U.S. stocks are slightly lower in late-morning trading on Monday, with the S&P 500 (SNPINDEX:^GSPC) and the Dow Jones Industrial Average (DJINDICES:^DJI) (DJINDICES: $INDU), both up 0.41% at 11:30 a.m. ET. Today's putative culprit: OPEC, which failed to deliver an agreement to freeze oil production levels.
The oil factor is counterweighed by (among other things) Morgan Stanley's earnings, which came in above expectations, confirming a trend established by the top banks last week. This is a busy week on the earnings front, with roughly a fifth of the companies in the S&P 500 reporting results.
Let's leave day-to-day events behind and gain some perspective that's more consistent with long-term stock investing. This morning, I came across a transcript of an investor call led by Charles de Vaulx of International Value Advisors, a value investor who doesn't fit neatly into a style box.
De Vaulx has co-managed the IVA Worldwide Fund and the IVA Global Fund since their inception (Oct. 2008 -- talk about a horrible time to launch a mutual fund!).
He's extremely risk averse and laments the fact that, even during the beginning-of-year correction, he was unable to put much cash to work (both funds were nearly 40% in cash at the end of February):
It was still a remarkable correction in the sense that stocks of higher quality companies, of higher quality businesses -- Diageo, Kuehne Nagel, L'Oreal, ADP,Secom, Shimano -- those stocks came down a lot less than the Glencore, Anglo American, Deutsche Bank, Standard Charter [sic] of this world... [W]hile at times, some of those names were offering modest discounts to their estimates, they were still not offering the 20% to 30% discount we typically insist upon, the so-called margin of safety Ben Graham wrote about.
He also warns about the illusion of value:
[M]any so-called value investors use way too narrow a definition of value investing. They believe it's all about low price to book, low PE, high dividend yields. Thanks to low interest rates and the resulting overinvestment in energy, mining, steel, cement, automobile, manufacturing, shipping, oil rigs, shopping malls, etc., the flaw with this simplistic approach is that book value often times can become meaningless, the earnings in the P/E might be peak earnings, and the dividend in the dividend yield may not be sustainable.
Any examples of situations in which that risk was borne out? Yes, indeed:
Think about all the large mining companies that recently slashed their dividends or even Kinder Morgan who eliminated it altogether. We at IVA try to be more eclectic in our value approach, putting full emphasis on qualitative aspects, pricing power, strength of the moat, etc., than we are acting as pure deep value investors.
In other words, franchise quality far and away trumps a bargain-basement multiple in terms of attractive investment characteristics. Or as Warren Buffett puts it, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Another way in which de Vaulx differentiates himself is gold bullion -- both funds' largest position, at 6% to 7%. De Vaulx insists that "we view and use gold strictly as a hedge in our portfolios and believe that at today's prices." Regardless, in my opinion, it's an absurdity.
We don't want to end on a dour note. Are there any ideas that de Vaulx still likes?
[W]e own today in the portfolio stocks that we believe to be significantly undervalued in the top 10 holdings of the Worldwide Fund -- I can think of Astellas Pharma (ALPMY), trading at less than nine times enterprise value to EBITA with 20% of net cash to market cap, with Berkshire Hathaway, and Samsung Electronics trading at huge discounts.