According to Wikipedia, an activist shareholder “uses an equity stake in a corporation to put public pressure on its management”. However, that is not true for all of them. Some value and activist investors today chose a completely different and more effective approach.
In this new Opalesque BACKSTAGE video, Jeffrey Ubben explains the ONLY time one of his activist investments did NOT work out was actually when the public was involved. Learn directly from Jeffrey Ubben, Chief Executive Officer and Chief Investment Officer of ValueAct Capital, how the style has evolved and what strategies work best to achieve superior results:
* The ValueAct Capital strategy: Changing companies from the inside
* Is the involvement of the media helpful for activist investing?
* What are the problems of proxy contests?
* The Drivers of the ValueAct Capital strategy: Detailed examples and why it works
Jeffrey W. Ubben is a Founder, Chief Executive Officer and the Chief Investment Officer of ValueAct Capital. Prior to founding ValueAct Capital in 2000, Mr. Ubben was a Managing Partner at Blum Capital Partners (“Blum”) for more than five years. Previously, Mr. Ubben spent eight years at Fidelity Investments where he managed the Fidelity Value Fund. The Fidelity Value Fund had $4.5bn when Ubben left.
In this white paper, James Montier, a member of GMO’s Asset Allocation team, discusses the importance of dividends historically and in today’s investment environment.
I’m happy to see James back on the blogging circuit…take a look at his latest post.
Excerpt via James Montier:
However, any consideration of the purchase of insurance should not be divorced from a discussion of the price of the insurance. Cheap insurance is wonderful, and clearly benefits portfolios in terms of robustness. However, the key word is that the insurance must be cheap (or at very worst fair value). Buying expensive insurance is a waste of time. I used to live in Tokyo and was constantly amazed that the day after an earth tremor the cost of earthquake insurance would soar, as would the demand!
You should really only want insurance when it is cheap, as this is the time when no one else wants it, and (perversely) the events are most likely. Buying expensive insurance is just like buying any other overpriced asset … a path to the permanent impairment of capital. Rather than wasting money on expensive insurance, holding a larger cash balance makes sense. It preserves your dry powder for times when you want to deploy capital, and limits the downside.
Instead of finding undervalued companies….invert, invert, invert. Focus on being able to spot overvalued companies and then avoid them at all costs (unless you like shorting stocks).
Abstract (Via Beneish & Nichols)
We present a model to identify firms with substantially overvalued equity. The distinguishing feature of our study is that we analyze the valuation implications of an ex ante assessment of the likelihood of financial statement fraud. If, as Jensen (2005) suggests, the most costly cases of overvaluation culminate in financial statement fraud, an analysis that combines the likelihood of fraud with other characteristics capturing value -destruction is more likely to identify substantial overvaluation. Consistent with this view, our model predicts year-ahead abnormal stock price declines of over 25percent, and identifies firms that are nearly five times more likely to subsequently restate earnings.
Interesting insights and asset allocation predictions by one of the greats of investing.
Note this is a review of the recent CFA event also attended by Seth Klarman (notes of Klarman’s talk have been circulating the internet where as Grantham’s speech has gone under the radar)
Excerpt (via Robert Huebscher @ Advisor Perspectives)
For this approach to work, one must have a clear idea of fair value and a way to determine when prices deviate from it. Price-to-earnings ratios are one of the variables Grantham looks at to determine whether an asset class has deviated from its fair value. Specifically, he uses Shiller’s “normalized” PE ratios, which averages earnings over at least 10 years. “PEs that are not normalized are worth nothing,” he said.
Using those PE ratios, Grantham regularly forecasts returns over seven-year time horizons, which he said was “as close as possible to the periodicity of the market.” He has performed this exercise 28 times since 1994 – forecasting returns for major global asset classes – and claims that he has a perfect record of predicting returns using this “simple-minded” (his words) technique.
The Value style of investing is explored in this paper. The analysis is segmented into four parts: historical considerations are briefly noted, and then an extensive review is conducted of the literature on various price to value indicators. Next, the reasons for value outperformance are examined. The paper concludes with a review of performance measures of value-oriented investments.
Conclusion (via Kevin C. Kaufhold)
The weight of the evidence highly suggests that value-oriented factors do provide superior results as measured on a statistical, back-testing basis. The reasons for the outperformance are less clear, but revolve around two main and somewhat competing theories: first, the market model is in need of further refinements; and second, behavioral factors may be responsible for persisting valuation situations.
Whether value styled investors and managers can consistently capture and provide superior returns in a real world setting is very much an open question, however. If any investing strategy can outperform a relevant benchmark index on a risk-adjusted, posttax, and post-expense basis, it may be the value style. Considering that value benchmark indexes have outperformed growth indexes over long time frames and that high expense ratios virtually guarantee underperformance, perhaps the most prudent and practical course of action to take would be to simply invest in a value-oriented index fund. Active management is always a possibility, but the success of such a strategy would largely depend upon keeping expense ratios very low while simultaneously providing superior investment management abilities and skills.
It is widely recognized that value strategies – those that invest in stocks with low market values relative to measures of their fundamentals (e.g. low prices relative to earnings, dividends, book assets and cash flows) – tend to show higher returns. In this paper we focus on the early value metric devised and employed by Benjamin Graham – net current asset value to market value (NCAV/MV) – to see if it is still useful in the modern context. Examining stocks listed on the London Stock Exchange for the period 1981 to 2005 we observe that those with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years. We allow for the possibility that the phenomenon being observed is due to the additional return experienced on smaller companies (the “size effect”) and still find an NCAV/MV premium. The profitability of this NCAV/MV strategy in the UK cannot be explained using Capital Asset Pricing Model (CAPM). Further, Fama and French’s three-factor model (FF3M) can not explain the abnormal return of the NCAV/MV strategy. These premiums might be due to irrational pricing.
I can’t express how grateful I am; Ben is a wonderful note taker.
Excerpt via Ben
The following are my detailed notes from the 2010 Value Investing Congress in Pasadena, CA on May 4th and 5th.. The great list of speakers included Bruce Berkowitz, Mohnish Pabrai, Eric Sprott, Tom Russo and Whitney Tilson, just to name a few. Topics ranged from the merits of owning gold to the attractiveness of small caps to investing in India and China.
After over 33 pages and about 18,000 words I hope have I captured all of the stocks discussed as well as the unique investment philosophies and themes highlighted by the speakers. I also included all of the responses from the Q&A sessions after each one of the presentations.
