Ben Graham Value Conference IV

A Brief Synopsis of CFA NY's Ben Graham IV Conference

by Michael Oliver Weinberg, CFA, Chair of Value Investing

In our first morning keynote, I discussed Can Man + Machine beat Mr. Market? The Third Wave of Investing, Autonomous Learning Investment Strategies (ALIS), the next investment process paradigm. These are the confluence of five unprecedented developments. One, the growth of unstructured and nonfinancial data. Two, data science to classify the data. Three, machine learning techniques are working to find value in the data. Four, low cost computing to process and store the data. Five, playing to close to the information edge is a risk. It has been said that games such as Checkers, Chess, Go, Jeopardy and Texas Hold-em Poker were all too complicated for computers to beat humans at. Computers have since beat humans at all of these, however man plus machine beats machine alone.

ALIS managers are typically PhDs who use all quadrants of data, data science, machine learning and employ a man plus machine process. On the 37th move Gary Kasparov and Lee Sedol, each respectively lost to computers at Chess and Go, and both effectively thought the moves by the computer were beyond the current human understanding of the game. MOV in assembly language means replace the old with the new. That is what we believe ALIS managers are doing. In our opinion, ALIS managers can beat Mr. Market.

In our second morning keynote, Rupal Bhansali of Ariel Investments, stressed the importance of being correct, but non consensus. She highlighted the tire industry, with Michelin as an example. They are misunderstood due to the importance and complexity of tires. The stock has commensurately out-performed. Bhansali sited Microsoft as a staple, however, a business staple, not a consumer staple, because who after all can live without Microsoft?

Professor Aswath Damadoran, a Professor at NYU’s Stern School of Business, discussed Valuation. He is a self admitted, non-value investor and that is not a typo. Damadoran views valuation as a craft. In his opinion, people all too often mistake accounting for finance. Accounting records the past, is backward looking, extremely rule driven and often heavily influenced by goodwill. Accounting does not account for growth and the future. Distributed cash flow (DCF) strikes terror in his heart. Many investors ignore or will not invest in companies that have negative cash flow, but they are young growth companies and this should not be unexpected. He has developed a DCF nomenclature that includes Chimera, Dreamstate, Disonant, Trojan, Kabuki, Robo and Mutant DCFs. One must turn a story into numbers to create valuations and in turn have faith in those valuations.

Jason Karp, Chief Investment Officer of Tourbillon, presented the theme of natural and organic food consumption, as well as an idea in the space. Millennials are impacting consumption habits, and are more quality conscious and less brand conscious. Similarly there has been a huge transition from branded products to generics. SunOpta is a private label manufacturer of organic products for companies like Whole Foods, Walmart, Starbucks and Costco, to name a few. SunOpta made operational and execution errors. The company has since changed management, restructured and this is likely to improve prospective earnings growth in Karp’s opinion.

Thomas Russo, Managing Member of Gardner Russo & Gardner, Paul Isaac, CEO of Arbiter Partners and Christopher Davis, Portfolio Manager at Davis Advisors were on a panel on Investing in Family Owned Companies, moderated by Vishal Mishra, Vice-chair of Value Investing at CFA NY. Russo believes that family businesses are often misunderstood and often under-valued. Davis and Isaac both believe that family businesses are not dissimilar from non-family businesses, that there are some well run ones and other less well run ones. Davis believes investors are best served by understanding how the management company is motivated, ideally by performance, not assets under management in the case of investment companies.

Russo sited Heineken as a family run, long-term core holding that was able to avoid Wall Street’s suggestion to buy a Brazilian brewer at a peak valuation 4 years ago, and just bought it at a fraction of the price. Isaac suggests Bollore, the French conglomerate as a security that trades at a discount to its sum-of-its-parts valuation. Davis expressed a strong view that companies shouldn’t have super-voting shares, and Amazon has proven that, compared to other technology companies, such as Alphabet.

John Levin, founder of Levin Capital Strategies, and Murray Stahl, CEO of Horizon Kinetics had a discussion which I moderated. Levin’s view is that commodity producers are likely beneficiaries of diminished supply, which in turn would lead to higher prices and earnings. Stahl is a proponent and miner of cryptocurrency, and Levin shares his views on them. Levin views General Electric, GE, as a company with under-valued service driven businesses that has undergone a material positive transition. Neither panelist was favorably inclined toward the valuation of Tesla. Stahl suggested the current market capitalization assumed an unrealistic market share and profitability for the company over time.

Charles Dreifus, Portfolio Manager at Royce Associates delivered a keynote speech. In it he sited the proliferation of non-GAAP earnings which are typically adjusted to improve the earnings numbers. Companies that provide non-GAAP guidance can more easily meet and beat earnings, because they are in the business to manufacture earnings. Analysts on companies that report non-GAAP earnings, are implicitly discouraged from providing GAAP earnings. Value matters but so does quality of earnings, and the best combination is value with high quality of earnings. Investors should read proxy statements, as Chris Davis suggested earlier in the conference. Audit committees should take on greater responsibility for companies that too liberally use non-GAAP earnings. Auditors increasingly are showing compensation in narrative form rather than tabular form to obfuscate compensation and because they are likely conflicted due to their remuneration from the companies they are auditing.

Gregory Steinmetz, the author of The World’s Richest Man discussed his book on Jacob Fugger. Fugger was the first to create a consolidated financial statement. He persuaded the Pope to allow interest to be charged on loans. Though he was born a peasant he viewed himself on equal footing with the nobility and demanded repayment of his loans to them as though they were his equal. Today based on Steinmetz’s calculation, Fugger would be worth approximately $400Bn.

Frederick Martin, the founder of Disciplined Growth Investors gave a presentation on The Hidden Variable Connecting Growth and Value Investing. He is an investor and author who wrote a book on Ben Graham’s lost chapter on growth stock investing. Similarly, he buys small companies that will become big companies, and they believe their seven year forecasts of growth have historically been quite accurate.

Elliot Trexler, moderated a panel on investment mistakes, with Mariko Gordon, CEO of Daruma Capital, Joe Hall, Managing Director at Deutsche Asset Management, Steve Courtney, Portfolio Manager at QMA. Joe Hall transforms accounting data into what they believe are numbers that are more economically accurate by using Cashflow Return on Capital Invested (CROCI).

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