April 14, 2005
Notes from a discussion given by Jean-Marie Eveillard at NYSSA on Global Value Investing.
1. He was asked if he is fairly certain that intrinsic value will be achieved by the companies he invests in. His reply was, ” More like hoping or praying that intrinsic value will be achieved. At the same time I am hoping and praying that the analysis in determining the intrinsic value is correct.”
2. Value investors were uncommon in the USA 20 years ago. It is like that today in the international investment climate. Hence the potential to find an out of USA value investment is greater, because arena is less proliferated.
3. Corporate governance outside the USA is greater today than it was 20 years ago.
4. Claims there is a big difference between GAAP and IASB (International Accounting Standards Board) .
a. GAAP looks at specific rules, whereas IASB looks at the “spirit” of the transaction.
b. Large companies take advantage of GAAP to smooth earnings. Examples of this are paying corporate officers with Stock Options as opposed to cash compensation.
c. Walter Schloss said that he has never bought a foreign stock. His argument was trust of USA accounting. Now that there are scandals, that thought process is no longer valid. Biggest scandals are those with major US companies which are engaged in “intellectual dishonesty”.
5. You must distinguish between international investing and emerging market investing. As you invest internationally, look at similar valuation methods as you would in the states. These are based on your investment philosophy. Continue to use Ben Graham, Warren Buffett and other traditional methods. Look for inefficiencies in companies presentation. What I suppose he means is to understand the accounting method, quality of earnings, cash flows, etc. Know when to use “Sum of Parts” versus “earnings methods”.
|Developed Market||In the middle||Emerging Market|
|USA||Hong Kong and China||Indonesia|
6. Value investors must be patient. This can take 3 to 5 years or longer. Sell Side research is very short term minded. Sell Side research determines if there is a catalyst for current growth. If Sell Sides see no growth in year or two, they will discard that investment. Value investors will look at a temporary no growth investment. Value investors should not rely on a catalyst. A low growth field will have no or minimal competition.
7. Look at China and India , and see if you can invest in an indirect route. For example, what will those countries be consuming.
8. 6 – 7% of his portfolio has been and probably will continue to be in Precious Metals.
9. He does not use Discounted Cash Flow methods. He certainly applies valuation metrics on expected cash flow. He didn’t say this, but I suspect that he has a road map on investing, whereas the parameters are always changing and updated. He discussed how he uses a range of intrinsic values for one company. Hence his valuation thoughts can have a =/- 30 % or so. He likes to see a stability of cash flow. He didn’t mention this, but I assume he looks for companies with earnings or cash flow predictability.
a. He claims that PEG ratios are “garbage”. ( I can see his point, but do disagree, as you can use the PEG in the same method as mentioned in part 9. above.)
b. What would a somewhat knowledgeable investor pay today for a business. Again, he commented on using either Graham or Buffett approach.
c. When he is in a good mood, he says this about Wall Street, ” Wall Street is a vast promotion machine.”
d. When he is in a bad mood, he says this about Wall Street, ” Wall Street is a den of thieves.”
10. Buying Criteria.
a. He does not use screens.
b. He will often buy at an enterprise value of 10X EBIT
c. He will sometimes buy at enterprise value of 15X EBIT. He did mention “15X EBIT is not exactly cheap.”
d. Always restates financials when valuing. He didn’t mention the following, but I would imagine that he looks for earnings quality, smoothing scenarios, moderate to aggressive accounting applications, conservative applications, historical cost versus fair value accounting. When using “Sum of Parts” method, conservatively value the assets and the debt. Realize that your valuation can be materially incorrect.
11. You do not need to visit management. This is especially true when using Ben Graham type of analysis. In theory, when you meet with management, they are either going to be silent. They aren’t going to be able to tell you anything that will materially change your investment thesis. He stressed that even an intellectually honest person (mentioned Warren Buffett), will not tell you the weaknesses of their own business.
12. low interest rates are almost over.
13. He will often buy a company at $30, then again at $25, again at $20, and so on. These are times to accumulate, if your investment thesis is correct.
14. He mentioned that Seth Klarman is good reading. I will have to look into that.
15. He mentioned Marty Whitman’s distinction between a “temporary unrealized capital loss” (this is described in 13. above) versus a permanent impairment of capital. A “temporary unrealized capital loss” is absolutely nothing to worry about. The following is my extrapolation of permanent loss of capital…. A permanent impairment of capital is acknowledgement that you %^&$ed up your investment. When this happens (and it will happen), you need to acknowledge your mistake, recognize that you are human, and move on. The day that you realize that your analysis is wrong, is the when you need to change your investment position and move on.
16. Update your intrinsic value analysis when new information becomes available. Continue to look for severe over or undervaluation.
17. This was very important for me. He mentioned that Warren Buffett became the 2nd richest man while he lived in Omaha Nebraska. (I won’t comment on the use of the word, “rich” versus “wealthy”.) Warren Buffett is certainly wealthy, and of course, I find him to be incredibly “rich”. A rich man is someone who is happy even if they have no material wealth. Well, I guess I did get into the use of the word, “rich”.
Rely on your research. Don’t worry what the herd says. Just make sure your research is correct. I often do this by constantly revisiting your research and trying to poke holes in it. As mentioned often on our site, “Doubt is central to understanding.”
18. “It is warmer inside the herd”
19. “Use a sensible investment approach”