Value investing and Specialization
In the video above, Bruce Greenwood spoke about the ins and outs of complex value investing, the importance of being a specialized investor, and the unique opportunities provided by investing in local monopolies.
(1:24) What is the economics of information?(3:19) What Bruce is most proud of(7:25) Information summary of Bruce’s book (11:06) “Understanding value means understanding growth.” (11:49) “You better be well informed, and to be well informed, you need to specialize.”(20:58) The relationship between inflation and success in business(22:11) How specialization is essential(25:18) The value of specializing in local monopolies(33:21) Is ESG going to be the way of the future?(34:21).
Bruce posits that to become successful in value investing today, one must become a specialist not only by industry, but by region. Investment landscape all over is not all the same and specialization is needed to become successful in a specific region of the world.
Great investors like Warren Buffett are specialized in up to 4 different industries and anytime he strays away from his core competencies without seeking help from a regional or industry experts he normally lose money. For example, when Warren Buffett wanted to invest in China he employed the help of Himalaya Capital CEO, Lee who is an expert on Chinese investments. Warren Buffett proceeded to invest heavily in BYD.
Buffett’s big mistake: Back in 2008, Buffett invested billions of dollars into major oil company ConocoPhillips. () At the time, oil was at all-time high prices, and the world was at the doorstep of a major economic crisis. Here’s how Buffett himself described his decision in his 2008 letter to shareholders:
“Last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie [Munger] or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.”
This is the main reason why Warren Buffett keep all his management when he acquires a company, he relies on his manager’s expertise to run his respective businesses successfully.
Warren Buffett had the CEO of Google and Microsoft at his disposal,but couldn’t overcome his lack of tech education or experience. Even though he used Google at Geico extensively, but still couldn’t see the value in the business simply because he’s not a tech specialist. Today, tech focused funds like Vista Partners are performing better than Warren simply because of specialization or specialized knowledge base.
Value investing is now about cashing in on or relying on personal, professional specialization or expertise. This idea was first introduced by Peter Lynch in his book, Beating the Street. It’s important to invest in what you know or understand like Cassandra Harris, CFO of Tupperware, she invested $56,000 in Tupperware’s securities when it was less than $2 and few months later that investment yielded millions in dollars.
Take for example Michael Jackson in 1985, he shelled out $47.5 million to buy a publishing catalog that included 250 Beatles songs. Ten years later Sony paid Jackson $90 million for half the rights, forming a joint venture called Sony/ATV.
Today, the Jackson estate and Sony share ownership of the catalog, which now boasts half a million songs including titles by Bob Dylan, Elvis Presley, Eminem and other artists. Insiders place the catalog’s value somewhere in the neighborhood of $1.5 billion, based on estimated proceeds of $50 million to $100 million per year. The estimate marks a 3,000% increase in value from the catalog’s initial purchase price — better than the 1,650% return on Class A shares of Warren Buffett’s Berkshire Hathaway since 1990. Likewise Michael Jordan, regarded as the GOAT of basketball decided to invest $175 million on the Bobcats after retirement; that investment today is worth more than $1 billion dollars. He knew the value of a basketball team was around $40 million dollar when he came into the league in the early 80s and he knew it’s going to continue to grow in value.