Highlights From The 2024 Value Investing Conference
“I am a firm believer in stock picking,” says Dr. George Athanassakos, the founder and managing director, Ben Graham Centre for Value Investing. “Research shows that the higher volatility from stocks is mostly on the upside. Stocks have both higher upside and more limited downside than bonds.”
Read on for more highlights from this year’s conference…
People-ish:
AI And The Future Of Investing
Innovations in machine learning and generative Artificial Intelligence (AI) will upend many professions, including those in finance. Already big investment banks such as Goldman Sachs, Deutsche Bank and Morgan Stanley are anticipating cutting back on new analyst hires by up to two-thirds and reducing entry-level salaries, which typically start at US100K. (No more regular dinner and drinks at Carbone.) The global consulting firm Accenture has estimated that three-quarters of bank employees from across the industry would see their working hours reduced or eliminated by AI.
The conference’s morning keynote was Andi Kerenxhi, president of Ubineer Corp., a Toronto-based software company that helps investment professionals generate alpha with AI-driven formulas, captured data, sector analysis and insights. A former trader and analyst, Kerenxhi posed the question whether machine learning merely offers another data set or is a real edge? He argued that by doing the heavy lifting of research, human agency is better able to come to the fore with sophisticated decision-making by, for example, interpreting data to decide whether it represents value building or value destruction for a particular business. This hybrid process is what Kerenxhi terms “people-ish”, and machine augmented “decisioning”. One thing is certain, he said that machine learning is allowing investors to do more, and it raises the level of output for everyone.
Here's a thought: As these powerful machine learning tools are used by more investors thus raising their skill levels, what will be a greater determinant of alpha: skill or luck? As Michael Mauboussin states in his book The Success Equation, the “paradox of skill” occurs when both skill and luck define outcomes (as they do in investing). As skill improves, luck becomes more important in determining outcomes. What impact could this have on the demand for active vs passive investment products?
The Most Important Thing
Samantha McLemore worked alongside legendary investor Bill Miller for over two decades before founding her firm Patient Capital Management in 2020. A value investor to the core, McLemore stood at the podium in front of 1,000 value investors and posed the question: The Rumoured Death of Value Investing: Complete Fabrication or Grains of Truth? (Spoiler alert: it’s the former.). She argued that, over the long term, all investors, whether they are retail or professional, have three main sources of edge: informational, analytical, and behavioural.
Laws against insider trading mean the first edge is not significant. All investors can have access to the same information. The analytical edge is important, and it is an area where investors can compete for dominance. However, it is the behavioural edge that includes having a long-term orientation which is by far the most important and the single greatest edge an investor can have.
Doing the deep research and “being able to know ‘what is the bogie for this business?’ is the strength of value investing,” she said, because stock prices follow revisions to expectations. McLemore cited that both successful marriages and successful investments benefit from going in with a set of lower expectations. She gave the example of her company’s investment in General Motors, a company with low expectations that she considers deeply undervalued.
Here's a thought: Since the behavioural edge is the most important factor in long-term investing success, why don’t business schools (and retail investors, too) study philosophy and Zen meditation to help gain better mastery over both the emotional and rational mind?
The Intelligent Investor – 75 Years Young
The luncheon keynote speaker was Wall Street Journal veteran columnist Jason Zweig. He is the author of several books and editor of revised editions of Benjamin Graham’s iconic tome The Intelligent Investor which was first published in 1949. In his keynote, Zweig posed the question: “What can we learn from Benjamin Graham that still matters?”
Zweig argues that Benjamin Graham’s insights as an investor and psychologist are enduring. Graham started investing in 1925 and created his fund, Graham-Newman Corp. in 1936. It ran for twenty years. During this period, the fund compounded wealth annually at 14.7 per cent compared to the S&P500 at 12.2 per cent.
Today, investors know him more for his formulas that he used to determine the intrinsic value of an asset, but Zweig refers to many of these formulas as “nonsense”. Graham was a far more flexible and insightful thinker than a follower of static formulas. Zweig argued that Graham’s greatest lasting contribution to finance was as an astute observer of human psychology. Knowing that there was always likely to be a gap between what people should do and what they would do, Graham stressed achievable solutions, not optimal ones. “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right,” he argued. Both retail and professional investors are often their own worst enemies by following market trends or buying high and selling low.
Here's a thought: It’s not uncommon for investors to take an orthodox approach to a particular style of investing. This can lead to inflexible thinking and sub-optimal decision-making such as buying companies that are value traps. Unlike almost all professional investors, Graham rated, not his fund’s performance, but his own performance based on the soundness of his reasoning and decision-making.
Active Investing:
Finding The Orange Dot
Graeme Foster, portfolio manager of Orbis Investments, gave a lively talk on generating alpha by choosing “hairy” companies that are unloved and under-owned (visually represented by the orange dots in a sea of blue dots). He focused on movie cinemas as a sector that is “very hairy”. First there was COVID when no one went to the movies, followed by the writers’ and actors’ strikes. Today, the cineplex competes with streaming platforms which offer high quality series and films, AR/VR technology which has many devotees, and rising inflation which has increased the costs of a night out at the movies. Since 2019, the industry has been in a secular decline with share prices dropping around 60 per cent. Yet, there is more to this story, Foster says.
Both Amazon and Apple have earmarked US$1billion each on new content slated for theatrical release. Why would streaming platforms bother to focus on theatres? A theatrical release still gives films a stamp of approval. The top ten movies, like Dune and Frozen, on most streaming platforms, had prior theatrical releases. This strategy generates big paydays for the owners of the content who get their cake and eat it, too, due to the longevity and relevance of the content. Cinema shares remain very cheap despite box office revenues going up. Even with fewer guests, the higher costs of ticket and concession treats are contributing to higher revenues. Foster predicts share prices will go back to 2019 levels by 2026. He mentioned Cinemark (CNK) as one example. Other publicly traded cinema companies include AMC, IMAX, and Cineplex (CGX) which reported revenues up 46 per cent from a year ago (for March) at $59.2 million vs. $40.6 million. Cinemas might just find their “Hollywood Ending”.
Rita Silvan, CIM is a finance journalist specializing in women and investing. She is the former editor-in-chief of ELLE Canada and Golden Girl Finance. Rita produces content for leading financial institutions and wealth advisors and has appeared on BNN Bloomberg, CBC Newsworld, and other media outlets. She can be reached at rita@ellesworth.ca.