Notes from the Value Investing Congress Part II

And we’re back! Catch Part I of my notes here.

John Mauldin, more of a macro guy than a value investor, takes the stage after the break. If you’re not familiar, Mauldin’s newsletter Thoughts from the Frontline has a million subs, he writes very thoughtful weekly missives on the state of the world’s economic situation.

He’s here to discuss how we should think about uncertainty as portfolio managers.

There is a difference between “risk” and “unknown unknowns.”  (me: Oy vey, this is starting off like a Dr Seuss book…)

Financial markets get obsessive about the idea that they can identify risk and quantify it. This forces us to miss the obvious risks a la 2008.  “My initial guess was that we’d lose $400 billion because of sub-prime. Everyone said I was so ‘doom and gloom.’ Turns out I had the direction right, but we lost way more.”

In 1850, the most widely held job in America was farming. 50 years later, it was “personal service” – laborers in the city cleaning up after horses, providing wood for ovens, launderers etc. Hard to have foreseen that shift.

There’s a digression about how out of nowhere there will be a cure for cancer, this is an uncertainty and could hurt investors in cancer treatment drug stocks.

“Uncertainty is tough to model – a great deal of it comes from human nature and we are very mercurial creatures.”

“There are decades when nothing happens and then there are weeks where decades happen” – China joining the WTO, 9/11 etc.

Great quote from Frederic Bastiat in 1850:

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

John tells us that Europe is a disaster (stop the presses) but goes on to say there is no way out other than a depression. “The only solution was to not form the Union in the first place.” (me: Policy-makers with time machines, please take note.)

In the US, we have our own situation. We’re confronting how to solve the deficit. This election is about the direction of the compromise to come – raise taxes or cut spending. Neither works alone, a compromise is the only way out. No politician can run based on that reality but that’s the only answer. He says behind the scenes politicians understand this, but they can’t say it out loud.

Keynes vs von Mises vs Fisher vs Friedman is the state of play – the Great Experiment.

“You cannot spend more than you take in, 266 economic crises throughout history show that, eventually, the bond market will jerk your chain back.”

But he is bullish on the “march of technology.” “I can believe that we can see Moore’s Law continue to trickle down to the biotech and robotics industry, and to telecommunications.” He looks for companies that have an edge on the future, mentions Monsanto. “There’s value to be found in looking over the current crisis.” Europe’s problems will not stop basic human progression.

The Millennium Wave is still coming, as the debt supercycle winds down and the secular bear market comes to a close in the next four or five years. “Boomers are going to live a lot longer than you think.” Asia – not just China – will step into the gap as Europe diminishes.

The message is that we have to run our portfolios taking into account the risks we can see, but also remember uncerrtainty we can’t. Also we must take into account the possibility of positive surprises. (me: I think this is the version of his spiel he saves for a long-only, buy and hold crowd like this one, there’s no way he’s this optimistic in front of the gold n’ gun lunatics who make up his core audience).


Here’s Bill Ackman of Pershing Square. This is the first time today that attendees are sneaking iPhone pics of a speaker, I’m sitting above them so I see everything 🙂

Ackman begins with General Growth Properties – “How can I possibly have more to say about this company?”

Great anecdote about how David Simon kept telling him “you should have sold to me” throughout 2011, early 2012. This eventually leads to talks involving Brookfield Asset Management (BAM).

Ackman believes that 5 of the 9 board members of GGP are conflicted and should be removed. He is also concerned that Brookfield is attempting to buy enough shares that they can gain control of the company without paying shareholders a premium. They now have 42%, roughly 357 million shares of GGP. Ackman doesn’t understand how it’s possible that Brookfield isn’t subject to insider Form 4 filing requirements yet.

Brookfield is now very close to controlling the company, especially if a buyout vote takes place. Ackman is concerned that there will be a “Brookfield Discount” in GGP’s share price going forward if there is a perception that they control the company.

Ackman believes that David Simon is still interested in GGP, despite his assertions to the contrary. “The last thing David Simon wants to do is generate interest in the stock. But I can tell you that Simon Properties is extremely interested. But if you ask him, he might still say no.” (audience chuckles)

GGP is paying a 5.6% unlevered yield versus 1.6% on a 10-year Treasury. “Which would you rather own?”

Ackman concludes that yes, there is a lot of upside in GGP, but shareholders are better off with a Simon merger. It is a “substantially superior” outcome than remaining independent.  Shareholders would get shares in Simon on the transaction, a big premium, a higher yield and a safer holding with less leverage.

GGP, now trading at 19, should be “worth $31 on a standalone basis over the next 5 years”, but a deal with Simon would be even more favorable.  Operating synergies, better management, economies of scale and lower interest expense are the key to this thesis.

Ackman would like to see a deal of 86% stock, 14% cash where GGP is exchanged at $24 per share in Simon stock (now trading around $150). “A great deal for both General Growth and for Simon.” Could lead to an equivalent of $29 per share for GGP/Simon holders by year-end if announced soon.  Ackman believes this is Simon’s last chance before Brookfield takes de facto control – “they will never sell.”

Great laugh line when Ackman reads a letter from CEO Bruce Flatt at BAM, who compares himself to Warren Buffett.  “I know Berkshire Hathaway, and Brookfield Asset Management is no Berkshire Hathaway.”

Some really interesting behind the curtains stuff about how BAM outmaneuvered David Simon, pretending they were interested in selling GGP to him, requiring him to sign a two-year standstill. It was a ploy created by BAM to lock up their GGP stake in a new entity, Brookfield Property (BPY).

This whole General Growth saga is fascinating, we still don’t know how it ends. Ackman concludes that it ain’t over yet. Crowd applauds, Whitney Tilson comes out from backstage beaming like a little boy who’s just put on a successful play.

Bill Ackman takes some questions from the attendees, addresses JCP – “We still like it, we think it’s the “General growth of Retailers. JCPenney has only 20% less real estate than GGP, but trades at a sixth of the valuation. The CEO is doing the right thing for the next 5 or 10 years. Ron Johnson is building a mall within a mall. He’s got a tired mall that he’s revamping. he brings in Joe Fresh and other high quality brands like Levis and Nike. Also involving local brands that are not nationally known – for instance Giggle, a children’s clothing concept with only NYC and Menlo Park locales.” Bottom line is that Ackman believes in the Ron Johnson strategy, the little shops are a bright spot, the rest of the stores will take time. “If you can think past the next three months, this has a lot of potential.”

Your boy powers down and heads out to the lobby for a glass of wine. Thanks for reading, good night!

Read Also:

Notes from the Value Investing Conference Part I (TRB)







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