What We're Reading ~ Investment Process Edition

One ratio to rule them all: EV/EBITDA [Gannon & Hoang on Investing]

Avoiding unforced errors in investing [Abnormal Returns]

15 great investor quotes [BigPicture]

Four real-world investing rules that should be taught in school [Minyanville]

What can I do to become a better analyst in the future? [Reddit]

Screening for the 10 best-performing companies [Motley Fool]

Lazard: Countercyclical finance play? [Brooklyn Investor]

Jeff Ubben sees upside at Halliburton [Institutional Investor]

Interview w/ Tom Russo: The path to global brand investing [Barron's]

Taking a look at Chevron [Turnkey Analyst]

A guide to managing risk [Seeking Alpha]

Activist value investing: be your own change agent [Aswath Damodaran]

Reducing risk with concentration and diversification [Royce Funds]

Industry case study: Why newspapers were doomed all along [Harvard Biz Review]

The Case For Quantitative Value Investment

Today's linkfest focused on investment process and we wanted to take that a step further with a long-form piece by Toby Carlisle of Eyquem Investment Management.  He's penned an interesting missive on the case for quantitative value investment.

In order to frame things, he's outlined a backdrop for his argument:

- Value stocks have beaten the market over the long term
- Most managers have failed to do the same
- The gap between the performance of active value managers and underlying performance of a value benchmark is likely due to systematic behavioral errors

Carlisle's argument for a quantitative approach centers on eliminating those behavioral errors.

In summary, Carlisle concludes that, "The quantitative method outpaces most active value managers, and with more consistency.  It does so because our behavioral errors are most pronounced when we reason intuitively.  We can reduce our errors by relying on statistical evidence, and limiting our discretion."

Embedded below is the case for quantitative value investment:



For similar reading, definitely check out the links we posted today on investment process.

Addendum to Hedge Fund China Bear Thesis

A few days ago we posted a summary of hedge funds' bearish China thesis.  Today we wanted to post up an addendum to that research from Patrick Wolff, entitled "Question Authority." 

This was written while he was at Clarium Capital in 2010 and covers the topic from a slightly different perspective.  Wolff now manages Grandmaster Capital.  Last year we highlighted Wolff's interview where he labeled China a debt-fueled investment bubble.

Embedded below is his China research:



And on an amusing note, we've also below included his parody on China via an imaginary press conference by President Obama.  Enjoy:



And for further research on the ever-important country, head to a summary of hedge funds' China bear thesis.

Presentations from ValueX Vail Conference: LINTA, BAC, AMZN, CNW, PSUN, SPLS & More

We wanted to post up the presentations from the ValueX Vail Conference that just took place last week.  Vitaliy Katsenelson (follow him on Twitter here) hosted the event and it featured numerous equity pitches, including Jim Chanos' presentation on value traps that we posted yesterday.

The other presentations are posted below and include:

- Patrick Brennan, CFA on the bull case for Liberty Interactive (LINTA)
- Kai Shih of Shih Investments on Bank of America (BAC)
- Josh Tarasoff of Greenlea Lane Capital on Amazon.com (AMZN)
- Dan Amoss of Strategic Short Report: Short Con-Way (CNW)
- Shane Calhoun of Belcaro Capital on Pacific Sunwear (PSUN)
- Adrian Mak on Staples (SPLS)
- Joe Cornell of Spin-Off Research: The ABC's of Spin-Offs
- JJ Abodeely of Sitka Pacific Capital on value investing from top-down
- Footnoted's Michelle Leder on diving into SEC filings
- Greg Merrill of Strategic Asset Management on exporting natural gas
- Alex Rubalcava on managing investor workflow
- Hendrik Leber of ACATIS: A European perspective
- Jon Markman on Reminiscences of a Stock Operator

Email readers please click here to come view the presentations embedded below:


Patrick Brennan: Liberty Interactive (LINTA) 




Kai Shih on Bank of America (BAC)




Josh Tarasoff on Amazon.com (AMZN)




Dan Amoss: Short Con-Way (CNW)




Shane Calhoun on Pacific Sunwear (PSUN)




Adrian Mak on Staples (SPLS)




Joe Cornell: The ABC's of Spin-Offs




JJ Abodeely on Value Investing From Top-Down



Michelle Leder on Diving into SEC Filings




Greg Merrill on Exporting Natural Gas




Alex Rubalcava on Managing Investor Workflow




Hendrik Leber: A European Perspective




Jon Markman on Reminiscences of a Stock Operator





Thanks again to Vitaliy for making all of the presentations available.

If you missed it, be sure to also check out Jim Chanos' presentation on CNX, PBR, HPQ, CSTR & SAN from the event as well.

Jim Chanos' Presentation on Global Value Traps: CNX, PBR, HPQ, CSTR, SAN & FMG

Emailed in from a reader, today we're posting up Jim Chanos of Kynikos Associates' presentation entitled 'A Search For Global Value ... Traps!" 

He gave the presentation this past week at the VALUEx Vail conference, an event put on by Vitaliy Katsenelson, a CIO who made our list of top finance people to follow on Twitter.  You can follow Vitaliy on Twitter here.

In Chanos' presentation, the hedge fund manager outlines how investors can separate value stocks from value traps.  He specifies common characteristics of value traps as:

- Cyclical and/or overly dependent on one product

- Hindsight drives expectations

- Marquis management and/or famous investor(s)

- Appears cheap using management's metric

- Accounting issues

This is not the first time we've seen Chanos talk about his focus on value traps as we've posted up how he's been shorting Petrobras and Fortescue.  And in a separate interview he talked about his shorts of Coinstar and Dell.

In his latest presentation, Chanos outlines the bearish and "value trap" thesis associated with the following names:

U.S. shale explosion: Consol Energy (CNX), national oil company: Petrobras (PBR), computing revolution: Hewlett-Packard (HPQ), digital distribution: Coinstar (CSTR), troubled national balance sheet: Banco Santander (SAN SM), and  iron ore rush: Fortescue (ASX:FMG).


Embedded below is Chanos' entire presentation with his thesis on each name outlined:




For more on Chanos, yesterday we posted up his bearish China stance as well as an in-depth interview with Columbia Business School.

Avenue Capital's Marc Lasry: Huge Amount of Distressed Opportunities in Europe

Marc Lasry, co-founder of Avenue Capital appeared today on Bloomberg TV where he said he thinks there's a huge amount of distressed debt investing opportunities in Europe.  He also argued that Europe would not blow up.

His firm manages just under $13 billion and this is the second time we've seen him appear to talk about the opportunities in distressed debt.


Here are some select excerpts from his interview we found intriguing:

On investing in Europe:  "The great thing about Europe today is you've got a huge amount of supply and very little demand. So you're not really bumping into everybody. I think that’ll change over time."

Which is the better opportunity: US or Europe?  "I think in Europe today, you're getting overpaid for the risk. For us, we can buy senior debt in Europe for around 50 cents, 60 cents and here in the U.S. you're paying 70 cents or 80 cents for it. The question is, where do you want to be investing? A lot of it goes to, if you look at investing today, the risk-free rate is 20 basis points, so where are you getting paid to take the risk? For us to make 15% to 20%, we think we can do it in Europe a lot easier than here."

How Avenue's been investing:  "We have been investing the capital about 5% a month. The reason for that if we think over the next year or year and a half, there's a huge amount of opportunities and the question is, is the better time to invest three months ago or three months from now? Our view is to invest over time. And we think we'll just average in the prices."

Is Lasry worried about Europe short-term? "It matters but our long-term view is over the course of the next two or three years, everything is going to work itself out, and whether it's George Soros or it's somebody else, which you constantly keep hearing every week and every month that Europe has problems. We all know that. I think it'll work out. If you believe that and you invest, you'll do well."


Embedded below is Marc Lasry's full interview with Bloomberg TV:




For more on this investor, Marc Lasry is profiled/interviewed in the new book The Alpha Masters which is definitely worth reading.

Arbitrage Movie Trailer: Film About Hedge Fund Manager Played By Richard Gere

We're posting up the trailer from the upcoming movie Arbitrage.  Directed by Nicholas Jarecki, it stars Richard Gere, Susan Sarandon, Brit Marling, Tim Roth, and Nate Parker.  The trailer looks like it also features a cameo by CNBC's Maria Bartiromo.  The movie will be released on September 14th, 2012.

Gere plays a hedge fund manager who is desperate to sell his trading empire before the depth of his fraud is exposed, but he makes an error that forces him to turn to an unlikely person for help.

The trailer makes it look like the film is less about finance and more about a drama and homicide case.  The film's tagline is Arbitrage: Power is the Best Alibi.

Embedded below is the movie trailer for Arbitrage:



If you missed some of the financial films that came out last year, check out the Margin Call movie trailer, as well as the Confidence Game trailer.

What We're Reading ~ 6/27/12

Mutual fund managers have the wrong skills [Dealbreaker]

News Corp surges on split hopes [CNNMoney]

Errors and checklist for investors [BigPicture]

Emerging managers delivered twice the returns of established ones [AllAboutAlpha]

17 investors in one word each [Gannon & Hoang on Investing]

Big hedge funds' succession problems [Institutional Investor]

Is your hedge fund style drifting? [Forbes]

2 bonds that DoubleLine bought over $1.7bn of last month [Economic Musings]

5 worries from the Morningstar investment conference [Morningstar]

Will Danoff: Day in the life of Fidelity's Contrafund manager [Reuters]

John Hussman: Enter the blindside recession [SeekingAlpha]

The bull case on Corrections Corp of America [Barrons]

Hewlett Packard shares fall like it's 2005 while debt swells [All Things D]

Two huge pharmacy chains become even bigger [The Economist]

SEC sues Harbinger's Phil Falcone [Bloomberg]

Mitt Romney's hedge fund history [Fortune]

The biases you don't know you have [Harvard Business Review]

Summary of Hedge Fund Bearish China Thesis: Kynikos, Corriente, Pivot, Eclectica, Greenlight & More

Today we're posting up a .pdf entitled "Global Macro Hedge Funds: Emerging Perspectives on China."  It essentially outlines the bearish China thesis held by numerous well known hedge funds.

The research summarizes viewpoints from the following managers and we've extracted some of the perspectives below.

Jim Chanos' Kynikos Associates: "Chanos cites several factors which he considers to be predictive of (a collapse of the Chinese economy), including the country's economic dependence on new construction, which accounts for 60% of China's economy (versus 10-15% in western nations) and which is fueling demand globally for industrial commodities, particularly in Australia, Brazil and Canada.  Mr. Chanos has stated that China's reliance on property development to produce nearly the entirety of the country's economic growth, rather than appreciable growth in exports and domestic demand, is without historical precedent and is ultimately unsustainable."

We've recently posted Chanos' bearish view on China and have called attention to his short of Fortescue Metals in Australia.  And then longtime readers will recall we posted Chanos' hour long presentation on China back in 2010.


Mark Hart's Corriente Advisors: "Mr. Hart has publicly stated his assessment, based upon his team's research, that China is generally misperceived (and therefore mispriced) as a perpetual 'economic miracle,' when in fact the reality is that the country's economy is a credit-fueled bubble."

At last year's Ira Sohn Conference, we posted some notes from Hart's talk on China.


Hugh Hendry's Eclectica Asset Management: "Mr. Hendry identifies parallels between the present situation in China and that of Japan in the 1920s when economic imbalances ultimately caused the entire system to collapse and foresees 'a dramatic collapse' of the Chinese economy as the inevitable result of the inherent instability resulting from massive debt growth to fund infrastructure projects which is 'unprecedented in 400 years of economic history' in conjunction with a structurally flawed political economy in which gross domestic product growth is not matched by domestic wealth creation."

You can read about Hendry's Asian bear portfolio he constructed.


Pivot Capital Management: "Three principal reasons for their perspective on China's pending economic downturn: 1.  China's expansion cycle has already greatly surpassed all prior global capital investment cycles; 2. Recent economic growth is not sustainable and is predominantly the result of massive fiscal stimulus, concomitant with a surge in the growth of credit, none of which is sustainable; and 3. China has substantial overcapacity in virtually every industrial manufacturing and infrastructure sector, causing declining marginal returns on investment."


David Einhorn's Greenlight Capital: At the Ira Sohn Conference this year, "Mr. Einhorn presented a markedly negative perspective on China, stating that China is misunderstood and is not an investment opportunity.  He stated that capital flight has already started and that money is leaving the country, noting the slowdown in export growth and how inflation has tempered the influx of hot money."


Embedded below is the complete summary of hedge funds' bearish China thesis in a 44-page comprehensive document:  






For more hedge fund views on China, we've highlighted the debate between Xerion's Dan Arbess and Jim Chanos in China: bubble or bonanza?

We've also posted previous resources such as Vitaliy Katsenelson on China: the mother of all black swans.

George Soros Interview on the European Crisis

Well known investor George Soros yesterday spoke with Bloomberg TV about the European crisis.  He called for the continent to start a fund to buy bonds of Italy and Spain.  The investor said that, "There is a disagreement on the fiscal side.  Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco.  That could actually be fatal."

Germany's Merkel today said that she's against Eurobonds.  Soros yesterday said that, "unfortunately, she has been leading Europe in the wrong direction."  Here are some other notable quotes from his interview:

Soros on the European Crisis

“Basically there is an interrelated problem of the banking system and the excessive risk premium on sovereign debt - they are Siamese twins, tied together and you have to tackle both. It's recognized that you have to do that and there is no widespread agreement on what to do on the banking side. It's the beginning of a banking union and there is a disagreement on the fiscal side and unless that is resolved in the next 3 days then I am afraid that the summit could turn out to be a fiasco, and that could be fatal, because you are facing the possibility of Greece leaving the euro and perhaps the European Union and you need to strengthen the remaining euro structure to withstand that shock.”


On What Europe Needs

“What you need is a European fiscal authority that will be composed of the finance ministers but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and the one that preceded it and it would be empowered to issue treasury bills, to set up a debt reduction fund and actually buy up the excess stock of that that has accumulated in the hands of particularly Italy and Spain and finally combine issuing treasury bills. Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.” 

“Euro bonds are not possible because Germany would not consider euro bonds until you have a political union, and I think it's actually quite justified, it should come at the end of the process not at the beginning. This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties. What it means is the political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance its debt on reasonable terms.”


Embedded below is the video of George Soros' interview with Bloomberg TV:



For more from this investor's family office operations, we've posted up the latest portfolio activity from Soros Fund Management.

Jeff Saut's Weekly Investment Strategy

Market strategist Jeff Saut is out with his latest commentary about perspective.  He argues that last Thursday the stock market's perspective changed.  He writes,

"Hence, while we have stopped recommitting the cash raised following the end of the 'buying stampede' on 1/26/12, we continue to think the print 'low' of June 4th will prove to be the 'low' of the current cycle."

Saut continues to advocate patience as things play out and give further clues as to where the markets are truly headed.

His missive this week also includes comments from their healthcare analyst about the Affordable Care Act and the Supreme Court's impending ruling which are worth reading.


Embedded below is Jeff Saut's latest market commentary for this week:




You can download a .pdf copy here.

If you missed it last week, we also posted Saut's thoughts on market mood.

Dr. Michael Burry's Commencement Speech: UCLA Economics 2012

Dr. Michael Burry of Scion Capital and subprime shorting fame gave the UCLA Economics commencement speech this year and the video is embedded below.  Burry was an undergraduate there himself.

This was emailed to us over a dozen times and marks another rare appearance by the famous investor profiled in Michael Lewis' book, The Big Short.

One of the best quotes from Burry's speech is: "As it turns out, information is not perfect, volatility does not define risk, markets are not efficient, the individual is adaptable."

Embedded below is Michael Burry's commencement speech at UCLA:




We've posted a ton of resources on the Scion Capital man, so definitely check out:

- Michael Burry on Bloomberg's risk takers

- Burry's primer on credit default swaps & the subprime short

- Michael Burry buys agricultural land and gold

- Burry's subprime speech at Vanderbilt

Tiger Global Reveals Justice Holdings Stake (Now Burger King)

Chase Coleman's hedge fund firm Tiger Global recently filed a disclosure in the UK on Justice Holdings (LON:JUSH).  The filing reveals that trading took place on April 19th and Tiger have disclosed a 5.27% holding in Justice with 4,000,000 shares.

Readers will recall that Justice Holdings is Bill Ackman's specialty purpose acquisition (SPAC) vehicle that holds a 29% stake in Burger King.  Ackman founded Justice along with Martin Franklin and Nicolas Berggruen by raising $1.4 billion in an IPO in London.

Justice Holdings was recently merged with Burger King Worldwide and now trades on the New York Stock Exchange under ticker BKW.  We've previously posted Ackman's presentation on Burger King.

Per Yahoo Finance, Burger King Worldwide is "operates fast food hamburger restaurants principally under the Burger King brand worldwide.  The company's restaurants primarily offer flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks."

Chase Coleman was recently listed as one of the top 25 highest earning hedge fund managers of 2011.

Steve Mandel's Lone Pine Capital Buys More Esprit

Steve Mandel's hedge fund firm Lone Pine Capital have raised their stake in Esprit Holdings (HK:330).  Per Hong Kong Stock Exchange data, the hedge fund bought just over 14 million shares on June 15th and almost 1.4 million shares on June 13th.

These buys come right after the company's CEO and chairman left and shares plunged.  Lone Pine now owns over 14% of the company.  Additionally, Mandel's firm has easily doubled its stake in the company over the past year or so and are the company's largest shareholder.

Also worth highlighting is that Marathon Asset Management is the second largest shareholder with around 7% ownership in Esprit.

Last week we highlighted an interview with Neev Capital's Rahul Sharma who talked about Inditex's Zara brand and Hennes & Mauritz, otherwise known as H&M.  Esprit seems to be hurt by competition by these brands.

For more on this hedge fund, we've detailed Lone Pine's new position in Cooper Companies.

Per Google Finance,  Esprit is "engaged in wholesale and retail distribution and licensing of fashion and lifestyle products designed under its own Esprit brand name. The brand creates women’s, men’s and kids’ collections for all occasions and distributes in over 1,100 directly managed retail stores and over 11,000 controlled-space wholesale point-of-sales internationally. The Company operates with 12 established product lines offering women’s wear, men’s wear, kid’s wear, edc youth, as well as shoes and accessories."

Be sure to also check out our post on why Steve Mandel likes Kohls.

Bill Ackman's Pershing Square Reveals Extent of Burger King Stake

Bill Ackman's hedge fund firm Pershing Square has filed a 13G with the SEC regarding a new position in Burger King Worldwide (BKW).  This position is not exactly 'new' because Ackman's Justice Holdings (JUSH) traded in the UK bought a 29% stake in Burger King and BKW recently listed on the New York Stock Exchange.

Per the filing, Pershing Square has disclosed a 12% ownership stake in BKW with 41,922,908 shares.  Justice Holdings bought 29% of Burger King while the rest is owned by 3G Capital.  Today we also posted up how Chase Coleman's hedge fund Tiger Global took a stake in Justice (now BKW).

To see the investment thesis on this name, head to Bill Ackman's presentation on Burger King.

Per Yahoo Finance, Burger King "operates fast food hamburger restaurants principally under the Burger King brand worldwide.  The company's restaurants primarily offer flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks."

For more from this hedge fund, head to Pershing Square's Q1 letter.