Whether uncovering the realities of value investing or the factors that set companies up for long-term growth, there was plenty of expert advice shared at the Ben Graham Centre’s 2016 Value Investing Conference in Toronto.
Two keynote speakers from opposite ends of the spectrum shared their recipes for success. Charles Brandes, Chairman of Brandes Investment Partners LP, is a successful value investor who trained under Benjamin Graham, the economist and teacher commonly referred to as "the father of value investing.” He discussed the truths and beliefs of intelligent investing. Peter Kaufman, Chairman and CEO of Glenair Inc., is a business operator who discussed how to reach the sweet spot in business by creating a trust-based culture.
The conference also included panel sessions with value investing professionals and corporate executives who shared their personal advice and investing strategies.
Value Investor panel:
Richard Rooney, President and Chief Investment Officer, Burgundy Asset Management Ltd.; Kim Shannon, President and Chief Investment Officer, Sionna Investment Managers; Paul J. Lountzis, President, Lountzis Asset Management, LLC; Irwin Rotenberg, President, Lissom Investment Management Inc.; and Chuck Akre, Chief Executive Officer and Chief Investment Officer, Akre Capital Management.
Corporate Executive panel:
David Sokol, Owner and Chief Executive Officer, Teton Capital, LLC; Hisham Ezz Al-Arab, Chairman and Managing Director, Commercial International Bank; Ajit Isaac, Chairman and Managing Director, Quess Corporation; and Bill Gregson, Chief Executive Officer, Cara Corporation.
Here are some of the themes that emerged:
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Want different results? Think differently.
There’s no question value investing can pay off. Just ask Brandes. He built his company’s fortune by adhering to the principles he was taught in the 1970s by Benjamin Graham. Brandes was Graham’s stockbroker and later founded his own company following Graham’s model.
He focuses his strategy on identifying undervalued companies, holding them for the long term (five to 20 years or longer), and having a highly concentrated portfolio (anywhere from 20 to 70 positions in the portfolio). Not only has the strategy worked for him, Brandes said value stocks beat other stocks, such as growth, over the long term. Comparing the Morgan Stanley Capital International Value Index with the Morgan Stanley Capital International Growth Index, Brandes said value stocks have delivered twice the returns of growth stocks since 1975.
“Using the basic Ben Graham philosophy has proven to produce better results than growth,” he said. “There’s no question that value outperforms growth over a long period of time.”
But Brandes said adhering to the strategy is not easy because it strays from the norm and clients might question it.
“You have to think differently from the majority of investors if you want to outperform them. It’s very simple, but hard to do,” he said. “It’s not easy from the standpoint of dealing with clients and dealing with your own type of thinking.”
Value and quality together are king
While acknowledging that value stocks are the way to go, Rooney stressed that quality also matters. Putting together a quality portfolio can be more expensive, but Rooney said it helps with managing risk. He recommends a balance of value and quality by investing in high-quality companies at attractive prices.
“Quality and value are involved in a kind of tug of war. That’s very simplistic, but I think it captures an essential truth. The tension between these two things is useful and may be essential in producing good returns at an acceptable level of risk,” he said. “You may let value pull you in one direction or let quality pull you in the other, but you should always feel that tension as an investor. Whatever you do, whether you’re pulling from the value side or the quality side, don’t let go of the rope.”
Another way to reduce risk is to have a margin of safety. Sokol discussed the importance of allowing room for things to go wrong, both when operating a business and analyzing companies as potential investments.
“There are things you can’t predict in business and many of them you don’t even know about. You don’t even know the risk is there,” he said. “Recognize that human nature is such that we always overstate the positives and understate the negatives.”
(L-R) Ajit Isaac, Chairman and Managing Director, Quess Corporation; and David Sokol, Owner and Chief Executive Officer, Teton Capital, LLC.
Be wary of human emotion and learn from history
Shannon discussed how human emotions affect investing. She said financial crises only happen every 40-80 years because once people live through a crisis, they are emotionally scarred and vow never to let that problem happen again. But then a new generation comes along believing they can better manage risk and the cycle continues.
“When you think about the stock market, it’s really nothing more than a place where many human minds come together to decide at what price they’re willing to transact stocks that day. We bring with us ourselves and our human emotions,” she said. “We get plugged into stock prices in multiple ways, but I think one of the most fundamental ways is the phenomenon that psychologists have long called groupthink where we’ll behave much more outrageously in the comfort and safety of a crowd or a group dynamic.”
Shannon said a tool to help take emotionalism out of investing is to step back and take a look at investing history.
“What happens in two days is a dot on a long-term picture,” she said. “We prefer the longer-term perspective because it shows us how emotional human beings have interacted with financial market history in the past.”
Rotenberg said the front pages of newspapers are also valuable resources. They reveal how people are reacting to current events and shed light on investing opportunities. For example, in the spring of 2011 reaction to Johnson & Johnson recalls made the front pages of newspapers so Rotenberg suspected there would be a subsequent drop in the valuation of the company’s stock. Sure enough, it dropped lower than it had in 25 years and he had an opportunity to buy stock at bargain prices and later did well on the investment when the company rebounded from the crisis.
“One thing that will never change is human psychology. So what is popular and what is not liked will always end up on the front page,” he said.
Research and judgment come into play
Lountzis stressed that investors need to spend more time researching companies so they’ll better understand what they’re buying. This means meeting face-to-face with employees, not just reading company reports.
“It’s important to go out into the field and meet really smart people who can give you what we call ‘differential insights.’ They’ll help you to understand the business and the industry in which it competes,” he said.
Equally important is good judgment. But Akre said good judgment is only developed through learning from previous mistakes.
“Judgment comes from experience and experience comes from bad judgment,” he said.
Culture is critical
When you’re analyzing companies for potential investments, their cultures are important factors. Kaufman likened building a culture to reassuring a new puppy that you’ve brought into your home. You create a safe, calm, reassuring environment; communicate in soft soothing tones, share your food and water, and be 100 per cent constant. After a few days, the puppy will decide it can trust you and will be dedicated to you for life. He said business leaders who create a safe environment, communicate well, and are consistent typically have employees who go all in for their companies.
“A trust-based, win-win culture that’s genuine in every respect is how to take the normal levels of human effort; such as productivity, co-operation, and ingenuity; and to multiply them by five or 10 times,” he said.
Isaac and Ezz Al-Arab echoed his sentiments.
“The issue that would keep me awake at night is the diminishment of our culture. The most valuable thing in our company today is our culture,” said Isaac. “It’s a culture built around our people, leadership, and the type of internal dynamics that we build in terms of decision-making and how we treat our customers, vendors, and anybody who interfaces with us.”
Ezz Al-Arab said the culture at his bank is that of a family. They go through good times and bad times and they support each other throughout it all.
“We don’t think of this as a job. Every day, we are on a mission,” he said. “The staff defend the bank like it’s their country. It creates a vibe. They have the same interests: to protect the institution, grow the business, and make more profit.”
Culture can even be rebuilt. Gregson discussed Cara’s takeover of Fairfax Financial Holdings-owned Prime Restaurants in 2013, which consolidated two major Canadian restaurant companies under one corporate roof.
“When you get into distressed companies, the people there have been part of the decisions, but they haven’t always had the final say in the decisions. You have to work with the people there because there is a lot of institutional knowledge. There are people who care, who are smart and passionate, and who know the business,” he said. “You have to go in and challenge them and hopefully get them going in a different direction that works.”
The annual Ben Graham Centre’s Value Investing Conference is the largest conference of its kind in Canada and aims to explain, discuss and debate the principles, practices and various applications of value investing from a global context.