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Concentrated Investing Cover

Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (Wiley Finance, 2016) chronicles many virtually unknown—but wildly successful—value investors who have regularly and spectacularly blown away the results of even the world’s top fund managers. Sharing the insights of these top value investors, expert authors Allen Benello, Michael van Biema, and Tobias Carlisle unveil the strategies that make concentrated value investing incredibly profitable, while at the same time showing how to mitigate risk over time. Highlighting the history and approaches of four top value investors, the authors tell the fascinating story of the investors who dare to tread where few others have, and the wildly-successful track records that have resulted.

Turning the notion of diversification on its head, concentrated value investors pick a small group of undervalued stocks and hold onto them through even the lean years. The approach has been championed by Warren Buffett, the best known value investor of our time, but a small group of lesser-known investors has also used this approach to achieve outstanding returns.

  • Discover the success of Lou Simpson, a former GEICO investment manager and eventual successor to Warren Buffett at Berkshire Hathaway
  • Read about Kristian Siem, described as “Norway’s Warren Buffett,” and the success he has had at Siem Industries

Concentrated Investing will quickly have you re-thinking the conventional wisdom related to diversification and learning from the top concentrated value investors the world has never heard of.

Order from Amazon: Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors

From the Inside Flap

If you’ve studied value investing, some of the names in this book may be familiar, but the majority probably won’t be. Nonetheless, they are a who’s who in concentrated value investing, each with their own unique story, skillset, and philosophies that have gained them tremendous wealth and accomplishment while flying below the radar—until now. Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors takes you inside the ledgers and playbooks of this select group of history’s elite value investors to uncover their secrets for the new generation of wealth builders.

Turning the practice of diversification on its head, concentrated value investors purchase a small group of undervalued stocks and hold them through the highs and lows of the long term. You will read a lot about the juggernaut of value investing, Warren Buffett, who amassed the legendary Berkshire Hathaway with this approach. But this motivating book shows you he wasn’t the first or only one. This eye-opening examination will have you re-thinking conventional wisdom on asset allocation and emulating such concentrated value investors as:

  • A former GEICO investment manager whom Buffett has named “a cinch to be inducted into the investment hall of fame”
  • Kristian Siem, who grew Siem Industries at 25.6% annually over the past twenty- five years by following two key principles
  • Edward Thorp and the formula he trusted to risk $662.5 million on to collect just $2.5 million in a rare opportunity
  • Trends, momentum, volatility, and volume all change day to day and create opportunities to pick up the undervalued stocks that grow into fortunes, as you’ll see in Concentrated Investing.

From the Back Cover

Praise for Concentrated Investing

MARIO GABELLI, CEO and founder, Gabelli Asset Management:

Concentrated Investing may not be for all fiduciaries but the principals highlighted in this book—such as Lou Simpson whose career I have tracked since his days at Shareholders Management to Berkshire Hathaway—underscore this proven approach to long term investing. Pick your best stocks and have concentrated holdings—just as Warren Buffett has done at Berkshire Hathaway.

JEAN-MARIE EVEILLARD, Senior advisor and former PM of the First Eagle Funds:

I used to run mutual funds, so I did not have permanent sources of capital (in the late 1990s, I lost 7 out of 10 shareholders in less than 3 years). Too bad, because I agree that risk is not volatility, it is the risk of permanent loss of capital. And, yes, it is hard to move away from the herd, but hey, most good things in life come hard. So, as this book suggests, in my next life, I will run a closed-end fund and have a concentrated portfolio.

CHARLES ROYCE, CEO and founder, The Royce Funds:

This is more than a book…it is a detailed compendium of the life and temperament of the greatest concentrated investors…the Simpson and Keynes stories are terrific testimonies to both their practice and their learnings over time…the stories of Simpson and Keynes alone…are worth the book price X 100.

CHARLES BRANDES, CEO and founder, Brandes Investment Partners:

The pervasive investment world definition of ‘risk’ today is price volatility. This book reminds us that this definition is a fallacy for true investors. It demonstrates that intelligent concentration is the ideal investment philosophy.

ALAN KAHN, CEO and cofounder, Kahn Brothers & Co. (Retired):

We all know of ‘the World’s greatest investor,’ Warren Buffett, but how many of us know the man whom Mr. Buffett chose to do HIS portfolio investing, Lou Simpson, who managed the vast portfolio of Berkshire Hathaway’s insurance subsidiary GEICO? The brightest stars, like Benjamin Graham, can be seen with the unaided eye. But this book trains the telescope on the less explored parts of the investment skies and provides us with the secret to success: run concentrated portfolios with permanent capital to prevent against capital withdrawals just at the depressed times when bold investment action is called for. Read! Enjoy! And get richer!

Order From Amazon: Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors

 

Singular Diligence HeaderAnd it’s growing earnings faster than sales

A bonus Singular Diligence report covering a large, U.S. stock with a highly predictable, good return on capital and a good growth rate.

It distributes the products needed to keep a large business running smoothly. It sells light bulbs, motors, gloves, screwdrivers, mops, buckets, brooms, and literally thousands of other products. And it has unusually high margins.

This surprises some people. Investors and analysts see 40% gross margins and wonder how that can be. How can a middleman mark-up basic, boring products like we’ve talked about here – mops, buttons, motors, light bulbs, etc. – by 50% to 70% over the price they paid for that product?

Click here to learn more

Singular Diligence Header

This month’s Singular Diligence report covers one of the world’s largest marketing services companies.

Marketing services agencies are great businesses. When run right in terms of costs, capital allocation, etc. these businesses make for great long-term investments. They will be great businesses in 5, 10, and 15 years from now with many of the same clients.

We’ve picked the single best stock in the ad industry. It’s the company with the best financial results. It has the best history of capital allocation. Awards might not matter, but this company’ agencies win more awards than anyone else.

What does matter is price. It’s the best stock in industry and it’s the cheapest.

Click here to learn more

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This month’s Singular Diligence report covers one of the largest banks in Texas.

The bank has lower operating expenses than other banks, a higher efficiency ratio, high gross yields on its loans and low net charge offs. It is able to gather each dollar of deposits more cheaply than other banks. And then it makes more money per dollar of loans it makes because it receives a high yield for these loans while simultaneously charging off a lower than normal amount of each loan each year for its losses.

As a result, it has grown deposits per share 12 percent annually over the last 17 years while maintaining 20-25 percent dividend payout rate

Click here to learn more

In The Case for Activist Investors Walter Frick reviews my 2014 book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) in the Harvard Business Review. Frick says that it “reads more like an academic literature review:”

Heavily footnoted but nonetheless enjoyable, it makes the case for value investing—the search for undervalued stocks—and explains why practitioners such as Warren Buffett, whose 1964 letter to American Express is in Gramm’s book, and more strident activists such as Carl Icahn, whose 1985 letter to Phillips Petroleum is also featured in Dear Chairman, have been able to beat the market.

The reference to “Gramm’s book” is to Jeff Gramm’s excellent Dear Chairman, a book that I reading and enjoying now.

Buy my book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

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 Deep Value, 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 Acquirer’s Multiple.

FOSL Cover

Singular Diligence has a new report on Fossil Group, Inc., the global designer of consumer fashion accessories, notably watches and jewelry, handbags, small leather goods, belts, and sunglasses.

The company gets about 55% of sales from brands it pays royalties to license and about 45% from brands the company owns. Licensed brands include Emporio Armani, DKNY, Diesel, Burberry, Michael Kors, Adidas, Marc Jacobs, Karl Lagerfeld, Tory Burch, and Kate Spade. Company owned brands include Fossil and Skagen.

Fossil is a large brand (about $2 billion in sales at retail and $1.3 billion in revenue booked by the company). Skagen is a small brand. Fossil gets most of its sales and profits from two brands: the Fossil brand (which it owns) and the Michael Kors brand (which it licenses).

The stock is extraordinarily cheap. It is much, much cheaper than either Swatch or Movado, which we have covered in previous notes. It’s not an exaggeration to say that Fossil trades for about half the price of a “normal” stock in “normal” times.

Click here to read more.

“Everybody has a plan until they get punched in the mouth.” That’s Mike Tyson, the once-and-forever baddest man on the planet, and former boxing champion, explaining in his own words that the best laid plans of mice and men go often askew.

Well, you’ve just been hit in the mouth. The S&P 500 is down more than 8% this year and down more than 11% since it topped out on May 20 last year. That makes it officially a correction. What’s your plan?

Let’s get one thing straight: Nobody saw this coming. In the post mortem, it’ll be attributed to oil or China or North Korea but the real reason is that stock markets, like many things in the natural world, occasionally collapse. Take, for example, the 1987 stock market crash. The popular explanation for that decline is “program trading,” the computer-driven sale of futures to hedge declining stock portfolios, which was said to have created a self-reinforcing cascade of selling: The selling itself forced further selling. In the aftermath, John J. Phelan, then-chairman of the New York Stock Exchange, told The Wall Street Journal that “at least five factors” contributed to the collapse (via Above the Market):

[T]he fact that the market had gone five years without a large correction; inflation fears, whether justified or not; rising interest rates; the conflict with Iran; and the volatility caused by “derivative instruments” such as stock-index options and futures.”

The Wall Street Journal further noted that Phelan “declined to blame the decline on program trading alone.” Was Phelan wrong, or is the popular explanation wrong?

Here’s Robert Seawright, who writes about investors’ behavioral foibles on his Above the Marketblog, explaining that Phelan’s explanation, while counterintuitive, “is wholly consistent with catastrophes of various sorts in the natural world and in society”:

Wildfires, fragile power grids, mismanaged telecommunication systems, global terrorist movements, migrating viruses, volatile markets and the weather are all self-organizing, complex systems that evolve to states of criticality. Upon reaching a critical state, these systems then become subject to cascades, rapid down-turns in complexity from which they may recover but which will be experienced again repeatedly.

Seawright likens such things to a sandpile:

Scientists began examining sandpiles and discovered that each tiny grain of sand added to the pile increased the overall risk of avalanche but which grain of sand would make the difference and when the big avalanches would occur remained unknown and unknowable.

The timing and causes of big avalanches in the stock market are similarly unknown and unknowable. If Phelan was right, it seems we can’t even predict stock market crashes after they occur.

There is research that shows the market becomes more likely to crash when it becomes overvalued. Nobel Laureate James Tobin’s ratio is one such measure of valuation. The ratio compares the market value and replacement value of the same assets in the stock market. Logically, there should be a relationship between the market and replacement values of the same assets and they should trade at approximately the same ratio (for reasons beyond the scope of this post, the relationship isn’t 1:1 but it should be roughly constant). Investor Mark Spitznagel says that when the q ratio gets too high–the market is expensive and overvalued–and large losses become much more likely:

[W]hen Q is high, large stock market losses are no longer a tail event but become an expected event.

In other words, the higher the sandpile, the more likely a crash. How high is the sandpile now? According to the most recent update published January 4 on Doug Short, who tracks the ratio, it currently stands 55% above its long-term average and close to its historic highs:

Here’s the problem with using valuation to predict big declines: The market has rallied about 45% since Spitznagel published his paper in May 2012. In fact, the market has been overvalued for most of the last 25 years, only dropping under fair value for a brief period in late 2008 and early 2009. While there were two huge crashes over those 25 years–the “dot com” bust from 2000 to 2002 and the 2007 to 2009 “credit crisis”–and a couple of smaller ones in 1998 and 2011, the market is up over 400% since first crossing into overvalued territory. The sandpile might grow increasingly shaky and an avalanche become increasingly likely but it can get a lot higher before that last tiny grain of sand finally makes a difference.

It is for precisely this reason that Warren Buffett advises value investors to ignore the level of the overall stock market and focus instead on individual stocks:

At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.

Value investors take an ad hoc approach to portfolio management, only holding cash to the extent that they can’t find undervalued stocks. If you’re value investor, it doesn’t make sense to sell undervalued stocks in anticipation of a stock market sell-off. That’s usually the best time to buy stocks. Buffett counsels that you should not be in the stock market unless you can “watch your stock holding decline by 50% without becoming panic-stricken.” If you are unwilling to endure a 50% crash and you still want to own stocks, there is another way.

Read more at Forbes

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