Grant's Current Yield Podcast – "International Value Mysteries"
July 10, 2024
Host: Jim Grant (A), Deputy Editor: Evan Lorenz (B)
Guest: David Samra, Managing Director, Artisan Partners International Value Team (C)

Episode Overview

This episode welcomes top value investor David Samra to discuss the persistent mysteries and opportunities of international value investing. Jim Grant and Evan Lorenz guide an in-depth conversation about why value strategies outside the U.S. have performed robustly, how Samra’s team navigates inefficiencies and risks, and the unique qualities of major holdings such as Alibaba. Samra shares contrarian wisdom, the importance of admitting mistakes, and offers wit-filled historical analogies to frame 2024’s investment landscape.

Key Discussion Points & Insights

1. The Philosophy and Process of Value Investing

• The “Buy Low, Sell High” Mantra
  • Samra details the importance of narrowing uncertainty in cash flow estimates through deep research.
  • "It's driven by spending an enormous amount of time studying businesses...The more research that we do, we can narrow that uncertainty." — Samra [03:09]
• Contrasts with Market Efficiency Theory
  • Grant challenges the view that diligent research adds little in efficient markets, citing index funds' rise.
  • Samra demystifies PE ratios and explains his anchoring framework: compare expected returns to a risk-free rate (typically using a 6% benchmark) [04:17–05:45].

2. International Value: Why It Works

• Performance Edge Outside the U.S.
  • The Artisan International Value Fund has outperformed, with 11.5% annualized return vs. ~7.5% for the relevant index [06:14].
  • Samra describes unique inefficiencies:
    • Non-U.S. markets are less liquid.
    • Most capital in foreign markets originates from U.S. investors.
    • Foreign markets often feature slower-growing, lower-return companies and wider trading spreads.
  • "Outside the U.S., the markets lend themselves to value investing…and if you’re patient and you have an ability to recognize the difference between a good business and a bad business...it can be an environment that is very fruitful." — Samra [08:44]

3. Mysteries and Contrarian Opportunities

• The Enigma of Undervalued Quality
  • Samra explains the biggest mysteries: great businesses (e.g., Samsung, Alibaba) with clear returns and scale trading at extremely low multiples (like 5x earnings) [07:03–08:26].
• Lessons from Global Explorations
  • He highlights the mismatch in expectations, e.g., India’s universally overpriced paint companies vs. overlooked, high-quality businesses elsewhere.

4. The Value of Admitting Mistakes

• Reporting errors to shareholders helps foster learning, humility, and improved decision-making.
• "You try to learn from the dumb things that you do over the years...We like to report those to our shareholders, especially during time periods when our investment performance looks good." — Samra [11:10]

5. Patience, Process, and the Challenge of Managing Flows

• Patience is critical, both as a competitive edge and a function of investor alignment, especially with mutual funds where redemptions present liquidity challenges [13:48–15:49].
• The fund is closed to new investors for capital management, ensuring alignment and flexibility.

6. U.S. vs. International Valuations

• Structural Differences:
  • U.S. stocks trade at higher valuations due to better legal frameworks, scale, capital markets, and growth characteristics.
  • "The US has 320 million rich people all speaking one language and have a robust legal system with...venture capital and private equity community that's unrivaled anywhere else in the world." — Samra [16:07–17:51]
• Quality and growth disparity justify the persistent valuation gap.

7. Case Study: Alibaba

• Jeopardy Segment & Deep Dive
  • The “mystery mogul” is revealed as Jack Ma [18:30].
  • Alibaba is likened to a hybrid of Amazon, Google, and a marketplace—a capital-light, fee-collecting, cash-rich business, yet it trades at 5x earnings due to regulatory and political risks.
  • "When you’re small...you could go to places...and find these little companies that were terribly mispriced...But as you get larger...it's extremely difficult to find...an extremely good business...at a seriously undervalued price. And that's a needle and a haystack." — Samra [18:40–22:39]
• The undervaluation is attributed to:
  • Geopolitical risks (China/CCP control)
  • Slower growth
  • Market psychology preferring good news to bad news

8. The Virtues of Bad News

• Running Toward Distress
  • Samra and team seek out mispricings in markets burdened with pessimism—be it country or company specific.
  • "Bad news is a living. Yeah, bad news in the stock market is extraordinary. It's an extraordinary gift." — Samra [23:21–24:24]

9. Market Cycles and Human Psychology

• Quoting Phil Carret: "Typically a major market movement runs so far that the amateur in speculation forgets that an opposite trend has ever been known..." [24:30]
• Investors' adaptability to regime changes (like the end of low/zero rates) is questioned. Recent years haven't produced as many blowups as Samra thought probable, despite dramatically rising rates [25:01–25:42].

10. Investment Constraints and Portfolio Construction

• Cash Limits: The fund may hold up to 15% cash (increased from 10%) in the absence of compelling opportunities—balancing business realities and investor expectations [28:33–29:43].

11. Parable of the Steel Beams – Geopolitics and Hidden Costs

• Personal anecdote: Building a patio on sand (and a hillside) required massive, costly reinforcement—an analogy to unseen costs in deglobalization and supply-chain shifts.
• "There are a lot of things that we don't see...If we have this goal...to move all of this manufacturing out of its most efficient geography...there are costs associated with that...That will lead to inflation." — Samra [31:13–33:56]

Memorable Quotes and Moments

• "The greatest competitive advantage that a value investor has is patience. Whereas most of the stock market is so focused on the immediate." — Samra [13:48]
• "Bad news in the stock market is extraordinary. It's an extraordinary gift." — Samra [24:24]
• On Alibaba: "[It] trades at five times earnings, which is extraordinary for such a large company. Now, there are very good reasons for that...but if you click all those items—a good business with a strong balance sheet and management...and you want to buy it at a seriously undervalued price, that's a needle and a haystack." — Samra [18:40]

Timestamps for Key Segments

• [03:09] – Samra on how to "buy low, sell high"
• [04:17–05:45] – Importance of anchoring cash flow to expected returns and the risk-free rate
• [06:14] – Grant highlights fund performance vs. index
• [07:03–08:26] – Mysteries of global market valuation and behavioral anomalies
• [08:44] – Why value investing works better internationally
• [11:10] – On reporting mistakes and learning
• [13:48] – The importance of patience and investor alignment
• [16:07–17:51] – Comparing U.S. and ex-U.S. valuations
• [18:30] – Jack Ma revealed; Alibaba case study
• [23:21–24:24] – Pursuing bad news and finding value in pessimism
• [25:01] – Market cycles and rate regime changes
• [28:33–29:43] – Portfolio cash allocation limits
• [31:13–33:56] – Parable of steel beams and hidden costs in deglobalization

Tone and Style

The episode brims with the trademark Grant wit and depth, historical and literary allusion, with Samra’s understated candor and focus on process—making for an insightful, lively, and occasionally humorous look at the hard realities of global value investing.

Note:

Closing remarks jokingly address the fund's closed status and suggest (not seriously) that attendees of the upcoming Grant’s Conference might get special consideration for investment.