As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, Lockheed Martin Corp (LMT).

Profile

Lockheed Martin is the world’s largest defense contractor and has dominated the Western market for high-end fighter aircraft since it won the F-35 Joint Strike Fighter program in 2001. Lockheed’s largest segment is aeronautics, which derives upward of two-thirds of its revenue from the F-35. Lockheed’s remaining segments are rotary and mission systems, mainly encompassing the Sikorsky helicopter business; missiles and fire control, which creates missiles and missile defense systems; and space systems, which produces satellites and receives equity income from the United Launch Alliance joint

Recent Performance

Over the past twelve months the share price is up 22.31%.

Source: Google Finance

Inputs

Discount Rate: 6%
Terminal Growth Rate: 2%
WACC: 6%

Forecasted Free Cash Flows (FCFs)

| Year | FCF (billions) | PV(billions) | | 2024 | 6.91 | 6.52 | | 2025 | 7.13 | 6.35 | | 2026 | 7.35 | 6.17 | | 2027 | 7.59 | 6.01 | | 2028 | 7.83 | 5.85 |

Terminal Value

Terminal Value = FCF * (1 + g) / (r – g) = 199.67 billion

Present Value of Terminal Value

PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 149.20 billion

Present Value of Free Cash Flows

Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 30.90 billion

Enterprise Value

Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 180.10 billion

Net Debt

Net Debt = Total Debt – Total Cash = 16.17 billion

Equity Value

Equity Value = Enterprise Value – Net Debt = 163.93 billion

Per-Share DCF Value

Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $697.57

Conclusion

| DCF Value | Current Price | Margin of Safety | | --- | --- | --- | | $697.57 | $551.82 | 20.89% |

Based on the DCF valuation, the stock is undervalued. The DCF value of $697.57 share is higher than the current market price of $551.82. The Margin of Safety is 20.89%.

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This week’s best investing news:

Warren Buffett’s Apple share sales and cash pile spark intrigue over motives (FT)

Mohnish Pabrai on The Dhandho Investor: The Low-Risk Value Method to High Returns (MOI)

David Einhorn – We have increased our bets on inflation (CNBC)

Why The Long Face, Uncle Warren? (Felder)

Aswath Damodaran – The Siren Song of Sustainability: The Theocratic Trifecta’s Third Leg! (AD)

Short-Term vs. Long-Term Forecasts (Verdad)

Fundsmith’s profit decline forces Terry Smith to take second pay cut (Investment Week)

Top 10 High Shareholder Yield Stocks – November 2024 (Validea)

Guy Spier – Operating From A Position Of Power & Not Scarcity For Success (Guy Spier)

OakTree – The Evolution of Asset-Backed Finance (OakTree)

Elections Have Consequences (Downtown Josh Brown)

Does Warren Buffett Know Something That We Don’t? (WSJ)

Contrary to widespread belief… (Havenstein)

What to Buy if the Election Has You Worrying About Inflation (Jason Zweig)

No Perfect Answers (Humble Dollar)

‘Diversification Is Back’—Why 60/40 Portfolios Are Working (Morningstar)

Letter to A Young Investor #5: You Stand Alone (Safal)

Peter Goodman, How the World ran Out of Everything (MiB)

What Long-Term Stock Returns Should I Assume in My Plan? (BestInterest)

The Miracle of U.S Equities (Morningstar)

50 All-Time Highs for the S&P 500 So Far This Year (Apollo)

Cash! (Brooklyn Investor)

When Interest Rates Matter and When They Don’t (WhiteCoat)

Policymakers don’t want to tank the stock market (TKer)

Horizon Kinetics’ Q3 2024 Commentary (HK)

Mairs & Power Growth Fund Q3 2024 Commentary (M&P)

Weitz Investment Management: Balancing Volatility and Opportunity (Weitz)

This week’s best value Investing news:

GMO – A Historic Opportunity in Deep Value (GMO)

Pzena Investment Management: Value Investing During Drawdowns (Pzena)

Finding Value Stocks in an Overbought Market (The Street)

This week’s Fear & Greed Index:

This week’s best investing podcasts:

JP Morgan’s David Kelly – Spread Out or Miss Out (Meb Faber)

Ep 461. The Trump Economy, Interest Rates, Deficits, Supermarkets, and an Intriguing Value Stock (FC)

Making Sense of Markets in a Post Election World (Excess Returns)

Ernie Garcia – Leading Through Crisis (ILTB)

Small Cap Stocks Rip – How to Profit (On The Tape)

Choosing an Investment Manager: Beyond Warren and Charlie (Vitaliy Katsenelson)

Jim Murphy and Charlie Hill: ‘The Value Proposition for Municipal Bonds Has Rarely Been Stronger’ (LV)

How to Think (and Work) Like a Billion Dollar Investor (Knowledge Project)

Carley Dillon: How We Consistently Deliver Over 15% Organic Growth (Barron’s)

This week’s Buffett Indicator:

Strongly Overvalued.

This week’s best investing research:

Markets Becoming More Efficient: The Disappearing Index Effect (AlphaArchitect)

An Era’s Tour of Private Equity (AllAboutAlpha)

A Guide for Investment Analysts: Working with Historical Market Data (CFA)

The Big Picture Cognitive Bias (PAL)

This week’s best investing tweet:

This is the greatest investor ever.

Stanley Druckenmiller has never had a down year.

His fund returned 30% annually for 30 years.

Here is his updated philosophy: pic.twitter.com/lJWYJqwU9p

— Oguz O. | 𝕏 Capitalist (@thexcapitalist) November 14, 2024

This week’s best investing graphic:

China’s Economy is Larger Than 30 Asian Economies Combined (Visual Capitalist)

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As part of our ongoing series here at The Acquirer’s Multiple, each week we focus on one of the stocks from our Stock Screeners, and why it’s a ‘buy’ based on key fundamentals.

One of the cheapest stocks in our Stock Screeners is:

Lowe’s Companies Inc (LOW)

Lowe’s is the second-largest home improvement retailer in the world, operating more than 1,700 stores in the United States, after the 2023 divestiture of its Canadian locations (RONA, Lowe’s Canada, Réno-Dépôt, and Dick’s Lumber). The firm’s stores offer products and services for home decorating, maintenance, repair, and remodeling, with maintenance and repair accounting for two thirds of products sold. Lowe’s targets retail do-it-yourself (around 75% of sales) and do-it-for-me customers as well as commercial and professional business clients (around 25% of sales). We estimate Lowe’s captures a high-single-digit share of the domestic home improvement market, based on US Census data and management’s market size estimates.

A quick look at the share price history (below) over the past twelve months shows that the price is up 34.75%. Here’s why the company is undervalued.

Source: Google Finance

Key Stats

Market Cap: $148.66 Billion

Enterprise Value: $184.21 Billion

Operating Earnings

Operating Earnings: $10.52 Billion

Acquirer’s Multiple

Acquirer’s Multiple: 17.50

Free Cash Flow (TTM)

Free Cash Flow: $7.58 Billion

FCF/MC Yield %:

FCF/MC Yield: 5.10

Shareholder Yield %:

Shareholder Yield: 4.10

Other Indicators

Piotroski F Score: 7.00

Buyback Yield %: 2.40

ROA (5 Year Avge%): 5

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During their recent episode, Taylor, Carlisle, and Matthew Fine discussed The Growing Divide in S&P 500 Valuations: What It Means for Value Investors. Here’s an excerpt from the episode:

Tobias: One of the little charts that you had showed the S&P 500 quartile spreads most expensive to cheapest. It’s a topic that we discuss regularly on this show. What did you, guys, deduce from your analysis of the quartiles of the S&P 500?

Matthew: Well, very candidly, originally, when I started looking at things like that. We’re bottom-up fundamental people. We’re not top-down quant people trying to carve up the market in that way. But when we were in 2017, 2018, 2019 and you felt as a fundamental value manager, like you’re beating your head against the wall, I don’t understand the relative performance. I don’t understand why these businesses I own have not been rerated even though, in some of those years, the absolute returns are pretty good, the relative were quite poor.

So, the first value for looking at something like that is to get me personally back off the ledge. Like, “What am I doing wrong? Is it me? Is it the world’s gone mad?”

Jake: What did you come up paraphrase that like, “You’re not interested in flows, but the flows are interested in you.”

[laughter]Matthew: Yeah, it’s absolutely right. But I thought it was absolutely fascinating. The more I think about that chart, the more important I actually think it is. There’s a lot of information in there. We could probably devote an entire call to it. But what I saw in 2017, 2018, 2019 was this spread just growing and growing and growing. It had been growing basically since 2012 or 2013. So, now, here we are a decade plus of expansion of that spread where expensive companies, meaning, that the most expensive quartile, the S&P 500, have just become relentlessly more expensive.

What’s also interesting about that chart, is if you have to look a little more closely, but the bottom quartile, the cheapest, has actually gotten cheaper over that time period. So, this notion, one side note or one piece that came out of it, this notion that low interest rates were driving long duration growth companies with cash flows way out in the future is what makes them long duration in people’s minds. Low interest rates should favor them disproportionately.

Maybe that’s true mathematically. I actually put that math in a white paper at one point looking at that, but low interest rates and shrinking discount rates inflate the value of all cash flows. But you can see in that chart, that’s not what’s happening. The cheapest stocks are actually becoming cheaper. They should inflate too, even if the most expensive should inflate more. But that didn’t happen. So, it’s not an interest rate phenomenon.

That chart, I believe is 35 years that you’re referring to, it goes back to basically 1990 and you saw it explode into the dot-com bubble, so harking back to my earliest days. I think we got to like a spread of like 16, so that could be 12 for the cheapest, 28 for the most expensive, something like that. And then, dot-com bubble burst and value strategies, the spread compressed.

While the spread is compressing, that’s very favorable for value strategies. A normal number for that spread is about 9. It went to 16 in the dot-com bubble, compressed. And it kept compressing, all the way right up to before the GFC. It got very low by historical standards, where there’s an argument to be made actually that in 2007 that cheap companies were not cheap enough on a relative basis or cheap was too expensive, if you will, on a relative basis.

I do suspect there’s something in there related to why a lot of value managers didn’t actually do quite as well in the GFC as some people had expected them to. That spread compression tells me a little bit about that. And then, it’s blown way out, got past the dot-com bubble by 2021, 2022. We reconciled about a good portion of that, but 2023 and 2024 has gone even wider. So, it just tells you a ton about why it’s really difficult for value managers on a relative basis, if expensive just keeps getting more expensive and if there is very little if any rerating happening in the cheaper end of the spectrum.

I know I said a lot there, but it’s mostly a US phenomenon. When you look at other markets, you see a little bit of it. When you look at an index for the world, you see a lot of it. But that’s just because the index– MSCI World, for example, is 2/3rd the US maybe even as high as 70%. So, you get a ton of influence from the US market in MSCI World. But on a foreign market basis, you really don’t see a lot of that, which does make me suspect, which I wrote in a recent letter, that the flows from active to passive $3 trillion in the last 10 years does probably have something to do with that. Although I just want to be careful, it’s hard to prove that and correlation does not equal causality. Yeah.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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In his interview in the book – Efficiently Inefficient, Cliff Asness discusses the parallels between quantitative and judgmental (discretionary) investing, noting that both seek undervalued stocks with catalysts that might change their valuations.

He highlights that while judgmental managers often concentrate their holdings, relying on deep company knowledge, quants leverage diversification, applying models across thousands of stocks to spread risk. Asness notes that quant investors benefit from extensive data analysis and systematic approaches but still face periods of underperformance.

Both strategies share risks, as unforeseen events or errors can disrupt even well-informed investments. Ultimately, disciplined quant strategies can add value through broad, consistent application across markets.

Here’s an excerpt from the interview:

Asness: I think good judgmental managers are often looking for the same things we are—cheap stocks with a catalyst as to why they won’t remain cheap, and vice versa for shorts. In fact, for a long time I used to think we did something very different, until I realized that “catalyst” and “momentum” share a lot in common and so do quants and more discretionary managers.

In fact, be it for rational or irrational reasons, I think this is the type of management, quant or judgmental, that adds value over time.

The big difference between quants and non-quants comes down to diversification, which quants rely on, and concentration, which judgmental managers rely on. But what we tend to like or dislike in general is actually fairly similar.

A discretionary manager gets to intimately know the companies they invest in. We don’t, but our advantage is that we can apply our trading philosophy to thousands of stocks at the same time. If the philosophy works, it’s very hard for us to lose over time given that we spread the risk over so many stocks. Of course, as implied earlier, it’s very easy to lose for a while even if you’re right!

Even if a discretionary manager knows a company very well, the CEO can still turn out to be a philandering embezzler, so you have that stock-specific randomness if you only hold a few stocks. And no matter how well you know something, there is still just a chance you’re wrong.

Quantitative investors can process a lot of information. We look at many more stocks and many more factors than is easily done by discretionary stock pickers. Further, we apply the same investment principles across stocks, backtest our strategies, and follow our models with some discipline.

You can find a copy of the book here:

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined

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In this interview with Kiatnakin Phatra Wealth Management, Howard Marks explains why effective risk control is essential to achieving investment success, summarizing his philosophy as “if we avoid the losers, the winners take care of themselves.”

Rather than seeking extraordinary gains, Marks focuses on maintaining consistent, good-quality investments, aspiring for results that are “always good, sometimes great, never terrible.” He shares an analogy, comparing dining at his favorite Italian restaurant to investing with his firm, Oaktree Capital: both aim for reliable quality.

This disciplined approach to risk control, Marks believes, can yield an impressive track record over time without requiring constant excellence.

Here’s an excerpt from the interview:

Marks: So number one, risk control. Our motto is, if we avoid the losers, the winners take care of themselves. So, you know, we don’t go out hunting for elephants; we just go out—we want to have a large number of good investments.

In fact, the Financial Times has a column on Saturdays called Lunch with the FT, and they took me to lunch in December at my favorite Italian restaurant in New York. And I said to the reporter, “Eating in this restaurant is like investing at Oak Tree: always good, sometimes great, never terrible.”

This is really one way for me to describe my goals. It would be great to say we’re always going to be terrific, but it’s not true—nobody can produce that.

But if you can just do, you don’t even have to be good all the time—good almost all the time, great some of the time, but never terrible. And if you do that for a few decades, you’ll have one of the greatest records in history.

You can watch the entire interview here:

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Over the past twelve months ten Large-Cap stocks have underperformed all others. Here’s this week’s top 10 worst performing Large-Caps in the last twelve months:

| Name | 1 Year Price Returns (Daily) | | Walgreens Boots Alliance (WBA) | -51.34% | | Dollar Tree (DLTR) | -46.16% | | Estee Lauder Companies (EL) | -42.40% | | Humana (HUM) | -42.15% | | Moderna (MRNA) | -38.57% | | APA (APA) | -38.32% | | Intel (INTC) | -33.81% | | Dollar General (DG) | -33.79% | | Celanese (CE) | -31.73% | | DexCom (DXCM) | -27.37% |

Here’s what they look like in one chart:

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Part of the weekly research here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Warren Buffett, Joel Greenblatt, Carl Icahn, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks. The top investor data is provided from their latest 13F’s. This week we’ll take a look at:

Marathon Petroleum Corp (MPC)

Marathon Petroleum is an independent refiner with 13 refineries in the midcontinent, West Coast, and Gulf Coast of the United States with total throughput capacity of 3.0 million barrels per day. Its Dickinson, North Dakota, facility produces 184 million gallons a year of renewable diesel. Its Martinez, California, facility will have the ability to produce 730 million gallons a year of renewable diesel once converted. The firm also owns and operates midstream assets primarily through its listed master limited partnership, MPLX.

A quick look at the price chart below shows us that the stock is up 3.56% in the past twelve months.

Source: Google Finance

(Shares)

Paul Singer – 7,365,000

Cliff Asness – 1,197,401

Israel Englander – 678,142

Ken Griffin – 668,235

Bernard Horn – 210,594

Ray Dalio – 115,354

Paul Tudor Jones – 52,651

Joel Greenblatt – 44,870

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During their recent episode, Taylor, Carlisle, and Matthew Fine discussed Apperceptive Mass: From Katamari to Cognitive Growth. Here’s an excerpt from the episode:

Tobias: We are right at the top of the hour, which means that it’s JT’s vegetables. Market for everybody who’s looking for the timestamp just wants to [Jake chuckles] skip straight to the veggies.

Jake: Yeah. So, I’m on the road, so we got to set the bar a little lower than normal. So, this week we’re exploring a concept from a 19th century psychologist, which was actually wasn’t even a term yet back then, but he didn’t know that. We’re going to connect it with a Japanese video game. And so, the psych term is something called apperceptive mass. Have either of you had any experience with the term, apperceptive mass?

Tobias: I have not.

Matthew: I have not. No.

Jake: Okay. Well, eventually, as you’ll see, we’ll be able to even tie some of this back to Charlie Munger. It’ll get pretty self-evident by then. But my interest in the term came about, because I was relistening to the 2022 Berkshire AGM. Buffett brings it up explicitly. It was the first time I’d ever heard that term.

We’ll first rewind the clock back to the early 1800s, and we’ll meet this guy named Johann Friedrich Herbart, H-E-R-B-A-R-T, German philosopher and psychologist. Again, before that was even a thing. He was one of the founding figures of modern educational theory. He coined this term, apperceptive mass. So, what does it mean? Apperceptive means having the ability to understand something new by relating it to past experiences. It’s like this body of knowledge and experiences that you carry around in your head. It’s like this network of ideas that you’ve built over time, frameworks, models that help you connect with new information that’s coming in.

So, for example, let’s say you’re a student who’s learning physics. If you’d already understood basic maths and some scientific principles, like if you drop an apple, it’ll fall back to the earth, you’re then much more equipped to grasp increasingly advanced concepts, because you have this existing context in which to fold the new information into. So, your apperceptive mass, your pre-existing knowledge base, acts as a scaffolding for learning. Maybe even you might call it a lattice work. But if you lack that foundational knowledge, you’re likely to struggle. That’s because you don’t have these cognitive hooks to hang the information on.

So, onto the video game side of this. Have you guys ever heard of this video game called Katamari Damacy? Damacy? I’m not sure how you say that, but Katamari–

Tobias: Oh, I’ve played with my son. I’m one of the top two American players. No, I’ve never heard of it. [chuckles]

Jake: I knew it. All right. You’ve probably seen it before at some point. Katamari means clump in Japanese. It’s this game where you control where this ball rolls around, and objects then adhere to the ball and it becomes increasingly bigger. As more and more things stick to it and as the ball gets increasingly bigger in diameter, it’s then capable of grabbing increasingly larger objects and sticking them together. And so, eventually, the ball becomes big enough to grab entire buildings and eventually reaches galactic proportions. You start off with like this little tiny ball. I’m not sure what it is. I don’t know if it’s the compounding nature of it or what, but it’s incredibly satisfying to play for some reason.

So, you can probably already see where I’m going with all this. Like, you have this app perceptive mass, which is really like a cerebral Katamari. You could pick up increasingly large intellectual objects as the mass increases. The more massive it becomes, your toolbox gets more full and you’re more prepared to then see problems from different angles, tackle more complexity with nuanced solutions. This new information is just easier to assimilate bigger chunks of it, because you have this big mass that’s already rolling around.

So, obviously, lots of advantages to having a healthy apperceptive mass, but it can also lead to pitfalls if we aren’t careful. So, cognitive defects like overconfidence bias or confirmation bias can cause us to interpret new information in a way that already aligns with our existing beliefs, even if that interpretation is actually flawed. No doubt, social media amplifies this problem. We’re talking on the eve of the election. We don’t need to go into to how much I– [crosstalk]

Tobias: There’s an election on?

Jake: Oh, yeah. Well, that’s what I heard. So, some new study, some anecdote, some chart, it fits right into your apperceptive mass wheelhouse, and it just strengthens your confidence that you really know what’s going on. Maybe that’s true, maybe it isn’t. It’s like, “Uh-huh, I found the smoking gun that proves what I’ve always believed.” Being smart, you’re actually sometimes at a disadvantage because it’s easier to talk yourself into a really good narrative and find these facts which support your priors. You’re that much better at it.

So, I think it’s key to maintain an open-minded approach, regularly try to update your knowledge base. I think as Ted Lasso said like “Be curious, not judgmental,” which I think is one of really beautiful phrase. I think he stole that from, what was it? Some, I can’t remember, was it Wordsworth or somebody. It’s probably not that. And then, Darwin also would famously write down a fact which contradicted with his previous understanding within 30 minutes of finding it out, because he knew that his mind would then actively work to reject whatever it was that he [Tobias laughs] just learned, because it didn’t fit in with the previous apperceptive mass that he had.

Of course, all this know ties together with Munger’s concept of the lattice work of mental models and emphasizing interconnected knowledge is much more powerful than the man with the hammer. So, to close things out, let’s just take a second to think about this, what the size of Munger’s intellectual Katamari would look like. Imagine it’s rolling up entire planets together or solar systems, it’d be pretty impressive.

Tobias: Yeah. Good long runway. Good one, JT.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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In his 2013 Berkshire Hathaway Annual Letter, Warren Buffett explains that Berkshire Hathaway’s intrinsic value far exceeds its book value, a gap that has widened over time. This justified a 2012 decision allowing share repurchases at 120% of book value, as such buybacks benefit shareholders by securing shares below intrinsic value.

However, no shares were repurchased in 2013 due to price constraints. Buffett, alongside Charlie Munger, expects Berkshire to outperform the S&P during down or moderately up markets but to underperform when the market rises strongly. Despite occasional shortfalls, Buffett remains confident that Berkshire will continue to exceed the S&P over full market cycles.

Here’s an excerpt from the letter:

As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That’s why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense.

Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level.

If it does, we will be aggressive.

Charlie Munger, Berkshire’s vice chairman and my partner, and I believe both Berkshire’s book value and intrinsic value will outperform the S&P in years when the market is down or moderately up.

We expect to fall short, though, in years when the market is strong — as we did in 2013. We have underperformed in ten of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%.

Over the stock market cycle between yearends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results.

You can find a copy of the letter here:

2013 Berkshire Hathaway Annual Letter

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In his book – Principles: Life and Work, Ray Dalio emphasizes the importance of confronting and accepting uncertainty to make better decisions. He advocates for the value of seeking diverse perspectives and staying humble about what you know, as knowledge gaps can lead to critical insights.

Dalio encourages logical decision-making through expected value calculations, managing risks, and avoiding overconfidence by triangulating opinions with credible sources. He advises making a series of small, uncorrelated bets to minimize potential losses while maximizing opportunities. Success, he argues, lies as much in asking the right questions as in finding the right answers.

Here’s an excerpt from the book:

190) Recognize the Power of Knowing How to Deal with Not Knowing

191) Recognize that your goal is to come up with the best answer, that the probability of your having it is small, and that even if you have it, you can’t be confident that you do have it unless you have other believable people test you.

192) Understand that the ability to deal with not knowing is far more powerful than knowing

a) Embrace the power of asking: “What don’t I know, and what should I do about it?”
b)Finding the path to success is at least as dependent on coming up with the right questions as coming up with answers.

193) Remember that your goal is to find the best answer, not to give the best one you have.

194) While everyone has the right to have questions and theories, only believable people have the right to have opinions

195) Constantly worry about what you are missing.

a) Successful people ask for the criticism of others and consider its merit.
b) Triangulate your view.

196) Make All Decisions Logically, as Expected Value Calculations

197) Considering both the probabilities and the payoffs of the consequences, make sure that the probability of the unacceptable (i.e., the risk of ruin) is nil.

a) The cost of a bad decision is equal to or greater than the reward of a good decision, so knowing what you don’t know is at least as valuable as knowing.
b) Recognize opportunities where there isn’t much to lose and a lot to gain, even if the probability of the gain happening is low.
c) Understand how valuable it is to raise the probability that your decision will be right by accurately assessing the probability of your being right.
d) Don’t bet too much on anything. Make 15 or more good, uncorrelated bets.

You can find a copy of the book here:

Principles Life and Work – Ray Dalio

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As part of the weekly research here at The Acquirer’s Multiple we’re always interested in superinvestors who hold the same stocks that appear in our Acquirer’s Multiple Stock Screeners, based on their latest 13F’s. Investors such as Warren Buffett, Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

While doing this research we’ve also uncovered a number of stocks that superinvestors have sold, or reduced in their portfolios, according to their latest 13f’s. So we’re now providing a new weekly feature article called ‘One Stock Superinvestors Are Selling‘. This week we’ll take a look at:

Microsoft Corp (MSFT)

Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three equally sized broad segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops).A quick look at the price chart below for the company shows us that the stock is up 17.85% in the past twelve months.

Source: Google Finance

Superinvestors who reduced, or sold out of the company’s stock, according to their latest 13Fs, include:

(Remaining shares)

Terry Smith – 7,140,615

Cliff Asness – 3,868,943

Dan Loeb – 1,580,000

Donald Yacktman – 1,248,427

Ken Griffin – 1,243,093

David Tepper – 1,181,356

Jean-Marie Eveillard – 659,204

Stan Druckenmiller – 400,490

John Rogers – 265,438

Bernard Horn – 104,926

Cath Wood – 30,409

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During their recent episode, Taylor, Carlisle, and Matthew Fine discussed Mercedes and European Banks Are Leading in Shareholder Capital Returns. Here’s an excerpt from the episode:

Matthew: Yeah. Maybe that’s the side of the top. I haven’t explicitly focused the way that he has on companies that are returning a lot of capital. But it’s happened almost accidentally. And I nowhere close in my career have I managed a portfolio that’s returning as much capital as exists in the portfolio today.

I think that it’s a combination of a couple things. One is the investment philosophy itself. So, we start with cheap companies and we start with super well financed companies. We try our best, although this is probably the hardest part of the process, but try to align ourselves with management teams that are going to act sensibly, do smart things, not destroy the capital.

So, when a company makes a dollar of profit, it’s got a choice about what it can do with that dollar of profit. It can reinvest in the business at some rate, or it can go dividend it out and buy back shares. When the shares are trading at something like five or six times earnings, which is really common in the Third Avenue Value Fund today, you’ve got whatever that is, 16% to 20% earnings yield on your reinvestment in the buyback.

It’s very hard. There aren’t a lot of businesses that offer 20% return on invested capital to put that money back into the business. If you’ve started already with companies that are super well financed and have already have excess resources, you’re going to get a lot of capital return. So, it’s happening all over the place.

The auto OEM space is a great example. Mercedes is the extreme example, actually, where they said, “We’re going to pay out this ordinary dividend, which is a high single digit number, like 7% or 8% yield.” I don’t have a current number in front of me, but 7% or 8% yield, something like that on a current basis. And then, after that dividend, they’re going to take 100% of the free cash flows from its automotive business and distribute those back to shareholders, because they have like 30 billion euros of net cash at the automotive business already. They have more money than they know what to do with. So, they’re going to return basically 100% of the free cash flows.

The European banks, there’s a lot of that going on where you’ve got super well financed companies paying it back, dividends, share buybacks, Bank of Ireland, Deutsche, which both of them which we own are doing exactly that. And then, in Japan, you’re seeing a lot more capital return, although it’s by force and it’s not enough. It’s probably enough to move the meter from a valuation perspective, but it’s nowhere near what it ought to be. So, there’s just a ton of that going on in the portfolio today for all of the reasons that we’re talking about.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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During the 1998 Berkshire Hathaway Annual Meeting, Warren Buffett contemplates the impact if all Fortune 500 companies were run by exceptional leaders like Jack Welch. He suggests that, while each individual might excel, competition among 500 “sensational competitors” could lead to a self-neutralizing effect, driving down returns on equity due to intense rivalry.

Buffett argues that markets often reward relative, rather than absolute, intelligence, implying that moderate competition benefits investors more than an environment of uniformly high-performing managers. He humorously concludes that weak competition is advantageous and likens it to the idea of beating a chess champion like Bobby Fischer only by playing him in a different game.

Here’s an excerpt from the meeting:

Buffett: An interesting question is to think about, if you had 500 Jack Welches and they were running the Fortune — they’re cloned — and they were running all of the Fortune 500 companies, would returns on equity for American business be higher or lower than they are presently?

I mean, if you have 500 sensational competitors, they can all be rational, and they will be. They’ll be smart and keep trying to do all the right things. But there’s a self-neutralizing effect, just like having 500 expert chess players or 500 expert bridge players. You still have a lot of losers if they get together and play in a tournament.

So, it’s not at all clear that if all American management were dramatically better — leaving out the competition against foreign enterprises — that returns on equity would be a lot better. They might very well drive things down. That’s what, to some extent, can easily happen in securities markets. It’s way better to be in securities markets if you have a hundred IQ and everybody else operating has an 80, than if you have 140 and all the rest of them also have 140.

So the secret of life is weak competition, you know. (Laughter) Somebody said, “How do you beat Bobby Fischer?” You play him in any game except chess. (Laughter) That’s how you beat Jack Welch. You play him in any game except business, although he’s a very good golfer, I want to — (laughs) — point out.

He shot a 69 a few months ago when I saw him at a very tough course. Jack manages to play 70 or 80 rounds of golf a year and come in sub-par occasionally, while still doing what he does at GE. He’s a great manager. But 500 Jack Welches? I’m not at all sure that would make stocks more valuable in this country.

You can watch the entire meeting here:

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In his book – The Dhandho Investor, Mohnish Pabrai outlines seven key questions that investors should address before buying a stock. He emphasizes understanding the business deeply, accurately estimating its intrinsic value over time, ensuring it’s priced at a significant discount (over 50%), and being comfortable investing a large portion of one’s net worth.

Pabrai also stresses minimal downside risk, a strong competitive moat, and management’s capability and honesty. He advises that all criteria must be met to proceed with an investment. If not, one should wait for a better opportunity, as entering without full confidence is risky.

Here’s an excerpt from the book:

Much of this book has fixated on the various nuances of buying stocks. This is by no means a summary, but here are seven questions that an investor ought to be thinking about before entering any stock market chakravyuh:

Is it a business I understand very well—squarely within my circle of competence?
Do I know the intrinsic value of the business today and, with a high degree of confidence, how it is likely to change over the next few years?
Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?
Would I be willing to invest a large part of my net worth into this business?
Is the downside minimal?
Does the business have a moat?
Is it run by able and honest managers?

One should only consider buying if the answer to all seven is a resounding yes. If a well-understood business is offered to you at half or less than its underlying intrinsic value two to three years from now, with minimal downside risk, take it. If not, take a pass on entering this chakravyuh. There will be better chances in the future.

You can find a copy of the book here:

The Dhandho Investor: The Low-Risk Value Method to High Returns: Mohnish Pabrai

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As part of the weekly research here at The Acquirer’s Multiple we’re always interested in investing gurus who hold the same stocks that appear in our Acquirer’s Multiple Stock Screeners, based on their latest 13F’s. Investors such as Warren Buffett, Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

While doing this research we’ve also uncovered a number of common stocks that investing gurus have recently bought, or continuing to hold in their portfolios, according to their latest 13f’s. This week we’ll take a look at:

Uber Technologies Inc (UBER)

Uber Technologies is a technology provider that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. The firm’s on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, which, as the firm refers to it, provides “aerial ride-sharing.” Uber Technologies is headquartered in San Francisco and operates in over 63 countries with over 150 million users who order rides or food at least once a month.A quick look at the price chart below for the company shows us that the stock is up 54.47% in the past twelve months.

Source: Google Finance

Superinvestors who recently bought, or continue to hold the stock, according to their latest 13Fs include:

(Shares)

Israel Englander – 3,683,090

Tom Russo – 3,644,712

Ken Griffin – 2,654,435

Dan Loeb – 2,100,000

David Tepper – 1,500,000

Steve Romick – 1,435,399

Lee Ainslie – 1,404,425

George Soros – 699,574

Steve Cohen – 369,755

Joel Greenblatt – 163,545

Tom Gayner – 88,000

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During their recent episode, Taylor, Carlisle, and Matthew Fine discussed Derating and Lack of Rerating Are Changing the Face of Value Investing. Here’s an excerpt from the episode:

Tobias: This is a related question, but I tend to agree that if everything gets too cheap and all the competition for investing in this sector goes away, then you should– It’s not an iron law, but it’s an emergent effect of markets, so that’s where you get all of the returns that you get outsized returns if there’s nobody hunting around in super cheap stocks, because the companies themselves should be able to earn and perform.

David Einhorn has been a little bit vocal about this, talking about, the two sources of return are essentially reinvestment in the business and the flows that you get, the capital returns, buybacks, and dividends, whatever else it might be. And he said he was focusing more on the capital returns, because the market wasn’t giving any credit for reinvestment. That certainly seems to be the case, if you look across many of these portfolios you see, compressing multiples, book earnings, cash flows, whatever the case may be. I think that’s one of the topics that you addressed too. You looked at reinvestment versus capital returns. Do you want to talk about that a little bit?

Matthew: I do. Before I get into that, David has said one of the most insightful and thought-provoking things I’ve heard in my career. Recently, he was asked– I guess it’s maybe a year and a half ago or so at this point, so maybe not that recent. But he was asked when value investing comes back, and if your viewers have not heard that, he said it at a Robinhood event and you can find the original version. But basically, what he was saying is that in the old days– This mirrors my experience so closely is why it resonated with me.

But in the old days, you used to find some diamond in the rough. It would be cheap and bombed out. But you would see that the business quality was higher than other people. In your estimation and your judgment, you would buy it very cheaply, the business would perform, and eventually, other people would come in and see that it was a pretty good business and rerate the business.

So, you would get two pieces of return to your point. One is, the value being created from the operations of the business, and then you get the rerating and then you get a really good investment outcome, if that’s the case. But his point was value investing may never come back, because that rerating is not happening, because there aren’t young people coming into this industry. It’s becoming less competitive, not more competitive. So, there’s nobody coming to rerate your business.

To my point, everybody’s getting redeemed, the capital base is shrinking. That rerating phenomenon is not happening. You can actually see that in that S&P, PE spread chart. The rerating is just not happening. In fact, it’s derating still. So, I thought that was so insightful. His approach has been to focus on companies that are returning a lot of capital to you, because you’re not getting that credit for reinvestment and you’re not getting that rerating.

I like that approach. I’m not sure as maybe you heard a minute ago, I’m as cynical about value never coming back. I do still think that it is a cycle. I remember being here in 1999 when it was a very sleepy place and probably very undesirable place to work. Five years later, there was a stack of Ivy league MBA resumes [Jake laughs] waiting at the door for people to–

Jake: Yeah. That’s how you know it’s going to stop working here at any moment.

[laughter]You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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During the 1999 Berkshire Hathaway Annual Meeting, Warren Buffett discussed Berkshire Hathaway’s caution against excessive borrowing, explaining that while moderate debt might have increased their wealth, substantial borrowing could have led to trouble.

He highlights how many intelligent investors consistently use risky, leveraged instruments, especially with others’ money. Buffett references the Long-Term Capital Management (LTCM) crisis, where derivatives allowed investors to bypass standard margin requirements, creating highly leveraged positions without upfront capital.

Though derivatives can succeed most of the time, the risks aren’t offset by potential gains, likening it to Russian roulette. Buffett warns that such practices, though profitable temporarily, can ultimately lead to failure.

Here’s an excerpt from the meeting:

Buffett: And as you know, at Berkshire, we’ve never used any real amount of borrowed money. Now, if we’d used somewhat more, you know, we’d be really rich. But if we’d used a whole lot more, we might have gotten in trouble some times.

And there’s just no upside to it, you know? What’s two percentage points more, you know, on a given year, that year?

And run the risk of real failure. But very bright people do it, and they do it consistently, and they will continue to do it. And as long as explosive-type instruments are out there, they will gravitate toward them. And particularly, people will gravitate toward them who have very little to lose, but who are operating with other people’s money.

One of the things, for example, in the LTCM case — and Charlie mentioned it in terms of derivatives — in effect, there were ways found to get around the — and they were legal, obviously — to get around the margin requirements. Because risk arbitrage is a business that Charlie and I have been in for 40 years in one form or another.

And normally, that means putting up the money to buy the stock on the long side and then shorting something against it where you expect a merger or something to happen.

But through derivatives, people have found out how to do that, essentially putting up no money, just by writing a derivative contract on both sides. And there are margin requirements, as you know, that the Fed promulgates that, I believe, still call for 50 percent equity on stock purchases.

But those requirements do not apply if you arrange the transaction in derivative form. So that these billions of dollars of positions in equities, essentially, were being financed a hundred percent by the people who wrote the derivative contracts. And that leads to trouble.

You know, 99 percent of the time it works. But, you know, 83 and a thirds percent of the time, it works to play Russian roulette with one bullet in there and six chambers. But neither 83 1/3 percent or 99 percent is good enough when there is no gain to offset the risk of loss.

You can watch the entire meeting here:

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During his recent interview with Barron’s, Howard Marks reflects on his early days in finance, noting that banks in the 1970s invested in the “Nifty Fifty” — America’s top-growing companies, seen as infallible regardless of price.

Despite the companies’ quality, investors who held these stocks for five years lost over 90% of their money because they overpaid. Marks emphasizes that while asset quality matters more over longer horizons, price remains critical.

He warns that a great asset doesn’t automatically make a great investment; to succeed, investors must prioritize price. The key, Marks concludes, is buying not just good companies but buying them at the right price.

Here’s an excerpt from the interview:

Marks: Look, I started working in this business 55 years ago last month, at a bank. And the banks invested in what were called the “Nifty Fifty,” the stocks of the 50 best and fastest-growing companies in America.

Companies that were so great there was no price too high—nothing could ever go wrong. And if you bought those stocks the day I got there and held them tenaciously for five years, you lost over 90% of your money. Why? Because they were too expensive.

It’s not what you buy; it’s what you pay that determines a good investment. Now, the longer your time horizon, the quality of the thing you buy matters more and the price you paid matters a bit less.

But still people have to understand that a good asset is not synonymous with a good investment. To make a good investment, you have to be price-conscious.

So that’s really what it comes down to. It’s not a matter of buying good things but buying things well. And you have to understanding that difference, and it’s more than grammatical.

You can watch the entire interview here:

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One of the best resources for investors are the publicly available 13F-HR documents that each fund is required to submit to the SEC. These documents allow investors to track their favorite superinvestors, their fund’s current holdings, plus their new buys and sold out positions. We spend a lot of time here at The Acquirer’s Multiple digging through these 13F-HR documents to find out which superinvestors hold positions in the stocks listed in our Stock Screeners.

As a new weekly feature, we’re now providing the top 10 holdings from some of our favorite superinvestors based on their latest 13F-HR documents.

This week we’ll take a look at superinvestor Li Lu (06-30-2024). The current market value of his portfolio is $2,561,616,158 with a top 10 holdings concentration of 100%.

Top 10 Holdings

| Sym | Stock | Value ($000) | % | Shares | | BAC | BANK OF AMERICA CORP | 719,086 | 28% | 18,081,133 | | GOOG | ALPHABET INC CLASS C | 558,330 | 22% | 3,044,000 | | GOOGL | ALPHABET INC CLASS A | 463,262 | 18% | 2,543,300 | | BRK-B | BERKSHIRE HATHAWAY INC CLASS B | 365,204 | 14% | 897,749 | | EWBC | EAST WEST BANCORP INC | 203,312 | 7.90% | 2,776,351 | | AAPL | APPLE INC | 159,986 | 6.20% | 759,600 | | OXY | OCCIDENTAL PETROLEUM CORP | 92,433 | 3.60% | 1,466,500 |

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In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle, Jake Taylor, and Matthew Fine discuss:

Derating and Lack of Rerating Are Changing the Face of Value Investing
Mercedes and European Banks Are Leading in Shareholder Capital Returns
Apperceptive Mass: From Katamari to Cognitive Growth
The Growing Divide in S&P 500 Valuations: What It Means for Value Investors
The Impact of Passive Investing on Market Dynamics
Mean Reversion: How Cycles and Secular Trends Shape Investment Decision
Subaru’s Unique Investment Opportunity Amid Auto Industry Challenges
Offshore Energy Industry Set for Long-Term Growth
EasyJet and the Power of Balancing Asset Valuation and Recovery Potential
Finding Opportunity in Uncertainty: Buying Gray Clouds, Selling Sunshine
Marty Whitman’s Legacy: Surviving High Rates
Fixed Liabilities as Hidden Assets: Real-World Examples
Seven & I: Why Resistance to Change Could Hinder Value Creation

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Transcript

Tobias: This meeting is being livestreamed, which means this is Value: After Hours. I am Tobias Carlisle, joined as always by my cohost, Jake Taylor. Our special guest today is Matthew Fine. He’s portfolio manager at Marty Whitman’s old Third Avenue Value Fund. Welcome, Matthew. How are you?

Matthew: I’m great. Thanks, guys. Nice to see you. Thanks for having me.

Tobias: I think I had a quick look at your bio, and the two things that really stood out to me, one is that you’ve been with Third Avenue since the year 2000, which I’m incredibly envious. You got there straight out of college?

Matthew: I did. I did– [crosstalk]

Jake: Elementary school, it looks like.

[laughter]Matthew: That’s flattery, and I’ll take it. But I graduated from college in 1999. It’s actually been an amazing ride. The most formative years of my career, I think, were the earliest ones right in the heat of the dot-com. It was an incredibly confusing time to start working at a, what was then, a very sleepy fundamental value firm. Some not so flattering things were being said about the principal of this firm, Marty Whitman himself. I was too young to realize that the same things were being said about Bob Rodriguez and Jean-Marie Eveillard and every other famed value- [crosstalk]

Tobias: Buffett.

Matthew: -out there.

Jake: Yeah.

Matthew: Yeah. Frankly, it’s a miracle that I ended up here. I knew that I wanted to be an investor. I studied economics in college. All I knew that was that I wanted to be an investor. It was the heat of the dot-com bubble. I didn’t know anything about investing, but I wanted to invest. I was interviewing in New York. I was staying at a friend’s apartment. My family’s not connected to finance. I went on to all these interviews. I basically had two weeks to get a job, because I had two weeks of availability to sleep on their couch.

Jake: [laughs]

Matthew: I came back to their apartment after having interviewed at Third Avenue. I weaseled my way into an interview here, and I told my friend’s father whose apartment it was, where I had been that day, and he said– He took me aside, very seasoned investor himself and said, “If you want to be an investor and those people are willing to give you a job, you’d be an imbecile not to take the job.”

Tobias: [laughs]

Matthew: So, I knew nothing, but I knew enough to take his advice and I started working at Third Avenue. But I didn’t think I’d be there very long, to be honest. [Jake chuckles] I saw these guys, and it just resonates with me today. I remember it like it was yesterday, but these people who graduated from college a year or two ahead of me from Hamilton College, and some were working at Excite@Home or Pets.com or whatever else it was, or even capital markets groups of investment banks, making a lot of money, driving fancy cars, making tons of money very quickly.

I thought that was the way the world was going. Everybody was criticizing the principle of the firm I work at. It was very confusing for somebody who doesn’t know anything about investing. And then, obviously, the dot-com bubble crashed in March of 2000. It’s an anecdote. But just a few months before that, one of the very first experiences I had at Third Avenue was at the Annual Investor Conference. The keynote speaker was Sam Zell.

Just minutes before it was time for Sam to speak, he bursts through the door– He’s got two of his lieutenants with him. He’s on the fly. He hasn’t been in the room. He just marches straight up to the dais and he delivers this speech to the crowd called the “Emperor has no Clothes” addressing the dot-com bubble. Explains to the crowd, “Trees do not grow to the sky.” And then, literally, three months later, the dot-com bubble crashes. It’s just incredibly prescient and– Value strategies really prove their metal in that environment. It was just so exciting to me and so interesting. The world really changed, and I ended up staying for 25 years.

Tobias: And more to come, hopefully. In one of the letters that you sent through, I had a look at the Third Avenue Value Fund is the flagship for Third Avenue. It was launched in 1986 and run by Marty initially. That’s right, isn’t it?

Matthew: 1991.

===

Marty Whitman’s Legacy: Surviving High Rates

Tobias: 1991? Okay. So, you’ve showed the 10-year under Volcker peaking and then– So, the Third Avenue Value Fund has only seen declining interest rates. So, how do you think it’ll go if you go into a rising rate environment?

Matthew: That’s what the point of that letter was, was to contemplate what life might be like in a rising rate environment. So, if you really want to understand this investment philosophy, which is where I was coming from with the letter and really understand where Marty was coming from the way he created this philosophy, you have to understand where he was coming from.

He spent most of his career as a distressed debt investor, a bankruptcy expert, restructuring expert in the US in the 1960s, 1970s and 1980s. So, he’s in a rapidly rising inflationary environment, rapidly rising interest rate environment, and went through episodic periods of incredibly scarce access to capital. So, he’s a guy, both by virtue of his exposure to distress and by virtue of that interest rate environment, who really understood the incredible power and value of having financial wherewithal at the corporate level, having solvency and a good balance sheet, frankly.

And then, in 1981, rates peaked. Five years after that, he started the fund. 10 years after that– He lived through a decade of declining rates from the peak. But he couldn’t possibly have known that you’re going to see the next 30 years of declining interest rates very steadily, and you basically can’t find a rolling five-year period of rising interest rates over that 30-year period. So, we created this philosophy– he created this philosophy and then basically went into an environment where it had, I don’t want to say that it’s not valuable because it absolutely is, because there are areas in the world and areas for industries and periods where capital becomes very scarce. And we have definitely experienced that. But less helpful than it should have been.

Investment strategies that employ a lot of leverage, I’m thinking about just levered buyout industry, private equity industry, all kinds of yield co-type of businesses, cell towers, a lot of commercial real estate just feeds off of cheaper and cheaper access to capital. There’s this self-fulfilling relationship between declining interest rates and declining cap rates. So, you get rising asset values. The next buyer can come in, use cheaper financing, bid the asset up, so you get capital appreciation and all kinds of opportunities to cash out ReFi’s and dividend recaps in a falling rate environment. But our approach has been in light of that rate trajectory, very conservative.

In 2022, well, I guess it was in 2021, but in 2021 and 2022, when rates started rising rapidly, the equity market did quite badly. In 2022, we had our best year of relative performance in 35-year history of the fund. I think that tells you a little bit about the power of financial wherewithal and how we might fare in a higher or more normal is a better way to phrase it, a more normal rate environment.

===

Fixed Liabilities as Hidden Assets: Real-World Examples

Jake: I still remember reading the Marty’s book The Aggressive Conservative Investor. One of the things he talked about in there that blew my mind at the time was like, “The idea that some liabilities are really almost more like assets.” I conceptually sort of understood it, but it didn’t really sink in and hit home for me until 2021, 2022 when I had a fixed rate mortgage on my house that was quite low– The rate of inflation being what it was three times as much. And I was like, “Uh-oh, that’s what a liability that really looks like an asset feels like. Okay, I get it now.”

Matthew: Hang on to that mortgage for dear life.

Jake: Yeah. Well, you don’t have a choice, do you?

Tobias: [laughs]

Matthew: In my personal experience with him, when I heard him invoke that concept, although it’s in the books too, quite familiar with it, but when he really invoked a lot was around restructuring of Kmart. This is in the early 2000s, and we were the second largest creditor behind Eddie Lampert in restructuring Kmart. Kmart, at the time, had a whole bunch of way below market leases that were potentially monetizable and theoretically one of the most valuable assets in the restructuring. That’s just another example.

We have an investment today in a company called Harbour Energy that just did a very big deal to buy a bunch of assets from effectively from BASF in Germany. This is an upstream oil and gas producer. Part of the deal was that they would port over all of the indebtedness of the BASF subsidiary assets which had long duration, super low-cost financing. You brought this capital structure over with, it was super attractive. And it’s just another example.

Obviously, a lot of Japanese companies that do cross border business– We no longer do, but had an investment in Seven & i. When they bought the Speedway business from Marathon, it was a huge deal. They financed it with borrowings in Japan basically on a drive by for 80 basis point financing. Talk about a carry trade. It was incredible.

Jake: Yeah.

Matthew: Yeah.

Jake: And now, ACT is trying to buy them, like going the other direction. That’s interesting, huh?

===

Seven & I: Why Resistance to Change Could Hinder Value Creation

Matthew: We don’t own it, so I don’t have a horse in the race, but I would be very surprised. The Seven & i Speedway transaction was not approved by the DOJ. They closed it anyway without DOJ approval. The DOJ did not want to allow that to go through. That was to take them from about a 6% market share to an 8% market share. This is talking about taking–crosstalk]

Jake: The two biggest, yeah?

Matthew: -8 to 15, you know, 14, 15. Maybe with a ton of concessions, they get it done. Obviously Seven & i. One of the reasons we sold it was that it became clear– Value Act was very active in Seven & i trying to get them to do a lot of the things that were obviously should have been done to create value. We very much agreed with Value Act. It became clear through that process and through the AGM, the general meeting and the proxy contest, that the company was not willingly going to do the right things.

After that process, we moved on. And now, when ACT wants to engage them and they’ve resisted any kind of engagement, they’ve resisted disclosure, they’ve resisted all proper governance, and they actually went running for cover from the Japanese government asking for core status, which is basically like you’re of national interest and sought protection from the government to excuse them from even having to run a process, and that tells you a lot about their mentality.

Jake: Core 7-Eleven’s, it’s a [chuckles] national security.

Matthew: Honestly. Exactly.

Jake: National security slurpees?

Matthew: They’ve got a card business and they’ve got a bunch of consumer data which is undoubtedly true what they mean. Run the process, engage with them, anyway.

===

Tobias: Matthew, let me give a quick shoutout and then let’s talk S&P 500 quartiles.

Matthew: Mm.

Jake Taylor: I’d rather not.

Tobias: Petah Tikva, Israel. [chuckles]

Jake: [laughs]

Tobias: Bellevue. Santo Domingo, Dominican Republic. Boise, Idaho. Valparaíso. What’s up, Mac? Samson’s in Greece, on a break. Andhra Pradesh, India. Encinitas. Cromwell, New Zealand. Early stuff for you. Brandon, Mississippi. Tallahassee. Knoxville, Tennessee. Toronto. Wollongong, New South Wales. Good job. Nashville, Tennessee. Durham, Connecticut. Colorado. Lawrence, Kansas.

Jake: Put St. Louis on the map here for me.

Tobias: Rochester. Malta, Montana and St. Louis. Where are you coming in from, Matthew?

Matthew: Where am I right now?

Tobias: Yeah. Right now.

Matthew: In New York, Midtown East. I’m on Third Avenue.

Tobias: Nice.

Matthew: Yeah.

Jake: Makes sense. The math checks out.

Tobias: It’s becoming clearer.

Matthew: No, we could re-thought that when we named the firm. It’s very limiting.

Tobias: Hard to move.

Jake: Yeah.

===

The Growing Divide in S&P 500 Valuations: What It Means for Value Investors