’s century-old leading financial services brand name. Halyk had the #1 position as a result of its consumer banking franchise prior to its 2017 merger with the #2 bank, that dominated the corporate side – as a result, creating the region’s undisputed powerhouse. With $28 billion in assets, $2.9 billion in equity, and 2017 net income of $540 million, at its $3.8 billion market cap, Halyk sells for a low 7 times earnings and 1.3 times book. In recent years, the banking industry was (too slowly) fixing its post-financial crisis liquidity troubles, but those problems have been solved through mergers and the setting up of bad loan AMCs. At the same time, no other banks are publicly traded with a meaningful float – thus, there isn’t a ready base of analysts following the Kazakh banks today (as there was during the boom years of 2006-2007). In addition to a low valuation on present numbers, which are normalized, Halyk has significant growth opportunities from the internal growth of the Kazakh economy, and significant improvement potential from the integration of last year’s merger – which was a company with nearly the same size asset base, but much lower profitability, as it. Using conservative earnings growth assumptions and expectations of a reflation of Kazakh equity multiples in coming years, Isaac believes the shares have significant price appreciation potential.

KISALAYA SINGH, MANAGING PARTNER, ANYA INVESTMENT PARTNERS

AIN HOLDINGS (Tokyo: 9627) is the leader in the highly fragmented pharmacy dispensing business in Japan. Dominated by 60,000+ one-man and small-chain pharmacies, the sector appears poised for consolidation, driven by a combination of regulatory changes and ageing one-man store owners without heirs. Ain is ideally placed to be the sector consolidator with its long history of growth driven by astute organic expansion and M&A. Founder and president Kichi Otani is a disciplined capital allocator and operator who has compounded book value and earnings at 18+% annually over the past ten years, while earnings ROE of 14+%, despite a net cash balance sheet. With an equity stake of almost 9%, Otani remains invested in the continued growth of the company. A long growth runway is available for Ain to increase revenue market share from 3% currently, by acquiring small chains and setting up more efficient large-scale pharmacies. Incremental ROI of M&A is high, driven by an ability to pay acquisition multiples as low as 5.5x EV/EBITDA and improve the operating margin of acquired businesses. Recently trading at a “fair” multiple of 8.6x EV/EBITDA, the market appears to be cognizant of Ain’s prospects for M&A growth, but not fully appreciative of recently allowed large-scale pharmacy growth. The market may also overestimate regulatory uncertainty, which injects volatility in the stock price. Primarily a revenue and earnings growth story, Ain also has the kind of high ROE, healthy cash generation, and consistent growth that have been rewarded by higher trading multiples in Japan.

LALARAM SINGH, CHIEF INVESTMENT OFFICER, VIBRANT SECURITIES

CARE RATINGS (BSE: 534804, NSE: CARERATING) offers an opportunity to buy a wide-moat business at the lower end of its historical range, with potential for high-teens earnings growth and valuation multiple rerating. CARE is the second-largest credit rating agency in India, with market share of ~24%. It posted revenue of US$48 million and after-tax profit of US$24 million in 2017. At the recent price of US$19 per share, the company is available at a market cap of US$550 million. The company is debt-free, with net cash holdings of US$62 million (~11% of market value). The company has generated US$98 million in cumulative cash from operations over the last five years, all of which has been returned to shareholders in the form of dividends. The company requires minimal capex to grow revenue. CARE recently traded at a dividend yield of 2.3% and an FCF yield of ~4%.

RAJEEV THAKKAR, CHIEF INVESTMENT OFFICER, PPFAS MUTUAL FUND

SUZUKI MOTOR CORP. (Tokyo: 7269; OTC: SZKMY) is a play on the underpenetrated Indian auto market. India accounts for ~ 2/3 of the profits of Suzuki Motor. Penetration in India is 22 cars per 1,000 persons, as compared to 102 in China, 569 in Western Europe, and 808 in the U.S., based on OICA data for 2016. Maruti Suzuki (56.2%-owned by Suzuki Motor Corporation) sells almost one of every two cars in India. It participates in the high-growth Indian market and benefits from the gradual shift towards higher-value premium cars. India has been a tough market for other players to profit from, as seen by the difficulties faced by General Motors, Volkswagen, Toyota, and Ford. Maruti Suzuki benefits from scale efficiencies and a wider network; it is the incumbent and has been in the market since 1981, as compared to the relatively recent entry of other players. Suzuki Motor benefits not only from the 56.2% stake in Maruti but also gets significant royalty income from Maruti. Apart from participation in the Indian auto space, Suzuki Motor has optionality in the Japanese, ASEAN, and European markets in which Suzuki operates. The shares trade at a P/E of ~13.5.

JIRO YASU, REPRESENTATIVE DIRECTOR, AND PATRICK RIAL, SENIOR ANALYST, VARECS PARTNERS

CRE INC. (Tokyo: 3458) is a real estate company that develops and manages distribution warehouses. It is one of largest managers of such facilities in Japan. It develops a couple of warehouses per year and sells them off to its own REIT. It also gets the contract to manage them. Revenues for the development business can be lumpy, depending on how many warehouses are developed and sold each year. On the other hand, the growing property management and REIT management businesses are recurring and quite stable. Jiro and Patrick expect the market quotation to improve in the coming years as the weight of the recurring businesses grows. Japan needs more cutting-edge, large warehouses because many of the existing warehouses are aging and small. Many companies can cut logistics costs by moving to newer, larger warehouses. Also, the growth of e-commerce should provide stable demand growth for such warehouses. At the recent share price, CRE’s market cap is 23 billion yen and enterprise value is 28 billion yen. A couple of warehouses are sitting on the balance sheet (will be sold this fiscal year). The sale proceeds and equity holdings explain most of the enterprise value, with little value assigned to the recurring revenue businesses.

SOUMIL ZAVERI, PARTNER, DMZ PARTNERS

TEAMLEASE SERVICES (TL) (NSE: TEAMLEASE) is one of India’s largest “people supply chain” companies with an estimated ~5% market share in India’s flexible staffing industry. The company provides general staffing solutions which involves matching hiring requirements of customers (companies) with the right human resources (associates). TL currently manages ~177,000 associates for 2,500+ customers at 6,000+ locations across industries in India. The company is able to do this with ~1,600 core employees. TL also offers recruitment, regulatory compliance, payroll and skill enhancement services. The company was founded in 2002 by two industry veterans, Manish Sabharwal and Ashok Reddy with 40 employees and one client. In Soumil’s view, Teamlease could manage a much larger associate employee base while substantially leveraging technology to improve operational efficiencies over the next decade. Soumil does not find it implausible for the flexible staffing business to continue to take market share from informal market participants given the country’s continued “formalization”. To provide some context on the opportunity set, India’s working age population consists of ~60% of its ~1.2 billion people, yet only 10% of the workforce forms a part of the formal economy (although a majority of the informal sector includes agricultural employment). Additionally, complex labor laws have hampered a faster transition to more formal and permanent employment. In fact, more than 70% market share in the temporary staffing industry is estimated to be in the informal sector. As enforceability of regulations and progressive changes (e.g., GST) gain momentum we expect participants like Teamlease with proficient technology platforms, lean operating models and robust compliance and regulatory frameworks to be large beneficiaries.

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Tucows: Low-Cost Leader with Experienced “Outsider” CEO

April 8, 2018 in Ideas, Letters

This article by John Lewis is excerpted from a letter of Osmium Partners.

Tucows (TCX; $56.40)1, an ICANN accredited registrar, provides domain name and email services through a global distribution network. The company also operates a rapidly growing MVNO (wireless service) called Ting, which features innovative pricing and category-leading customer service. The company also derives revenue from the sale of fixed high-speed internet access via fiber (Ting Internet) in select towns. TCX generated $252 million in sales for the LTM ending June 30, 2017 and has a current market capitalization of approximately $597 million. (TCX is a holding across all funds.)

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Certain factual and statistical (both historical and projected) industry and market data and other information contained herein was obtained by Osmium Partners from independent, third-party sources that it deems to be reliable. However, Osmium Partners has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained herein reflect the belief of Osmium Partners, which belief may be based in whole or in part on such data and other information. The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Osmium Partners concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any materials herein. Actual results may vary materially from the estimates and projected results contained herein. Past Osmium performance is not indicative of future results. Osmium Partners disclaims any obligation to update this letter. A portion of the Partnership’s assets may from time to time be invested in securities that have limited liquidity. The Partnership’s investment strategy is to make concentrated investments in what it views as its best ideas. The Offering Memorandum and Limited Partnership Agreement offers a comprehensive overview of the risk factors involved in investing with Osmium Partners. The information contained herein is provided for informational purposes only. This is not an offer to sell, or a solicitation to buy, limited partnership interests in Osmium. An investment in Osmium is not suitable for all investors. Stocks mentioned in the newsletter do not constitute a recommendation to buy or sell the individual securities.

CARE Ratings: Second-Largest Credit Ratings Agency in India

April 6, 2018 in Asia, Asian Investing Summit, Asian Investing Summit 2018, Asian Investing Summit 2018 Featured, Audio, Equities, Financials, GARP, Small Cap, Transcripts, Wide Moat

Lalaram Singh of Vibrant Securities presented his in-depth investment thesis on the credit ratings industry in India and CARE Ratings (BSE: 534804, NSE: CARERATING) at Asian Investing Summit 2018.

Thesis summary:

CARE Ratings offers an opportunity to buy a wide-moat business at the lower end of its historical range, with potential for high-teens earnings growth and valuation multiple rerating.

CARE is the second-largest credit rating agency in India, with market share of ~24%. It posted revenue of US$48 million and after-tax profit of US$24 million in 2017. At the recent price of US$19 per share, the company is available at a market cap of US$550 million.

The company is debt-free, with net cash holdings of US$62 million (~11% of market value). The company has generated US$98 million in cumulative cash from operations over the last five years, all of which has been returned to shareholders in the form of dividends. The company requires minimal capex to grow revenue.

CARE recently traded at a dividend yield of 2.3% and an FCF yield of ~4%.

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About the instructor:

Lalaram Singh is the CIO at Vibrant Securities, managing the proprietary book based on long only, value investing principles. Vibrant Securities is a 20+ year old stock broking company based out of Mumbai. At Vibrant, Lalaram is responsible for building the research team from scratch and formulating the investment strategy, idea generation and portfolio management process. Previously, Lalaram was the co-founder of AnalyseWise Investment Advisors, an Independent Equity Research company catering to retail, institutions and brokers. Lalaram was a part of AnalyseWise from Aug-14 to July-16. Prior to co-founding AnalyseWise , Lalaram was a part of 12 member team in Bain Capital at their Mumbai Office where he evaluated investment opportunities across industries ranging from Healthcare, IT, Industrials, & Consumer Goods. Lalaram began his career at J.P. Morgan in July-2012 upon completion of his Bachelors in Mechanical Engineering from Mumbai University. At J.P. Morgan, Lalaram supported the Asia M&A team working on companies across banking, insurance, securities and asset management in India, China and South East Asia.

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