Lyall Taylor: Unravelling value's decade-long underperformance (and imminent resurgence)

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In a recent (generally excellent) podcast with Inside the Rope with David Clark (#78), John Hempton discussed (amongst other things) value's past decade of underperformance, and opined that the primary driver was the fact that the pace of technological change had accelerated, such that we have seen an unprecedented level of disruption to traditional business models. Value investors have apparently spent a decade naively riding doomed low-multiple companies like the Myers of this world into oblivion. 

This is a very commonly expressed view/belief, and intuitively it feels right. The danger with intuitively-satisfying beliefs though is that they can discourage you from looking for evidence to confirm whether those intuitions are in fact true. It seems true, so it must be true, right? A surprising amount of the time, the answer is no. Just because something is intuitive does not mean it is correct (after all, it was intuitive to pre-modern humans the world was flat, and it's not very intuitive we evolved from primordial sea creatures), and as Mark Twain once noted, "It ain't what you don't know that gets you into trouble, it's what you know that just ain't so". The story of the emergence of the scientific method is a story of humans starting to demand evidence instead of merely relying on our unsubstantiated intuitions.

Charlie Munger: Be Rational, Not Brilliant

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Rationality is a core skill that any value investor should possess. If you are someone who is looking to buy assets when their owners are panic selling because you believe them to be undervalued, then you - by definition - have to be a very rational person. This type of contrarian behavior can only result in success if you are able to really cut through the emotion of the situation and drill down to the core value proposition of an investment.

Munger's advice is to try and avoid confirmation bias. This bias occurs when investors go looking for evidence that supports a belief that they already hold, rather than looking for evidence that challenges that belief.

Harris Kupperman: Micro Cap Planet Finding Cheap Stuff and Playing it Well with Harris “Kuppy” Kupperman, Founder and CIO of Praetorian Capital

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For this episode of the Planet MicroCap Podcast, I spoke with Harris “Kuppy” Kupperman. He is the Founder and CIO of Praetorian Capital and Chief Adventurer of the Adventures in Capitalism blog. Kuppy, as an investor, has always been looking for cheap stuff, something I think most of us as investors look to accomplish. What we discuss in our interview is how he’s gone about finding the cheap stuff and his game plan on making money on those bets. We cover his background, investing philosophy, event-driven investing, shipping, bitcoin, and more! Please enjoy!

Alta Fox Capital: “Makings of a Multibagger” and the Goal for Constant Improvement

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Alta Fox consistently seeks to identify exceptionally high-quality businesses at cheap multiples of normalized earnings over a medium-term time horizon of 3-5 years. Our hunt for quality at a cheap price often leads us to structurally inefficient small and micro-cap equities where there is less competition from institutional investors. However, at Alta Fox, we have always indicated our belief that high-quality, attractively priced companies can be found in many places, regardless of market cap. 

Ronald Stoferle: All roads lead to gold

 

Charlie Mungers ‘Bag Of Tricks’

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Charlie also revealed how he created near a billion dollars in value for the University of California, Santa Barbara when a friend was struggling to sell her family’s 1,800 acre ocean front ranch. Despite two miles of frontage to the ocean, a perfect climate and great views, draconian planning laws significantly inhibited the use to which the land could be put. Recognising an opportunity to realise value, Charlie donated $70m to the University of California, Santa Barbara to buy the land. Charlie knew the University wasn’t subject to the Santa Barbara zoning laws and could therefore develop needed student accommodation on the site. This outside-the-box thinking effectively created a billion dollars of value for the University and a once unattainable sale price for the friend.

“We all start out stupid, and we all have a hard time staying sensible. You have to keep working at it. Berkshire would be a wreck today if it were run by the Warren I knew when we started. We kept learning. I don't think we'd have all the billions of stock of Coca-Cola we now have if we hadn't bought See’s. Now, you know how we were smart enough to buy See’s. Barely. The answer is barely.”

“I am continuously invested in American equities. But I've had my Berkshire stock decline by 50% three times. It doesn't bother me that much. That's just a natural consequence of an adult life, properly lived. If you have my attitude, it doesn't really matter. I always liked Kipling's expression in that poem called “If”. He said, success and failure, treat those two imposters just the same. Just roll with it.”

Giddy-up: What investment icons learnt from punting (gambling)

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And the great lesson in humility that every gambler learns very quickly – that is, that even the smartest people can’t win them all – is also a lesson that should be imprinted on the brain of every investor.

“Investing is a game of skill – meaning inferior players can’t expect to be above-average winners in the long run,” Marks wrote in a seminal piece on the similarities between gambling and investing, appropriately titled "You bet!"

“But it also includes elements of chance – meaning skill won’t win out every time. In the long run, superior skill will overcome the impact of bad luck. But in the short run, luck can overwhelm skill, and the two can be indistinguishable.”

“Success in gambling doesn’t go to those who pick winners but to those with the ability to identify superior propositions," Marks says. "The goal is to find situations where the odds are generous to one side or the other, whether favourite or underdog. In other words, a mispricing.

“It’s exactly the same in investing. People often say to me, 'YZ is a great company with a bright future, so I bought the stock.' They’re picking a favourite but ignoring the proposition. The former alone isn’t enough; they should consider the latter as well.