We recently had the pleasure of interviewing Juan Huerta de Soto Huarte, investment analyst at Cobas Asset Management, based in Madrid, Spain. Juan has worked with Francisco García Paramés for over five years, both at Bestinver and Cobas. Juan has also worked as an analyst at azValor Asset Management.
The following interview has been translated from Spanish.
MOI Global: Tell us about your educational background and your experience.
Juan Huerta de Soto: When I finished high school, I did not have a clear vocation, so I decided to follow the advice of my family and study Law and Business Administration and Management at the Complutense University of Madrid. It is a long degree program (6 years), but it gave me a little more time to discover what I wanted to do, and it helped me avoid specializing in any particular sector too soon. This turned out to be a very good decision, because initially, I had wanted to study law, and had I done that, I might not have discovered value investing. In my first years at the university, I was more interested in laws and their practical application. However, in my third year, I took an Introduction to Corporate Finance course and since then, my interest has focused on the world of business, finance, and economics.
I owe my discovery of value investing to my family as well. As you can imagine, much of what I am today is due to them. More specifically, my older brother recommended I read One Up on Wall Street, by Peter Lynch, to get me started in the world of investment. Though I was pursuing a degree in business, it was not until I read Lynch’s book that I began to grasp what it meant to invest wisely, and from that point on, my intellectual interest has focused almost entirely on investment and economics. It is curious to note that my brother found that book thanks to the readings recommended by Bestinver Asset Management, a prominent independent asset-management firm in Spain and, at that time, the employer of Francisco García Paramés and his team, with whom I would come to work years later.
When I finished Lynch’s book, I began reading every book I could find about value investing, watching every interview and lecture that featured the Bestinver team (practically the only value management firm in Spain at the time, and by far the largest and most successful), and investing my small savings in Bestinver funds and in Spanish listed companies. My first investments in listed companies awakened my passion for business analysis and ultimately revealed to me a desire to devote myself professionally to financial analysis and investment.
Even so, desires are not everything, and at that time, it was difficult to find work at a value management firm in Spain, mainly due to the shortage of companies with that particular investment philosophy. Therefore, I decided to work toward a master’s degree in applied economics with a focus on the Austrian School of Economics at the Universidad Rey Juan Carlos. Fortune smiled on me, and a junior analyst position opened up at Bestinver just as I was finishing my master’s degree and my internship was drawing to a close. In September 2013, I joined the team of Francisco García Paramés. Almost two years later, the investment team decided to found an independent asset management firm, thus ending a relationship of many years with Bestinver. Fortunately, they decided to count me in on the project, and as soon as I left Bestinver, I joined the rest of the team at azValor Asset Management. These were good years, in which I acquired practical knowledge not found in books, and I was able to develop as an analyst, sharpen the skills I had, and learn new ones. In the end, after nearly two more years, Francisco García Paramés, who had not joined azValor due to contractual impediments, decided to found his own investment firm. I was invited to take part in the project, and I accepted. It has been a year and a half since then, and I hope to keep contributing to this exciting project for the rest of my professional life.
MOI: What are the investment criteria of Cobas Asset Management? How has it evolved over time?
Huerta de Soto: At Cobas we are not dogmatic, but the opposite. We think flexibly, and that enables us to invest whenever a series of basic preconditions are met. When I say that we are not dogmatic, I mean that we do not limit ourselves to a particular investment style, which quite frequently happens nowadays. In other words, we are not one hundred percent deep value, nor do we belong exclusively to the school of Buffett and Munger (quality companies at reasonable prices). Instead, we invest where we think value exists and the market is inefficient. For instance, right now the US stock market is high, as is part of the European market. They are close to their highest levels in the last twenty years, so we have no problem looking for opportunities in other parts of the world, such as in Asia, where a substantial portion of our portfolio is currently invested.
Another good example would be cyclical sectors, especially raw materials. In the past, we have preferred to invest in companies with a clear competitive advantage, a high return on capital, and a certain pricing power; that is, the exact opposite of commodity sectors. However, due to the expansion of credit orchestrated by central banks since the financial crisis of 2008 and to decreases in interest rates to historic lows, holders of the newly created money have sought a decent return, first in fixed income investments, thus causing an unprecedented bubble, and then in certain equity sectors, such as quality and dividend-paying companies.
Consequently, in our opinion, at the present time, good companies, as I have defined them, are quite expensive in general, while certain sectors, such as the maritime transport of raw materials, and oil and gas, among others, are close to their lowest levels in the last ten years. If one knows how to search well and is willing to carry out a comprehensive analysis of such sectors, it is possible to find good companies, with good management teams, little debt, and great potential for appreciation.
With these two examples, I have attempted to illustrate the flexibility that characterizes our investment process. We feel that a good investor must be capable of generating value in any economic context, and not only when the stock market drops and the best companies become affordable. It is necessary to go where a strong discrepancy exists between value and price, and that is what we at Cobas try to do at all times.
As for the basic preconditions we want fulfilled, the most important are the capacity to understand the company (the famous “circle of competence”), clean accounts and a healthy balance sheet, the quality of the management team, and above all, the price. When it comes to the price, one might say we actually are a little dogmatic, since, as a general rule, we are not willing to pay a high price because the company is a particularly good one or because considerable growth is expected. We tend to think that the main risk we face is that of overpaying, which usually occurs when one is overly generous with the initial price and the margin of safety with respect to valuation is not wide enough. Beyond that, if, within the specified criteria, we find a company with barriers to entry and high returns on capital, we always tend to prefer it over another company in the same circumstances but without competitive advantages.
MOI: How do you generate investment ideas?
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