Lessons from the Ben Graham Centre’s Value Investing Conference

Laura Fyfe is an MSc 2019 candidate. She shares insights from the Ben Graham Centre’s 2018 Value Investing Conference in Toronto.

Ivey’s Ben Graham Centre for Value Investing held its annual conference on April 25 at the Sheraton Centre in downtown Toronto. The largest of its kind in Canada, the conference aims to explain, discuss, and debate the principles, practices, and various applications of value investing from a global context. A panel of value investing professionals shared how they evaluate and compound value in their portfolios, while corporate executives shared their strategies for seeking and creating value for their shareholders. Keynote speakers William McMorrow, Chairman and CEO of Kennedy Wilson Holdings Inc., and Mason Hawkins, Chairman and CEO of Southeastern Asset Management Inc., underscored the importance of investing for the long term. Wielding expertise from the shipping industry to small caps, the speakers imparted abiding advice for the more than 300 aspirant to veteran value investors. Their insights are ever relevant amidst criticism of the value philosophy in today’s low interest rate and increasingly passive investment climate.

Many of the speakers, such as Mohnish Pabrai, Managing Partner of Pabrai Investment Funds, commented on overvaluation of the North American equity markets, and advocated research into overseas opportunities.

“The U.S. market is fully overpriced and does not offer the half-off discounts I find attractive,” said Pabrai.

He said the same of India’s big names. The country’s smaller companies, though, often do a poor job of marketing themselves, creating lots of opportunities.

“It’s like drinking out of a fire hydrant,” he said.

Puneet Dalmia, Managing Director of Dalmia Bharat Group, echoed this sentiment, calling the current era “Asia’s century, and India’s decade” and spotlighting the country’s sixth-place global ranking by market cap. Pabrai also pointed to the South Korean market, rife with high-quality management teams.

Elizabeth Lilly, Founder and President of Crocus Hill Partners, countered that small caps offer refuge from precarious prices even within North America. In all cases, McMorrow and Hawkins advised attendees to invest in the most resilient businesses they could find, and then hold them indefinitely.

Concentration

In his opening address, Professor George Athanassakos, Director of the Ben Graham Centre, chided North American mutual fund managers for their herd-like, index-mirroring investment behaviour and attributed their widespread underperformance to the same.

“Fund managers underperform the index not because they lack stock-picking abilities, but rather because institutional factors force them to over-diversify,” he said.

Hawkins echoed this sentiment.

“It is imperative to align economic incentives to compound capital most productively,” he said.

Value investors need to face different incentives to allow them to take risks by having concentrated portfolios. Hawkins and John Phelan, Co-Managing Partner and Co-Founder of MSD Capital, both commented that having a long-term, concentrated approach to stock picking reduces the number of decisions one has to make, allows for focus on high-probability investment outcomes, and reduces one’s error margin. Similarly, Phelan cautioned against “diworseification,” and impelled investors to constantly eliminate their “least-best” holdings.

Jan Hummel, Founding Partner of Paradigm Capital AG, gave this advice: “Past, current, and future, the most important thing for investors to create is an edge,” he said, which might best be accomplished by following Pabrai’s simple counsel: “Be as far away from the index as possible.”

Contrarianism

Concentration is in and of itself contrarian. However, contrarianism is arguably what creates the conditions for concentration, by allowing investors to unearth and capitalize on unique opportunities.

Hummel discussed the importance of specialization.

“Specialization is essential: if you discriminate based on geography, market capitalization, or business quality, the universe pares down by about 90 per cent; specialize and aim to be in an imperfect space,” he said.

Conducting deep, fundamental research is also a contrarian pursuit in this information era. With reflective and engaged research in areas neglected by the herd comes different, often better, insights.

“There is no such thing as a shortage of information in this era. In fact, there is the opposite; what we have is a shortage of insight. Invert everything,” said Phelan, an MSD maxim. Insight allows for conviction in contrariansim, for confidence that in “tak[ing] calculated risks when others are fearful,” one may capitalize on out-of-favour ideas, as Kennedy Wilson did at the time of Brexit dejection.

Lilly commented on the enduring relevance of what she learned over Cherry Coke and burgers shared with value guru Warren Buffett when she made the case for off-the-radar small and microcap stocks. She stressed the importance of looking where others are not and building one’s own “mosaic of information” when conducting independent research. She said two inputs to this mosaic are often underappreciated: In-person management meetings and proxy circulars. The former reveal important insights about the dynamic between executives, the latter is the first thing she reads when assessing a business. Lilly called attention to the startling fact that more than half of small-cap stocks in the U.S. have no or a single analyst following them, adding that growth in exchange-traded funds will further reduce this coverage. She predicts the long-term outperformance of small caps will only increase alongside increased mergers and acquisitions activity, market volatility, and rising rates.

“I would often feel like I was getting insider information, simply because some of the companies were so small that, unless they took the initiative to do first-hand research, other investors wouldn’t have the same information I got from calling the company on the phone,” she said.

Contrarian thinking has undoubtedly served Lilly’s firm well.

Culture

Though some would think culture might be less relevant to a quantitative discipline, such as investing, it was a mainstay of this year’s conference. So, too, was it a central theme at the annual meetings of esteemed North American value investors Prem Watsa and Warren Buffett. Just as Athanassakos deemed misaligned institutional incentives deleterious to the outperformance of some active managers, failure to maintain culture should prove equally if not more so to the pursuits of value investing firms. After all, their sole assets are their people. Buffett has emphasized human discipline as being just as, if not more, valuable to successful long-term investment outcomes than quantitative considerations. Thus, creating the conditions in which investors might hone their emotional discipline, have the confidence to pursue non-consensus bets, and improve as individuals is of the utmost importance.

David Sokol, Chairman & Chief Executive Officer, Teton Capital, LLC discussed the value of culture.

“If people aren’t adding value to your culture, switch them out the same way you would trim your ‘least-best’ names. Culture trumps strategy; guard it diligently. Nothing dilutes a margin of safety faster than a dilution of values and culture,” he said.

Finally, the speakers stressed independent thinking; asking hard, distinctive questions; and, a commitment to continual learning.

Read more on value investing

On that note, the following books were recommended to those wishing to extend their learning about value investing:

• Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter (recommended by Mason Hawkins);
• Bull! A History of the Boom and Bust, 1982-2004 by Maggie Mahar (Recommended by Mohnish Pabrai); and,
• The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William N. Thorndike (Recommended by Mason Hawkins).

Speakers at the Ben Graham Centre’s 2018 Value Investing Conference

Morning keynote speaker:

• William McMorrow, Chairman and CEO, Kennedy Wilson Holdings Inc., Beverly Hills, Calif. – Taking the Long View – Lessons Learned from 30 Years of Real Estate Value Investing.

Luncheon keynote speaker:

• Mason Hawkins, Chairman and CEO, Southeastern Asset Management Inc., Memphis, Tenn. – Long Term, Concentrated and Engaged Value Investing.

Value investor session:

• Mohnish Pabrai, Managing Partner, Pabrai Investment Funds, Irvine, Calif. – Where Have We Been and Where Are We Headed?;
• John Phelan, Co-Managing Partner and Co-Founder, MSD Capital, New York City, N.Y. – Portfolio Management the MSD Way;
• Elizabeth Lilly, Founder and President, Crocus Hill Partners, St. Paul, Minn. – Small and Microcap Stocks: The Last Undiscovered Frontier for Alpha;
• Allan MacDonald, Senior Vice President and Portfolio Manager, Burgundy Asset Management Ltd., Toronto, Ont. – Finding Great Investment Opportunities in New Business Models; and,
• Jan Hummel, Founding Partner, Paradigm Capital AG, Munich, Germany –
  The Future of Active Value Investing.

Corporate executives session:

• David Sokol, Chairman & Chief Executive Officer, Teton Capital, LLC, Jackson Hole, Wyo. – Insights in the Global Container Shipping Industry: The Case of Seaspan;
• Puneet Dalmia, Managing Director, Dalmia Bharat Group, New Delhi, India – Insights in Finding Value-Creating Opportunities: The Case of India;
• Nirmal Jain, Founder and Chairman, India Infoline Holdings Ltd., Mumbai, India; and,
• Ramesh Damani, Chairman, Avenue Supermarts Ltd., Mumbai, India.