We are out with the fourth episode of This Week in Intelligent Investing, featuring Elliot Turner of RGA Investment Advisors, Phil Ordway of Anabatic Investment Partners, and Chris Bloomstran of Semper Augustus.

Enjoy the conversation!

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In this episode, John hosts a discussion of:

  • the intersection of position management and research (led by Elliot Turner)
  • a preview of Larry Cunningham’s guest appearance (led by Phil Ordway)
  • a recap of Berkshire’s Q2 earnings report (led by Chris Bloomstran)

Listener Perspective

Fellow MOI Global instructor Dave Sather, President of Victoria, Texas-based Sather Financial Group, shared the following thoughts after reflecting on this episode:

If it were not for the Great Recession — and the associated bank bailout and preferred securities Berkshire received, we have often wondered if Berkshire would have taken a position in Goldman. In our opinion, Goldman sold their souls when they did their IPO in 1999. Once the partners’ capital was cashed out, the reach for money overwhelmed their desire for a clean reputation.

Buffett has often admired Jamie Dimon and used JP Morgan as a preferred banker to Berkshire. However, after the Solomon scandal he opined that investment banking was feast or famine depending upon who the rainmakers were. If you lost a rainmaker, it could really impact the bottom line. As such, given reputational risks, selling Goldman does not surprise us.

JP Morgan was a little less obvious. We know Buffett’s admiration for Dimon and we know that Buffett, personally, has significant holdings in JP Morgan. However, would it be that attractive without Dimon? Maybe Dimon’s age and recent cancer scare got Buffett’s attention. For us, there have been easier decisions to make.

The Wells Fargo and Bank of New York decisions are not surprising, either.
We vacated our bank holdings a year ago. Net interest margins continued to compress, compliance costs continued to increase….and this is before factoring in COVID related loan losses.

Add in the reputational risk to Wells Fargo and there has been much to dislike. Their investment division has struggled to hang on to people and customers. WFC was not allowed to participate in the PPP loans because of their “troubled bank” status. WFC has a much higher cost of compliance due to their numerous, and on-going, issues. The one good thing with WFC is that they stole Bank of NY’s CEO, Charlie Scharf.

Bank of America, on the other hand, will touch 50% of US households via one of their products. Brian Moynihan has stabilized and revived BAC. He is well respected by peers and regulators. BAC is doing an admirable job of making fees versus net interest margin. For instance, a friend recently looked to refinance their home. The drop in rate was ok going from 3.875% to 2.9%. However, BAC got to bank a $10,000 refinance fee on a $275,000 house. That is fee revenue of nearly 4%. Compliance costs are impacting all banks. As such, it really requires significant size to survive. In the banking industry, only the largest will be able to pay up for compliance….and still have a decent rate of return.

With Bank of NY, we still think it is a wide moat business… but reminds us that even wide moat businesses can be sub-par investments. With BK also losing their CEO to WFC, it just added another headwind. With interest rates coming down, BK has even less opportunity to make money via interest float. The one good aspect for BK will remain the expansion of technology and a reduced need to rent real estate. Even then, there appear to be easier decisions to make.

The Apple decision and the airlines both have some liquidity similarities. Both allowed Buffett to deploy a fair amount of cash. With Apple, there is lots of daily volume as well as a significant amount of cash on Apples balance sheet that must give Buffett some peace of mind. However, it does appear that Berkshires cash is presenting a bit of an anchor on where/how Berkshire can deploy cash. For us, the airlines definitely identified a situation in which we wonder if the circumstances were the same… but Berkshire had much less cash… would Buffett still have allocated cash to the airlines?

The conversation on position sizing was quite good and very appreciated. We have often observed Don Yacktman scale up and down the same positions in a portfolio. It seemed like there was some similarity of strategy/philosophy voiced in your conversation.

Follow Up

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The content of this podcast is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this podcast. The podcast participants and their affiliates may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated on this podcast.

About the participants:

Elliot Turner is a co-founder and Managing Partner, CIO at RGA Investment Advisors, LLC. RGA Investment Advisors runs a long-term, low turnover, growth at a reasonable price investment strategy seeking out global opportunities. Elliot focuses on discovering and analyzing long-term, high quality investment opportunities and strategic portfolio management. Prior to joining RGA, Elliot managed portfolios at at AustinWeston Asset Management LLC, Chimera Securities and T3 Capital. Elliot holds the Chartered Financial Analyst (CFA) designation as well as a Juris Doctor from Brooklyn Law School.. He also holds a Bachelor of Arts degree from Emory University where he double majored in Political Science and Philosophy.

Philip Ordway is Managing Principal and Portfolio Manager of Anabatic Fund, L.P. Previously, Philip was a partner at Chicago Fundamental Investment Partners (CFIP). At CFIP, which he joined in 2007, Philip was responsible for investments across the capital structure in various industries. Prior to joining CFIP, Philip was an analyst in structured corporate finance with Citigroup Global Markets, Inc. from 2002 to 2005. Philip earned his B.S. in Education & Social Policy and Economics from Northwestern University in 2002 and his M.B.A. from the Kellogg School of Management at Northwestern University in 2007, where he now serves as an Adjunct Professor in the Finance Department.

Christopher P. Bloomstran, CFA , is the President and Chief Investment Officer of Semper Augustus Investments Group LLC. Chris has more than 25 years of investment experience with a value-driven approach to fundamental equity and industry research. At Semper Augustus, Chris directs all aspects of the firm’s research and portfolio management effort. Prior to forming Semper Augustus in 1998 – in the midst of the stock market and technology bubble – Chris was a Vice President and Portfolio Manager at UMB Investment Advisors. While at UMB Investment Advisors, Chris managed the Trust Investment offices in St. Louis and Denver. Among his investment duties at the firm, he managed the Scout Balanced Fund from the fund’s inception in 1995 until 1998, when he left to start Semper Augustus. Chris received his Bachelor of Science in Business Administration with an emphasis in Finance from the University of Colorado at Boulder, where he also played football. He earned his Chartered Financial Analyst (CFA) designation in 1994. Chris is a member of the CFA Society of St. Louis and of the CFA Institute. He has served on the Board of Directors of the CFA Society of St. Louis since 2002, where he was elected to sequential terms as Vice President from 2005 to 2006, President from 2006 to 2007 and Immediate Past President from 2007 to 2009. Chris has judged the Global Finals and the Americas Finals several times for CFA Institute’s University Global Investment Challenge. Chris served for a number of years as a member of the Bretton Woods Committee in Washington DC, an institution championing and raising awareness of the International Monetary Fund, the World Bank and the World Trade Organization. He has also served on various not-for profit boards in St. Louis. His resides in St. Louis with his wife and two children.