Video Lecture by Tim McElvaine Of McElvaine Investment Management

Posted on March 1, 2011 by Adib Motiwala

Tim McElvaine is the founder and President of McElvaine Investment Management Ltd. Tim established The McElvaine Investment Trust in 1996 and acquired The McElvaine Limited Partnership (previously Cundill Capital Limited Partnership) in the summer of 2000. Tim developed his value-oriented philosophy during his 12-year career with Peter Cundill & Associates Ltd. where, amongst other capacities, he served as Manager of the Cundill Security Fund (1992-99), Co-Manager of the Cundill Value Fund (1998-2003) and Chief Investment Officer (1998-2003).

He recently spoke to students at the Ben Graham Center for Value Investing. I heard the lecture and found it compelling and a must see for any student of value investing. The Q/A is really awesome. Some of the topics covered are

His thoughts on Gold as an investment

Portfolio concentration: he does 4,6,8% positions. Build them slowly. Value stocks dont go up that fast. Takes his time to build his positions.

Talks about 2 investments and compares them

Opinion on oil – None. You don’t need an opinion on everything.

How to get a job: What to do v/s what not to do to get noticed. Send a current investment idea.

Toughest part is knowing when to sell
– specially slow drip where the value goes down slowly.
– fall is easier to sell out of.

3 year horizon

Investing in Ireland.

Having your own account while managing others money is not a good idea as pe him.

How he was able to raise capital for his funds.
– slow, tests your passion
– suddenly people start sending money
– its not only good performance
– took him forever to get to 10 million. then went to 100 million relatively quickly.

Does he hedge currency risk? he does. to reduce volatility but Browne’s study showed not much difference over multi-year performance

3 – 4 reasons to buy is plenty: He does not want 20 reasons

Simplify your thought process. value guy focus is margin of safety. focus on big stuff. not minute details. too much information makes u over confident.

How does he avoid value traps?
– value trap is not where stock is flat. its where NAV is going down. He looks at that.

Which valuation method does he like the most?
– liquidation value can be tough to judge
– replacement.
– private market value is his favorite. likes asset protection to go with it

How value investing has changed?
– lot of competition.
– likes going in messy situation when all hell breaks loose.
– take price risk in short term. mos.

Him being away from Toronto?
– away from noise
– turns off PC at times. 100s of mails a day. figure out how to unplug.

How does he control his emotions?
– It ain’t a game. stock does not know you own it. If you are a multi year investor, you don’t need to be glued to the prices
– Do for a walk. Don’t trade.
– Write down why you buy a stock.

Thoughts on activist investing
– its difficult. He does not like it.

Does he invest in technology stocks?
– He does but its tougher for him. Would he invest in facebook? good luck with that.
– He did buy apple. Sold apple (AAPL).

What is potential of value investing in singapore / india? educating people there or even starting a business there.
– Find people who trust you and understand you.
– Talking to momentum investor about value…u may never be able to explain to them ur style.

What is most important thing you learned in investing and life in 25 years?
– Relationships matter.
– Passion

Video can be seen here

Posted in Canadian investors | 1 Comment

Great investor Peter Cundhill passed away

Posted on January 31, 2011 by Adib Motiwala

Last week, the value investing world lost another great. Canadian investor, Peter Cundhill, passed away on January 24, 2011 at the age of 72.

Mr. Cundhill lectured at the Richard Ivey School in 2005. Watch the video here.

Learn more about Peter Cundhill here

An article on His legacy

OID interview

Another article on Peter Cundhill

A few posts back, I blogged about Tim McElvaine and his investment philosophy. He spent the early years of his career working closely with Peter Cundhill.

Posted in Canadian investors | Comments Off on Great investor Peter Cundhill passed away

An Introduction to Value Investing

Posted on January 27, 2011 by Adib Motiwala

I presented an Introduction to Value Investing to the students of the University of Texas at Dallas.
[scribd id=47702545 key=key-4wxq8r7g80mf28nwin9 mode=slideshow]

Posted in Motiwala Capital, Presentations, value investing | 9 Comments

McElvaine Investment Management’s phiolosophy

Posted on January 24, 2011 by Adib Motiwala

I came across McElvaine Investment Management via another blog. Tim McElvaine is the founder and President of McElvaine Investment Management Ltd. Tim developed his value-oriented philosophy during his 12-year career with Peter Cundill & Associates Ltd. Peter Cundill, I have read is a renowned investor in Canada.

I liked the simplicity of the investment philosophy which is summarized as below

IN A NUTSHELL, our investment philosophy is “to make all the money on the purchase.” As an investor, we believe one of the few things we can control is the price we are willing to pay. Therefore, when we are selecting investments, we focus on what we are getting and at what price we are prepared to act. Our intention is to invest only where the difference between the value of the investment and the price we pay gives us a margin of safety.
The factors we consider in assessing investments include:

1. The difference between the “intrinsic value” and the market price of the investment
2. The business risks associated with the investment
3. Incentives that align management’s and shareholders’ interests.

They have an acronym for what they look for in an investment. It ABBA.

A – Accident
B – Bird in hand
B – Brick house
A – Avoid ( or atleast understand) Lola / Align interests

Read about it here. Its worth printing and keeping around.

An excellent interview with Tim is found here

A most recent video lecture in 2011 can be seen here

Posted in Canadian investors, Investing Rules | 1 Comment

MakeMusic (MMUS) – Niche business with Free Cash Flow and solid balance sheet is music to my ears

Posted on January 22, 2011 by Adib Motiwala

I am participating in the Value Ideas Contest at GuruFocus.com. I have submitted my long thesis on MakeMusic (MMUS) for the same.

MakeMusic, Inc. founded in 1990 develops and markets proprietary music technology solutions under the Finale and SmartMusic brands. The company’s products provide alternatives to traditional practice, education, and composition techniques. Its software product sales are made through traditional distribution channels and MakeMusic’s Web sites.

MakeMusic with a market cap of $24 million had sales of $17 million in the last 12 months. It has $10 million in cash on the balance sheet giving an Enterprise Value of $14 million. MMUS produced free cash flow of $2.8 million in the last twelve months. On an EV /FCF basis, MMUS trades extremely cheap at 5 times. The lowest FCF in the last 3 years was $2 million.

The entire analysis can be read on GuruFocus.com

Disclaimer: Long MMUS at the time of this post.

Posted in Stock analysis | Tagged | 2 Comments

Patience: The Hard Part of Value Investing

Posted on January 18, 2011 by Adib Motiwala

I came across an excellent value investing related website from a fund manager in Canada. The website is called Value Investigator by Michael Irwin who runs the ABC Funds in Canada

They have a section where they provide commentary on some of their current ideas – Value Favorites. The Value Vault section contains old ideas that have been sold. The Value Library section contains some good articles and their commentary on value ideas. I found an excellent article in this list that talks about the toughest aspect of being a value investor – and that is being PATIENT.

I am taking the liberty quote some relevant parts here:

“Firstly, let me admit that the easy part of value investing is finding cheap stocks. We start off by diligently researching a company’s balance sheet, prospects, hidden assets, potential liabilities, and etcetera. As a second line of defense, we will also review a company’s technicals or stock price chart patterns to give us a trading perspective. Ultimately, if a stock cuts it, we attempt to buy our position. This process, in all candour, is the easy part of value investing. Now the hard part of value investing begins… and that is the patience of waiting it out until the general market (i.e. other investors) catches on to our new investment purchase. The realization of our ultimate price target, unfortunately, may take weeks, months or even years to play itself out.”

In all three cases, their market prices declined below our initial purchase price. At times it appeared that no one even cared about these fundamentally cheap stocks in spite of the fact that all three offered dividend yields of 1.5 to 2.5%. Moreover it was of little consolation to investors that these shares were trading at over 50% below their net asset or intrinsic value. We were questioned many times why these stocks traded so poorly and when (heaven forbid) might we throw in the towel and sell out. Clearly, patience and discipline became the hard part of value investing.

“In conclusion, we offer the following observations:

At the early stages of value purchases there is considerable frustration and investment agony until a particular stock’s value is recognized and its share price climbs.
Once recognized, the value stock rapidly runs up in price. This sudden appreciation and transformation from value to momentum share play will equally test a value investor’s resolve regarding the “when to sell” decision.

When all is said and done, I honestly believe that fundamental value investing, notwithstanding the time element, always wins out in the end.”

Read the entire article here

Posted in value investing | 2 Comments

Wet Seal (WTSLA) is not my kind of stock

Posted on January 16, 2011 by Adib Motiwala

I was looking through this spreadsheet where I track the valuations of several retailers. Since I use a Google spreadsheet to track the data, the stock prices, EPS and P/E are automatically updated.

Two of my current holdings, GameStop (GME) and Aeropostale (ARO) showed up on the list and they continue to remain very cheap with TTM P/E of 8.5 and 10 respectively. I also noted that BestBuy (BBY) seemed quite attractive at 10.7x P/E ( after a sharp fall in price after recent earnings).

I found a new name Wet Seal Inc (WTSLA) trading at 4.4x TTM P/E. I was quite intrigued and decided to take a look to see if it was worth doing detailed research. After about 5 minutes I had made up my mind to give it as pass.

Wet Seal operates two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “Arden B”. Wet Seal is a junior apparel brand for teenage girls who seek trend-focused and value-competitive clothing, with a target customer age of 13 to 19 years old. Wet Seal seeks to provide its customer base with a balance of affordably priced, fashionable and basic apparel and accessories. Arden B is a fashion brand at value price points for the feminine contemporary woman with sex appeal. Arden B targets customers aged 25 to 35 years old and seeks to deliver contemporary collections of fashion and basic separates and accessories for various aspects of the customers’ lifestyles.

The recent stock price was $3.76 with a market cap of 376 million. TTM Sales were $566 million and net income of $88 million.

Here are some of the reasons I passed on Wet Seal.

1) No sales increase over a decade: Sales in 2001 were $580 million. Sales in 2010 were $561 million. In the years from 2001 to 2010, sales see-sawed and are actually lower than the sales in 2001.

2) Inconsistent history of profitability: 4 years of losses from 2004 – 2007.

3) Heavy dilution of shareholders: Shares outstanding went from 44 million in 2006 to 72 million in 2007 to 94 million in 2008.

4) Low Op margins in the low single digits.

5) FCF much lower than net income: Earnings increased by 200% in FY 2009 from $30 million to $90 million but FCF went in the opposite direction and decreased by 31% from $35 million to $19 million. On reading further, i found that net income for fiscal 2009 includes the reversal of the valuation allowance against the net deferred tax assets in the amount of $71.3 million. So, really net income was more like $22million. ( Thats why it makes sense to look at EBIT or Operating Income)

That said, Wet Seal has about $140 million in excess cash out of a market cap of $376 million. Every single metric says the stock is cheap when looked at TTM numbers. (EV/EBIT = 7, EV / FCF = 7.7, P/E = 4.4, P/B = 1.4, EV / Sales = 0.4). Some investors undoubtedly would consider it as a candidate for a turnaround. With such a cheaply valued stock, if there is improvement in terms of sales and operating margins, the stock could see significant upside.

Another potential catalyst could be the new CEO. Susan McGalla was appointed as the CEO on Jan 12th 2011. She spent 14 years at American Eagle (NYSE:AEO), most recently as president and chief merchandising officer.

However, given a choice I always prefer investing in a company that has consistently been able to increase sales, profitability and cashflows and YET trades at a cheap multiple. Aeropostale and Gamestop are two such companies. You can check the analysis I posted on Aeropostale here. Part 1 | Part 2

No thanks Wet Seal.

Disclosure: No position in WTSLA. I have a long position in Aeropostale and Gamestop at the time of writing this post.

Posted in Stock analysis | Tagged | 1 Comment

The Wisdom of great investors – Davis Advisors

Posted on January 13, 2011 by Adib Motiwala

David advisors have some excellent eduction material for investors on their website.

Here is the summary of one such paper they put out which comes from the master investors.

Avoid Self-Destructive Investor Behavior

Chasing the hot-performing investment category or making major tweaks to your long-term investment plan can sabotage your ability to build wealth. Instead, work closely with your financial advisor to outline your long-term goals, develop a plan to achieve them and set the expectation that you will stick with that plan when faced with difficult periods for the market.

Understand That Crises Are Inevitable

Crises are painful and difficult, but they are also an inevitable part of any long-term investor’s journey. Investors who bear this in mind may be less likely to react emotionally, more likely to stay the course, and be better positioned to benefit from the long-term growth potential of stocks.

Understand While Painful, Crisis Creates Opportunity
Low prices can increase future returns. Investors who bear this in mind are more likely to endure hard times and be there to benefit from the subsequent periods of recovery.

Don’t Attempt to Time the Market
Investors who understand that timing the market is a loser’s game will be less prone to reacting to short-term extremes in the market and more likely to adhere to their long-term investment plan.

Don’t Let Emotions Guide Your Investment Decisions
Great investors throughout history have recognized the value of making decisions that may not feel good at the time but that will bear fruit over the long term–such as investing in areas of the market that investors are avoiding and avoiding areas of the market that investors are embracing.

Recognize That Short-Term Underperformance Is Inevitable

Almost all great investment managers go through periods of underperformance. Build this expectation into your hiring decisions and also remember it when contemplating a manager change.

Disregard Short-Term Forecasts and Predictions
Don’t make decisions based on variables that are impossible to predict or control over the short term. Instead, focus your energy toward creating a diversified portfolio, developing a proper time horizon and
setting realistic return expectations.

Posted in Investing Rules | Comments Off on The Wisdom of great investors – Davis Advisors

The story of Francis Chou – extremely motivating

Posted on January 11, 2011 by Adib Motiwala

I can bet that most of you would not have heard of Francis Chou. He is one of the most successful fund managers in Canada. I recently saw a series of video talks on the website of the Richard Ivey School of Business at the University of Western Ontario. Among these videos, I found Francis Chou. Its a must see. He is such a simple man and speaks simply and elegantly.

His story is simply remarkable. Francis came to Canada from Allahabad, India at the age of 19 in 1976. He only had a 12th standard education. He was working in Bell Canada as a telephone repairman. Not satisfied with this career, he wanted to do more with his life. He came across an articles about Ben Graham and read the Intelligent Investor. He then became enamored by Value investing and read everything he could about Graham, Value Investing, Buffett and so on.

He then started an investment club with about 50,000 dollars with contributions from 5 other co-workers. In 5 years, he had turned it to 1.5 million dollars. Later on, he converted it to a mutual fund called as the Chou Funds. He had two funds for a long time. The Chou associates fund has a 15 year plus track record. Annualized 11%. The Chou RRSP fund has 12% annual return over 15 years. Later in 2000’s he added 3 more funds ( Asia Fund, Europe Fund, Bond Fund). In 2010, he started two funds in the US. Chou Equity Opportunity fund and Chou Income Opportunity Fund. See http://chouamerica.com/

In 2008, his fund performance suffered like most investors. However, he was confident that his style of investing – the value style would work. He did well in 2009 but I dont have exact numbers.

He has three strategies. The first one he practiced is the typical Graham method of net-nets. An excellent website for net-nets is http://stocksbelowncav.blogspot.com/

Another strategy is special situations. He did not talk much about this in the videos. He mostly talked about net-nets and his favorite style.
The one that he likes the most is the Buffett style which is to buy quality companies at cheap prices.

Another aspect that blew my mind is that he has another job and manages his funds pretty much on the side. He works with Prem Watsa at Fairfax Financial. Prem Watsa is a renowned value investor and is considered as the Buffett of Canada.

Here is an article about him

See his videos 2009 | 2008 | 2007 2006

I was certainly motivated to learn about Francis Chou and hear him. Maybe one day, I will meet the kind man.

Posted in Canadian investors | 2 Comments

Ten Rules of Value Investing by Zeke Ashton

Posted on January 10, 2011 by Adib Motiwala

Every now and then I lose patience with some of my stocks. I see other folks trading in and out of the same stocks that I have held on to steadfastly because I believe they are under-valued. I start to wonder if i should engage in a bit of trading. At such times, I find it comforting to read material that will keep me true to the discipline of value investing.

Here is such material. The below is taken from a presentation made by Zeke Ashton who runs Centaur Capital Partners.

1. Resist the Urge to Speculate
2. Don’t Lose Money
3. Valuing Businesses is the Key
4. Build a Circle of Competence
5. Wait for the Perfect Pitch
6. Make the Market Your Servant
7. Be an Absolute Return Investor
8. When in Doubt, Hold Cash
9. Know When to Sell
10. Many Ways to Investor Heaven

Entire presentation is available here

Posted in Investing Rules, value investing, Zeke Ashton | Comments Off on Ten Rules of Value Investing by Zeke Ashton