Why Value Investing Works

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Here’s an alternative view of why value investing works (see indented quote below). It’s obviously not the only reason, but it strikes me as something that’s likely to perpetuate (at least in the U.S.). I’ll elaborate by adding a generalization that few people read and who knows how much they gain/retain. Thus, for investors, the competition is fundamentally guaranteed to be fairly limited. Combine the above with the interesting studies of Horizon Kinetics (see @HorizonKinetics on Twitter), for example, as well as with the long recognized reasons why value investing works, and our chances are even better yet. Google this post’s title and for those who haven’t seen Tweedy, Browne’s related report, include its name in your search. In last week’s Barron’s editorial, “Commencement Address: On diminishing the value of a college education,” by Thomas G. Donlan, the following excerpt caught my eye:

The U.S. tried this before [reducing “barriers” (to college completion)]. A broad movement arose at the end of the 19th century to bring more Americans to a higher level of education. Fewer than 15% of Americans had graduated from high school, so high school was made into a free entitlement, with lower academic standards. By 1999, 83% of Americans had graduated from high school, but they had to go to college to get something like the education that high school grads received in 1900.

 

John Muir: Food for Thought for Value Investors

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In my last post I talked about how I enjoy reading and like to read as much non-finance material as possible. I have since finished the critique of John Muir’s writing that was published by I assume the now late Univ. of Wisconsin professor Herbert Smith (published in 1965). The following passage by Muir (from John of the Mountains; shared by Smith late in his review) may be applicable today as much as it must have been in his time ~100 years ago. Perhaps this is especially important to keep in mind during bull markets:

No sane man in the hands of nature can doubt the doubleness of his life. Soul and body receive separate nourishment and separate exercise, and speedily reach a stage of development wherein each is easily known apart from the other. Living artificially, we seldom see much of our real selves. Our torpid souls are hopelessly entangled with our torpid bodies, and not only is there a confused mingling of our own souls with our own bodies, but we hardly possess a separate existence from our neighbors. 

Emphasis added. Muir ends this thought by describing his favored means of independence.

The life of a mountaineer seems to be particularly favorable to the development of soul-life, as well as limb-life, each receiving abundance of exercise and abundance of food.

Previously: John Muir: Speaking of the Herd

 

John Muir: Speaking of the Herd

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Outside of work and preparing for the quarterly Uguisu Value newsletter (among plenty of other things going on!) I spend a fair amount of personal time reading. A number of wonderful books for value investors have been published in recent years — most notably I’m thinking of The Manual of Ideas and The Education of a Value Investor. In addition to reading investing books and annual reports, I like to mix in as much non-investing material as I can.

Recently I began reading a critical review of the famous environmental preservationist John Muir’s (1838-1914) writing. Not long after arriving in California, around the age of 30, Muir worked for a short while as a shepherd. He made the following observation about sheep (quote below). I’m sure there are not a few individual investors that end up in this situation with the vicissitudes of “the market” (or as we value investors prefer, “Mr. Market”). Muir’s depiction also reminds me of some of the institutional and HNWI investors that I pitched regarding a small-cap Japan activist fund. Recapitulating the investment merits of profitable companies trading at substantial discounts to tangible assets, to so-called sophisticated investors … while being grilled about macroeconomic risks and the very company-specific characteristics (smaller capitalization, obscurity, etc.) that make value investing attractive. Go figure.

Paraphrasing Muir:

Even sheep that have strayed from the flock huddle timidly and silently, basely human in their actions. Afraid of their freedom, not knowing what to do with it, and seeming glad to get back into their old familiar bondage.

It is worth mentioning that in fact Muir was fond of wild sheep.

Nostalgic for California this past winter, it was fun to see Muir’s name appear in Hampton Sides’ In the Kingdom of Ice. Put that book on your reading list. A character in Sides’ story is a Melville. The joys of being a value investor and not stuck watching stock quotes.

Some thoughts about investing in Japan

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I recently published an exclusive article at Seeking Alpha, “Thoughts About Investing in Japan.” I like how SA has incorporated the summary bullet points atop its posts. I’m posting them below here with the original article linked in the aforementioned title. It’s not easy writing about Japanese stocks on SA when fewer and fewer Japanese ADRs trade in the U.S. (you can’t link Tokyo-listed ordinary shares on the site), let alone the matter that I’m focused on smaller caps. Have a look at the SA article and by the way, if you missed it, I launched a small/micro cap quarterly best-idea Japanese stock newsletter (Uguisu Value) in January.

Summary

  • Nomura’s latest investor survey shows Japanese individuals remain long Japan.

  • Demand for Japanese stocks seen exceeding supply.

  • Most-watched stocks include many usual suspects.

  • Thinking of Soros, Templeton, and Marks for Japan 2015-20.

  • Japanese stock idea generation.

Uguisu Value Newsletter: micro and small-cap Japanese stocks

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The Uguisu Value newsletter, focused on micro-cap and small-cap Japanese stocks, has launched! The first edition features a micro-cap (>$50M <$300M) with a conservative 200%+ upside; an asymmetrical risk/reward profile with multiple value-unlocking catalysts including potential for the editor and private investor, Steven Towns, to engage management/BoD.  Steven’s portfolio is highly-concentrated in thoroughly researched deep-conviction equities targeting baseline 2x(+) returns. Each quarterly edition of Uguisu Value will feature one in-depth writeup: such focus comes from Buffett’s “20-hole punch card” mindset and the fact that the best investors tend to have concentrated portfolios. Fluent in Japanese and a specialist in smaller-cap, domestic-demand focused Japanese companies, Steven’s research uses original Japanese language sources, often of companies that have little or no analyst coverage and no English (language) securities filings; all newsletters are published in English. Click for additional details and to subscribe. We look forward to welcoming you as a subscriber.

Japan-focused portfolio performance versus select benchmarks:

2013: 34.1% (40.1% in yen-denomination) | TSE-2: 44.2% | Jasdaq: 87.1% | Nikkei 225: 56.7% |
iShares MSIC Japan ETF (EWJ): 24.2% | WisdomTree Japan Hedged (DXJ): 38.1%

2014: 32.6% (49.1% in yen-denomination) | TSE-2: 23.0% | Jasdaq:   1.9% | Nikkei 225:    7.1% |
iShares MSCI Japan ETF (EWJ): -6.4%  | WisdomTree Japan Hedged (DXJ): -1.9%

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The Uguisu Value newsletter has been reviewed and is endorsed by:

John Mihaljevic, CFA, and Oliver Mihaljevic of The Manual of Ideas

Guy Spier, Aquamarine Capital —“Excellent thinking and ideas for investing in Japan.”

Nate Tobik, 
Oddball Stocks —“Steven Towns is an expert on Japanese small caps.  If you want exposure to cheap and safe Japanese stocks with a value-bent then Steven’s letter is the ultimate resource.”

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Interested in a free copy of the first edition? Email us your name and affiliation (indiv./private investor or company name) and we’ll email you a copy prior to releasing the second edition scheduled for early April. Email: contact@steventowns.com.

Berkshire Beyond Buffett: Final Chapters

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This is the final post of my live-tweeting and highlighting of professor Larry Cunningham’s book, Berkshire Beyond Buffett. I’ve practically run out of superlatives…. ValueWalk (dot-com) reported Berkshire Beyond Buffett was among the top-10 books purchased in 2014 by its readers. I suspect the momentum will continue this year. If you’ve missed any of the tweets or posts, see them in order here: IIIIII, and IV (and follow on Twitter: @ActiveInvesting).

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Berkshire Beyond Buffett: Modesty and Simplicity

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This is my fourth installment of notes and summary tweets of Larry Cunningham’s perspicacious book, Berkshire Beyond Buffett: The Enduring Value of Values. If you’ve missed any of the tweets or posts, see them in order here: I, II, and III (and follow on Twitter: @ActiveInvesting). I’ve selectively shared nuggets from Larry’s book and I’m finding Twitter’s 140 character limit to be just-right for capturing some of the highlights to share with others that will also spark my memory of the greater detail in the book; this also preserves the bulk of Larry’s hard work.

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Berkshire Beyond Buffett: Values

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Here’s my latest installment of notes I’ve compiled while I continue to read Larry Cunningham’s wonderful book, Berkshire Beyond Buffett: The Enduring Value of Values. Chapter 6 (“Kinship”) is one of my favorites thus far. It seemed to come alive and really epitomize “the enduring value of values.” I will continue to shares notes in this way as it’s much more efficient (posting a summary of my live-tweets) than trying to go back and put my notes into prose. One-third finished reading, I can already say that Berkshire Beyond Buffett is a keeper for me and should be on your reading list if not already. See my earlier posts (I and II).

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Berkshire Beyond Buffett: Insurance Notes

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Berkshire Beyond Buffett - Larry Cunningham (Columbia Business School)Larry Cunningham is one of the most respected authors who has written about Warren Buffett and Berkshire Hathaway. His Berkshire Beyond Buffett: The Enduring Value of Values is proving to be an informative read thus far — last week I posted some notes and takeaways from the first few chapters. This time I’m sharing more of the same from the remainder of chapter 3 as well as chapter 4, which is the first chapter of the second part of the book.

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Susan Decker on the Magic of Berkshire Hathaway’s Returns

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Susan Decker’s recent panel discussion comments pointed out some of the magic behind Berkshire Hathaway’s returns. There is nothing new for Berkshire followers and investors, except the tax-free comment that Decker made got me thinking. Buffett’s baby is simple conceptually (i.e. float-supported — Decker didn’t mention float, by the way — with cash flow rich capital allocation to, and flow back from, operating subsidiaries and portfolio securities) and has performed brilliantly in terms of the annual and cumulative profits/investment returns achieved. See’s Candies is one heck of an example (see the BBB link below).

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