Contrarian Investor: Robert Kleinschmidt

Steve Forbes Interview: Robert Kleinschmidt, Contrarian Investor

Good cause but little openness Produces corruption

Questions over Greg Mortenson's stories   video

This is a good report about when high causes without supervision can go quite wrong. Even my daughter donated her piggy bank saving to Greg Mortenson.

Thomas Russo's Path to Global Big-Brand Investing

6/16/2012 on Barron's

Barron's: Your portfolio looks like few others, with its exposure to European companies. How did it get that way?
Russo: The best way I've found to participate in the growth of developing markets is through European companies whose brands have been present but unaffordable in those markets, and whose managements are willing to redeploy Western-market cash flows into the expansion of those brands in the developing world, where the tastes already exist, the preferences already exist, but affordability hasn't.
Which companies meet this test?
A perfect example is Nestlé. Another is Philip Morris International [ticker: PM]. In the spirits industry, it would be Pernod Ricard, Diageo [DEO] and Brown-Forman. In beer, Heineken, Anheuser-Busch InBev [BUD] SABMiller [SBMRY]. And in payment systems, MasterCard [MA].
Some of these companies are European. Is that a concern, given the troubles there?
We're buying the rest of the world through Europe, and that gives us the chance to buy a company with solid prospects like Nestlé or Heineken at 10 to 15 times net income.
What have these European companies done well?
Their brands have populated the world because Europeans colonized; their companies were just more global. America has had the great virtue of having a large enough market that companies could get rich without leaving our shores. Nestlé is based in a country [Switzerland] of just seven million people. It had to be global.
What's prevented many American companies from achieving the same success?
The U.S. pioneered option-driven executive compensation, and that put unnecessary pressure on making sure earnings grew at a smooth and steady rate. But those same factors led many American companies to under-invest and left them less competitive than their international counterparts. There are some notable exceptions like Berkshire Hathaway and MasterCard that have deployed capital well and done so without regard for reported profits.
Your portfolio is dominated by a few industries: cigarettes, beer, spirits, financials.
Part of it is a circle-of-competence thing. As an investor, you have to like what you do because it requires staying very close to the subject. I don't care about semiconductors. I'd be a poor investor in that industry.
Some investors are wary of family-controlled companies. You seem to disagree.
Look at the Tisch family. They've been able to build an enormous fortune at Loews [L], and it has been carefully and conservatively run because it is their money. It is Warren's money at Berkshire. It is the Brown family's money at Brown-Forman. It is the Ricard family's money at Pernod Ricard. The best family-controlled companies are willing to invest without regard to reported profits. If you own a company, you don't care what it reports as profits. You care how much more wealth is created over time.
Nestlé has long been one of the largest investments. What makes it special?
The culture. It's really quite phenomenal. Nestlé has 328,000 employees around the world, and they are still able to get the job done in a thoughtful, locally sensitive way. There also is a focus on the long term. When I first invested in Nestlé, in 1987, the CEO at the time was asked about the planning horizon at Nestlé, and he said it was 35 years. He said the company breaks it up into five-year increments, and I thought that was just perfect.
What portion of Nestlé's profits come from the developing world?
About 35%—and it has grown from 25% four years ago. What's intriguing is to look at where Nestlé is committing capital. Two years ago, Nestlé said it was taking its developing-market organic capital spending from a billion to 2½ billion. On top of that Nestlé spent $12 billion to buy Pfizer's [PFE] nutritionals business and $3.5 billion to buy China's leading confectionary company and a local beverage company.
What appeals to you about Berkshire? It's trading for a historically low valuation of less than 1.2 times book value.
It's as interesting an investment today as it has been over the sweep of my career. It is certainly far bigger and more recognized today than in 1982. But at the same time, its opportunity set is far broader. In 1982, it would never have been shown those 700 million of 10-year warrants on Bank of America [BAC] with a strike price at 7 that it got for free (along with a $5 billion preferred-stock investment). That type of investment will reward us as shareholders enormously, tomorrow. The bench that Warren has put together on the investment side deserves high praise: Todd Combs and Ted Weschler.

What about Berkshire post-Buffett?
It will be a different company, but I think it could be a very value-creating company still. It has an able team to help deploy Berkshire's cash, and Berkshire could pay a fairly high dividend when you consider that the bulk of Buffett's shares will end up inside the Gates Foundation, and that entity is burdened with a 4%-5% payout ratio.
You're referring to government rules on spending by charitable organizations? How high could the dividend be?
It could be 4% because Berkshire generates so much cash. At the end of the day, the burden of putting cash to use that Warren has faced may not be faced by his successors because of share buybacks and a big dividend.
What appeals to you about Richemont?
Richemont is our only investment in global luxury. Cartier is its flagship brand, and it's a real gem. On top of that, there's Van Cleef & Arpels and Montblanc, which has evolved from a pen company to a luxury watch and accessories brand. It's family-controlled, and its CEO, Johann Rupert, is fair in the way he runs it. He observes that a luxury good is something that you never knew you needed until you discover it, and then you can't live without it. Richemont is tapping into places in the world that are increasingly prosperous and have a drive for possessions. Half the business at Cartier in Paris is from mainland Chinese travelers, and that has just started. Richemont has opened 300 stores in China. Rupert admits that he is sitting on top of a volcano in China, and he thinks that as long as the consumer calls the shots, he'll win.
Why do you like the liquor business?
Pernod Ricard, Diageo, and Brown-Forman are all investing against current results to deepen their offerings, deepen their distribution, deepen their advertising message, and deepen their on-premise promotions. They are doing all these things today to spark demand for the future. The size of the markets is enormous. In China the market for spirits is 550 million cases a year. Premium imports amount to just five million cases. China probably represents 15% of Pernod Ricard profits, and the industry has scratched less than 1% of that market. When the Chinese travel globally, they come home from England with a taste for Scotch whisky because they saw it in a fancy location prominently displayed. And so we are positioning ourselves through those three companies to participate in that transformation of Chinese consumption to a premium and an import model. India is right behind China, Indians consume about 150 million cases of whiskey a year, and their preference is for scotch and it is currently denied fair access because of tariffs and duties, yet those barriers are falling away.
What about Brown-Forman?
Brown-Forman is the story of Jack Daniel's—and it's a good story. It's investing heavily to grow Jack Daniel's globally. When I first invested in 1987, Brown-Forman sold five million cases of Jack in North America and a half million globally. Twenty-five years later, Jack Daniel's sales in North America are still 5 million cases, but six million are sold internationally. In 18 markets, they've crossed the 100,000- cases-annually mark. That's important because as Jack Daniel's goes from 50,000 to 100,000 cases, the company suddenly starts to absorb their fixed market-development costs, and you have margin.
Will the family ever sell? There's been lots of consolidation in the past decade.
There are pieces of the industry's global-distribution puzzle that yet have to fall into place. Brown-Forman is a critical component, and it'll either be an aggregator or be aggregated over time. It certainly has shown the virtue of investing at the cost of current income, because over the past 25 years, it has put up an awful lot of expenses to develop Jack Daniel's while the stock has generated an annualized return of about 13%.
Do you think Africa is important to the beer industry?
Heineken and SABMiller are extraordinarily exposed to Africa for a larger part of their profits, and they are deploying enormous capital in Africa to build future demand. The appetite is large. Sub-Saharan Africans drink 400 million barrels of beer a year, and only 90 million barrels is now branded and bottled. The rest is home-made. We are investing in the conversion of unbranded home brew to branded and bottled beer. Heineken makes 25% of its profits in Africa, and for SABMiller, it's closer to 35%.
What about Heineken?
Heineken is the laggard in terms of valuation because it is family controlled. The family controls it through a 50.1% holding in Heineken Holding, which in turn owns 50.1% of Heineken NV [HEIA.Netherlands}. We own the holding company—the shares the family owns.
Do they trade at a discount?
A big discount of around 17%. It is almost unprecedented that you get a chance to invest in voting shares at a 17% discount
Any difference between the two stocks?
Everything is the same. Heineken Holding trades for 32 euros, and the company may earn €3.10 next year, so it's trading for about 10 times next year's earnings. Heineken NV trades for 38. It has been tarred by some investors as a Western European company.
Heineken, however, has a partnership in Asia that gives it huge participation in Indonesia and Vietnam. It also owns the second-largest brewer in Mexico. It's involved in the premium business in China and owns 40% of India's largest brewer.
You favor Unilever over its long-time rival Procter & Gamble [PG]. Why's that?
It has been less well-run for a longer period of time. Unilever's CEO, Paul Polman, came in three years ago, having been trained at P&G and having been senior at Nestlé. Polman knows where Unilever needs to go to have the same level of success that Procter has long enjoyed. There is no reason why that can't happen. Unilever also is cheaper. Its ADRs trade around 32, about 14 times next year's earnings. That's less expensive than Procter.
And Unilever has a better developing-market presence?
It has a huge market share, including old colonial markets like India. Brazil also is a big market. Unfortunately, P&G is going the other way. It got to the point of peak performance, but over the past 18 to 24 months it feels like it is slipping.
My summary: It's not easy to find businesses with brands that the rest of the world cares about and have enough money to develop. And you need to find managements that will do so even if it burdens current income. That combination doesn't exist all over the place.
Great. Thanks, Tom.

A star fund's mystery man

The manager of the country's top-performing mutual fund is a reclusive former biochemist. What's his secret?

Well, not surprisingly, he is another guy following Graham, Buffett and Fisher, a bottom-up investors. What surprisingly is that he generated 40.5% annualized return since 2007. 

Read more on Fortune March 2012 here.

Allan Mecham Interview

From The Manual of Ideas on April 21, 2010:

About his investors:
His investors act and think like owners rather than traders. This will allow him to focus on long term. Such an investor base really adds value when you go through periods of distress and under-performance; precisely the time when you need confidence and stability is apt to be the time when investors are rushing for the exits and questioning the approach.

About good business
- understand biz like an owner
- biz should have staying power
- I have to be confident about the general nature of the biz and industry landscape on a long term basis
- I'm big on track record. Stay away from unproven companies with short operating histories.
- I believe a heavy dose of humility and intellectual honesty. Don't fool yourself, and remember you are the easiest person to fool. from Richard Feynman
- think barriers to entry, competitive landscape/threats, the ongoing capital needs, overall economics, durability of biz
- Stress test: what happens under 7-10% unemployment ( if it is 4-5% now) and 6-8% interest rate? Is the biz overly reliant on loose credit extension and frivolous spending?
- I've built up a base of companies that I understand well and would like to own at the right price.
( This is the beauty of the public markets: if you can be patient, there is a good chance the volatility of the marketplace will give you the chance to own companies on your watch list. )
- Think downside before think upside.

Books to read:
- enjoy all the behavior psychology stuffs.
- recommend, predictably irrational - Ariely, nudge - Thaler, how we decide - Lehrer, think twice - Mauboussin
- also The Big Short, The end of the wall street, The relentless Revolution -Appleby

Get ready to buy great business at bargain prices

Dow Waves Goodbye to 2012 Gains WSJ 6-1-2012

Jobs Slowdown Adds to Global Fears

Wall Street sinks on U.S. jobs data, Dow negative for 2012

The stock market dropped 275 points on last Friday and dropped more today. It has dropped close to 10% within the last 2 months. With possible worse situation in Europe, investor sentiment can go further down. 

I strongly suggest all of you to get your cash ready now. Since excellent opportunities in buying good properties or excellent business will arrive.

For the record, I have taken several positions in past week but still 60%+ in cash position. 

"Be fearful when others are greedy and be greedy when others are fearful." Warren Buffett

Cheers,

Josh

Allan Mecham: The 400% Man

SmartMoney Magazine recently profiled Allan Mecham, a 34-year old college drop-out turned value investor at Arlington Value Management, who returned a cumulative 400% return over the twelve years ending December 31, 2011 (including  the astonishing 11% in 2008 and 59% in 2009 when the market was cratering). Rather than investing in unknown microcaps that soar after being “discovered” by the mainstream financial community, much of Mecham’s returns have been earned from large caps.

Read the rest of the article here.

You can then read the follow-up article called The 400% Man's New Big Bet

[L]ast year he levered up the fund and has invested half the money in Warren Buffett’s Berkshire Hathaway. 
“Able to borrow at around 1.5%, we levered (Berkshire) into a 50%+ position,” he wrote in his annual letter to shareholders. “Though not advocates of leverage, we believe the low cost and modest amount, combined with [Berkshire's] iron-clad safety and cheap price, makes our action sensible.”
There is some method to the madness. Mecham, a long-term Buffett disciple, argues that Berkshire Hathaway stock, on its own, “provides ample diversity, with exposure to disparate businesses (more than 70), sectors, and asset allocations.” Berkshire’s assets include a ton of cash-generative businesses, a book of blue-chip public stocks valued at more than $75 billion, and nearly $40 billion in cash, he says.

He was also interviewed by The Manual of Ideas starting from p7. Check here.

Overprepared for the Next Storm

This is from Barrons article on 6/2/2012. 

Though some market experts claimed that the repeat of 2008 is likely. Do they mean more than 50 - 70% ? I say it is unlikely, less than 20%. This means to take advantages of any sizable dip such as 10% to 20% decline to buy up good business.   

Josh
---------------------------------------------------------

A lot of the market's "de-risking" process has already unfolded.

 

A New York Times headline Wednesday proclaimed "Windows Are Ready for the Big Storm (the One from Last August)." The article was about the curious abundance of Manhattan apartment windows still taped in ineffectual and belated protection against Hurricane Irene. But it could well have been alluding to the financial markets' bracing for a rerun of last summer's gale of dangerous economic conditions.

The global selloff in risk assets during May, mostly prompted by the gradual but steady weakening in Europe's debt levees and sharp slowing in China's economy, was barely tallied by the time the lousy May employment report arrived Friday morning.

The meager net increase of 69,000 jobs was the poorest reading since—you guessed it—last August, as the 2011 Europe debt drama was peaking. And gold prices, so long in an ebb phase, had their largest one-day rise since August, too, as expectations of more central-bank money-conjuring surged. Big U.S. stocks had held up better than nearly every other risk-asset class for the year but succumbed Friday to more aggressive selling, the Dow industrials losing 274 points and surrendering all gains for the year.

With the Dow at 12,118, and the Standard & Poor's 500 at 1278—just about where they were sitting one year ago—the burden of proof falls upon those who have been suggesting, here and elsewhere, that 2012 need not hew so closely to the 2011 macro-panic-and-policy-rescue script.

The case for avoiding last year's fate, or worse, rests on somewhat larger fundamental cushions—and on the simple observation that traumas so fresh in mind don't usually allow for a hazardous complacency to rebuild so quickly. Corporate earnings, total employment, retail sales, housing activity and bank lending are all significantly higher than they were a year ago, while stock-market valuations at this year's market peak were less lofty than at the first-quarter 2011 peak. Further, there is now a new European Central Bank chairman who has shown more willingness to marshal monetary powers to head off banking collapse.

WITH STOCK MARKETS OUTSIDE the U.S. having lost 20% in the past 12 months and twice as much in May as American stocks, it wouldn't be much of a shock for the S&P 500 to sag another couple of percent back to that old familiar 1250 level, or a bit lower.

For reasons that may include sheer coincidence, this level is a frequent fulcrum for the index. The 1250 mark immediately preceded the Lehman Brothers collapse, was roughly where 2011 started and ended, and has been crossed during 10 separate weeks in the past year and at least 50 times since the index first got there 13 years ago.

Chartists already are on alert, with the S&P 500 breaking below the market's 200-day average, a measure the market also toggled above and below for parts of 2011. Now, as then, the evidence can support either a painful correction after a 30% rally, or the foreboding overture to a bear market.

Stocks are close to probing valuation levels that have tended to arrest declines in the past couple of years. The S&P 500 is trading below 13 times earnings for the past 12 months and less than 12 times forecast earnings, though it's a fair bet that those profit forecasts are vulnerable to downward pressure.

ONE THING ABOUT THIS YEAR'S market downturn is that it was preceded by a distinctly defensive tone, the majority hunkered against "expected shocks." Even before the overall market had shed 10%, the areas that call out loudest for punishment in a growth-and-credit scare had been pummeled, with financial, commodity, emerging markets and lower-quality tech names badly underperforming. Bespoke Investment Group notes that its log of the frequency of financial headlines on the virally popular online news aggregator Drudge Report is again approaching peak levels previously coinciding with tradable market lows.

This suggests a lot of the "de-risking" process has already unfolded, and that the merest of upbeat stimuli—with ECB policy makers meeting this week, and the Fed convening and Greece voting soon thereafter—would touch off a quicksilver rally, with the tape so oversold and the investor mood dour.

Investors already lucky or smart enough to be in a defensive crouch who are looking to take on some "upside risk" protection in the event of such a rally should consider trounced, high-volatility cyclical names, in small doses. These might include Cliffs Natural Resources (ticker: CLF), the Market Vectors Coal ETF (KOL),Halliburton (HAL), SanDisk (SNDK) and Hess (HES).