BeyondProxy linked to this rare footage of Cundill speaking of his investment philosophy (Value) and approach to capturing the value premium. Peter, a Canadian, found that no matter what was happening in the home market, there was usually a market in which one could find plenty of beaten up stocks. He made it his mission to spend several months each year in the country that had stocks that had been beaten up the most in the prior year. Hence, There is Always Something To Do, which can be found in the bookstore above.

Peter suffered from a neurological condition, which was diagnosed soon after he gave this lecture, and he died in 2011.

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My only complaint is that the speaker is not always identified (although many are famous) and we do not always know when their words were spoken. I think if we had known, such as when Marty Whitman was telling the world in 2008 that there were terrific investment opportunities thanks to the plummet in the equity market, that the spoken words would have been even more powerful.

In the course of reviewing the videos, I came across an investor that I never saw or heard of before. I should not have been surprised to find that he was Canadian. Last year I came across a terrific biography of another Canadian value investor of whom I had not known–Peter Cundill–and it reminds me that there is more to the world of value investing than what occurs in Omaha and within a few hundred miles of New York City. The newely discovered Canadian is Irwin Michael. He runs a family of mutual funds called ABC funds, but also has a website for value investing called Value Investigator, which I included in the resources section. I have already gotten a few new ideas from it.

In addition, the portions of interviews of Walter Schloss show Schloss at the Ivey School of Business, which is located in Western Ontario and houses the Ben Graham Centre for Value Investing. I had know of the centre for a while but am only now adding it to the resources page.

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• Who is this guy? Why would Buffett pick an unknown manager/firm?
• How could someone be such a good investor and remain relatively unknown?
• Weschler has one investment employee working at his firm and one assistant. How could someone running a tiny office fill Buffett’s shoes?
• Why is Buffett once again tapping a hedge fund manager for a successor? Is he changing his approach to value investing?

I will address each question:

Why Would Buffett Pick an Unknown?

Of course Buffett has to pick an unknown investor from an unknown firm. Virtually all of the known investors at known firms are employees of great marketing firms–that’s how you know who they are–but they are usually not great investors. Virtually all of the known firms have business models that rely on well-oiled marketing machines to gather assets because they are paid on the size of the assets that they manage, not on their performance.

As asset gatherers, the known investors must ensure that they never fall too far behind the rest of the market and their competitors. The only way that they can ensure that they keep pace is by becoming a closet indexer–someone who pretends to spend a lot of effort on security selection but who, in reality, merely invests in each of the large companies in a large-company index, plus or minus minor adjustments for aesthetics. Of Course, Buffett, a value investor, does not invest that way even now.

How Could Someone be a Good Investor and Remain Relatively Unknown?

For almost their entire careers, most of the world’s best investors remained unknown by the overwhelming majority of the investing public. They generally have long periods when they are accessible to only a few savvy people/firms, and then they suddenly find themselves in the spotlight after reaching a tipping point. Welcome to Ted Weschler’s “moment.” Another example: Hardly any but a small number of savvy professionals heard of Peter Cundill before he died in January 2011. It took a posthumously published biography for many to know his record and style, and even now few have heard of him. Ironically, the lack of attention is what helps make value investors, great investors. By the way, it is no coincidence that most of the world’s best investment managers (by long-term performance) also happen to be value investors.

How Could Someone Running a Tiny Office Fill Buffett’s Shoes?

Are you kidding me? Most of the world’s best investors work alone; they avoid investment committees like the plague. Committees lead to group-think and group-thinking leads to bad investment decisions. They diligently read through financial statements, talk to a company’s customers, and meld dozens of pieces of information to form a unique view; they do not delegate that very important work.

The general attitude behind this third question is: “You aren’t structured like Fidelity or American Funds, you don’t have the resources that they do, and you don’t have a lot of experts on staff to which you can delegate work, so how can you be any good?” They fail to grasp that great investing does not take a lot of experts and IQ points, and that because of technology, a single investor has more resources at his fingertips than Fidelity did just ten years ago; it is how those resources are used that matter, not the number of them. As Buffett himself once said about what it takes to be a successful investor (I paraphrase), “Any IQ points over 125 are wasted.”

Also, contrarian value investors who run concentrated portfolios don’t need experts on staff as much as they need a strong constitution. Great investing is simple, but it is not easy. It is not difficult to read financial statements, have a view of a business’s competitive position, draw conclusions about the business’s prospects, and know whether its market price is low enough to offer a margin of safety. But, it is difficult to invest only when one has a margin of safety because for the price to be low enough to provide a margin of safety, nearly everyone else has to disagree with your view.

Contrarian, margin-of-safety investors must go against the herd. As Michael Mauboussin has explained about great investing: “A proper temperament beats a high IQ every time.” Finally, most of the Superinvestors that Buffett highlighted in his Superinvestors speech at Columbia University (see tab above) worked alone or with minimal staff. It is only the marketing machines that need a large staff and that consists mostly of marketing and legal professionals. Oh, and by the way, Buffett himself invests alone in a tiny office.

Why is Buffett Hiring Another Hedge Fund Manager to Succeed Him?

True value investors must use something like a hedge fund structure (or be an insurance company like Berkshire Hathaway with permanent capital) to improve the odds of generating alpha. Value investors must have a long-term view and hedge funds can be structured so that their investors cannot redeem for extended periods. Value investors must run concentrated portfolios and hedge funds allow the most freedom to do that. Value investors must be contrarian and hedge funds help insulate hedge fund managers from the daily scrutiny that would make contrarianism nearly impossible for the average person.

Finally, as I demonstrated in investor communications, Warren Buffett began his career as a hedge fund manager and remained one for ten years. Buffett contributed $700 of capital at the launch of his hedge fund in 1957 and his friends and family contributed another $100,000; most of today’s great investors started that way with small amounts of capital from friends and family.

Today, Buffett still behaves as a hedge fund manager but one with the ultimate luxury–permanent capital. I listed Buffett’s first business model as one that I  would emulate for my own fund. It should not be a surprise that many still relatively unknown, but extremely successful value investors also emulated Buffett’s hedge fund structure and philosophy. It should not be a surprise that virtually all of these great investors started small and stayed small for a long, long time thus enabling them to stay under the radar.

But don’t just take my word for it, read what Buffett wrote in a letter to his hedge fund partners on January 20, 1966:

“Last year in commenting on the inability of the overwhelming majority of investment managers to achieve performance superior to that of pure chance, I ascribed it primarily to the product of: “(1) group decisions – my perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size with all parties really participating in decisions; (2) a desire to conform to the policies and (to an extent) the portfolios of other large well-regarded organizations; (3) an institutional framework whereby average is “safe” and the personal rewards for independent action are in no way commensurate with the general risk attached to such action; (4) an adherence to certain diversification practices which are irrational; and finally and importantly, (5) inertia.”

In each of these ways, Ted Weschler is an ideal candidate to eventually replace Buffett.

For some of the media reaction, see:

http://online.wsj.com/article/SB10001424053111903532804576569142588655126.html?KEYWORDS=weschler

I’ll bet that Jason Zweig, a Ben Graham biographer, is as amused by the reaction as I am, but he keeps it together on the video in the story.

For an interesting take on Buffett’s transition from an obvious hedge fund manager to a less obvious one with permanent capital, see the Joe Taussig paper embedded in a link at the bottom of this blog post:

 http://www.santangelsreview.com/2011/09/05/dan-loeb-of-third-point-to-create-a-reinsurance-company/

Taussig Capital is a Zurich based consultant to hedge fund managers.

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The book starts off brilliantly by describing Cundill’s EUREKA!!! moment. Cundill was in the prime of his career but felt that there was something missing from his approach to investing. He was already 35-years old and had been going down a series of blind alleys. The inability to avoid blind alleys would lead to an entire career of mediocrity and he was at the point when it is often difficult to change direction. Then, a colleague pressed into his hand a book written by George Goodman called Super Money to read on a flight home. 

 ”Within minutes his attention was riveted and he could barely contain his excitement. That night he wrote in his journal:” 

 Goodman devotes chapter 3 to Benjamin Graham and Warren Buffett and “the margin of safety.” It struck me like a thunderbolt–there before me in plain terms was the method, the solid theoretical back-up to selecting investments based on the principle of realizable underlying value. My years of apprenticeship are over: “THIS IS WHAT I WANT TO DO FOR THE REST OF MY LIFE!   

I got chills when I read that last sentence because I had a similar experience late in my career after several years of graduate school, studying for CFA exams, and a sixteen-year career performing credit analysis for capital markets firms. 

Peter’s results were so outstanding that he won the Analyst’s Choice Career Achievement Award in 2001. Take it from someone who had to shake off nearly twenty-five years of “education” and was even farther down the road than Cundill before he had his EUREKA moment: It is better to discover the simple brilliance of value investing late in life than never.

Sadly, Cundill passed away in January of this year. The book has been added to the Vlue Investing Bookstore above.

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