Mr. Gideon King’s parting notes on his decision to close down his hedge fund business:
“Controlling capital and engaging intellectually is good work if one can get it. The business, on the other hand, has changed dramatically. As the endless quest for becoming institutional continues on, the soul of investing might get lost, as the unmitigated compliance processes become cumbersome and interfere with the purity of speculative contemplation.”
From time to time we must look in the investment mirror and conclude that we are stinking and we have no one to blame but ourselves. This is an interesting piece that academically exposes a lot of the other times.
CLICK HERE to download Cove Street Capital’s January 2015 Strategy Letter Number 19, “The Great Complacency…Continued”
A friend of ours who works for a well-known activist firm summed it up perfectly when he said, “We are living in the era of the activist halo.” From 300-page PowerPoint presentations to incredible revelations about the amount of salt that should be included in pasta water to investors who own 20,000 shares asking for Board seats, there has been a proliferation of “activist” activity.
Some of this is good, some of this is bad as Wall Street is just like Hollywood – take a fundamentally good idea and ruin it with ten successively dismal iterations. As a “guideline,” it’s not for us. Successful investment is all about the “investment.” Activism is about the time horizon. We always welcome being right sooner than later, but the beauty about investing for a living is the ability to be left alone and think, pick good combinations of business model, valuation and people, and then let compounding work for you without the “need” to be public and hire lawyers. It’s solid indoor work with no heavy lifting.
But the fun thing about investment life is that it is usually better to live by guidelines—an indication or outline of policy or conduct—rather than hard rules, given that the only “rule” outside of unimpeachable ethics and integrity, is that the future remains uncertain. read more…
A senior member of our investment team read this transcript and couldn’t help but replace the words “investment management” in lieu of the subject being discussed. Worth reading and thinking about.
A recent article in the Wall Street Journal penned by Michael Dell is so full of self-serving garbage it is difficult to know where to start. (Click here to go to the op-ed at WSJ.) What is clear in most companies is that the fish rots from the head and Dell’s decade of miscues—led by Michael Dell and his hand-chosen successors— brought it to a position of miserable valuation, investor apathy, and then finally investor activism…not the other way around as Mr. Dell implies.
If a company clearly delineates a course of strategic investment, provides clear accounting into how results of this investment are measured, and most importantly, provides accountability if money is wasted, then it will attract an intelligent group of long-term shareholders who will properly discount the detraction from short-term earnings. That might explain the “sage” ability of investors to value the hundreds of billions of dollars invested in life science research which are almost by definition difficult to handicap, not to mention the hundreds of billions of dollars of market value accorded to any variety of seemingly overvalued (by our standards) technology companies. While there is “bad” activism, there is equally disastrous capital allocation by entrenched management teams. The two extremes deserve each other and somehow life manages to go on. read more…
CLICK HERE to download “The hipster effect: When anticonformists all look the same” by Jonathan Touboul
This is a very nicely done and thoughtful piece about a topic that every serious long term shareholder eventually faces despite best intentions.
CLICK HERE to download PDF
CLICK HERE to download Cove Street Capital’s September 2014 Strategy Letter Number 18, “Metastability”
Of the myriad of reasons proffered daily as to why we are the verge of stock market doom, a “decline in share repurchase” has come up a lot. We would note the following:
As the below chart suggests, shares outstanding for most of the S&P 500 as a whole have not changed in a decade. Material share repurchase that actually reduces shares outstanding is not the majority rule. If it has been the prop for the market going up, it will not be the reason for a decline.
So where do all these hundreds of billions of dollars of share repurchase go as a whole? It is a correct statement that many Boards and management simply don’t understand the corporate finance behind effective share repurchase and use it to disguise the very high cost of dilution to shareholders from aggressive compensation programs. See the chart again. read more…