Is the market cheap or expensive? This is a question that I get asked a lot, but never ask myself. I am a value investor and focus on specific securities - what are they worth and what do they cost? However, I understand that not everyone can devote all their time and energy to scouring the world for deals, discounts and mispricings. So here is a modest proposal for using discounts and premiums on the public securities of the great asset allocators as an indicator of opportunities for fellow value investors.
There are billions of people on planet Earth, but only a small handful of world class asset allocators and an even smaller group tied directly to publicly traded shares. When these shares are bargains, I like to own them. Most recently, in 2009, I owned them all. Since then, I have owned fewer and fewer until today, when for the first time since the lows of the financial crisis, I own none. In fact, this will be one of my few articles in which the disclosure states no ownership of any stock mentioned.
My thesis is that the relative attractiveness of value investors' shares is a worthwhile indicator of the attractiveness of the current opportunity set for value investors. When these securities are out of favor, value investing itself is out of favor. When these are fully priced, then value investments are mostly fully priced. In such circumstances, we do not go to cash or withdraw from the market. Instead, we rely on hard catalysts with explicit returns of capital so that we can protect ourselves from an expensive market and treacherous times for value investors.
Which shares are vehicles for the great value?
- Alleghany Corporation (Y)
- Berkshire Hathaway Inc. (BRK.A / BRK.B)
- Daily Journal Corporation (DJCO)
- Fairfax Financial Holdings Ltd (FFH)
- Leucadia National Corp. (LUK)
- Loews Corporation (L)
- Markel Corporation (MKL)
- White Mountains Insurance Group Ltd. (WTM)
The first thing that you notice about these companies when you begin to research them is that they did not blow a lot of money on websites. Consider Alleghany's homepage, which says only:
Other than a bit of small print at the bottom by their lawyers, that is all that it says. If you look for it, you will find out that they,
"shun investment fads and fashions in favor of acquiring relatively few interests in basic financial and industrial enterprises that offer the potential to deliver long-term value to the investor."
No stock promoters here. They almost seem to hope that you won't notice them. But, while you weren't noticing them, their stock was up over 2,000% since the mid-1980s. Today, their shares trade at a premium to their book value. While they have bought many bargains through the years, their stock is not one today.
Berkshire Hathaway is another fully priced stock managed by a value investor (also another website that looks like an inexpensive afterthought). Since 1990, BRK.A is up over 2,000% as well. Today, BRK.A trades at over a 30% premium to book value. We usually own the stock and added most recently each time that Warren Buffett announced buybacks at varying premiums to book. But the price shot away each time, making it impossible for him to buy back much equity.
If you're waiting for Daily Journal Corporation's investor relations department to return your call, you might be waiting for a very long time. Their website is… terse. Their stock is up over 1,000% since the mid-1980s. They were lightly invested until the financial crisis at which point, their genius chairman, Charlie Munger, piled their capital into bargain priced stocks, which subsequently soared. Did any other publicly traded company enter the market so forcefully and at such an auspicious price and time? But nothing about today's prices is as enticing to Mr. Munger. Alas, nothing about today's DJCO price is as enticing to me.
Perhaps in honor of its Canadian heritage, Fairfax Financial Holdings Limited has a leaf on the lower right hand of its website on top of the otherwise typical "1980s Print Shop with a white background" value investor website. Their long-term performance has been meteoric: In the 27 years since they began in 1985, their compound annual growth in book value per share has been 23%, while their common stock price has compounded at 19% annually. But today, their stock price sits at a substantial premium in relation to its book value.
With Leucadia National Corp., the pattern continues: managers brilliant, performance stellar, up over 11,000% since 1972, their website crap, with one more example of a dated font on top of a white background. But today? LUK trades without any meaningful discount to book value.
Loews Corporation: Finally, a splash of color with expensive graphics! Wait, no, never mind, that was Lowe's (LOW). Loews: white background, budget layout. Zippo graphics on home page. Yes I must be at the home of another one of my value investing heroes, in this case a whole family of them. Since 1973, their stock is up over 10,000%. But today, the crazy price that was available during the financial crisis has largely corrected.
Markel Corporation is up almost 6,000% since the mid-1980s. Their website is suitably boring, cheap looking, and features the sensible white background value investor uniform. Today, the stock trades at a substantial premium above its book value.
White Mountain Insurance Group Ltd. is our last great hope for a flashy, expensive website… but no luck. White background behind a block of non-descript text. How have they done? Up almost 2,000% since the mid-1980s. Today, they have recovered from the financial crisis and trading at a smallish discount to book. This from WTM's website is indicative of both the strong value creation and weak graphic creation that you can expect from the stars of the value investing world:
So what is a value investor to do? How can we "shun investment fads and fashions" when value investing itself becomes, even temporarily, a fad and fashion? It certainly makes it harder to find bargains "that offer the potential to deliver long-term value to the investor."
We've looked at the markets' pricing of some of the great asset allocators, but how does the market price the mere mortals, with some mediocrities thrown in? If we look at broad indicators of investor sentiment towards asset allocators, the story persists.
So essentially no one is offered at a substantial discount today, not the generally discount-deserving closed-end funds and not the attention-avoiding value investors. This will drive investors to seek returns from speculations on future market moves. Alternatively, one can search for one-off security mispricing where a given market participant makes a non-economic trade and where there is a substantial return of capital unrelated to the broader market. While these may be few and far between, we will continue to search for and exploit such opportunities.
Additional disclosure: For once, I don't own a single share of any of these.