(Published: February 27, 2017 at 9.30 A.M. EST)
Hello Friends, we are pleased to interview Amir Dov, CPA, founder of Levontin Capital, a long-biased hedge fund based in Tel Aviv, Israel. Amir, who launched his fund in October of 2015, believes intensive, bottom-up research will yield superior returns for his investors. In a short span of time, he seems to have established himself as a stock-picker. In fact, research and investor communication are areas where Amir clearly stands out, as is evident from his impactful, yet succinct discourses about his fund’s portfolio stocks, as contained in his quarterly newsletters for his investors.
The interview is in podcast and transcript formats.
Amir Dov, Tel Aviv, Israel
Podcast of Interview with Amir Dov
Transcript of Interview with Amir Dov
1. Hi Amir, nice to have you with us today. Could you please describe your evolution into an analyst and investor? How did you prepare yourself for the role?
Amir Dov: Hi Nitiin, thank you for having me. Sure. My evolution as an analyst and as an investor came through a process of turning my hobby into a profession. I was interested and involved in the stock market from a very young age. In fact, I was checking stock quotes for my dad in the newspaper when I was 10 years old. So, at a pretty young age I started managing my own savings and at a later stage a little bit of the savings of some close friends. However, I wasn’t directly involved in the equities market in my professional life. I was a CPA with Ernst & Young and then I went to work as finance director at a small tech company here in Tel Aviv, before I decided to just quit everything and kind of look for a way to do investing for a living. What I’m saying is my work wasn’t directly involved with the stock market, it was involved in an indirect way, as a future investor and business analyst.
During my time with E&Y, I was mostly doing buy-side financial due diligence – which means I was analyzing companies that were about to get acquired on behalf of the buyer. I think that was a huge learning experience for me in so many ways. First, I got to see a lot of different businesses from the inside, and understand how much more there’s in a business that isn’t always reflected in the numbers and the financial statements. The second thing is that in many instances, I had a first-hand experience on how and why some deals are being pursued. So, I’ve seen all kinds of stuff, some of it was good and some was bad, and I think that this was the basis for my current perception of just how important incentives are in the corporate world.
2. Alright, that’s quite an impeccable professional background and experience, Amir. Which texts did you learn the most from? Leaving aside investing classics such as Security Analysis and The Intelligent Investor, who are your favorite authors and books published in the last few years?
Amir: I learn a lot from books, publications, annual letters of other money managers that I follow. But I also think that I learn just as much from doing nothing sometimes. Just having some to to think by yourself, trying to simplify a certain story, trying to understand the incentives system that is in place. Just stopping everything, and devoting time to thinking. And I think this “do nothing” time is sometimes forgotten in our constant chase to read more and learn more, especially today with the availability of all this data online, all the publications. There’s really so much available to read, and for free. I also think a huge part of my learning comes from actual decision making, whether those decisions are good or bad. I think the learning curve when you’re actually operating, making decisions, is much steeper than from just reading books or going through texts. Of course, this could come at a cost of making a mistake that will cost you a lot of money, and that should be balanced accordingly. So, I don’t think my investors want me to just go out there and make mistakes that will cost them money for the benefit of my learning. But on the other hand, if you are too afraid to make mistakes, I believe there’s only just so much that you can learn.
Now I want to answer your original question. So, in terms of book recommendations, I have to say I’ve grown a bit tired of straight-up investing books, even though they served me well in the past and I’ve learned a lot from Benjamin Graham and Greenblatt and all the other legends – I learned so much from their material. But what I mean by that is that there are so many investment books that preach the same principles over and over, why volatility should be embraced and not feared, why you should do value investing and nothing else, why you should run a concentrated portfolio, etc. We love to read thoughts that match with what we already know, some sort of confirmation bias, but I’m not sure by how much these books could really expand my knowledge base. I would much rather read a book about a completely new topic that I know absolutely nothing about, than just another memoir of a successful hedge fund manager.
Another caveat – I don’t read that many books that were recently published, because there is so much catching up to do, so many great books that were written 20 or 30 years ago. So, if you force my hand to pick a couple of recently published books – those would be ‘Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism’ and ‘The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success’ – they are well known in the investment community and they are also very good books and quite different from the usual stuff.
And in terms of older publications, I would recommend two of the most interesting books I’ve read in the last year – one is ‘Einstein: His Life and Universe‘ the biography of Albert Einstein, written by Walter Isaacson, which is I think the best written and most interesting biography I’ve ever read. And the second one is little book called ‘Healing Back Pain: The Mind-Body Connection‘. That book was written 25 years ago by Dr. John Sarno. And I know that judging from its title it sounds like a popular science or a coaching book, or something like “How to get really rich in 10 easy steps”, and I was skeptical at first too – but this was truly an amazing book by a doctor who I think will eventually be greatly appreciated by society. I know it’s unrelated to the topic we’re discussing. But if you suffer from any kind of chronic pain, especially in your lower back, I really can’t give you any better advice than to pay these 10 dollars and order this book as soon as possible.
3. Interesting reading list, Amir, esp. the one on back pain management. I’m sure all of the guys in the investing world would have suffered or are suffering from back pain at the moment!
For the benefit of my international audience, could you please tell us something about the Israeli stock market? Honestly, I am myself not much clued in.
Amir: As a stock market itself, I am not sure there’s a lot of interesting stuff to say about it. It’s a small country, with a relatively small stock exchange. I guess it resembles many other small exchanges around the world, with mostly local stocks. I guess the most “unique” thing about it is that it operates on Sundays and is closed on Fridays, because this is how our week runs here in Israel – from Sunday to Thursday, and not from Monday to Friday.
3 b. Yeah, I guess that’s what you have in common across most of the Middle East region, where Thursdays and Fridays are the weekend days.
How much is the market capitalization of the Tel Aviv Stock Exchange?
Amir: By the end of 2016, it was 820 bn Shekels, which is around USD 220 billion. Just to give you some perspective, the largest company traded on TASE is Teva, which is about USD40bn market cap. So, a big part of that USD 220bn market cap comes from Teva.
3 c. Oh, that’s interesting – ~20% coming from a single stock! How many companies are listed on the TASE? How many of them are foreign companies?
Amir: There are approximately 450 publicly traded companies, and I’d say almost all of them are Israeli, at least originally. In recent years, there’s sort of a mini-trend to list foreign companies particularly in the biopharmaceuticals sector, but I don’t think there are more than a handful of foreign companies that are listed on TASE right now.
3 d. How many Israeli companies have market cap of over USD1bn? Of course, you already named Teva with a USD40bn market cap.
Amir: As regards the question of how many companies are above USD1bn market cap, you would have to include a lot of high-tech Israeli companies that don’t trade on TASE, but only on the Nasdaq – those would be, for example, Checkpoint and Mellanox. But in terms of what’s traded here on the local stock exchange, there are around 35 companies that qualify with market cap higher than USD1bn, which suits our main index which is Tel Aviv 35. So basically, all the TA35 companies are those with market cap of over USD1bn.
3 e. Okay, that’s an interesting insight. It’s nice to know that being such a small country of just about 7mn people, Israel has got 35 companies with substantial market cap of USD1bn. Apart from IT, which are the other key sectors being represented on the TASE?
Amir: By IT, I assume you mean technology. Technology is a big part of the Israeli economy, but when you look at the local stock market, it’s not among the top 3 sectors in terms of market capitalization. We have Financials and Real Estate as the #3 and #2 sectors, and the largest sector is Pharmaceuticals which relates to what I told before about Teva being 20% of the total market capitalization of the stock exchange.
3 f. How much is the CAGR of returns on leading Israeli indexes over the last 2 decades or so?
Amir: I don’t follow the indexes too intensively, but in the last 10 years, the leading index which is the TA25 (now changed to TA35 just last month) returned 4.7% annually, excluding dividends. If we assume ~2% dividend yield, we would have something between 6.5%-7% CAGR which is probably an underperformance relative to most indexes in the western world, in the last decade.
3 g. Just a side question. Are foreign investors allowed to invest on the TASE and if yes, how much is the overall ballpark foreign investment in the USD220bn market cap?
Amir: Well, they are allowed to invest and it’s relatively easy to invest in TASE for foreign investors. But I’m not sure about the numbers. I’d say it’s still relatively a low portion of the total market cap coming from foreign investors, but I’m not really sure.
4. Amir, what can you tell us about the Israeli business and corporate scenario?
Amir: I think nowadays it’s a lot about tech and especially start-ups. There’s a really a big start-up scene here. That’s probably driven by some sort of a combination between plenty of VC money that is hanging around here and the Israeli culture, which is I believe very suitable for entrepreneurship. So, this is really something you feel here and especially in Tel Aviv – I’m not sure about the other parts of the country, it’s probably less so. Eventually, it’s great for the economy, because it develops talent and it draws the attention of tech giants around the world that in many cases those companies try to capitalize on that talent by opening a research center or something similar here in Tel Aviv. So, we’ve seen this trend in the past say five years, a lot of the new giants – Facebook, Amazon, Google are coming here and starting a research center.
But this also reflects on what is the business scenario in the long term. I think in terms of building and growing businesses to be global leaders, with a lot of long-term thinking, I think the Israeli business culture is probably less developed than the one in the US or Western Europe. But I guess it’s okay, we’re still a young country with a short history in building businesses, so we’re still learning. So, we’ll get there.
4 b. What are the key differences between U.S. companies and Israeli companies, in terms of founders/promoters? How does the corporate governance in Israeli companies stack up v. that in U.S. or European companies?
Amir: That’s an interesting question. I think in many ways, the issues with corporate governance that we have here are more similar to the ones in Europe than those in the US. What I mean by that in terms of laws and regulations, I think we have a pretty advanced system, that is not very different from other countries. But more in the way that in many of the publicly-traded companies here in Israel, we still have a majority owner who is either the original founder or members of his family, or sometimes it’s actually a Kibbutz that owns the majority stake in a company, and in many cases, they control 70%-80% of the company. Sometimes it’s even 90% of the company.
So, this setup leaves you more vulnerable to shareholder abuse and other issues, if you decide to own a minority stake, if you decide to be just a public shareholder. But we have courts for that and they have been pretty supportive to minority shareholders’ rights throughout the years. However, going to court is obviously a hassle, so not many shareholders want to start this process by themselves. So, sometimes it’s much easier to simply avoid owning the stock. I guess this is another thing that will get better and better over time. It’s the corporate governance issue that should mature with the economy.
5. Alright. Chinese companies and Israel-domiciled companies form the largest number of foreign companies listed on the Nasdaq. As far as I know, over a hundred Israeli companies are listed on the Nasdaq currently. Why do so many companies from Israel get listed on the Nasdaq?
Amir: Ha, I didn’t know that. I knew there are a lot of Israeli companies listed on the Nasdaq, but I didn’t know we are at the top of the list. I am not sure about the reasons, but I can guess that technology has been a very attractive sector that has been pretty appealing to global investors throughout the years. If you list on the Nasdaq, it’s more attractive in terms of liquidity, it’s easier to do secondary offering, it’s easier to raise debt. You have a much higher profile as a company if you list on the Nasdaq. So, as long as you are strong enough and apparently Israeli high-tech companies were strong enough to do that, it’s probably better for the corporate in terms of liquidity in future. I would also say that it’s probably some kind of sign of weakness of the local exchange, because it seems the local exchange can’t provide these companies with the same attraction or the same exposure that the Nasdaq listing provides them with.
6. Alright, Amir. Israel’s GDP growth is modest at around 3.8% p.a. versus say ~3% for the U.S. and ~7% for India. Of course, Israel is a tiny economy compared with the US and even India. What are the long-term growth prospects of Israeli companies?
Amir: Well, first, I’m not sure I’d say it’s modest given the growth rates in the developed world during the current cycle. I mean, 2% is probably the norm now around Europe and North America, and if we’re at 3.8%, I think that’s pretty high. Nonetheless, I should probably be more patriotic, but unfortunately, I don’t think this growth rate is sustainable. I’m not a great macro analyst, but I believe our recent growth numbers were fueled by 3 main factors – one is population growth, as Israel always enjoyed positive contribution to the GDP from migration of overseas Jews into the country. The second is the high-tech sector, which has seen great growth rates in recent years. It was fueled by a lot of venture capital money, also the cheap money environment that fueled venture capital eventually. The third is real estate – prices have been rising at very high rates for more than a decade now. This real estate boom is contributing to the GDP and to the wealth factor of the population. But at the end of the day, I’m not convinced it actually has a net positive contribution for the Israeli people. When you look at lower and middle class Israelis, who now pay higher rents, but are probably less likely to be able to afford buying a home. So, I’m not sure GDP numbers reflect reality.
So, if you ask me, and again I don’t consider myself a very good macro analyst, the last two factors – the cheap money coming into the venture world, and the sharp rise in real estate prices, those are not sustainable. So, those won’t be able to push GDP numbers for much longer. Israel will need to find new growth engines, and with the Shekel being as strong as it is, it might be a difficult task.
7. Amir, nice perspective on the Israeli economy and the Israeli stock market. Coming to your fund, how have been the last 18-odd months for you, since you got yourself into active money management?
Amir: I can tell you that it was a very intense learning experience, but also a very enjoyable and rewarding one. So, I really can’t complain! I love what I do. I love managing myself, setting my own goals and I have no problem spending entire days by myself with financial statements and other reading material. I actually enjoy my days very much. However, I think the most important thing I’ve been learning in the last 18 months, and I’m deliberately using “learning” because I’m still far from perfecting that, is time management and making sacrifices. And what I mean by that is that there are just so many companies that I want to dig further into, so much stuff I want to read – and information is going around, and you want to put the time and get to the bottom of it.
And then you have your current portfolio to take care of, so you need to read their filings, and you need to have some time to do some thinking between tasks. Now you add to that all the admin work that is involved in managing a fund on your own, and obviously, meetings with potential investors – I mean, if I don’t do that, there’s really no point in running a fund, right? So, you add all these in and combine them with a 2-year-old son, and what I sort of realized in this intense period is that you have to prioritize. Unfortunately, I can’t read everything that I think is interesting. I can’t thoroughly analyze 2-3 different companies every week. So, I think an important lesson I’m still trying to teach myself – is that you can do well and outperform even if you don’t look at every investment opportunity out there and you don’t read every nugget of wisdom that is being published.
8. Alright, great. So, you believe in being focused, and not chasing every wild idea you come across. How has your research process evolved? What are the research methods you use? Do you rely on sell-side research, as mentioned in one of your investment theses, or screens, or use any other method?
Amir: You mentioned a lot of different source, so I’ll try to get to them one-by-one. I barely use any screens anymore. I used to run screens that were pretty basic – high ROIC, low P/E, High FCF yield, etc. However, in our profession, you don’t get any extra points for originality, which is by the way something I’m not sure I can say for analysts in larger organizations. I’m pretty sure many analysts are trying to stand out within their organization by coming up with original ideas, trying to score some extra points with their managers, by popping up names their managers never heard before!
But for me, I have no one to pat me on the shoulder for bringing up a name he never heard before, so I stick to where I think the best ROI will be in terms of my research hours. I spend a lot of time on Value Investors Club, and to a lesser extent on SumZero as well. Both of those repositories have some excellent investment ideas published on a daily basis. And for us, in the current structure and strategy of our fund, all I need eventually is 1-2 new ideas per quarter, and sometimes even less. Preferably even lesser – if I find good ideas, I don’t even need 1-2 new every quarter. On top of that, I also have a short-list of money managers that I follow and keep track on their portfolio through their annual letters, so some ideas are coming from there as well.
Now regarding sell-side research – for me, sell-side reports usually come into the game at a later stage, in most cases during my research process after I have already spent a day or two on the company. I think sell-side reports could be a great source for many things. Industry background, Management’s plans, competitors. Sometimes technology is explained much better in a sell-side report than in company filings. I think you can use sell-side reports to shorten the research cycle. In many cases, they explain complex issues that I had trouble understanding from the company’s own filings. However, it’s just that the part that contains the projections, valuation and recommendation (buy/hold/sell) – is that part I usually pay less attention to.
9. You have stated that you allocate zero percent of your time to guessing the next quarter’s EPS, and a full 100% to learning and understanding the business economics and competitive landscape, assessing management quality, etc. Typically, how many stocks do you target to identify and analyze on a yearly basis?
Amir: It’s a very good question, and I probably should have this target number, but I don’t. I estimate that I look closely at around 30-35-40 businesses every year, and on a more superficial level probably twice that much – around 70 or 80. Out of these 30-40 that I look closely, I probably dig deep on around 15-20 and end up investing in something between 5-10.
Now, you mentioned the sentence “allocating zero percent to guessing the next quarter’s EPS” and I have to say something about that. And as much as I said I like using sell-side research at some point during my process, it just kills me sometimes to listen to sell-side analysts’ questions on earning calls. I mean, just so many questions are directed towards some accounting issue that couldn’t be less important to the long-term prospects of the business, or just trying to ask the same question from different angles to try and squeeze a little hint about next quarters’ results. It just seems absurd that so many unimportant questions are being asked and so few questions about the fundamental issues that will drive this business in the future. But hey, I guess their short-termism is our opportunity, so I can’t really complain too much!
10. Haha, Amir, you’re aware that I’ve been a sell-side analyst for a long time, so I know where you’re coming from, in terms of your reservations on sell-side research. And well, yes, I’ve moved on myself.
Your thorough research process would also mean that you have a longish holding period for your stocks. Typically, how long would you hold an investment before taking the call whether to continue or not?
Amir: OK, so my favorite holding period is forever, or at least the state of mind of it. I don’t really plan to hold most of them forever. But I do like these opportunities in which I know that if markets are shut down for 5 or 10 years, I’d still be happy with my money where it is. You know what I mean? Not all of our current holdings qualify as such, but I think most of them do. Historically, I’ve held most of my investments for somewhere between one and three years on average. Hopefully, the quality of our current and future investment will be higher, so I can hold them for longer and still compound at a high rate of return with the same holdings and I don’t have to switch them every two or three years.
11.Alright. How large is your track list of companies, Amir? How frequently do you modify the same?
Amir: I have a watch list and It’s actually pretty large, probably larger than it should be. I think it has something like 80 names in it currently which is a lot to track. Obviously, I’m not reading every earnings report for each one of them, but I do try to keep track and revisit them once in every few quarters, just to see where they are and if anything material has changed. I have set up this notification system that I put on through Google Docs, and I’ve set this brackets for every company on my watch list – for price movements like +25%, +50%, -20%, -40%, etc. Every time a company on my watch list moves between those brackets, I get notified. So, this kind of pulls me in to see what’s changed and if anything material happens, I can revisit and see what has caused this change.
12. That’s an interesting method of tracking your stocks. You mostly use the FCF multiple to value stocks. Which are the other common valuation parameters you use, across industries?
Amir: Well, it could vary a little bit from industry to industry, but eventually I believe it still all boils down to free cash flow. For one company, I might be looking at the EBITDA, and for another at the P/E, but eventually the reason I look at any specific metric is because I think this metric is the best approximation of future free cash flows this business is going to be able to generate. So, I am focusing on free cash flow, even if I am looking at EBITDA. I think you can call it free cash flow, you can call it earning power, you can call it however you want – the meaning will be similar. This is what I’m after eventually, realizing what is the free cash flow this company can produce on a recurring basis.
13. Having invested in disparate geographies, how do you tackle the challenges of analyzing and monitoring companies across differing geographies?
Amir: It’s an interesting topic. I think it really depends on the business eventually. Some business will be heavily affected by local culture, consumption habits, etc. So, you need to think carefully, whether you’re “qualified” to really understand this company better or at least as well as the local analyst. I’ll admit that it’s a judgment call in many times, and there isn’t a definite answer. In many cases, I feel I’m perfectly capable of understanding everything that is important, even though I’m far away, and in others – not so much. I’ll give you an example. Even though I’ve been investing in the US for many years now, I’ve been there many times and I feel I know the culture quite well – I still can’t get myself to invest in (or short) any local retailers. I’ve looked at several retailers in the last few years, some of them long candidates and some of them short candidates, obviously with Amazon coming in. But when it comes down to making a decision – I just feel like I’m lacking something really basic and that is that deep understanding of the American consumer. I just feel consumption and retailers are such a big part of the American culture, and I feel I’m at a disadvantage to almost every American investor when analyzing this industry. So, this is one industry I prefer to avoid at this point.
14. Amir, I believe the smaller the company, the more important it is to engage directly with the management. Do you agree? What is your preferred method of engaging with the management of investment targets? Is it one-on-one or via analyst con-calls?
Amir: Yes, I agree, it’s more important in smaller companies than in larger ones. But it’s also probably because I only have access to management at smaller companies. I can’t have one-on-one access to the CEO of Goldman Sachs! Also, in most cases, the smaller the company, the less available information you can find on management on the web. Less earning calls transcripts, interviews with the CEO, etc.
I can tell you Nitiin, I’m also not a huge fan of engaging with managements at all. I don’t put it as one of the most important things in my process. I’ll usually approach IR with some questions I have about the business during my research, and at smaller companies, I might reach out to the CFO, usually. In most cases I actually prefer talking with the CFO rather than the CEO, as I feel many CEOs are too well trained in dodging questions they don’t want to answer and it’s also sometimes harder to talk numbers with them, than with CFOs. Besides, I don’t feel like I have any unique touch when it comes to judging people over a phone call. I think you can learn a lot about management from reading past transcripts, some interviews, and also the financial statements themselves. It’s also something you develop over time if you follow the company long enough.
15. On a lighter note, hopefully some of your prospective investors will come to know something about you, after listening to this podcast and reading the transcript of this interview!
Your Q3 letter to investors discusses some of your investments. You have taken a position in Interactive Brokers ($IBKR). While the business may be a potential compounder, I believe the brokerage industry lacks pricing power. The world over, the broking segment has become extremely competitive over the last few years, resulting in wafer-thin trading commissions. IBKR currently enjoys pre-tax margins far superior to its peers. However, couldn’t this surplus margin get eroded with competitive pressures, and in turn, cap the profit growth for the company, going ahead?
Amir: Okay, so, these are some very good points and we can probably discuss some of them for way longer than this whole interview is going to take. In terms of pricing, like you said, pricing in the brokerage segment is going down. Schwab recently cut their minimum pricing per trade from $8.95 per trade to $6.95. I think that’s now a little lower than Ameritrade and E*Trade – you might say there’s a pricing war among those three.
But the equivalent trade at IBKR will cost approximately one dollar! So, I don’t see any real competition in terms of pricing from the big American brokerages, and I do think IBKR does have a lot of untapped pricing power given that huge difference I just described.
Now, the existence of the pricing power itself doesn’t mean, that this pricing power is going to be exploited anytime soon, or that a new low-cost online competitor can’t show up. But I do think they have this pricing power in their hands at this point. By the way, this reminds me that I saw the Charlie Munger Q&A at the Daily Journal annual meeting a few days ago, and he said something on the pricing power. Something like: “I don’t think capitalism is about making as much money as you can”. It might sound odd to some people, coming as it does from the symbol of capitalism! I think it was related to Valeant at some point. But if we try to apply it to IBKR, then I think raising prices simply isn’t a priority or a necessity when you’re still able to grow your business at 15% a year, and increasing your market share, or taking market share from your competitors, even when you spend much less than them on marketing. So, yes, there will come a time when price increases could be a weapon of choice for IBKR, but I just hope we still have many years of double-digit growth before we get there, before this happens.
One more thing I want to say about Interactive Brokers is that the lifetime value of a customer in the brokerage business is just enormous. It’s such a hassle to move your portfolio from one broker to another! And I really can’t think of a reason to do it unless (a) you’re overpaying, or (b) your broker really screwed up somewhere. With what we just discussed about pricing, and you can’t really be overpaying at Interactive Brokers. So we can just hope they don’t screw up with anything big. I mean, we’re safe in terms of keeping customers for a very long time. Look, I’m 33 years old and I’ve been with IBKR for two years now. I can easily stay with them and keep paying them for the next 40-50 years, and this is probably regardless of where I’m going to live during that period. So, I just can’t think of too many businesses that I’m going to pay to every year, for that long. That’s something!
15 b. Do you think IBKR could acquire a competitor, or that a consolidation could take place within the online trading space?
Amir: I don’t think IBKR is going to do any major M&A with one of the big names you mentioned. But I think a lot of smaller firms are feeling the pressure of regulation and competition right now, and are forced to make some kind of a move. This could result in giving up running your own back-office, and consolidating it with IBKR – we’ve seen a couple of those in the last couple of years. Those companies keep their customer-facing business going, and just consolidate their back-office with IBKR. We are probably going to see other scenarios also, going forward. I don’t know what they’ll be, they’ll reveal as we go.
16. Coming to your other investments, Amir. Please discuss in brief the rationale for investing in Altisource Residential ($RESI).
Amir: Yes, RESI is a great example of the exception of what I just described some time ago in this interview. It is not a company I’d like to own for the next ten years, if the equity markets were to shut down tomorrow. However, at the price we bought the shares, they were trading for less than 50% of its net asset value, with the assets being residential real estate – single family homes in the United States. Now, I’m not a big fan of investing in real estate, but I do know that in this market that we’re in, residential real estate just doesn’t sell for 50% discount very often or for very long. This was simply a story of a company that changed its strategy and sold off for short term reasons, probably a change of investor base and we were there to buy from those, and hold until the new wave of investors comes in and buys the shares from us. And this is just what happened.
17. In the past, you have invested in net-net businesses and special sits too. Could you describe a special situation that you invested in?
Amir: Sure. I think a special situation is a broad definition for anything that is not just a plain-vanilla value investing. Well, at least that’s what it is for me. Anyway, one of our better investments in 2016 was a tiny Israeli company called Shagrir, which was a spin-off coming out of another Israeli company called Pointer Telocation. And like in many cases with spin-offs, especially with small companies, there were quite a few reasons to expect a big sell-off in Shagrir’s shares right after the spin-off takes place, not from fundamental reasons.
So, let’s review what we had with Shagrir. First, Shagrir’s appraisal put its valuation at around ILS 70mn, while Pointer was trading at over ILS 220mn, so it was relatively small in size. Two, while Pointer is a technology company, Shagrir is a road-side assistance service provider with slim margins – something that Pointer’s investor base probably wouldn’t want to own. Pointer is also a global business and Shagrir is as local as it gets. Three, Pointer shares were dual-listed on both the Nasdaq and TASE, but Shagrir shares were only listed on TASE. That would mean a lot of foreign forced sellers that are probably less sensitive to the price. And finally, Shagrir’s pro-forma P&L was pretty ugly, with a lot of non-recurring charges, depreciation, that were masking what was actually a pretty nice and stable free cash flow.
This one played out just as expected, and we were ready – and buying as many shares as we could on the first week following the spin-off at or below 6 Shekels per share. This was in June, and the shares are now a little over 9 Shekels, and I still think they’re very cheap. I read somewhere that spin-offs are usually mispriced for about 12 months after the spin, so let’s see where Shagrir’s shares will be in June.
18. Alright, great insights, Amir! While your focus is on long-term wealth creation for your investors, you did quite well in a short-term investment in Lee Enterprises. Well, nothing wrong with being opportunistic, but would you rather restrict such investments in terms of number of companies or as a share of your portfolio, going ahead?
Amir: Well, being opportunistic is part of what we do and I’ll probably be doing it in the future as well. It will never be a huge part of our portfolio, but I don’t want to put a hard number on it. Position sizing is a big topic that we can discuss for hours, and our portfolio can be very dynamic sometimes and very static at other times – it really depends on the circumstances. So, I think allocating around 20%-30% of the portfolio to names that are more short-term in nature or tied to a certain catalyst that is coming in the next 12 months is the ballpark of where I want to be. But again, we might talk a year from now and that part of the portfolio might be 40% – it’s not a rule or anything.
19. Are there any investments where your thesis or assumptions did not play out, and where you took a major hit?
Amir: There were several mistakes that I’ve made throughout the years, but since the fund was launched in late-2015, there really wasn’t enough time for me to make any one big mistake that I can already do a post mortem on. I guess the closest thing will be LiLAC, which is the Latin-American tracking stock of Liberty Global. I bought our first shares for our portfolio at $35 and they traded as low as $19-$20 recently, even though they’ve corrected some of that decline after the recent earnings report, which was very good, and now trade at $27. I guess it remains to be seen whether the thesis will play out or not, since we’re still holding the shares, so I can’t really say it’s a success or a failure. But there were obviously some assumptions I made in the process that did not play out as I thought.
19 b. More importantly, Amir, what are the lessons investors can learn from such failures?
Amir: I think every such failure will teach us something new. For me, I think this specific incident was a big lesson that an emerging market equity will be treated by investors as an emerging market equity, even if it’s a unit inside a huge global corporate and is being led by one of the best capital allocators of all time – John Malone. And this is true especially if this company or this tracking unit underperforms. I think LiLAC wouldn’t have been punished by investors as it was, if it was operating in the US or Europe. But when you combine Latin American operations with high expectations from investors, and underperformance – results apparently could be harsh.
20. As investors we always evaluate risks. What is the one common, uncontrollable risk factor, across all your investments?
Amir: It’s a great question and I guess I’m saying this since I don’t have a very good answer! Maybe the one uncontrollable risk factor that is common to all our investments is that I don’t know how much I don’t know! Or if I may quote Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so!”.
20 b. Alright, Amir, this brings me to the last question for you today. How will your investment strategy likely evolve, over the next few years or so?
Amir: Oh, I wish I knew. I’m sure it will evolve over time, since the amount of new knowledge you absorb on this job every single week is just remarkable. So, hopefully I’m getting smarter every year and my investment strategy will get better over time. The nice thing about doing what I do is that you constantly learn on two fronts – the theoretical one – reading, talking and thinking, and the practical one. I’m constantly learning something new about the world works, just from trying to operate the fund as smoothly as possible. With this amount of learning, I am sure my investment strategy is going to evolve. I just have no idea how.
Alright. Thanks, Amir. This is my first interview with an investment professional outside of the US and Europe and I must say it’s gone quite well. You’ve shared a lot of insights not just about the Israeli stock market per se, but your own investing philosophy and I’m sure it’s a great value-add for my audience, which comprises of value investors across the world. I really hope my audience gives me great feedback on this interview. It’s been a pleasure, Amir, to have you with us today, and good luck with your fund!
Amir: I hope so too, Nitiin. Thank you so much for the kind words! Good luck with your initiative!
Amazon India Links for the books mentioned in this interview:
The Intelligent Investor
Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
Einstein: His Life and Universe
Healing Back Pain: The Mind-Body Connection
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