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Archive for the ‘Liquidation Value’ Category

Tracking our portfolio performance with Tickerspy

Posted in Greenbackd Portfolio, Liquidation Value, Stocks, tagged , , on April 10, 2009| 3 Comments »

We’ve been tracking our performance using Tickerspy. You can see our up-to-date portfolio and performance here (You’ll need to set up an account with Tickerspy, which is free). We’re providing the link to the Tickerspy account so that you don’t need to wait for our quarterly report to see how the Greenbackd Portfolio is performing. For those who don’t want to set up a Tickerspy account, here’s a screen grab showing our performance since we opened our account on March 6, 2009 through April 8, 2009 (The usual caveat applies: one month is too short a period of time to determine whether Greenbackd’s strategy is working.):

tickerspy

We’re using Tickerspy because it tracks the performance of each stock in the portfolio and the portfolio performance against the S&P500 and automatically updates it all on a daily basis. It’s almost there, but Tickerspy is not entirely satisfactory. Ideally, we’d like a widget for the site that does all of this and doesn’t require our readers to open an account. We haven’t found anything like that yet. Does anyone have any suggestions for a service like this? If so, please drop us a line at greenbackd [at] gmail [dot] com or leave a comment below.

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Tweedy Browne updates What Has Worked In Investing

Posted in About, Greenbackd, Liquidation Value, Net Current Asset Value, Net Quick Stocks, Net Quick Value, Stocks, tagged , , on April 3, 2009| 39 Comments »

Tweedy Browne, the deep value investment firm established in 1920, has updated its booklet, What Has Worked In Investing (.pdf). First published in 1992 and now updated for 2009, the booklet discusses over fifty academic studies of investment criteria that have produced high rates of investment return. Our interest in the booklet stems from its examination of a group of investment styles falling under the rubric, “Assets bought cheap,” in particular, Benjamin Graham’s “Net current asset value” method and the “Low price to book value” method.

Graham’s “Net current asset value” method

Says Tweedy Browne of Graham’s “Net current asset value” method:

The net current asset value approach is the oldest approach to investment in groups of securities with common selection characteristics of which we are aware. Benjamin Graham developed and tested this criterion between 1930 and 1932. The net current assets investment selection criterion calls for the purchase of stocks which are priced at 66% or less of a company’s underlying current assets (cash, receivables and inventory) net of all liabilities and claims senior to a company’s common stock (current liabilities, long-term debt, preferred stock, unfunded pension liabilities). For example, if a company’s current assets are $100 per share and the sum of current liabilities, long-term debt, preferred stock, and unfunded pension liabilities is $40 per share, then net current assets would be $60 per share, and Graham would pay no more than 66% of $60, or $40, for this stock. Graham used the net current asset investment selection technique extensively in the operations of his investment management business, Graham-Newman Corporation, through 1956. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20% per year

The booklet discusses a study conducted by Henry Oppenheimer, an Associate Professor of Finance at the State University of New York at Binghamton, in which he examined the returns of such stocks over a 13-year period from December 31, 1970 through December 31, 1983. Oppenheimer’s study assumed that all stocks meeting the investment criterion were purchased on December 31 of each year, held for one year, and replaced on December 31 of the subsequent year by stocks meeting the same criterion on that date. The total sample size was 645 net current asset selections. The smallest annual sample was 18 companies and the largest was 89 companies.

Oppenheimer’s conclusion about the returns from such stocks was nothing short of extraordinary:

The mean return from net current asset stocks for the 13-year period was 29.4% per year versus 11.5% per year for the NYSE-AMEX Index. One million dollars invested in the net current asset portfolio on December 31, 1970 would have increased to $25,497,300 by December 31, 1983. By comparison, $1,000,000 invested in the NYSE-AMEX Index would have increased to $3,729,600 on December 31, 1983. The net current asset portfolio’s exceptional performance over the entire 13 years was not consistent over smaller subsets of time within the 13-year period. For the three-year period, December 31, 1970 through December 31, 1973, which represents 23% of the 13-year study period, the mean annual return from the net current asset portfolio was .6% per year as compared to 4.6% per year for the NYSE-AMEX Index.

Perhaps most intriguing, though, was Oppenheimer’s conclusion about the relative outperformance of the loss-making stocks over the profitable ones:

The study also examined the investment results from the net current asset companies which operated at a loss (about one-third of the entire sample of companies) as compared to the investment results of the net current asset companies which operated profitably. The companies operating at a loss had slightly higher investment returns than the companies with positive earnings: 31.3% per year for the unprofitable companies versus 28.9% per year for the profitable companies.

We believe that Oppenheimer’s study presents a compelling argument for such an investment approach.

Low price in relation to book value

The second investment method falling under the rubric of “Assets bought cheap” is the “Low price in relation to book value” method. The booklet discusses a study conducted by Roger Ibbotson, Professor in the Practice of Finance at Yale School of Management and President of Ibbotson Associates, Inc., a consulting firm specializing in economics, investments and finance. In “Decile Portfolios of the New York Stock Exchange, 1967 – 1984,” Working Paper, Yale School of Management, 1986, Ibbotson studied the relationship between stock price as a proportion of book value and investment returns. To test this relationship, all stocks listed on the NYSE were ranked on December 31 of each year, according to stock price as a percentage of book value, and sorted into deciles. Ibbotson then measured the compound average annual returns for each decile for the 18-year period, December 31, 1966 through December 31, 1984.

Ibbotson found that stocks with a low price-to-book value ratio had significantly better investment returns over the 18-year period than stocks priced high as a proportion of book value. Tweedy Browne set out Ibbotson’s results in the following Table 1:

tweedy-table-1

A second study conducted by Werner F.M. DeBondt and Richard H. Thaler, Finance Professors at University of Wisconsin and Cornell University, respectively, examined stock price in relation to book value in “Further Evidence on Investor Overreaction and Stock Market Seasonality,” The Journal of Finance, July 1987. DeBondt and Thaler ranked all companies listed on the NYSE and AMEX, except companies that were part of the S&P 40 Financial Index, according to stock price in relation to book value and then sorted them into quintiles on December 31 in each of 1969, 1971, 1973, 1975, 1977 and 1979. DeBondt and Thaler then calculated the investment return against the equal weighted NYSE Index over the subsequent four years for all of the stocks in each selection period. The four-year returns against the market index were then averaged.

The stocks in the lowest quintile had an average market price to book value ratio of 0.36 and an average earnings yield (the inverse of the P/E ratio) of 0.10 (indicating a P/E of 10). DeBondt and Thaler found a cumulative average return in excess of the market index over the four years of 40.7%. Meanwhile, the stocks in the highest quintile, those with an average market price to book value ratio of 3.42 and an average earnings yield of 0.147 (a P/E of 6.8), returned 1.3% less than the market index over the four years after portfolio formation.

Perhaps the most striking finding by DeBondt and Thaler, and one that accords with our view about the difficulty of predicting earnings with any degree of accuracy, was the contrast between the earnings pattern of the companies in the lowest quintile (average price/book value of 0.36) and the highest quintile (average price/book value of 3.42). Tweedy Browne set out DeBondt and Thaler’s findings in Table 3 below, which describes the average earnings per share for companies in the lowest and highest quintile of price/book value in the three years prior to selection and the four years subsequent to selection:

tweedy-table-3

In the four years after the date of selection, the earnings of the companies in the lowest price/book value quintile increase 24.4%, more than the companies in the highest price/book value quintile, whose earnings increased only 8.2%. DeBondt and Thaler attribute the earnings outperformance of the companies in the lowest quintile to the phenomenon of “mean reversion,” which Tweedy Browne describes as the observation that “significant declines in earnings are followed by significant earnings increases, and that significant earnings increases are followed by slower rates of increase or declines.”

The booklet continues to discuss Tweedy Browne’s own findings confirming those of the studies described above, and a range of other studies that confirm the findings over different periods of time and in different countries. The findings form a compelling argument for an investment philosophy rooted in deep value and focused on assets, such as Greenbackd’s.

Buy my book The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market from on Kindle, paperback, and Audible.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on The Acquirer’s Multiple, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on the deep value stock screener at The Acquirer’s Multiple®.

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Seth Klarman on Investing in Corporate Liquidations

Posted in About, Liquidation, Liquidation Value, Seth Klarman, Stocks, tagged , on March 20, 2009| 1 Comment »

Today we complete our series on Seth Klarman, the founder of The Baupost Group, a deep value-oriented private investment partnership that has generated an annual compound return of 20% over the past 25 years, and the author of an iconic book on value investing, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

Following on from our earlier posts, Seth Klarman on Liquidation Value, and Seth Klarman on Catalysts, we present Seth Klarman’s application of liquidation value investment principles to a specific case: the City Investment Liquidating Trust (from Chapter 10 Areas of Opportunity for Value Investors: Catalysts, Ineficiences, and Institutional Constraints):

Investing in Corporate Liquidations

Some troubled companies, lacking viable alternatives, voluntarily liquidate in order to preempt a total wipeout of shareholders’ investments. Other, more interesting corporate liquidations are motivated by tax considerations, persistent stock market undervaluation, or the desire to escape the grasp of a corporate raider. A company involved in only one profitable line of business would typically prefer selling out to liquidating because possible double taxation (taxes both at the corporate and shareholder level) would be avoided. A company operating in diverse business lines, however, might find a liquidation or breakup to be the value-maximizing alternative, particularly if the liquidation process triggers a loss that results in a tax refund. Some of the most attractive corporate liquidations in the past decade have involved the breakup of conglomerates and investment companies.

Most equity investors prefer (or are effectively required) to hold shares in ongoing businesses. Companies in liquidation are the antithesis of the type of investment they want to make. Even some risk arbitrageurs (who have been known to buy just about anything) avoid investing in liquidations, believing the process to be too uncertain or protracted. Indeed, investing in liquidations is sometimes disparagingly referred to as cigarbutt investing, whereby an investor picks up someone else’s discard with a few puffs left on it and smokes it. Needless to say, because other investors disparage and avoid them, corporate liquidations may be particularly attractive opportunities for value investors.

City Investing Liquidating Trust

In 1984 shareholders of City Investing Company voted to liquidate. The assets of this conglomerate were diverse, and the most valuable subsidiary, Home Insurance Company, was particularly difficult for investors to appraise. Efforts to sell Home Insurance failed, and it was instead spun off to City Investing shareholders. The remaining assets were put into a newly formed entity called City Investing Liquidating Trust, which became a wonderful investment opportunity.

Table 2

table-2-margin-of-safetyAs shown in table 2, City Investing Liquidating Trust was a hodgepodge of assets. Few investors had the inclination or stamina to evaluate these assets or the willingness to own them for the duration of a liquidation likely to take several years. Thus, while the units were ignored by most potential buyers, they sold in high volume at approximately $3, or substantially below underlying value.

The shares of City Investing Liquidating Trust traded initially at depressed levels for a number of additional reasons. Many investors in the liquidation of City Investing had been disappointed with the prices received for assets sold previously and with City’s apparent inability to sell Home Insurance and complete its liquidation. Consequently many disgruntled investors in City Investing quickly dumped the liquidating trust units to move on to other opportunities. Once the intended spinoff of Home Insurance was announced, many investors purchased City Investing shares as a way of establishing an investment in Home Insurance before it began trading on its own, buying in at what they perceived to be a bargain price. Most of these investors were not interested in the liquidating trust, and sold their units upon receipt of the Home Insurance spinoff. In addition, the per unit market price of City Investing Liquidating Trust was below the minimum price threshold of many institutional investors. Since City Investing Company had been widely held by institutional investors, those who hadn’t sold earlier became natural sellers of the liquidating trust due to the low market price. Finally, after the Home Insurance spinoff, City Investing Liquidating Trust was delisted from the New York Stock Exchange. Trading initially only in the over-the-counter pink-sheet market, the units had no ticker symbol. Quotes were unobtainable either on-line or in most newspapers. This prompted further selling while simultaneously discouraging potential buyers.

The calculation of City Investing Liquidating Trust’s underlying value in table 2 is deliberately conservative. An important component of the eventual liquidating proceeds, and something investors mostly overlooked (a hidden value), was that City’s investment in the stock of Pace Industries, Inc., was at the time almost certainly worth more than historical cost. Pace was a company formed by Kohlberg, Kravis and Roberts (KKR) to purchase the Rheem, Uarco, and World Color Press businesses of City Investing in a December 1984 leveraged buyout. This buyout was profitable and performing well nine months later when the City Investing Liquidating Trust was formed.

The businesses of Pace had been purchased by KKR from City Investing in a financial environment quite different from the one that existed in September 1985. The interest rate on U.S. government bonds had declined by several hundred basis points in the intervening nine months, and the major stock market indexes had spurted sharply higher. These changes had almost certainly increased the value of City’s equity interest in Pace. This increased the apparent value of City Investing Liquidating Trust units well above the $5.02 estimate, making them an even more attractive bargain.

As with any value investment, the greater the undervaluation, the greater the margin of safety to investors. Moreover, approximately half of City’s value was comprised of liquid assets and marketable securities, further reducing the risk of a serious decline in value. Investors could reduce risk even more if they chose by selling short publicly traded General Development Corporation (GDV) shares in an amount equal to the number of GDV shares underlying their investment in the trust in order to lock in the value of City’s GDV holdings.

As it turned out, City Investing Liquidating Trust made rapid progress in liquidating. GDV shares surged in price and were distributed directly to unitholders. Wood Brothers Homes was sold, various receivables were collected, and most lucrative of all, City Investing received large cash distributions when Pace Industries sold its Rheem and Uarco subsidiaries at a substantial gain. The Pace Group debentures were redeemed prior to maturity with proceeds from the same asset sales. Meanwhile a number of the trust’s contingent liabilities were extinguished at little or no cost. By 1991 investors who purchased City Investing Liquidating Trust at inception had received several liquidating distributions with a combined value of approximately nine dollars per unit, or three times the September 1985 market price, with much of the value received in the early years of the liquidation process.

That concludes our series on Seth Klarman.

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Seth Klarman on Catalysts

Posted in About, Catalysts, Liquidation, Liquidation Value, Seth Klarman, Share buy-backs, Stocks, tagged , , on March 19, 2009| 10 Comments »

Following on from our earlier post, Seth Klarman on Liquidation Value, we present the second post in our series on Klarman’s Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.

As we discussed in our first post, Klarman is the founder of The Baupost Group, a deep value-oriented private investment partnership that has generated an annual compound return of 20% over the past 25 years. Klarman detailed his investment process in the iconic Margin of Safety. The book is required reading for all value investors, but is long out-of-print and notoriously difficult to obtain.

In today’s extract, drawn from Chapter 10 Areas of Opportunity for Value Investors: Catalysts, Ineficiences, and Institutional Constraints, Klarman discusses the importance of the catalyst in the investment process:

Once a security is purchased at a discount from underlying value, shareholders can benefit immediately if the stock price rises to better reflect underlying value or if an event occurs that causes that value to be realized by shareholders. Such an event eliminates investors’ dependence on market forces for investment profits. By precipitating the realization of underlying value, moreover, such an event considerably enhances investors’ margin of safety. I refer to such events as catalysts.

Some catalysts for the realization of underlying value exist at the discretion of a company’s management and board of directors. The decision to sell out or liquidate, for example, is made internally. Other catalysts are external and often relate to the voting control of a company’s stock. Control of the majority of a company’s stock typically allows the holder to elect the majority of the board of directors. Thus accumulation of stock leading to voting control, or simply management’s fear that this might happen, could lead to steps being taken by a company that cause its share price to more fully reflect underlying value.

Catalysts vary in their potency. The orderly sale or liquidation of a business leads to total value realization. Corporate spinoffs, share buybacks, recapitalizations, and major asset sales usually bring about only partial value realization.

…

Value investors are always on the lookout for catalysts. While buying assets at a discount from underlying value is the defining characteristic of value investing, the partial or total realization of underlying value through a catalyst is an important means of generating profits. Furthermore, the presence of a catalyst serves to reduce risk. If the gap between price and underlying value is likely to be closed quickly, the probability of losing money due to market fluctuations or adverse business developments is reduced. In the absence of a catalyst, however, underlying value could erode; conversely, the gap between price and value could widen with the vagaries of the market. Owning securities with catalysts for value realization is therefore an important way for investors to reduce the risk within their portfolios, augmenting the margin of safety achieved by investing at a discount from underlying value.

Catalysts that bring about total value realization are, of course, optimal. Nevertheless, catalysts for partial value realization serve two important purposes. First, they do help to realize underlying value, sometimes by placing it directly into the hands of shareholders such as through a recapitalization or spinoff and other times by reducing the discount between price and underlying value, such as through a share buyback. Second, a company that takes action resulting in the partial realization of underlying value for shareholders serves notice that management is shareholder oriented and may pursue additional value-realization strategies in the future. Over the years, for example, investors in Teledyne have repeatedly benefitted from timely share repurchases and spinoffs.

Tomorrow we present the final installment in the series, Seth Klarman on Investing in Corporate Liquidations.

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Seth Klarman on Liquidation Value

Posted in Liquidation Value, Net Current Asset Value, Net Quick Stocks, Net Quick Value, Seth Klarman, Stocks, tagged , , , on March 18, 2009| 7 Comments »

Seth Klarman, the founder of The Baupost Group, an exceptionally well-performed, deep value-oriented private investment partnership, is known for seeking idiosyncratic investments. The Baupost Group’s returns bear out his unusual strategy: Over the past 25 years, The Baupost Group has generated an annual compound return of 20% and is ranked 49th in Alpha’s hedge fund rankings.

Klarman detailed his investment process in Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, an iconic book on value investing that is required reading for all value investors. Published in 1991, the book is long out-of-print and famously difficult to obtain. According to a 2006 Business Week article, The $700 Used Book: Why all the buzz about Seth Klarman’s out-of-print investing classic?:

The 249-page book is especially hot among those seeking jobs with value-oriented investment firms. “You win serious points for talking Klarman,” says a newly minted MBA who got his hands on a copy prior to a late-round interview with a top mutual fund firm. “It’s pretty much assumed that you’ve read Graham and Dodd and Warren Buffett.” (Benjamin Graham and David Dodd’s 1934 work, Security Analysis, is a seminal book on value investing, while Buffett’s annual letters to shareholders are considered gospel.) “The book belongs in the category of Buffett and Graham,” says Oakmark Funds manager Bill Nygren, a collector of stock market tomes.

In the book, Klarman carefully explains the rationale for an investment strategy grounded in the value school. He also discusses at some length several sources for value investment opportunities. Why is the book germane to Greenbackd’s ongoing discussion of liquidation value investment? One source of investment opportunity identified by Klarman is stocks trading below liquidation value.

Klarman’s attitude to liquidation value investment closely accords with our own, and so we’ve reproduced below the relevant portion of Chapter 8 The Art of Business Valuation in Margin of Safety, in which he provides the basis for making such investments and outlines his approach to assessing liquidation value:

Liquidation Value

The liquidation value of a business is a conservative assessment of its worth in which only tangible assets are considered and intangibles, such as going-concern value, are not. Accordingly, when a stock is selling at a discount to liquidation value per share, a near rock-bottom appraisal, it is frequently an attractive investment.

A liquidation analysis is a theoretical exercise in valuation but not usually an actual approach to value realization. The assets of a company are typically worth more as part of an going concern than in liquidation, so liquidation value is generally a worst-case assessment. Even when an ongoing business is dismantled, many of its component parts are not actually liquidated but instead are sold intact as operating entities. Breakup value is one form of liquidation analysis, this involves determining the highest value of each component of a business, either as an ongoing enterprise or in liquidation. Most announced corporate liquidations are really breakups; ongoing business value is preserved whenever it exceeds liquidation value.

How should investors value assets in a liquidation analysis? An orderly liquidation over time is virtually certain to realize greater proceeds than a “fire sale,” but time is not always available to a company in liquidation. When a business is in financial distress, a quick liquidation (a fire sale) may maximize the estate value. In a fire sale the value of inventory, depending on its nature, must be discounted steeply below carrying value. Receivables should probably be significantly discounted as well; the nature of the business, the identity of the customer, the amount owed, and whether or not the business is in any way ongoing all influence the ultimate realization from each receivable.

When no crisis is at hand, liquidation proceeds are usually maximized through a more orderly winding up of a business. In an orderly liquidation the values realized from disposing of current assets will more closely approximate stated book value. Cash, as in any liquidation analysis, is worth one hundred cents on the dollar. Investment securities should be valued at market prices, less estimated transaction costs in selling them. Accounts receivable are appraised at close to their face amount. The realizable value of inventories – tens of thousands of programmed computer diskettes hundreds of thousands of purple slippers, or millions of sticks of chewing gum – is not so easily determinable and may well be less than book value. The discount depends on whether the inventories consist of finished goods, work in process, or raw materials, and whether or not there is the risk of technological or fashion obsolescence. The value of inventory in a supermarket does not fluctuate much, but the value of a warehouse full of computers certainly may. Obviously a liquidation sale would yield less for inventory than would an orderly sale to regular customers.

The liquidation value of a company’s fixed assets can be difficult to determine. The value of plant and equipment, for example, depends on its ability to generate cash flows, either in the current use or in alternative uses. Some machines and facilities are multipurpose and widely owned; others may have value only to the present owner. The value of restaurant equipment, for example, is more readily determinable than the value of an aging steel mill.

In approximating the liquidation value of a company, some value investors, emulating Benjamin Graham, calculate “net-net working capital” as a shortcut. Net working capital consists of current assets (cash, marketable securities, receivables, and inventories) less current liabilities (accounts, notes, and taxes payable within one year.) Net-net working capital is defined as net working capital minus all long-term liabilities. even when a company has little ongoing business value, investors who buy at a price below net-net working capital are protected by the approximate liquidation value of current assets alone. As long as working capital is not overstated and operations are not rapidly consuming cash, a company could liquidate its assets, extinguish all liabilities, and still distribute proceeds in excess of the market price to investors. Ongoing business losses can, however, quickly erode net-net working capital. Investors must therefore always consider the state of a company’s current operations before buying. Investors should also consider any off-balance sheet or contingent liabilities that might be incurred in the course of an actual liquidation, such as plant closing and environmental laws.

A corporate liquidation typically connotes business failure; but ironically, it may correspond with investment success. The reason is that the liquidation or breakup of a company is a catalyst for the realization of the underlying business value. Since value investors attempt to buy securities trading at a considerable discount from the value of a business’s underlying assets, a liquidation is one way for investors to realize profits.

A liquidation is, in a sense, one of the few interfaces where the essence of the stock market is revealed. Are stocks pieces of paper to be endlessly traded back and forth, or are they proportional interests in underlying businesses? A liquidation settles this debate, distributing to owners of pieces of paper the actual cash proceeds resulting from the sale of corporate assets to the highest bidder. A liquidation thereby acts as a tether to reality for the stock market, forcing either undervalued or overvalued share prices to move into line with actual underlying value.

We’ll continue our discussion on Seth Klarman and his approach to liquidation value investment later this week.

Buy my book The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market from on Kindle, paperback, and Audible.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on The Acquirer’s Multiple, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on the deep value stock screener at The Acquirer’s Multiple®.

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Fundamental Value Investors: Characteristics and Performance

Posted in About, Activist Investors, Greenbackd, Liquidation Value, Stocks, Warren Buffett, tagged , on February 13, 2009| 3 Comments »

The Manual of Ideas has a copy of Empirical Finance Research’s paper “Fundamental Value Investors: Characteristics and Performance” (.pdf). The paper examines the investment methods of professional value investors (defined as the members of the valueinvestorsclub.com) and concludes that value investing is a broad church encompassing many different styles, but predominantly consists of “Warren Buffett-style growth investors:”

We find that investors are overwhelmingly concerned with assessing intrinsic value. Discounted cash flow models, earnings multiples, GARP, and other similar valuation techniques are overwhelmingly used (87.50% include this analysis in their recommendation). Based on these results, professional value investors tend to be Warren Buffett-style growth investors…

The paper seems to quantitatively confirm our qualitative (read, baseless) assertion in the About Greenbackd page that “assets are a contrarian measure of value.” Less than a quarter of professional value investors incorporate the value of tangible assets in their investment decisions:

[A]pproximately 24% of value investors do incorporate the classic value technique of focusing on tangible asset undervaluation. The other favorite tools of value investors are open market repurchases (12.12%), the presence of net operating loss assets (5.29%), restructuring and spin-off situations (5.12%), and insider trading activity (4.70%).

The paper also indirectly tackles the question oft posed by commenters on this site which, incidentally, questions the very raison d’etre of Greenbackd: why opportunities to invest below liquidation value and alongside activist investors persist even after the filing of the 13D notice:

According to efficient market logic (Fama (1970)), the rational arbitrager should act alone, drive the price to the fundamental level, and reap all the rewards of the arbitrage he has found. Unfortunately, arbitragers find this difficult in practice. Two primary reasons for this are capital constraints and the limits to arbitrage arising from the realities in the investment management business (Shleifer and Vishny (1997)).

The paper is typical of Empirical Finance Research’s rigorous approach and well worth the effort.

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And never breath a word about your loss

Posted in About, Liquidation, Liquidation Value, Net Current Asset Value, Net Quick Stocks, Net Quick Value, Stocks, tagged , on February 6, 2009| 4 Comments »

CNBC has an interview with Ricardo Salinas, the Mexican billionaire who took a position in Circuit City Stores Inc (OTC:CCTYQ) after it fell into bankruptcy and lost $41 million. In the interview with Michelle Caruso-Cabrera, Salinas explains why he made his bet on CCTYQ and how it went wrong. Although Salinas’ CCTYQ investment wasn’t a Grahamian net net, his explanation does capture some of the pitfalls of investing based on asset values:

Mr. Salinas made the majority of his $41 million investment in Circuit City after the troubled chain filed for bankruptcy protection in November. He amassed a 28 percent stake in the company and then began trying to work out a deal with Circuit City’s suppliers in an effort to take the chain private.

But Mr. Salinas backed out of the deal just before the company decided to liquidate, according to a recent account in The Richmond Times-Dispatch.

“It was much more complicated than he expected it to be,” an unidentified source told the newspaper. Pricing on some inventory “was just too high” and the support from banks and vendors “just wasn’t there,” the Times-Dispatch quoted the source as saying.

In his CNBC interview, Mr. Salinas expressed regret about not capturing Circuit City at a bargain-basement price and losing his investment, but acknowledged that it was for the best.

“I don’t care how rich you are, it must hurt to lose $41 million,” Ms. Caruso-Cabrera said to Mr. Salinas on location in Mexico.

“You know – when you’re talking about investments and businesses- it doesn’t pay to be afraid,” Mr. Salinas said, according to a transcript of the interview, which will be broadcast Wednesday night on CNBC. “It doesn’t pay, because fear is not a good counselor. Fear makes you do stupid things. So, of course it hurts.”

Mr. Salinas said he is moving on from his experience but is still looking at buying American assets.

“Well, we’re looking at a couple of mining companies that have been really pounded by the declining commodities,” he said in the interview. “And we think that, you know, mining is a great business. So we might go into a new tack there.”

(Via The New York Times Dealbook)

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Wesley Gray’s Empirical Search Strategies

Posted in About, Liquidation Value, Net Cash Stocks, Net Net Stocks, Stocks, tagged , on January 30, 2009| Leave a Comment »

Wesley Gray, who occasionally drops by here to provide some high quality commentary, has launched his maiden hedge fund, “Empirical Search Strategies.”

The fund follows a “long-biased micro-cap equity strategy,” which means it invests in “special situations opportunities such as liquidations and companies selling for less than cash value.” Sounds like a good strategy to us.

The fund is down 12.56% since its September launch, which compares favorably with the performance of the Russell 2000 Index (down more than 39% during the same period).

Gray is completing his Ph.D. at the University of Chicago Booth School of Business.

You can read more about Gray’s strategy in the FinAlternatives article Ten Hut! Ex-Marine Launches Long/Short Hedge Fund or Gray’s own website Empirical Finance Research Blog.

Congratulations, Wes. We hope to see you here more often.

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Walter Schloss, superinvestor

Posted in About, Greenbackd, Liquidation Value, Warren Buffett, tagged , , on January 29, 2009| 5 Comments »

Walter Schloss might be one of Benjamin Graham’s lesser-known disciples, but to Warren Buffett, perhaps Graham’s most famous disciple, Schloss is a “superinvestor.” In The Superinvestors of Graham-and-Doddsville, an article based on a speech Buffett gave at Columbia Business School on May 17, 1984 and appearing in Hermes, the Columbia Business School magazine, Buffett said of Schloss:

Walter never went to college, but took a course from Ben Graham at night at the New York Institute of Finance. Walter left Graham-Newman in 1955 and achieved the record shown here over 28 years.

Here is what ‘Adam Smith’ – after I told him about Walter – wrote about him in Supermoney (1972):

He has now connections or access to useful information. Practically no on in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it.

…

Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. He doesn’t worry about whether it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do – and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.

This is Schloss’ record, extracted from Buffett’s article (click to go the article for the full-size table on page 7):

walter-schloss-record1

Over 28 1/4 years between 1955 and the first quarter of 1984 (when Buffett wrote the article), WJS Limited Partners returned 5,678.8% and in the WJS Partnership returned an astonishing 23,104.7%. Annualised, that’s 16.1% in WJS Limited Partners and 21.3% in the WJS Partnership. Both dwarf the S&P’s gain of 887.2% or 8.4% annually over the same period.

Fast forward 24 years to a February 2008 Forbes article titled, Experience:

Although he stopped running others’ money in 2003–by his account, he averaged a 16% total return after fees during five decades as a stand-alone investment manager, versus 10% for the S&P 500–Schloss today oversees his own multimillion-dollar portfolio with the zeal of a guy a third his age.

The Experience article highlights a few things about Schloss that we really like (mostly because they coincide with Greenbackd’s views on investing). First, he’s an asset investor:

“Most people say, ‘What is it going to earn next year?’ I focus on assets. If you don’t have a lot of debt, it’s worth something.”

Schloss had earlier discussed his preference for assets over earnings at the New York Society of Security Analysts (NYSSA) dedication of the Value Investing Archives in November 2007 (from the article NYSAA Value Investing Archive Dedication: Walter Schloss by Peter Lindmark):

“We try to buy stocks cheap.” His investment philosophy is based on equities which are quantitatively cheap and he often holds over 100 securities. Although he expounds that, “Each one is different. I don’t think you can generalize……But I think you just have to look at each situation on its own merits and decide whether it’s worth more than its asking price.” He prefers to buy assets rather than earnings. “Assets seem to change less than earnings.”

Second, as Buffett pointed out in his article, he’s not particularly interested in the nature of the business:

Schloss doesn’t profess to understand a company’s operations intimately and almost never talks to management. He doesn’t think much about timing–am I buying at the low? selling at the high?–or momentum.

Lindmark’s article also notes Schloss’ disinterest in the underlying business:

Mr. Graham simply did not care, and tried to purchase securities strictly on a quantitative basis. Mr. Schloss advocated buying decent companies with temporary problems. He stated, ” Warren understands businesses – I don’t. We’re buying in a way that we don’t have to be too smart about the business….”

Finally, we have to admit that we admire Schloss’ gentlemanly approach to running his business:

Typical work hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a half hour after the New York Stock Exchange’s closing bell.

You can see Schloss speaking here at the Ben Graham Center For Value Investing, Richard Ivey School of Business. Our favorite line:

If this doesn’t work, we can always liquidate it and get our money back.

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Changes to Greenbackd’s presentation of summary balance sheets

Posted in About, Greenbackd, Liquidation Value, Net Current Asset Value, Net Quick Value, tagged , , , on January 20, 2009| 4 Comments »

We are trialing a change to our summary presentation of company financial statements. The new summaries will look like this (this is our summary balance sheet for Aehr Test Systems (NASDAQ:AEHR) – it’s cheap but there’s no catalyst):

aehr-summary-changes

A brief explanation of the various changes:

  1. A. shows the carrying value of the receivables ($14.8M), our estimate for the percentage of carrying value the receivables will yield in liquidation (80%), the liquidating value ($11.8M) and the liquidating value per share ($1.41).
  2. B. shows the net current asset value ($25.5M), which, when added to the non-current asset value ($0.9M), gives the liquidating value for the company ($26.4M).
  3. C. is the same calculation as B. but on a per share basis: the net current asset value per share ($3.03), which, when added to the non-current asset value per share ($0.11), gives the liquidating value per share ($3.15).
  4. D. is the amount of stock the company has on issue.
  5. E. shows the liquidating value of the company ($26.4M), the net cash value of the company ($7.9M) and the market capitalization ($15.12M). In this instance, the company is trading at approximately 60% of our estimate of its liquidation value.
  6. F. shows the same amounts as E. on a per share basis against the stock price.
  7. G. and H. are the estimated liquidating value on a company and per share basis, and the net cash value on company and per share basis.

We’re keen to hear what you think of the changes. We think it presents the discount applied to the carrying values and the net current asset values more clearly than the previous summaries.

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