Southeastern Asset Management is one of the most well regarded value money managers, with whom I happened to had some interaction on the trading side at work. Their orders are chunky and may take the desk weeks or even months to get in/out of a position. The order size clearly resonates with the firm’s investment approach Josh Shores mentioned in this interview conducted by The Manual of Ideas. Many products had about 20 positions which seems to be quite concentrated for firm like their size.
As a value investor, I find this transcripts very informative, here I had some thoughts and takeaways:
- Think like an owner, and look for management who think and act as owners as well. For individual investors, we may not have the luxury to get to know executives well enough to make that judgement. But, one can look at management’s ownership of the business, and stock based comp to make sure the executives’ interests are in line with the investors.
- Good opportunities are usually complex ones: market inefficiency exists because not everyone are able to decipher complex deals. Take hotel industry as an example, a business of purely managed hotels or purely REIT are both easy to value, so everything should already be priced in before you can act on it. However, with a more complex structure, where one need to work hard to understand what is exactly going, there are usually better opportunities.
- Wait for fat pitches: Using Warren Buffet’s famous analogy, an investor doesn’t need to swing to avoid strike out. (although it may not be true if you manage others’ money and the investors are benchmarking you seriously… side note here: better to get money from investors who appreciate your approach and would not strike you out if you are lagging in certain period of business circles…) You can wait for fat pitches for as long as you want. If you pay 19* of FCF for a business worths 25* of FCF, you may still need rely on your future prediction accuracy. But if you can get it at 12*, you can have multiple ways to win. I am totally with this point however found it frustrating seeing big cash holding sitting in my portfolio dragging the overall return as the “fat pitch” is rarely to see recently. Naturally I would infer that if you swing infrequently, you may need to swing hard when you see a fat pitch (bet big and take concentrate positions).
- Generalist is fun. I just love the incumbent of an generalist described by Josh below: “What I love about investing is the intellectual exercise of discovery, particularly if you’re a generalist value investor, because you are learning about different industries, different people, different applications. There are all kinds of cross-fertilization, cross-disciplinary analogies and learning lessons. I’ve operated all over the world. I’ve done a lot in Japan, South America, Europe, the US. Nobody has a monopoly on creative ideas or knowledge, and there’s nothing new under the sun.” This would sound particularly appealing for anyone who is naturally curious. Interacting with different management team sounds even more fun, but one probably won’t get that level of interaction unless s/he has a large enough fund under management.
- Invest is about learning and pattern recognition. To be a good value investor, one has to have natural curiosity and open mind to explore and embrace different knowledge and views. “Oftentimes, what you’re seeing that seems a brave, new world has happened somewhere before.” I am a big believer of the notion of history repeats itself. One can learn pretty much anything from history. So keep reading, and learning from others’ experiences and stories.
Full interview pdf
Tao of Value 