Wednesday, May 8, 2013

The 2013 Pilgrimage - Part 2

6:30 am, May 3rd, Friday. My alarm had been snoozing for a few times. I had a sound sleep after yesterday's  value investing fest. Nine more great speakers today, including Howard Marks, one of the greatest thinkers and investors. Looks like it was going to be another great day. 

The first speaker today is Barnett Helzberg, founder of Helzberg Diamond, a subsidiary of Berkshire Hathaway. He talked about what he learned before selling to market and the entrepreneurship mentoring program. My biggest takeaway from his presentation is his insight on retail. When asked about what he thinks is most important in the retail business, he said management quality and business culture. Retail is essentially a people business, if you have bad management and bad culture, it will ultimately reflected in sales and profits. He said the retailers he admires the most are Nordstrom and  Costco. 

The second speaker today is David Rofle, a portfolio manager from Wedgewood Parters, a Saint-Louis based investment advisor. David talked about GEICO's history and Warren Buffett's investment history with GEICO, which reminded me of Tom Russo's speech from yesterday. For each new policyholder, GEICO will show approximately a loss of $250 in the first year but the present value of future premiums will be a net gain. Buffett told management at GEICO just to grow the business even though each new policy holder that was put on the books cost an enormous amount of losses the first year. They had high net present values and you've seen the history.The result: the number insured at GEICO, because of Berkshire's willingness to show the losses up front, have grown from just under a million policy holders to almost ten million. And his spending to drive that growth that just burdens operating income up front has grown from $30 million a year to almost $900 million. The fact is by spending up front, having the elasticity, the willingness, to burden your income statement and then getting the results in the future is a very nice trade off. GEICO is a great example of the capacity to suffer and discipline. David also talked about how Wedgewood Partners adheres to Buffett's 20 punch card philosophy and only invest in the 20 best ideas, resulting a ultra-low portfolio turnover. I asked David a question on how to utilize footnote information in the valuation process. He brought up a good point: Use footnote as a filtering tool, if you can't understand the footnote, simply don't buy the stock or sell the stock if you already own it. That's why they sold AIG back in 2008 because they could not understand the footnote. 

Then came Scott Phillips from Lauren Templeton Fund. His topic is the Templeton touch. Sir John Templeton is, without doubt, one of the best investors of all time yet his investment philosophy is not widely understood by the investing public. Buying at maximum pessimism is one of the doctrines I stick to but it is psychologically very difficult to do so when you almost have to go against everyone at that point. A case in point is JC Penney. Almost everyone thinks it is a dying business and stocks have dropped precipitously after the 2012 full year earnings release. When you hear media and almost everyone else is talking about the possible demise of JC Penney, it is certainly not easy to go against the crowd and voice a different opinion. 

The fourth speaker is Michael Shearn, author of the book "The Investment Checklist."  I have read his books three times and learned enormously. However, how to incorporate all the information from the checklist into the valuation process still baffles me. Luckily Michael answered my question inadvertently during his presentation, "the fair value derived from the checklist is dynamic, if you have a change in management, if will impact the valuation. " This is a great point. As human beings, we are all subject to the conservatism, confirmation bias and status-quo bias, the combination of which creates a massive psychological barrier  for us, as investors to absorb new information of the companies we invested in and make changes to the dynamic fair value accordingly. The most important thing, as Howard Marks would put it, is to be vigilant to structural industry or company-specific changes. 

The last speaker before lunch break is Ryan Floyd, founder of the Barca Capital. He talked about his investment in emerging markets and the power law. The key takeaway ties closely to Nassim Taleb's book of "Fooled by Randomness" and "Black Swan." Fat tail event does happen all the time. Right after he invested in a bank in Ivory Coast, a civil war broke out and the value of his investment tanked 40%. My thoughts on this is, the lower the probability of a certain event happen (inherently true for black swan events), the larger the possible loss and there is no way you can build this in a quantitative model. How do you hedge the risk? Don't be greedy and don't leverage. 

After Ryan's presentation, we took a lunch break. I talked to Jeff Stacey, a BRK meeting veteran and Richard Russo, Tom Russo's nephew over lunch time. Jeff talked about how BRK's meeting has evolved over time. 

The highlight of the day is Howard Marks. He doesn't give public presentations very often so his arrival grabbed everyone's attention. Howard's topic is the human side of investing. Here's a link to the detailed notes:

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