Podcast Summary
Value Investing: Experienced value investor Scott Barbie outperformed the market by sticking to traditional value investing strategies, finding undervalued stocks, and learning from industry veterans.
Scott Barbie, a value investor with over two decades of experience, has outperformed the market by sticking to traditional value investing strategies despite the shift towards high-flying tech stocks. Barbie's education in engineering and business, as well as mentorship from influential figures like Irving Kahn and Donald Smith, shaped his investing philosophy. He began his career at Simmons and Company, where he developed an interest in value investing and learned from a young value investor. His first successful investment was in Advanced Marketing Services, a net net stock. After business school, he worked for Bill Burno and Paul Gamble, learning the ropes of the industry. He then started marketing discounted securities to the street and eventually started the Aegis Value Fund in 1998. Barbie's success can be attributed to his discipline in sticking to value investing principles, his ability to find stocks that very few other investors will touch, and his mentorship from industry veterans. Despite drawdowns during the financial crisis and unconventional errors, Barbie has managed to create alignment with his investing team and the fund's investors. His story is a reminder that traditional value investing strategies can still be effective in today's market.
Core principles of successful investors: Successful investors maintain core principles, rooted in engineering and economics, to determine intrinsic value and buy at a margin of safety, understanding true risks, and taking unconventional approaches.
Successful investors like the speaker have maintained their core principles and philosophies despite market volatility and the temptation to follow trends. The speaker's value-oriented philosophy, rooted in engineering and economics, has guided him to determine intrinsic value and buy at a margin of safety. He has consistently stuck to this approach even during market bubbles and underperformance periods. The speaker also emphasizes the importance of understanding true risks, such as multiple, leverage, and fundamental business risks, rather than relying solely on stock price volatility as a measure of risk. Additionally, the speaker's unconventional approach includes not managing invested capital to avoid short-term index tracking errors, concentrating capital in a particular sector and on a small number of holdings, and not relying on historical price volatility as an effective measurement tool of investment risk. Few other investors follow these principles due to confusion about the relationship between stock prices and company value and the prevalence of low interest rates and leverage in the system.
Contrarian investing risks: Contrarian investing involves careful consideration of risks and assessing if potential rewards justify those risks. Not all high-risk investments are contrarian opportunities.
Successful contrarian investing requires careful consideration of various risks and assessing whether the potential rewards justify those risks. Contrarians, like the speaker, should not be opposed to the crowd for the sake of it, but rather, try to determine if they're at the extreme ends of the market cycle. The speaker shared an example of Orzone Gold, a business with excellent geology, metallurgy, and management, but high country risk due to political instability in Burkina Faso. Despite these risks, the speaker believed the potential rewards, such as a mine expansion increasing production and low free cash flow multiples, could offset them. Overall, successful contrarian investing involves a thorough analysis of various risks and a strong conviction in the potential rewards.
Undervalued Companies: Finding undervalued companies with solid fundamentals and industry trends can lead to successful investing, such as those with large discounts to book value and perceived management changes in the energy sector
Successful investing often involves finding undervalued companies, even if they're unloved and not appreciated on Wall Street. This can be achieved through various heuristics, such as the discount to book screen, which has historically delivered solid returns. However, it's important to consider other factors like cash flow, EV to EBITDA, and management changes. For instance, natural gas services was a successful investment for the speaker due to a large discount to tangible book value and perceived CEO turnover, but understanding the industry dynamics and long-term demand trends was also crucial. In the energy sector, the speaker sees strong underlying demand dynamics and a slowing supply growth, creating potential investment opportunities as some companies are being disposed of from pools of money managed for reasons other than maximizing risk-adjusted return.
Value Investing with Low Book Values: Value investing strategy involves buying companies with low book values for downside protection and growth from future cash flows. Adjustments to book value are necessary to evaluate its quality. Identifying tangible improvements in cost reductions and new projects can enhance return on equity.
The investment strategy focuses on buying companies with low book values as a margin of safety, while future cash flow generation serves as the growth driver. The team evaluates the quality of book value by considering adjustments to account for hidden assets or liabilities. Buying at a discount to book value provides downside protection and allows for riding through economic downturns. However, the return on equity can be low or negative when buying at these levels. The team looks for tangible situations, such as newly contracted projects or price movements after mergers, to identify improvements in return on equity. They prefer cost-side improvements because they are more measurable. Overall, the strategy is to identify companies that can generate tangible improvements in their businesses, focusing on cost reductions and newly contracted situations.
Quality companies risk: Perceived stable earners command high prices but face risks during economic downturns or rising interest rates, emphasizing the importance of maintaining discipline, selling when overvalued, and being adaptable to new information. Deep value opportunities may exist in high reputational risk industries like mining.
Quality companies, which are perceived as having stable earnings and slightly growing earnings, are currently in high demand and command premium prices. However, these companies may be at risk during economic downturns or when interest rates rise, potentially leading to a decline in their valuation. The speaker also emphasized the importance of maintaining discipline in investing, selling when stocks reach above intrinsic value, and being willing to adapt to new information. Additionally, the speaker discussed the importance of alignment between investors and employees in a fund and shared insights into why the mining industry can be an interesting area for deep value investors due to its high reputational risk and publicly available engineering reports.
Deception in financial discussions: During volatile market periods, it's crucial to carefully assess the underlying fundamentals of companies and market trends to avoid being misled by vague or excessive details.
People can be deceptive in two ways: some are vague about details to avoid discussing their business, while others provide excessive details to distract the listener from important issues. During the 2007-2009 financial crisis, the AEGIS fund experienced a significant 72% drop, but the underlying companies were not the problem. Instead, it was other shareholders and the broader market panic that caused the issue. In the current market, the S&P 500's valuations, particularly the "Magnificent Seven," are a concern due to potential overvaluation and the impact of passive investment strategies. The speaker was surprised by the tech stocks' recovery and the narrow market focus on these stocks, which could potentially lead to market instability. Ultimately, it's essential to carefully assess the underlying fundamentals of companies and market trends to navigate through volatile periods.
Tech sector challenges: The tech sector, particularly companies like NVIDIA, may face challenges due to unsustainable growth, energy consumption, and emerging bottlenecks. Investors may want to consider cheaper alternatives as future returns could be muted.
The technology sector, specifically companies like NVIDIA, may face significant challenges in the near future due to unsustainable growth, energy consumption, and emerging bottlenecks. The speaker suggests that the market may be experiencing a bubble similar to the one in 1999, and that there could be significant losses for those invested in these companies. He encourages investors to consider changing their game and exploring cheaper alternatives, as the future returns for these tech companies may be muted. The speaker is Scott Melker, and he can be found at Aegis Funds (AegisFUNDS.com). It's important to remember that all investment decisions should be made with the help of a professional.