We recently watched a talk from the Ben Graham Center for Value Investing and thought it was worthwhile to post. We have also provided our notes below.
As per their website: “Lountzis Asset Management, LLC is a registered investment adviser founded by Paul Lountzis in October 2000 to manage customized portfolios serving high net worth individuals, institutions and retirement plans.
Our investment objective is to maximize the long term after tax returns for our clients in various economic and market conditions while emphasizing the preservation of capital.
Prior to forming Lountzis Asset Management, LLC, Mr. Lountzis was employed by Ruane, Cunniff & Company, Inc., New York, NY, a registered investment adviser managing the Sequoia Mutual Fund as well as private accounts, from 1990 through 1999 as an analyst, and as a partner from 1995 through 1999.”
Talk Notes
· Make sure you understand the business – Some investors like complexity, I don’t. Simplicity and understanding the business. If I can’t really understand it I don’t even bother
· We like businesses with favourable long-term prospects. E.g. Amazon. They do $150-160B in business, runway is $4-5 trillion. Google’s advertising business globally is probably $800-900B. Amazon has a much longer runway. If there isn’t a long runway you won’t make a lot of money.
· Management has to be trustworthy. How honest and capable they are is very important.
· Attractive price.
· Remove noise and nonsense. Even if you spent 6 months on a company doing field research, etc. At the end it really comes down to a few key elements. Albert Einstein – “It’s not everything that can be counted counts, and not everything that counts can be counted.”
· Benchmark nonsense. It some value within reason but we focus on absolute return. If the benchmark is down 40% and your client is only down 35% it’s still not a good story.
· High fees are egregious. We did not go hedge fun/mutual fund route. Every client portfolio is unique and has its own allocations. It’s based on knowing each individual client. The client owns each individual’s securities allowing them to control their taxes and tax benefits.
· We have no categorization/are not market cap constrained, no artificial limitation. “We’re small cap growth” restricts you. Your only limitation should be to exercise sound judgement. We started buying fixed income and opportunity led to high single digit pref coupons.
· Clients get a monthly statement from custodian, Schwab.
· Warren Buffett’s advantage = permanent capital. Own capital + insurance float (but long-tail, premium comes in and can be for 20 years on hurricane insurance, now $90B while auto insurer does not have long-tail). He doesn’t have clients and so he can sit around and wait. Mututal funds that are run by great people can’t go above 5-6% cash or the financial planner will fire them. We’re trying to do that in our business.
· We typically have a large percentage of our client’s net worth because we want to build a stable high quality pool of capital.
· When getting to know clients – Don’t even talk about money at first. Focus on goals and aspirations. Then, questions: 1) what’s the primary purpose of the investment? 2)If they don’t have on the stock portion of their portfolio, if they don’t have at least 3-5 year horizon we tell them to not give us the money. 3) They shouldn’t exceed their risk tolerance emotionally or financially. This is a huge competitive advantage for us. We don’t have to worry about redemptions vs a mutual fund manager that has to sell.
o E.g. when we were smaller in 2005. Client wanted all stock as opposed to all balanced, don’t want any fixed income. 2006-2007 there was nonsense going on (people leveraging up their homes, etc). I wasn’t comfortable and I kept 50% of his portfolio in cash. When fall in 2008 and 2009 came we filled the portfolio with stock. The privilege of being able to hold cash enabled us to perform. If he made us invest in 2006 we could not have done this.
· We hate leverage. We never invest borrowed money. You’re just not rational when you’re investing money you don’t have. We also hate it in companies we invest in.
· Noted Buffett’s use of qualitative decision making, “he never used 400 page sensitivity models”.
· Being a good investor is lonely, requires humility because you will make mistakes, and be humble but not fearful, confident and not arrogant (when you will make mistakes) and the ability to really withstand pain.
· Characteristics of a good investor: 1) Willingness to be lonely, 2) The power of humility 3) the power to take pain
· I read 13Fs all the time. But just because Buffett buy it doesn’t mean we have to. We have to understand it.
· We focus on process not outcomes because you can control process. We do post-mortems, etc.
· Focus on what won’t change – People often look for what is going to change; change is good for consumers but terrifying for investors.
· Life is really short. Life is really precious. Even more important than investing is the relationships you build throughout your life personally because when you are happy personally it enables you have a foundation to be happy professionally that feeds on itself.
o Do you want to go into work every day to work with people who make your stomach churn?
Five questions for a money manager:
1) Impeccable integrity
2)What is your research process? How do you find opportunities? How did you find company x? How did you research it?
3) Invest with management teams/firms that are owned by the principals. You’re far better off finding a firm that is owned by the principals.
4) How do they invest their own money? E.g. follow on with client money?
5) Performance and fees
1: When you were young how did you build a track record? How do you convince people at first that they should trust you?
When people talk about starting a business, think about: do you want to deal with employees? Compliance? SEC? Another – Do you really have the confidence to invest someones life savings?
Also, where was the pool of capital. For me, it took 16 years, part of that is my fault. It came down to people who knew me and trusted me. The answer is you have to find people that will make a bet on you because you don’t have a track record.
What is your business investment regret? My biggest regrets are mistakes of omission. E.g. Gibelli Automotive Aftermarket Conference. Met Greg who ran O’riely.. Loved their model – 50% DIY and 50% within auto dealers where they took the product to them to fix cars. Autozone was all do it yourself. The stock was $35 and for whatever reason I never gained the conviction to buy and several years later it hit something like $400.
Given you have no limitations on segmentation, how do you screen? – I have created a list of about 700 companies in developed markets. There’s very few companies you raise that I don’t know about. E.g. Progressive I really know a lot about it. I have six lists. 1) Great companies ignoring valuation.
How do you get more information on companies you are looking it? – We believe in field base research. Why is their return on equity 25% when everyone else is 15%? The numbers give you the questions but everyone can look at the numbers. We try to understand the dynamics of the industry, nature of competition, and look at public and private companies in the space. We go back 20 years. Then we think who are the top few people in the world that could help us understand? We try to find a few people that can make the numbers come to life. E.g. Sam Walton started building in small rural markets and only later went into cities. We do qualitative first, if the numbers aren’t good we don’t even look into it, if they are we do qualitative analysis à Former employees, suppliers, etc. I also never visit managers unless I have done the quantitative analysis up front.
Managing upside scenarios. What is really hard as an investor because you always look at the cost you pay. Every day you go in its buy sell or hold. You can’t look back, you have to look forward. Every time you look at it I say “What is different today?” - With Mohawk flooring company. It went up significantly but when you looked at the business they were expanding into higher margin niches (not considered in the initial analysis) and so were actually worth more and worth holding. Because they held on longer (and had good reason to) their upside doubled.
United Healthcare – Bill Mcquire at United was unique. He was a physician by training, other CEOs were actuarial. What he did is he looked at healthcare needs. Today it is $184B business. The three jewels built by Bill that are going to be much larger than the traditional healthcare business. If I had been smart and recognized and he was different…. E.g. when he was hiring an investor relations lead, most companies hire a mouthpiece to repeat what management wants but he hired a sell side analyst so that they could get strategic insight on their competitors and help Bill formulate strategy. It was all there but I didn’t see it. If I bought United back in the early 90s we would have made 100x our money.
