@VIC: Two Long Picks from Mark Sellers

Fund manager Amit Chokshki attended this week's 3rd Annual New York Value Investing Congress on behalf of Seeking Alpha. Here are Amit's notes from the presentation of Mark Sellers, Sellers Capital:

• Portfolio weighting is very important but many investors don’t seem to have a methodical approach to portfolio weighting
• John Kelly developed the Kelly Formula that was used to help size bets in gambling
• Key tenet of the formula is that it never would allow a loss of 100% on any one bet
• Ed Thorpe of Beat the Dealer fame implemented the Kelly Formula at his firm Princeton Newport Partners which annualized 15.6% from 1969-1982
• Market efficiency won’t allow investors to take full Kelly bets and betting over Kelly recommendations actually reduces returns
• Everyone (including Sellers) underbets
• The average mutual fund holds 87 positions, how much value is being added?
• Sellers bases his investment decisions against a combination of three items:
  • Stock return exceeds hurdle rate of 20% per year
  • The upside is three times greater than the downside
  • Kelly Formula says to bet
• Contango O&G (MCF) – long idea
  • CEO is the Buffett of the natural gas industry and owns 20% of the company
  • Sum of parts value based various strategic assets
  • Kelly Formula suggested to invest 450% based on Sellers’ inputs
  • Sellers invested 1/9 of the Kelly recommendation which became ~50% portfolio position
• Lowe’s Companies (LOW) – long idea
  • Valued at close to worst case scenario
  • LOW is taking market share from Home Depot and still has growth opportunities
  • Downside is $20 according to Sellers
  • Kelly Formula suggests investing 500-600% of capital into LOW based on Sellers inputs
  • Sellers has made LOW 25% of his portfolio
• Key takeaways
  • Downside is far more important than the upside
  • Managers often underbet because of risk aversion and agency conflicts
  • Agency conflicts include asset outflows if thesis/investment is wrong