More Notes From Value Investing Congress West: Day 1

Zeke Ashton-Centaur Capital Partners
Surviving the Worst Case: Risk Management and Value Investing

A veteran of several Value Investing Congresses, Zeke Ashton provided useful insights into some of the pitfalls that befell value managers in 2008, and how to avoid them in the future.

Aston suggested that there are two approaches to value investing:
1. Home Run Portfolio- Highly concentrated portfolio, where identifying big winners is crucial to success
2. High Probability Portfolio- Less concentrated (15- 30 stocks), where avoiding big losers is critical to success. This approach relies on frequency of winners versus losers.
While Ashton did not suggest that either approach is inherently better, the approach used must be tailored to the risk management approach used by the manager.

Ashton prefers the high probability method, and warns against the following:

• Excessive Concentration
• Excessive exposure to one factor or theme
• Excessive leverage at the portfolio or security level (companies that are too highly leveraged)
• Political Risk- risk of changing laws, tax codes
• Liquidity Risk
• Risk from shorting- avoid blow-up risk

One of Ashton’s favorite ideas is Alleghany (Y), a holding company in property and casualty insurance:
• Long term record of value creation
• $4.1 billion investment portfolio
• Book Value is $277/share, currently trades at $261
• $351 million in share buybacks in 2008, all at below book value
• Fared well in 2008 despite gulf hurricanes, and portfolio damage due to market conditions- book value fell less than 5%
• Believes company is worth 1.5 times book, or $360 per share


Charles De Vaulx- International Value Advisors
A Cautious and Opportunistic Approach to Global Investing: Where Are We Finding Value Opportunities in the World Today?

First Eagle veteran De Vaulx, who left the firm in 2007, recently launched his new firm, International Value Advisors. In 2008, his fund was down just 12%, putting him near the top in terms of performance in a terrible year.

De Vaulx’s philosophy and approach to international investing:
• Cautious and opportunistic
• Firm is owner operated
• “Eat their own cooking” employees have $30 million invested in funds
• Long only across market cap spectrum
• Main objective- to not lose money
• Have high yield exposure

In terms of international investing, De Vaulx believes that:
• The diversification argument is weakening
• The real attraction is that international markets remain less efficient than US markets.
• In terms of accounting, disclosure is more reliable outside the US
• Corporate governance outside the US is weaker; a work in progress

De Vaulx’s current allocations reflect his view that there are greater opportunities outside the US in the equity markets, and opportunities in high yield bonds:

Equities: 33.1% (6.4% US, 15% Asia, 11% Europe)
High Yield Bonds: 34%
Gold: 8%
Cash: 23%
Energy and other: 1%

De Vaulx believes that while the overall outlook remains bleak, pockets of value have emerged. One of his favorite ideas is Nestle, which he sees as cheap and safe, with its food businesses trading at 9 times EBIT.


Brian Gaines-Springhouse Capital
Low Risk Bets in a Risky World

Brian Gaines is a first time presenter at this year’s Congress. Gaines’ fund, which was down 10% in 2008, employs both longs and shorts.

Long attributes:
• 20% maximum loss
• 50% upside in one year
• 5-10 great ideas, 70-90% long, 5-15% positions
• Willing to hold cash
Short attributes:
• 10% loss over time
• 30% upside in one year
• Small positions, 1-3%, bases on opportunities

Gaines is currently finding few ideas in the mid and large cap space, but is finding some small and micro cap names with strong balance sheets. One of his current ideas is Modus Link (MLNK), formerly CMGI.

• Supply chain management company
• $135 mm in cash, $30 mm in venture investments (at cost)
• Specialized packaging (Sandisk is one large customer)
• Largest player in outsourced space
• Has NOL carry forwards of $2 billion
• Currently trading at $4.00, has $4.70 in liquid net working capital
• Gaines believes base case value is $7.00 per share, could be as high as $20.


John Burbank-Passport Capital
China and the US Dollar: “Should We See Other People?”

Burbank stated that China is the world’s marginal provider of liquidity. In fact, China now holds 24% of US government debt. But given the amount of money the US has been printing, and the low interest rates on the debt, China may have better options for its capital beyond the status quo, including:
• Diversification-G8 becomes capital allocators, still dependent on exports
• Invest in itself-support internal growth, less dependence on exports
• Invest in what the country needs- natural resources including iron ore, potash, soybeans, copper and crude oil
Burbank sees little incentive for China to continue to but massive amounts of US Treasuries, and believes that they will indeed begin investing at home. This will allow for:
• Greater stability
• New sources of growth
• Less reliance on imports

Burbank also made the case for gold bullion, and believes that China, which currently holds about 31 million ounces, will be a big buyer of the precious metal.

In terms of other investment ideas, Burbank likes fertilizer companies Mosaic (MOS), and Potash (POT),

In conclusion, Burbank:
• Questions FIAT money
• Believes gold will continue to surge
• Believes there will be tailwinds for natural resources and emerging markets currencies
• Suggests China’s growth will become increasingly independent

Guy Spier-Aquamarine Capital Management
Investing in Global Education-From China to Brazil

Spier began with investment lessons learned in 2008 :
• Pay attention to concentration of risk- credit, geographic, customer
• Pay attention to hidden leverage
• Tangible versus intangible assets
• Importance of proper position sizing
• Always carry lots of cash

Spier ‘s believes that there are tremendous opportunities in for-profit education companies, especially in countries such as Brazil, where four such companies have gone public. Since Brazil does not have a system of community college, and there’s great demand for post-secondary education, he believes companies in this space will prosper.

His favorite name here is Estacio (Bovespa: ESTC3), which currently has 205K undergraduate students. Demand for graduates is high, as more than 19,000 companies are currently recruiting from the school. There may also ultimately be opportunities in India at some point as well. China also looks interesting, and here, he singled out Raffles Education Corp, which has done a tremendous job in training Chinese students to speak English.

David Rabinowitz-Kirkwood Capital
Stock-picking for the Scared and the Ignorants: Notes from an Expert

Atlanta based Rabinowitz focuses on restaurants and retailers primarily, and believes that having industry expertise is helpful in spotting and seizing opportunities. He does not currently own any names in either category, however, because he does not believe that valuations in these sectors are compelling.

Investment Process and Philosophy:
• Focuses on potential downside of an idea instead of upside
• Holds lots of cash
• Very patient, takes his time finding ideas and initiating positions

Rabinowitz favorite investment idea is Lancashire Holdings (LSE: LRE.L) a Bermuda based specialty insurer:
• 1.27 billion market cap
• Founded in 2005
• 86% of business is primary insurance; some reinsurance
• CEO Richard Brindle has a strong track record
• Conservatively run investment book: +3.1% return in 2008
• Short duration (1.8 years), $ 2billion portfolio, most in government bonds, $300 million in corporate, no equities
• Company trades at book
• Has returned 397 million in capital in 2007 and 2008
• Conservative in loss estimates
• 2009 pricing will be up 28-150% on its lines
• Worth 1.5 times book

Jed Nussdorf-Soapstone Capital
In Search of Pricing Power

Another first time VIC presenter, Nussdorf looks for businesses that have pricing power:
• Industries with inelastic demand
• Static or decreasing supply, enabling prices to hold or rise
• Believes that currently there is excess capacity in many industries, where there is little or no pricing power

Nussdorf believes that re-insurance is one of the few industries where demand is up, and there is pricing power. In fact, capacity has actually dropped as insurers suffered through a catastrophic 2008 (third worst year in history), and saw their investment income drop due to terrible market conditions.

Nussdorf likes the following names because of their clean investment portfolios, and low portfolio durations:
• Renaissance RE Holdings (NYSE:RNR)
• Validus Holdings (NYSE:VR)
• Lancashire Holdings (LSE:LRE.L)

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.