This break out session focused solely on value investing with a retrospective look on 2008 and investing strategy. The speakers included Bill Nygren, portfolio managerÂ forOakmark Fund, Meggan Walsh, portfolio manager for AIM Diversified Dividend Fund, and Martin Whitman, Co-Chief Investment Officer at Third Avenue Management.
The session focused initially on the fumbles in 2008 that each manager encountered. Some of the issues that were mentioned included the seduction of upward growth and how it blinded reality. Mr. Nygren focused on this and stated that psychologically it is difficult to see downside risk when the market is rolling without any hesitation. The cost of capital in relation to discounted cash flow analysis (DCF) was mentioned by Ms. Walsh and illustrated the difficulty in measuring risk in relation to valuation. Ms. Walsh mentioned on how difficult it was in 08 to measure what the true cost of capital was while the rates were fluctuating rapidly.
Mr. Whitman was particularly engaging and at length described the differences between market participants and true investors. He credited a lot of the downturn in the market to the participants (short term investors) who helped drive equity prices downward at a rapid pace. Also, he discussed how a stock being cheap was not a sole factor to determine buying decisions. Credit worthiness was a factor that Mr. Whitman emphasised on several occasions.
Whitman laid out his firms investing criteria which encompasses a three tier approach. First, they do not buy common stocks unless there is a strong financial position. Second, they buy in at prices that are at a discount to the companies net asset value (NAV). Finally, there must be sound evidence that the company will grow earnings by no less than 10% over the next ten years (compounded growth).Â
Walsh discussed how often investors give the income statement greater emphasis over the balance sheet and the folly in doing so.Â He stressed how important cash positions are in relation to the rate of return in money markets. Essentially he was stating that a company in a high cash position is earning an extremely low rate of return in comparison to a competitor who is invested in assets that are earning a greater return.
The moderator asked the question of what each speaker has learned from Ben Graham and also how they have deviated from his teaching. Margin of safety was mentioned as was the necessity of carefully looking at the balance sheet. Whitman mentioned how he feels that Graham was wrong on credit analysis and also that security analysis isn’t as difficult today as it was in the early 1960’s due to greater disclosure.
More of our coverage of the 2009 Morningstar Investment Conference:
–Thursday opening session
–Two Sides of the CoinÂ breakout session
–Thursday lunch general session
–Thursday general session with John Bogle