Lunch with Jean Marie Eveillard

EVEILLARD
Keys to successful value investing...
- Read (or re-read) Ben Graham's Intelligent Investor (http://www.amazon.com/s/ref=nb_sb_ss_i_0_12?url=search-alias%3Daps&field-keywords=intelligent+investor&sprefix=intelligent+)
- The future is uncertain, so humility and caution are important mindsets
- As Graham said, identify a company's intrinsic value, say $50, buy at $35 and begin selling at $45.
- Buffett diverged from Graham by identifying his "moat" as the likelihood of a company's continuing operations rather than just valuation
- Value knows no borders. Exploit idiosyncracies and inefficiencies in countries, sectors, neglected markets. (Peter Lynch said whoever turns over the most rocks wins.) He gave the example of many German stocks, whose earnings were understated due to excess reserves and Japanese stocks, whose underlying ex-cash ROEs are higher than unadjusted figures suggest.
- Buffett and Munger succeeded by reading voraciously, so he does the same.
- Efficient Market Hypothesis is bunk. Supporting evidence in the SuperInvestors of Graham & Doddsville Revisited, to which JME was added in 2004 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=878145
Psychology of value investing...
In the short run the market is a voting machine, but in the long run a weighing machine. In the short run, value investors will lag and suffer. In the Internet bubble of 1997-2000, JME lost 70% of his investors. Value investors need the psychological capital to withstand social pressures from bosses, peers, etc. during this underperformance. But ultimately value, like truth, will out. Key to withstanding this pressure is alignment of your time horizon and investors, i.e. pick your clients. Know the difference between temporary unrealized capital loss and permanent capital impairment.
Current View
- JME's outlook is for 3-4 years of "muddle thru" economic growth, not 3-4 years of severe economic declines. Probability of the latter, however, is non-zero.
- JME is amazed that the common view is that no one saw the crisis coming. Austrian School adherents, including him, did see it. The BIS whitepaper in 2006 explaining how busts follow credit booms was the best red flag. http://www.bis.org/publ/work205.pdf
- Hegemony of Keynesians and Monetarists over the last 80 years have forced "solutions or answers" in the form of deficit spending or lower rates. The Austrian School offers no recipes or solutions. Rather, Austrians say credit busts follow booms and admonishes authorities not to kick the can down the road.
- JME sees 3 potential outcomes, the last being most likely...
1. The economy will see a 3-5 year expansion driven by liquidity and leverage, meaning we remain in the post-WW2 landscape . Current market rally supports this thesis.
2. Deleveraging -- due to lack of lending and borrowing -- will leave the Fed pushing on a string, see Japan. Unlikely to happen as the West does not have Japan's spirit of resignation, so authorities will stimulate further leading to #3.
3. Most worrisome (and most likely) scenario is that 0% rates, an unprecedented budget deficit and the ballooning Fed balance sheet will lead to unintended consequences, i.e. high inflation. To invest in this environment, own gold and equities (real assets with pricing power).
Asides / One-Liners
- Japan is awash in stocks with net cash that exceed their market cap -- sadly, he didn't name names...
- In his next life, JME wants to come back as a closed end fund.
- "The US today feels like 1788 in France."
- 100% annual turnover does not equate to investing.
- Share repurchases should only be completed if mgmt can sell the entire business for much more than the market says it is worth.
Gold
At above $1000/oz, it is difficult to value gold. Rather, it should be seen as an alternative currency. In a world where many sovereign credits are under suspicion, there are no appealing currencies today.
The First Eagle Global Fund holds 10.9% of its AUM in gold and gold mining stocks. In Sept 2008, a Bloomberg interview revealed he held $1bn in gold in a vault in NY... http://www.bloomberg.com/apps/news?pid=20601101&sid=a8L00oInO1YM
Posted by Chris