← The Long View
The Long View
Amit Wadhwaney: ’Buying Cheap Has a Number of Attractions’
00:55:10
The international value investor and Moerus co-founder on the importance of conviction, survivability, risk aversion, industry structure, and opportunities for value investors in today’s market.
Loading summary
Transcript37 lines
- [00:00]
A
Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline. It's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself@vanguard.com audio. That's vanguard.com audio all investing is subject to risk. Vanguard Marketing Corporation Distributor Please stay tuned
- [00:28]
B
for important disclosure information at the conclusion of this episode.
- [00:34]
C
Welcome to the Longview. I'm Ben Johnson, Head of Client Solutions with Morningstar.
- [00:38]
B
And I'm Amy Arnott, Portfolio Strategist with Morningstar.
- [00:42]
C
Today's guest on the Longview is Amit Bhadwani, Portfolio Manager and co founder at Moyris Capital Management. Amit has over 30 years of experience researching and analyzing investment opportunities in developed emerging and frontier markets worldwide. Prior to co founding Moyris, Amit was a Portfolio manager, manager and Partner at Third Avenue Management where he worked alongside his Moyris co founding partners. Amit founded the international business at Third Avenue and was the founding manager of the Third Avenue Global Value Fund, the Third Avenue Emerging Markets Fund and the Third Avenue International Value Fund. Earlier in his career, Amit worked at MJ Whitman llc, a New York based broker dealer. Prior to joining MJ Whitman, Amit was a paper and forest products analyst at Bunting Warburg, a Canadian brokerage firm. He began his career at Domtar, a Canadian forest products company. Amit holds an MBA in Finance from the University of Chicago. He also holds a BA with honors and an MA in Economics from Concordia. At Concordia, he was awarded the Sun Life Prize and the Concordia University Fellow in Economics and he subsequently taught economics classes there. Amit also holds a BS Degree in Chemical Engineering and Mathematics from the University of Minnesota. Well Amit, welcome to the Longview. Thank you so much for joining Amy and I today.
- [02:21]
A
Thank you for having me.
- [02:22]
C
I wanted to start by asking you to tell us a bit about your background and I'm particularly curious about how you caught the investing bug.
- [02:33]
A
I was trained as an engineer and I also studied some math in those days and so I'm kind of a quantum person by training now. You know, it remains to be seen and I suspect it's probably not accurate to say that the quantum part of me has stayed, but I got interested in economics again. This is when I was living in Montreal, Canada and chemical engineering. Mathematics happened when I was in Minnesota. Just to give you some geography and some background, those are sort of pertinent in some ways, as you will see. So I got quite interested in economics and there too I veered to things clunky, econometrics and so on and so forth. So I studied that and the interest in investing really came out of two things. I mean it's not investing generally, but investing in a very specific sort of way. So study economics. I encountered a book by Marty Whitman. Actually it was not a book by. It was a book by Marty Whitman. But what caught my eye was his co author's name. The co author I knew of by his reputation, a very famous mathematical economist, Martin Shubik, he was at Yale, a game theorist and he wrote this book about investing. And how I came upon it was I read a review of the book in a publication called the Journal of Economic Literature which used to summarize new books which were of interest in terms of path breaking. And the review looked very interesting and amazingly it was at the university library. I read it. The book was full of jargon and again, I had never had a course in accounting before. The book was, you know, I always say it's amazing detergent prose. It was deadly. But it was very bright. It was a very bright book and I was fascinated by the book. And I would come back to the sort of stuff that you learned from that book. And so, you know, put that aside. I said this is kind of interesting, maybe I should do more of it. Again I was finishing up with my master's degree at that point point and I was wondering what I should do. I was working at that time as an engineer and I was doing this and what my hobby study economics at night was fun. And then I decided that I would apply for graduate school degree in business at Chicago. Now context we are in 1980. Inflation rates are high and interest rates are rising. This is a Volcker era. It's been decided that we're going to squeeze inflation analysis. Higher inflation rates is obviously, you know, a difficult thing. I was working in a company that was very cyclical. The business is very cyclical. And I got in Chicago for the MBA program University of and I did not get financial aid. Now of course the question is how do you conjure up the financing for this venture? I thought, well look, I mean the best you can do is a reduce your costs. Now there's only so many ways you can reduce your cost to do that because you pay by the course. And the one way you could do it was by reducing the number of months you were there, which is lots of Courses in every turn. So decision was made. Let's squeeze this into one year as a two year program. Squeezing it one year is. It's an effort. Let's just say it's an effort I would not recommend to most people. And what happened was what assets were there. I mentioned that we were in 1980, right? So 1980, the significance of that year, I was living in Montreal, Canada, which is Quebec. Quebec had its first separation referendum and there was a major freak out then. This promise is going to separate from the rest of the country. Our asses are going to be toast. And so everybody was fleeing. I said, I'm going to live here because the firm I worked for was owned by the government of Quebec. So I'm not going anywhere. So I might as well think in terms of, you know, it'd be nice to have a nice place. And Montreal in those days had some very beautiful old properties which were in need of some loving care, some renovation and so forth. So by a bunch of others, I bought a piece of one and, you know, sort of can put it away and be able to renovate it. Then I got into Chicago and there was no financial aid. Now I said, no, you know, how do I do this? So I said I'd sell as many assets that I had. And there were few. I was just an engineer working in Canada, Canadian salary, being paid, Canadian dollars, paying Canadian taxes. But I had this house, this sort of unrenovated house. And as it turned out, the separation referendum failed and of course prices soared. And I said, oh gosh, this is quite something. What timing this is. I sold that house and that paid for at least one year's, a bit more than one year's worth of tuition there. It was a very cheap house. It was a dump. It was great. So that was something interesting. I said, look, on one hand, this could be a very interesting way of earning a living. I didn't have to do much of anything. Investment was gradually becoming interesting after I read Marty's book. And I said, maybe sometime I'll figure out a way to combine these things, investing and earning a living. And again, there's two separate things, investing and the business of investing. Now that's story unto itself. But you know, I thought that was an interesting idea. And so I went to Chicago again, more quality stuff. I mean, it's a fabulous school. I wish I could stay there for two years, but I had only one year. I could afford only one year. I did graduate from there and came out of there and reached Montreal. And so that was the beginning of my interest in investing accidentally. And this is yet another accident. My past costed money and I was lucky to have sort of a. A seat. You know, watching this investing happen, it was absolutely fascinating. And I thought, my gosh, I mean, it'd be amazing to mentor with someone like that, you know, so in turn or learn and you know, sort of live this. And so I asked and I wound up working there. That's sort of the genesis of that. Again, all this quant stuff sort of kind of went out of the window. And we come back to that. I suppose all this econometrics of economics and academic finance, I mean it kind of went out of the window, but didn't. I mean there was a background, there's some sort of structure. The accounting certainly didn't knock it out the window. Counting was a big deal and Chicago's way good for the county. And that certainly helped me in the future. So that is sort of how investing started. My adventure and journey in investing started.
- [08:57]
B
So you trained and worked closely with Marty Whitman, as you mentioned. What are some of the lessons from that period that are still directly shaping how you invest today?
- [09:13]
A
So Marty absolutely hated academic finance and you know, shortly up there with academic finance types of economists now, maybe I don't reject them all. I don't put all of them into the same bin as he does. There isn't more than an element of respect for academic finance one certainly learns from that shapes your thinking. Economics, on the other hand, in terms of the kind of stuff that I aspire to do and what I learned from Marty is subordinate to many things. Economics clearly matters. The economics, the microeconomics of business, the structural organization of industries, that's very, very, very important to me. So when I learned from Marty, amongst other things, and I suspect we probably get to do that, is one recurrent forecasting of the macro economy is probably not worth it. You're probably going to get it wrong and you're going to risk the whole bunch of capital on making these judgments. So try to minimize that, minimize your forecast of the future. It just, it may or may not work. It's probably not worth the risk of doing that. So that's item number one. How do you deal with it? And this is kind of important is if you buy something cheaply and we'll get to what cheap means, and you buy something that is strongly capitalized, that is, has survivability in the sense that if you own things for long periods of time, lots of stuff can happen to your company. The Business that you bought, I mean, look, if you own it for six months, interest rates could go up 100 basis points, 50 basis points, depending on the country you're in. If you own things for three to five and more, they could go up by depending on the country you're talking about. If you're in Brazil, they could go up by 10 percentage points. That's a big deal. And the business that you own has to be able to survive that. So it's partly a matter of context. The nature of the business that you bought, its financial structure, its capitalization, the business model it employs, does it need to raise funding? I mean, sometimes the doors of capital markets close, as we saw in the great financial crisis here at GFC here, even the US this is not something you'd be taking for a given. So survivability, I mean, along many different sort of axes has to be assessed very carefully of business model. I mean, it's very important that there have to be some things that are interestingly attractive about a business. So survivability is that. So survivability in isolation is an interesting good business, desirable business with survivability. And of course, the valuation has to be cheap. And so that was a starting point of my understanding. And one of the things, you know, learning from Marty was you did this for a long period of time. And I suppose maybe that was the trick in me of saying you'd probably be wrong in the short term, which the odds are if things are cheap, they're cheap for a good reason, and things get worse, they could go down. And so just, you know, run and bear it. You buy some more. Maybe if things are not getting worse, if anything, you perceive any reason to believe things might actually improve and progress forward in time. Buying cheap has a number of attractions to it. What you're trying to do is buy at a price which would make it very attractive. It's less than what somebody who's in the business would be willing to pay for that business. And that's quite important that you are buying a business less than for what you can replicate it for what somebody in the business would be able to replicate it for as a real going concern. And that's quite important. And that's the essence of what we do. We try to buy things cheap in the sense that less than what's worth to a cash buyer who operates the business, is knowledgeable about the business.
- [13:14]
C
Amit, I'd like to come back to sort of your timeline and bring us to your present charge. The firm that you co founded with a number of your former Third Avenue colleagues, particularly interested in how you arrived at your choice of name and equally, if maybe not more interested in lessons learned and lessons applied. As you alluded to before, there's investing and then the business of investing. So how did you think about the latter with respect to building your own firm?
- [13:48]
A
So I was at 3rd Avenue for a number of years, more than a couple of decades, and by Falco founding partners since 2004. So it's a couple of decades right there. And the second one since 2008, actually 2007. The both will soon be two decades. So founding the business, the way I think about the business, I mean there's nothing abstract about it, but you stripped the business to the core. What is it that we do? What is it we'd like to do? The firm that I joined initially when we started at 3rd Avenue was a much smaller firm. It was very much a meritocracy, it was very credible. And my end of the business, the international side was very narrowly focused and the firm they approve. As firms get bigger and successful, they want to do more and more and they proliferate in a variety of different areas. And that perspective, these were, they pigeonholed us to some degree, they were distractions. So when we founded Moeris, we decided that we'd be a narrowly focused firm, deep value investing, long term investing, doing what we did for the long term. And we had just one area, one area of activity, buying things around the world as long as they were cheap and met our investment criteria. And we're attracted businesses that we could buy cheaply owned for long periods of time. And that was the idea. Now when you buy things from long periods of time, you have to have sufficient conviction that they would be around. Hence this concept of survivability outcome. It's an obsession. There's many sort of elements to this and it's what we call intrinsic to what we do is this risk aversion. Now risk aversion is, I say survivability and that's what Moeris refers to. Moeris refers to a city's defensive walls. Cities over time, I mean like as businesses should have ways of coping with adversity. I suppose in the old fashioned ways they could withstand assault by hostile parties. In our case, our companies should be able to cope with hostile environments, environments of adversity. I mean it could be rising interest rates, rising inflation, changes in government regulations. I mean there's a whole slew of things that could make life difficult for them and so we tend to obsess about that and which is how we're more escaped. It's a classical Latin word. My colleague Michael was behind this. Obscure as it may be, we believe him that such a word existed. And of course, you know, he connected us to a professor of classical Latin at NYU and he who gave us a lecture and he said, remember how to pronounce it correct worse. And so on and so forth. There is such a word. It's infrequent in use and no wonder we can find it easily doing searches online. But there was such a word and yeah, it describes how buying cheap is easier than buying something that's cheap and safe. Safe precedes cheapness in terms because safe basically winnows out all these things that you can have which are cheap but may or may not be around in the future. You know, sort of the huff and puff and blower house down kind of thing. That is what we want to avoid. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline, it's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself@vanguard.com audio. That's vanguard.com audio all investing is subject to risk. Vanguard MARKETING Corporation DISTRIBUTOR and one thing
- [17:39]
B
you've said in relation to finding cheap assets and cheap businesses is that trouble is opportunity. Can you expand on why you think that's the case?
- [17:53]
A
Yes. Now Safi causes cheapness, mishaps, mishaps at the level of a company. A good company slips on a banana peel. It happens. It really does happen. You wind up with companies that have amazing market positions, great businesses, and a bunch of things happen to them at one time. They converge and of course the stock crashes on you. It just crashes. So what we're looking for is what we call extreme cheapness. It's not quite buying the dip, it's a bit more buying the crash. Trouble causes this stuff to happen. Okay? It's not always trouble that presents us with an opportunity. It can be long periods of neglect, disinterest, operating in a business area that is loathed by people. Companies can make mistakes, as I mentioned earlier on. I mean, for example, Matura, a company beyond which is an absolutely beloved company. It's a fabulous company that makes beauty products in Brazil and Brazil is like many other Latin American countries, has a very large beauty Product spend. I mean, let me not expand upon that. You know where I go. If I was to comment about the spending in Brazil, but Latin America generally. Now their business model historically used to be purchase versus selling. And they proceeded to, they made lots of money. They were very, very successful firm beloved premium priced products. They did. And they were environmentally sensitive. They did a lot of things that appealed to people and they had products which as I understand are quite, quite good. They proceeded to expand, but the money they had, they made a series of acquisitions, most of them ill conceived and ill fated. And so the company's balance sheet, by that of Kilcher, I mean the stock went down by almost 90% between 2022 and 2024. And that is trouble. I mean, within this trouble we saw opportunity. The opportunity that the company, if they came to their senses, would reconstruct themselves by basically divesting all these other flotsam and jetsam they'd acquired along the way. The ideas were sort of squishy ideas. The reasoning was kind of squishy. They did not recognize the limitations of their own, that these are not businesses that they could manage. I mean, they were a Latin American company, person to person selling. And they were not going to manage chains of bricks and mortar stores across the world. That was Bar Shop I'm referring to, which was a disaster. They bought Avon across the world, which is because they thought it was also person to person selling, but selling in different parts of the world, different products, managing different sales forces. This is a wildly labor intensive business. You cannot let these people go and do their own thing. You have to have some, I don't use control, but some degree of management. It's management intensive in a way they could manage. So anyway, Natura basically got rid of all these things and it's sort of coming true. So bad things can happen to very good companies. But that's not the only source of opportunity. Just to note that I'm not out there looking for disasters or trouble, but you know, trouble, it does sort of, you know, makes you sit up and look. I mean, there could be businesses that people ignore. Businesses for whatever reason are unfashionable because I don't know, people have just. Sometimes people just don't get the trouble of sitting down with a pencil or paper and locking themselves up in a room and just doing it like a measurement of value, envisioning how the value might emerge, might out someday. So trouble, you know, getting out of trouble is also an important thing. But staying out of trouble. So companies that experience difficulties and it could be, you know, the environment in which they operate is horrible. It could be, you could be in the middle of some kind of a industrial crisis. You could have a geographic crisis. You could have, I was talking a capital markets crisis, you know, witnessed a global financial crisis or Eurozone crisis. Stuff happens, right? And you want to make sure that the business you buy it will not be affected or if that peripherally impacted by the crisis with which is coexisting. So what you want to see is businesses have a strong enough capitalization, an intelligent enough business model that will keep them out of trouble and they will be survivors at the end. So generally sometimes wonder what kinds of trouble do I seek or avoid some things, I mean ideally the trouble should have a transitory nature. It could feel like forever. When you deal with a company having all these headaches. The global financial crisis, its intensity was so large, the depth was so big and the damage was so widespread. Not just the United States, not just the US housing market, the Neiman, the breaststrokes, everybody was shaking to the core. Then of course red is ripples across Europe. You know, you got all kinds of financial institutions in terrible trouble. You thought it would never end. I mean at the time with the intensity, the noise, the cacophony that happened. So you ideally would like these episodes to be bounded in terms of time. However strong your company is, if something goes on for 10 years, it could SAP its rare result. I mean companies can great, great, great balance sheets, but they could erode. So if see you go to trouble is, you know, which would really bring you back to the question of survivability. I mean survivability in our off of risk aversion takes a number of forms. Risk as I see it, is not the day to day stock price volatility. That's not what concerns me that much. What concerns me is financial or business risk. Financial business risk emanates from two or three different sources. One is in charge of the company. And in terms of the company some generic characteristics could have crummy management, short term management, management that's self serving. You just avoid those even before trouble or trouble just I don't want to deal with people like that. Two, you could have a bad business model. Some businesses tend to require funding, access to financing, external financing, be capital markets, be banks be it what have you that should not be depended upon for your recurrent business. Okay, if you're making a big acquisition you might need external financing. But those happen sporadically and are sort of, you may do them, you may not do them. There's a discretionary element to that. But what you don't want is your day to day business requires you to go to the market every day and borrow. That is horrible. Which is why for example, we never got involved with Lehman, we never got involved with Bear Stearns or generally capital markets focused firms. And we did not experience that kind of misery during the GFC as a number of value investors did. External to the business could be things like unusual regulatory requirements. Some businesses are more sensitive and could be subjects of regulations. For example, some business D3 necessities. Now the definition varies by government and by country. For example, in India you would worry about buying businesses where the government feels pharmaceuticals, the products of the company are necessities and therefore the prices will be capped. So you avoid stuff like that. Handicapping government meddling is a very difficult thing. I mean good companies can do weird stuff. Maybe saw that. Have you seen that in Norway? You see that? New Zealand, both great countries to invest in great governance. However, sometimes the government deems some businesses necessary for whatever reason. And so the rules are being changed. I mean, we're seeing that United States, I mean, who thought spirit is worthy of being bailed out. Maybe I'd be heartless. I think spiritually no.
- [26:07]
C
I've flown it a few times and that was my initial impression as well.
- [26:11]
A
I mean, oh, oh. I mean you fly in Latin America, the Florida. The seats are impossible.
- [26:16]
B
It's a company that deserves to go out of business.
- [26:19]
A
Well, they do, they do. You know, they could go through bankruptcy and if the assets are worth buying something, you know, let's let the investors in that take the bath, the proverbial bath. And there's something wrong when it comes to bailing out airlines. I'm sorry, airlines, you know, can go through bankruptcy. That's what the bankruptcy code is about. But again, as I said, that's heartless. Maybe I went to the wrong school. The school of Marty Whitman, I mean, or Chicago. I mean they're actually aligned in that sometimes they will not be, but for that they totally are aligned. So some businesses are hard to invest in and you just don't, just don't want to do them. And there's the other thing about industry structure. People don't think enough about it. Sometimes industries are such that the barriers to entry are very limited. Now why does that matter? Well, there's a class of people who love moats. This. And that's not what I'm talking about. What I'm talking about is you buy something that's Depressed and oftentimes the course of evaluations being depressed is terrible near term business outlook because of things like overcapacity in the industry, things that could be rectified with the passage of time. You could have consolidation, closure of capacity. All kinds of things happen. Industries tend to fix themselves. The capital will go out of industry. So if, for example, an industry has very limited barriers to entry, as said industry post its period of difficulty, starts to make money, margins improve, you have lots of new entrants coming in again, you never make money. Your margins will always be sort of blah, they'd be sort of subpar and you're not going to make money. And that's kind of a boring industry. You know, I hang around for years, I would like to make money. And so that is a way of I'd rather not invest industries like that. So that's an external business. I mean, so we've done a piece talking about, you know, how we stay out of trouble. It's called risk. We talk about risk. I mean there's ways that how we perceive risk. So that's one thing we did at 3rd Avenue. We talked a lot about avoidance of risk and valuation, so forth. We've tried to codify that a bit more formally, a bit more rigorously and we practice it. And in terms of how we value things, our asset based valuation and what that does, avoidance of risk, the margin of safety is not just valuation. Buying cheaply is an important thing, but also the avoidance of trouble, avoidance of financial risk, business risk, anything that's existentially related to the business, anything that impair the value of your business, diminish its value during a holding period.
- [29:13]
B
So I wanted to follow up on kind of business structure risk as it relates to Natura Cosmetics, which it looks like was still your top holding as of the most recent portfolio that we have. And I think someone might look at that type of business that relies on kind of old school person to person sales and say, is that business model obsolete in the age of Instagram influencers? And you can buy whatever you want with one click. So how do you think about that type of risk in relation to Natura?
- [29:55]
A
So it started out as such. It did. Natura has progressed in time. Latin America is actually pretty good about that. Natural is actually even in the US it's available online for what it's worth. Check out Amazon, you'll see. Okay, I mean look, I think the product's expensive, but that's just me, I'm too cheap. But I mean, you know, who pays that Kind of price for soap. But anyway, fine. So Natura, in his last stage of wringing out Avon, they got rid of Avon, except they kept Avon Latin America and they were merging Avon Latin America into Natura. So there are two sales forces, two different sets of products and different compensation schemes. And this whole complicated thing that happened during the latter half of last year. And one of the problems was that bring the Avon people into the Natura ecosystem where they were trying to make them Instagram influencers. Now this is of course I don't have Instagram and yes, I have heard of influencers and what they do to industries and products and so forth, but Natura is, I don't say knee deep in that because that is something that plays very well country by country, culture by culture. Yeah, I mean, Peruvian influencers are different from Brazilian influencers, for example, I suspect. I mean, that's just me joking, you know, probably with some level of ignorance, but they are very much involved in that. And so the tour has tried to incorporate more contemporary practices rather than person to person stuff. But you know, person is how they started. In fact, they started as a bricks and mortar operation in 69. It was only 74 that they realized the person person stuff would be something that would become a viable model. And that expanded and took off initially Brazil and then across the rest of Latin America. And now of course, they're migrating to this practice of. In fact, that was very much a question we asked ourselves because a lot of this had moved online, a lot of it. And the marketing of these products is, I mean, I don't want to say turbocharged by, but Serbia is very much a part of it. And yeah, Natura does absolutely is doing more and more of that. And that was part of the teething pains of sort of migrating Avon into its own ecosystem.
- [32:16]
C
I wanted to touch on that because I think it shows up in your experience with Natura. But I think more broadly is something that has been a common theme in your portfolio in recent years, which is what you've referred to as value accretive corporate activity. So asset sales, spin offs, buybacks, et cetera. Is this purposefully, intentionally something that you're looking for? Why has this been a recurring theme in your portfolio? And is it something that you can even do intentionally? Or is it just kind of more emblematic of kind of an artifact, almost an outcropping of your approach over the latter?
- [33:00]
A
So what we try to do is buy a business cheap, cheap in relation to what somebody in the industry would normally purchase in a cash Transaction. Yeah. So the businesses usually have a number of characteristics which are interesting to us and potentially to somebody else. One, they have businesses which are the core, are actually good businesses which may at the point in time be underperforming or go through some sort of cyclical downturn. Something like that has depressed the performance and the implication of the price. Often these businesses, and because they're well capitalized, they usually hit down sheets. They could have surplus assets and so you could do lots with these businesses. So when you buy them cheaply as a measure, our approach to cheapness focuses on what you can sell. You can basically it's asset based investing in terms of what can the businesses, what will they transact for in a sane valued transaction, that is, you know, assets A, B and C here and now, what could you sell these assets for? You know, you know, ARM stands cash transaction, not a distressed transaction, but in arms, I mean, you're buying it in distress transaction, distress valuation. So that is an attraction to us. If we have done our work correctly, this should be, I mean, captive to acquirer your takeover bait. Now, ideally, and I say ideally because we've had some mishaps, we've had takeovers that prices I wish were much higher. Our good companies get taken over at prices I wish, you know, we want more obviously. So you wind up buy these things, I mean, buying businesses cheaply. And we like to own them for long periods of time over which as businesses emerge from their funk, they do better and better. As things normalize, they will do better and better and better and we do well alongside them. We obviously, we have to have sensible management. You have to have obviously the right sorts of conditions which may take time to emerge. The environment in which they operate, it could take time to emerge. But usually the passage of time, things sort of normalize, so to speak, and we do okay, so companies that are overcapitalized may have excess assets and they might wind up selling one or more of these assets. They may wind up either keeping the cash on the balance sheet for future acquisitions or buying back shares or returning interest via dividends. I mean, obviously relative tax efficiency, they stack different degrees of tax efficiency, these different transactions. But you know, that is one of the ways in which value is realized, crystallized, maybe returned to us. It is a byproduct of what we do. You know, buying reasonable businesses, decent businesses really cheaply allows this to happen. For example, I mean, over the last year, I mean, in the case of Batur, of course, what they've been doing is they've been Selling businesses. They've been cleaning up the rat and they're returning to a state where the balance sheet is decent, the businesses are ticking away, and hopefully probably all that restructuring stuff is behind them. Or last year was a year when there was a big glut of oil. God, it feels like an eternity with all the stuff that's going on now. So there was a huge glut of oil. I mean, there was a huge glove, actually. China is never going to come back. China's in a perpetual depression and no one needs oil. On and on and on, on. And we're all good at EVs and all that. Those are stories. Now, in a world like that, oil service companies can get very cheap. I mean, just to give you an example of Tidewater and Belaris, both companies have over the years gone through bankruptcies, emotional bankruptcies, good balance sheets. And tideboarder itself is an instructive story. Give me a bit to tell you that I'll come to the present. Here's a tideboarder provides both services to offshore rigs and the company emotional bankruptcy with a completely clean balance sheet, which, you know, a balance sheet that was in a. Allowed it to operate in a depressed, very depressed environment for its operations. So they could, you know, sort of eke out a little bit of money, make some money, lose a little bit of money, but had a really a fortress like balance sheet and net cash balance sheet. This was in 2017 and we bought it at 12 something per share. Then we had the pandemic. Oil prices went negative. Tiger was stock price went to $4 a share. It was howling all around it. My God, this is terrible. So we bought some more because, you know, I mean, the business was fine, its competitors was going under even faster. And so the world was consolidating around it, saying we bought a bunch of part four, broader Costa. Then you saw was in 2020, by 23, we were summing those shares at over $100 a share. So fast forward, remember 2023 was sort of the sort of hangover from the invasion of Ukraine and oil prices went up and everything's oil really up. And so 23 was a great opportunity to sort of move on. Fast forward 2025, we have a situation where there's lots of oils going out of fashion. Oils are now going to be used. All those stories went on. I mean, they will return, I promise you. So what happens is we are able to buy Tidewater and Bulmaris very cheaply. And the thing about these companies is the industry and the Oil service industry historically, while the individual assets are extremely expensive, I mean the prices of the stocks of the companies that own these assets swing around widely. So you can buy these assets very, very cheaply. Like very cheaply at a fraction of what would cost to replicate a business like that. So about Valeris and fast forward to this year. Valeris is the object of a takeover bid in Q1. And my God, I mean really, it like made our Q1. It was up about 95% during the quarter. Tidewater made it a very well priced acquisition and it was up by 60, 70%. It was up a lot, a lot during Q1 this year. So this sort of stuff happens when you are buying businesses cheaply. They become very attractive to acquirers. It's a byproduct. And again companies can do this stuff on their own. They can spin off assets, they can spin off assets, do very large share buybacks and there are a number of levers to pull create value. Marnie coined this term resource conversion for all these non operating ways in which you can create value. A comment about this. It's lumpy. It's lumpy that it doesn't happen every day. It happens periodically with companies and businesses. And the thing about that is it is also, I think I would contend in my conjecture, it happens in waves when stock prices can be used for acquisitions. So there are periods where none of this happens. Then there are periods where a lot of it happens. But to the extent you have businesses that are over capitalized, have surplus assets, you can see them realizing value and doing good things about their shareholders.
- [40:27]
B
So you touched on some of the wild swings we've seen in oil supply and oil prices. And looking at the portfolio overall you have pretty significant exposure to natural resources and basic materials related businesses. But you have said that you're not making calls on commodity prices. And I'm curious, how do you disentangle that from the fact that commodity prices will have significant influences on earnings and cash flows for many of these companies?
- [41:09]
A
So a couple of observations. One, let me answer it directly and then sort of be a little bit more. I'm not going to attempt to obfuscate but let's plunge into this thing. So commodity prices will have an impact and let's, let's go back sip with the Tidewater Valaris example. Higher oil prices may in the long term affect their well being and doing well. They have not by the way. In fact people are terrified that they have the assets in bad parts of the world right now. But that said, the returns on Our holdings may or may not be linearly linked to commodity prices. The return on Valeris happened before oil prices spiked. There was a takeover. And the return on Tidewater, which made a very good acquisition in Brazil, also happened before oil prices spiked. Just by way of example. Now it's the nature of the business. So these are not direct bets, so to speak. I hate that word bets on the commodity. The companies engage in businesses related to commodities and the relation might not be as direct as it seems. One great example will illustrate this. Dundee Corp. Dundee is up there is one of our holdings. Dundee was a holding company which had many, many, many businesses when we invested in it. It had real estate, it had cattle farms, it had fish farms. It has an investment in auto parts manufacturer. It has an investment even now in a private company that is working in a cure for Alzheimer's. And on and on. There was a whole slew of things. The founding owner passed away, the sun took over. We've known the Sun. The son is a brilliant resource investor. The stock was very cheap because it's a mishmash of many things and not making much money. So he presided the process of liquidation of everything. Everything to the point that he could narrowly focus the company's business in providing funding to mining companies, earlier stage mining companies. His background was he's a mining engineer and is also a finance dyke. He's got MBA too as well and has been doing this for decades. I've known him. A few decades ago we were at our company said Po. It was done to precious metals, separate distinct company. It was very good. So the company, the attraction to us was he had liquidated enough. The company was a Ben Graham net net. It was classic. You're buying less of the cost of liquid holdings, net or liabilities and you got everything else for nothing. Then when I said nothing is, you didn't know it was worth more than nothing. I had no idea how to value a company, a biotech company that's about making, working on a cure for Alzheimer's. We shall see. I mean, if it's nothing, that's fine too because I have value as nothing. If it's value as something, I'd be very happy to purchase it. So the process of liquidating those things continued to build value. And he paid down all the encumbrances, shrank the costs, on and on, did all the right sorts of things and then proceeded to slowly build up a portfolio of investments providing direct financing to companies in world of mining, be it copper, nickel mining, be it gold mining and so forth. So that's how that came about. It is absolutely true that this company's future and prospective fortunes will be influenced by the valuation of these underlying equity holdings or royalty holdings. Yes, actually they just sold a royalty. But that in turn is also going to be influenced by the natural resource base. But you're paying very little. What we paid for was a portfolio for businesses. You're buying this company at less than the value of his net card assets and that was a starting point to buy something for nothing. We also have wheat and precious metals. When we bought it, our holding goes back, initial holding goes back to 2016 when the fund started. It was a very bad year for gold and silver and I don't particularly care. Gold is a very strange thing to invest in. I have no sort of intuition of what it's worth, honestly, I just don't. What I did know was this company was in the business of providing capital to individual mines and basically having royalties on the individual mine operation or getting a portion of the output of said mine at a deeply discounted price. Now clearly, as the product does better like gold and silver, cobalt or prices do better, clearly this company does better, no question about it. On the other hand, its business is providing financing when prices are poor for gold, cobalt and silver and so forth. The competing sources of finance for mines are few and far between and this company is always cashed up and it's got a pristine balance sheet, large access to capital on or off balance sheet and is able to provide funding. So yes, operationally the earnings will do better in good times with resource in bad times, which is when they build the business, they do much better in terms of actually building cash flowing businesses in bad times. So yes, commodity prices do, but it's not a linear one. For one thing, I don't know, I'm not really a commodity bet per se. The bet is on their business model per se. And the trick is what could help them succeed is making intelligent investments in businesses.
- [47:21]
B
That makes sense. Thank you.
- [47:24]
C
With the last few minutes we've got left, I'd like to take stock of where we're at this current moment in markets. In many ways I think there are parallels that could be easily drawn to a moment that took place decades ago, the bursting of the dot com bubble, which was the moment that launched 1,000 value mutual funds across the US landscape of varying degrees of quality. And you've remarked in your letters to your investors that you're a relatively rare breed these days. And I'm curious is what we're Looking at right now, market concentration, fascination with all things AI, et cetera. A setup for a similar moment, a prospective scenario whereby value could finally have its, its long hoped for comeback.
- [48:17]
A
So I have over the last couple of years, when we started, Boris, it was probably the worst time ever. And I'm a really horrible timer. You know, look, we studied where as a firm in 2015, the Mutual Fund, 2016. And then of course you were hit by this onslaught of everything imaginable. You know, everybody was obsessed with technology, high growth and on and on and on. There's always been a new theme which seems to dominate empty, which is fine, which is absolutely fine. Now, a number up here chose to go down the path of, well, you know, the sincerest form of flattery is imitation. And so the growthy kind of investment crept into many people's portfolios. And of course this madness sort of blew up in 2022. And I think you should just look across all the people, the proclaiming stock, proclaiming value investors who got nailed in 2022. I mean, just as a footnote, I was managing money during all this craziness that went on in the late 90s and early 2000s. And I mean, we bought the same miserable, horrible stuff that we buy now. And we came through that period. I mean, I bought a lot of stuff in, during Asian crisis. I mean, this is the sort of stuff that causes career risk, you know. But that said, that's the stuff that saves our performers in 2000, 2001, 2002, before 2003 came and saved everybody. But we made money in all those years because as I said, these terrible things that were very cheap that were gradually themselves digging themselves out of the hole. So 2020 was an interesting, it should have been a wake up call for people, but apparently it wasn't so fine. The attrition in the world of value investors has been fierce. It really has been fierce. I mean, I watched friends, dear friends of mine, just wind up close up shop one by one. And the attrition in the number of funds, I mean the funds, for example. So we're in the world of little sandboxes, I suppose, called international smid, what have you. I mean, people have chosen category, it is probably true now, the number of people who roll their international funds into global funds so as to, I mean, the global funds, clearly, because they'd lost the US have done much better. And so of course these funds are out of sight and so they disappear. And so what I found, and a manifestation of that is the last number of years, people had groused that there's nothing to do the world of value. Oh God, there's lots to do with the world of value. We find more and more and more things. So last three, four years happen, I think quite good, quite good after 2020 and the craziness that went on in that year post 2021 has been a very interesting period for us. All I can say is that availability of opportunities, I mean, that's how I judge the environment. People can judge the environment by looking at aggregate market statistics, aggregate market valuations, which I think are wildly misleading. The U.S. the U.S. is highly overvalued. Fair enough. In the aggregate, yes. But there are pockets of value sitting inside it. So, I mean, I will not dismiss the US as a complete desert for value. The rest of the world is interesting and you have episodes of unpleasantness like the current one that we are going through, which is going to, if it continues and persists. We even had lots to do with the world away from the US Parts of the world are affected by the stuff that's going on in the Middle east, for example, and the fallout. There's a whole country that's running out of cooking fuel. India, for example. I mean, India is certainly under the gun right now. Does this mean there's going to be interesting things to do there? Maybe it's an unpleasant way of getting there. I really don't want to see people starving. Be terrible. So opportunities are there and I think we'll gradually proliferate, but in different areas over time.
- [52:26]
C
Amit, I want to thank you so much for joining us today and sharing your experience, your insights and, you know, a unique perspective on all the myriad opportunities that exist. It's just, I think, depends on your perspective and whether you're even looking for them or not these days.
- [52:46]
A
Well, to those who look with a curious eye, I think there's stuff out there, there and the diminution of competition in the world of value. At least our end of the value tent, is actually kind of good. It's good. The field of opportunity is actually gradually expanding because of that.
- [53:05]
C
Well, Mead, thank you again for being here with Amy and I today. We really enjoyed the conversation.
- [53:10]
A
Thank you very much. This is much appreciated.
- [53:13]
B
Thanks again. Amit,
- [53:19]
C
Thank you for joining us on the Longview. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts. You can follow me on social media star BenJohnson on X or @BenJohnson, CFA
- [53:38]
B
on LinkedIn and @Amy Arnott on LinkedIn.
- [53:43]
C
George Cassidy is our engineer for the podcast. Jessica Bevel produces the show notes each week and Jennifer Garrett copy edits our transcripts. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us@thelongvieworningstar.com until next time. Thanks for joining us.
- [54:07]
B
This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. And its affiliates, which together we refer to as Morningstar. Morningstar is not affiliated with guests or their business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy or the completeness of the data presented herein. This recording is for informational purposes only and the information, data analysis or opinion it includes or their use should not be considered investment or tax advice and therefore is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analyses or opinions for their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile. Before making any investment decision, please consult a tax and financial professional for advice specific to your individual circumstances. Morningstar Investment Management, LLC is a registered investment advisor and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc.
- [55:49]
A
Sam.