Last week, Erik attended the 2017 Latticework Investment Conference, put on by Shai Dardashti and the good people at Manual of Ideas (MoI). MoI is a value-based third party research subscription service that has a strong reputation among both money managers and highly engaged DIY investors, so they are an excellent fit for Framework’s investor education. It was founded by John Mihaljevic. He is a Yale grad who served as James Tobin‘s research assistant from 1996–98 and worked with Professor Tobin to refine the Tobin’s q estimation method.
One of the most gratifying parts of the conference was the number of people who stopped by to complement Erik on The Intelligent Option Investor. The book has made an impact on investors around the world! That’s great to see!
This was a good group split between fund managers, individual investors, family office managers, RIAs, and a few sell-side people. The speakers were drawn from the investment world, academia, and the world of industry which is always a good mix. Interestingly, many people interested specifically in small cap and international opportunities and ideas.
We’ve summarized the highlights here for your portfolio consideration. There is a brief list of speakers and their short bio’s further down.:
The “Markel Effect” and Baseball- Tom Gayner was asked to talk about his experience as co-CEO at Markel, a diversified holding company whose stock has compounded handsomely over the past 20 years. He spoke from the standpoint of an owner-operator, not as a “paper” investor, which was refreshing. Tom started off by talking about “horseshoe investing.” His example: A farrier charges $0.01 for the first nail and doubles the amount for each of the next nails (4×7=28 in total). Even starting small, the power of compounding means that the last nail is worth more than a million dollars. He said that he just thought about finding businesses that would double in a fairly short period of time. You will see this focus on the demand environment and the importance of revenue generation repeated in different ways throughout the highlights here. He thinks of his investments as the manager of a baseball organization. The big leaguers are relatively few, but there is an entire organization below that which can be thought of as a source of potential big leaguers someday. We like the sound of that!
China. China. China. – It speaks to the power of the Chinese economy that this subject came up so often across the speakers’ presentations. Interestingly the focus was on risk management there and the continuing concerns from value managers about the transparency of accounting (low) and the application of the rule of law (sporadic and highly conditional). Erik’s takeaway was that there is likely value in looking at a highly diversified China ETF, but that looking at single names exposes one to unknown or unmeasurable risks.
The Investing Value of “Stock” vs. “Flow”? – One of the speakers, Amit Wadhwaney mentioned preferring the balance sheet to the income statement (i.e., “stock” numbers over “flow” numbers). He looks for things that change very slowly, so favors businesses that are driven by demographic trends. These comments made Erik understand why some investors favor the balance sheet while he/Framework favor the “flow” valuation drivers. Flow number valuations rely upon making some projections about growth and that is the hardest part of a valuation. Framework looks at average growth and “investment efficacy” where balance sheet investors avoid thinking about growth by investing mainly in demographic-driven businesses like banks.
Consumer Packaged Goods (CPG) in Focus: A couple speakers focused their comments on the CPG industry and the disruptions there over the last few months. David Pakman, a Partner at Venrock, expects Amazon’s effects on grocery to be muted by the shear size of that industry. Bob Russo, Managing Partner at Gardner, Russo and Gardner, LLC, thinks that CPG companies willing to underperform in the short-term to build share in strongly-growing markets are especially attractive. He sees this characteristic most in companies that have a strong family involvement. Bob described what he sees the main problem with CPG firms – that they try to ride a cash cow for too long and fail to see innovative competitors (echoing Pakman’s observations).
A Berkshire Hathaway for the 21st Century! – Chamath Palihapitiya believes there were three waves of business innovation: A) Start of time through 1985, business characterized by brittleness. B) The Excel Age, characterized by false precision and deterministic projections, C) Creative Destruction, characterized by strengths of networks and speed of adaptation. His investment company collects data about the characteristics of an underlying company’s network interactions with their clients. Erik asked him whether his system was simply a way to gauge the strength of the demand environment, and he said this was exactly right. The focus on the demand environment struck Erik particularly because this is an important part of what Framework’s process focuses on in determining value. Mr. Palihapitiya’s company was described by his biographer as a “Berkshire Hathaway for the 21st Century.”
These were just some of the highlights from an idea-packed event. Thanks to Shai and MoI for the invitation. FWI members have access to the full review presentation from the event. Become a FWI member today and get started on your journey to becoming a more skilled investor.
Here’s the full speakers list:
- Amit Wadhwaney– Portfolio Manager and Co-Founding Partner
at Moerus Capital Management, LLC. Previously worked for the famous Marty Whitman at Third Avenue Value. - Adam Schwartz -Managing Director at First Manhattan Funds, a prominent value-based fund company, and Xiang “Sean” Huang -Managing Director at First Beijing, a subsidiary of First Manhattan.
- Bob Robotti – Portfolio Manager and Founder of Robotti and Company., Mike van Bienia – Founder of van Biema ValuePartners, a concentrated fund of funds. Formerly was a professor at Columbia Business School’s
value investing program, and Andrew Burns. - Tom Gayner – Co-CEO and Director of Markel Corporation (MKL), a company that is founded on insurance holdings, but also owns diverse
other businesses (e.g., bakery equipment). Known as a young Warren Buffett kind of character and as a good asset allocator. - Chamath Palihapitiya– Original member of the Facebook management team, he retired from Facebook to start an influential Silicon Valley venture capital business called Social Capital Partnership.
- Elliot Noss – Elliot Noss is founder and CEO at Tucows which challenged how software was distributed in the 1990s and how domain names were offered and managed in the 2000s and is challenging how mobile phone service and fixed Internet are provided today.
- David Pakman – Partner at Venrock, a venture capital firm, specializing in early stage consumer and enterprise Internet companies.
- Tom Russo – Partner and Managing Member of Gardner Russo & Gardner LLC since 1989.