I recently read a few investor letters from Q2. Notes are below. General takeaways are as follows:

Themes:

• Consider the unequal weighting of indexes (see: Murray Stahl)
• Enthusiasm with housing sector and REIT / MLP spinoffs due to low tax rate environment; see: Sears (Seritage Growth Properties, product of REIT spinoff)
• REITs and infrastructure investments (warehousing, logistics, containers) will play significant roles in China / Brazil. Oversold due to recessionary environment; could pose an investing opportunity for key players in space (Global Logistics Properties, China; Santos Brazil)
• India is a sleepy, potentially huge emerging markets investment opportunity (primarily with respect to automotive industry, fewer than 2% of citizens own cars); see: Suzuki
• Increase international exposure (US overweight); many opportunities in Europe, primarily in automotive and manufacturing (Rolls Royce)

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Donville Kent Asset Management
– J.P. Donville

I consider Return on Equity (ROE) to be the best general measure of growth in an enterprise. For me, ROE measures at least two important things.

• Growth in the net worth of an enterprise, which I consider to be the best measure of how fast an enterprise has actually grown over a specific time period
• Indication of the competitiveness of the enterprise, as I consider the spread between a company’s return on equity and its cost of equity to be an objective measure of the enterprise’s competitive advantage

Screening Criteria: 

• $100mm minimum market capitalization
• Sector subdivisions (6 total)
• ROE  < 5%
• ROE  > 5%

Sector Subdivisions

• Health
• Technology
• Consumer
• Industrial
• Financials
• Energy & Energy Services

Qualitative Considerations for Investment

Many of the attractive businesses we own are attractive because they have high levels of recurring revenues and/or very sticky relationships with their customers.

Much of this can be linked to a concept called “barriers to exit,” which means that the customer once engaged will only leave you if

• Prices become really high
• Product/service offering deteriorates significantly

Valuation

I am not a big proponent of either EV/EBITDA or P/Sales as valuation metrics for growth companies or for any kind of company for that matter.

• I prefer price to cash earnings which is simply GAAP earnings with amortization of intanginbles added back in

East Coast Asset Management
-Christopher Begg

It is not about ignoring the here and the now, but engaging the qualities that can be sustainable and enduring

Objectives vis a vis Mr. Market

• Compound capital at the highest rate of return (IRR)
• Mitigate chance of loss by operating with a margin of safety (MoS)

When the collective intelligence of the market is most rational in times absent of panic or euphoria, the best values may be hiding in plain sight, perhaps ignored because they appear too self-evident.

Finding mispricings requires the security analyst to identify why an investment might be misperceived (the poetical). This is where the attributes of the poet, a keen understanding of mortal, human behavior, should be considered. 

General Price-Action Catalysts

• Earnings releases
• Geopolitical events
• Change in political leadership
• Change in sector leadership
• Change in commodity prices

Investing is simply the counting of all cash and discounting that cash stream at an acceptable rate to determine what the investment is worth and buying that stream of cash at a discount to what it is worth.

A steady diet of cash on delivery is the great secret of a long-term compounding record

Characteristics of Cash On Delivery Investments

• Sustainable competitive moats
• Growing stream of cash earnings
• Low capital requirements to engender growth

Metrics to Consider

Compare share price to

• Per-share working capital
• Book value per share

Future Cash Earnings Comparisons

Regard future cash earnings with respect to:

• General market valuation
• Sector euphoria
• Single security optimism

Rotas Opera Tenet Arepo Sator

Whether it is at the heart of everything that grows (physical universe – compounding), everything that evolves (biology – evolution), or human systems (human achievement), there is the same timeless message: persistent incremental progress eternally repeated, or as the oldest palindrome has it – the sower works for mastery by turning the wheel.

Fairholme
Bruce Berkowitz

AIG

Metrics of consideration

• Book value (liquidation value) (12% growth)
• Equity to assets ratio (percentage claim on assets in event of liquidation) (>20%)

Commentary

• Fewer adverse developments from past businesses
• Reduce operating expenses
• Continued stock buybacks

Sears

Developments

• Since initial investment, Sears has distributed $31.85 to shareholders via spin-offs and other corporate actions
• Recently, Sears sold 235 properties and joint ventures with interest in 31 additional properties for $3.1bn in cash proceeds

Valuation

• SOTP: $125 p/sh; net of debt

Commentary

Focus on profitability instead of top-line growth to result in:

• Operational efficiencies
• Expense reductions
• Gross margin improvements

REIT Theme

Consider: Macy’s, Sears

Seritage Growth Properties

• Newly formed REIT which purchased 266 properties from Sears
• Joint venture partners, GGP, Macerich, Simon Property Group, intend to recognifugre or redevelop a substantial portion of the properties acquired in order to generate additional operating income and diversify the tenant mix
• Higher rent from new tenants

St. Joe Company

• 110,000 acre Sector Plan approved
• 170,000 residential units
• 22mm square feet of retail, commercial & industrial development
• $700mm in cash on hand to implement Sector Plan

FRMO Group
Murray Stahl

We much prefer the “time risk” of a dormant asset such as land that is to be developed, or unused frequency spectrum that generates no cash but is likely to be needed by the grand technologies currently being deployed.

South LaSalle Partners (SLP) – The Minneapolis Grain Exchange (MGEX)

Considerations

• Fixed cost structure is beneficial to Co from a volume perspective
• June & July volume for MGEX = highest ever recorded
• Volume is correlated with crop planting and harvesting cycle
• 18 of the 22 components of the Bloomberg Commodity index have dropped at least 20% from prior high prices
• Current bear market for commodities = huge upside
• MGEX now engaged with carbon trade exchange: contracts for carbon emissions
• MGEX real estate also presents upside: 325,000 square feet constructed in the midst of an urban renewal project; new stadium, new Wells Fargo building, etc

MGEX investment represents exposure to

• Commodities
• Carbon Credits
• Co-Investment Fee Income
• Theoretical possibility of new asset class (carbon emissions)

Additional Commentary

In the 12 months ended June 30, 2015, approximately 186 out of 330 iShares ETFs generated returns of less than positive 1%. Another 28 funds generated returns of less than 2% but greater than 1%. Therefore, less than 1/3 of all iShares ETFs produced return that were greater than the 2% presumptive rate of inflation.

We view index investing as the functional equivalent of mortgages with no individual income verification, since index investing rejects the value of individual security research.

Greenhaven Road Capital
-Scott Miller

Forums of Note

• Value Investors Club
• SumZero

Investors of Reference

• Warren Buffett
• Charlie Munger
• Bruce Berkowitz
• Monish Pabrai
• Murray Stahl (FRMO)

Commentary on Index Funds

On International Exposure

• When you dig into the S&P500 as Murray has done, of the top 50 companies in the S&P500, a full 44% of revenue is in fact from overseas and not from the US. When you dig into the “international” companies in the MSCI EAFE index, it turns out that 30% of their revenue is from the US. In addition to the buckets not being as neat as one would hope for, it turns out it is really hard t oknow what you own or why you own it when you own 500 of anything.

On Weighted Criteria for S&P and Russell

• The S&P and Russell are both “float weighted” which I would argue is a very poor selection criteria for finding the best investments
• If a large portion of a company is tightly controlled by the founder or management team, that company will be a smaller part of the index
• If a company is more expensive, it will be a larger part of the index because flot is the number of shares available for trading multiplied by their price

We can be “active manager” and seek out the very companies that the indexes deliberately exclude: those with strongly incentiveized management teams trading at cheap prices

Specific Attributes Considered in Equity Selection

• Insider ownership
• Reasonable Valuation / Asymetric Risk Reward
• Variant Perception: this can manifest itself in several ways, such as growth investors panicking when revenue slows while they fail to appreciate underlying cash flows
• Scalable Business Model: businesses with low incremental costs
• Growing Market
• Recurring Revenue
• Customer Value Proposition

Equities of Note

• Howard Hughes

General Outlook and Commentary

• Macro events of note include Greece and China

I understand that newspapers have to be filled with content because blank pages don’t sell papers or ads, and TV anchors have to talk about something, but I struggle to see the connection between Greece and China and the fundamentals of the 15 companies that we own.

Prior Affiliations

• Dan Loeb (Third Point)
• Eddie Lampert (ESL Investments)

New Positions

Halogen Software

• Dollar retention of all existing clients > 100%
• 8% Churn
• No customer is > 2% of total revenue
• Contracts > 2 years in duration

The fact that the company does not “screen” well and is optically losing money on an operating basis is a function of GAAP accounting where sales and marketing expenses are expensed to the income statement rather than capitalized to the balance sheet and then depreciated ratably over time. Given that sales and marketing is more than 50% of revenue and driving the almost 20% growth, I believe a more accurate way to think about those expenses is an investment, not an operating expense.

• If the sales and marketing expenses were capitalized, the company would be immediately profitable and be trading on the order of 6x EBITDA

Interactive Brokers

Thesis: they are the low cost provider, with the highest margins, low variable costs, and are growing at 20% per year

Look up

• Monish Pabrai
• Arlington Value Fund

Greenwood Investors
-Steven Wood

General Commentary

Our portfolio has become almost entirely international as nearly all of these companies are based in Europe. We aren’t trying to become a solely European-focused investor, and have done diligence on numerous companies recently, but only European markets are priced highly attractive right now. Latin American markets have gotten more interesting recently, and I’m eager to take a diligence 

It will come as no surprise that it’s currently high tide for the U.S. equity markets. Yet, there are a lot of sand-dollars exposed by the low-tide in Europe. These “dollars” also happen to be trading at fractions of their dollar value, and at far lower valuations than their U.S. competitors, who are frequently more poorly managed, particularly in the automotive industry

Fiat Chrysler (FCAU)

• Negative and false news stories have been recirculating about the company’s prospects
• Committed to doubling North American operating income by the end of the year
• North American profit margins are less than half of Ford’s and GM’s with a similar product mix
• North America structure limited by pricing; by Q1 2015 (following rolloffs of old models), pricing would be increasing by $281mm a quarter

Rolls Royce

We have used the recent double punch of European volatility and a guidance reset at Rolls Royce to build a core position in the company

• New CEO: Warren East from ARM holdings
• The Company has secured exclusive positions on most of Airbus’s wide-body planes
• Well positioned to monopolize the wide-body engine market, the fastest growing segment of the civil aerospace industry
• Rolls will be the fastest grower in the commercial aerospace industry, yet is shares are the cheapest in the industry and the valuation reflects deep pessimism today
• Negative perception due to profit margin gap v. main competitor, GE Aviation
• Poor management has brought down ROIC; East expected to bring ROIC to > 20%
• With just a few small acquisitions, large-scale 3D printing and some share repurchases, we think Rolls Royce shares are worth nearly five times today’s price over our typical time horizon

Macroeconomic Commentary

Plato predicted that democracy was unsustainable over the long-term, as it was dependent on an uninformed population making intelligent decisions. As we know from the stock market irrationality, not even the brightest minds can always get it right. Plato’s country has proved him right, as have the french as they’ve both elected leaders which have pursued highly unintelligent policies

• Greece: capital markets have “shut down” any communist policies
• France: elected a socialist president; now highly unpopular due to conflicting policy implementation (lowering the retirement age). Economy has remained stagnant

Policy in England, Spain and Italy

• England: re-election of pro-business government
• Italy: passed business-friendly reforms; consumer sentiment and auto sales are starting to reflect a better economy

Horizon Kinetics

General Considerations for ETF Investing

Theme: The manner in which ETF-based investing focuses all the inflow of capital into the very limited universe of larger, liquid companies must tend to inflate their valuations, which must tend to depress the expected future returns from those stocks

Example: By investing in an India ETF, do you really purchase exposure to the expanding Indian economy and at a price that permits the expected benefit?

• 4,000 publicly traded companies in India
• 740 w/ market cap > $100mm
• 480 w/ market cap > $250mm
• 65 w/ market cap > $5,000mm

India market, in comparison to US Market:

• National Stock Exchange of India (NSE) DTV = $2.9bn
• Apple DTV = $6.4bn
• Wisdom Tree India Fund; iShares MSCI India AUM = $6.4bn
• + Vanguard + MSCI Emerging Markets = $15.3bn investments in India from ETFs (versus $2.9bn NSE daily trading volume)
• Between 45% and 57% of the value of three of the largest India ETFs is in their top 10 holdings
• Each of the ETFs happen to hold, among their top 10, Reliance, Infosys, and Tata; of which, 68%, 98%, and 93% of their revenues come from outside of India

One can see how investing in an India ETF might provide rather limited exposure to the legitimate expansion of the Indian economy, and how excessive the valuations might be for those securities that do indeed benefit from that growth and happen to be large enough to attract ETF capital

Longleaf Partners Fund
-O. Mason Hawkins

Value Creation Considerations for Investments in Macau businesses

• Buying back deeply discounted shares
• Invest in high-return projects to increase visitor traffic
• Shift mix towards higher margin mass and premium mass business
• Diversify in-to non-gaming revenue sources supported by the government
• Refinancing debt at  attractive levels
• Securing long-term credit lines

Sustained, historically low interest rates in many countries have helped fuel global mergers, acquisitions, and initial public offerings approaching 2007 peak levels at multiples beyond our appraisals

Other Considerations Aiding Long-Term Holdings

• Selling real estate, creating real estate investment trusts (REITs) and master limited partnerships (MLPs), and monetizing other yield-driven assets
• Splitting conglomerates or disparate business units to gain proper price recognition and value creation optionality
• Positioning segments to be sold at strong multiples
• Pursuing consolidation that can build value
• Using currency dislocation to purchase assets at a discount
• Lock in debt at low rates
• Buy shares back at deep discounts

RV Capital
-Robert Vinalli

Investing Process

When I buy part of a company, my investment hypothesis is always the same – it is a great business with wonderful managers at an attractive price. I then track the following:

• Expansion of market and/or products and services
• Cost management
• Capital allocation

Investments

Grenkeleasing

• Net Income growth
• Revenue growth
• Slow increase in costs
• Launch in new geographic continents
• Small ticket costs stable

Baidu

• Strong transition from PC to mobile
• Heavy investment in marketing and promotion, content, and R&D
• Investment focus of the future includes O2O (online-to-offline); eg, ordering food or cinema tickets

Qualitative Considerations Affecting Market Valuation

• Market opportunity
• Ability to raise prices
• Durability of moat
• Ability of management to allocate capital

Primary Reasons for Shift Away from Low-Multiple Orthodoxy

• Preeminence of judging the strength of a company’s competitive advantage and the ability of its managers over the overall earnings power of a company over the long run
• Companies which are investing for the long run have to shoulder costs which depress current earnings. If you believe the foregone investments are value creative, this is not an indicator of undervaluation
• Companies which are managed for the long run tend to apply generally accpeting accounting principles more conservatively. This can lead to the company with the higher reported earnings not necessarily being the cheaper one at the same market price

Third Avenue Value Fund

General convictions: We believe that the portfolio’s exposure to overcapitalized regional banks, select set of exploration and production Energy companies and US housing related companies is well positioned to benefit from a rise in interest rates, a readjustment of the oil industry, and recovery in US housing

Investing Process

• Balance sheet analysis to assess creditworthiness
• Appraise aspects of company financial statements
• Management strategy
• Competitive environment
• Current business results

Primary Criteria

• Strong creditworthiness
• Consistent net asset value compounding
• Meaningful discount to NAV

Analyze v. long term goals

Current Positions

• Overcapitalized financial companies
• Oil exposed exploration and production companies
• Companies that are levered to a strengthening US housing cycle

Overcapitalized Financials

US Economic Environment

• Very Cold Winter
• Slow Employment
• Slow GDP Growth

Environment for Financial Cos

• Low interest rate environment
• Slow and competitive lending environment

Energy

Apache

• M&A activity (sale of Kitimat and Wheatston, $3.7bn)
• Exit of Australian E&P acreage for $2.1bn

Senior Breitburn Energy Bonds

• MLPs are not taxed and pay out most of their earnings in dividends
• Breitbrun produces cash flow from producing properties and does not engage in more risky exploration activites
• At the time of our ivnestment, tha market was concerned about the company’s leverage because the company was almost 90% drawn on its revolving credit line, as it had just completed its acuqisition of QR Energy at year end ’14

US Residential Housing

Macro trends

• High unemployment
• Low wage growth
• Tepid economic recovery
• Low mortgage availability due to tight federal standards and high degrees of student debt

Positive drivers

• Below trend housing starts
• loosening financial constraints
• Better general economic trends

Other facts

• Millenials make up 34% of the US workforce
• There are 92 millenials compared to 61 million Generation X and 77 million Baby boomers
• Will soak up housing inventory > drive housing starts > drive timber and lumber

Metrics of Note

• Tangible book value
• Net asset value

Third Avenue Small-Cap Value Fund

One true measure of Creditworthiness and downside protection is a willingness, or better said an enthusiastic desire, to add positions that have sold off and where our conviction in our investment thesis remains high

As deep value investors, Third Avenue Funds are mostly invested in companies with securities trading at meaningful to discounts to private market values due to 

• Short-term issues that can be resolved over time
• Companies possessing resources that are undervalued or simply ignored by earnings-oriented investors

E-commerce themes

• e-commerce: Same day delivery
• Omni-channel: buy online, pick up in store
• Improve inventory management software

REIT Metrics:

• Sales per square foot
• % properties leased

Third Avenue International Value Fund

Investments

• Natural resources
• Copper mining
• Oil Services
• Brazil
• Continental Europe

Brazil Themes

• “Ascension” of poor families in to middle class
• Slowing growth leading to recession
• Politics + systemic fraud of Petrobras

International Container Companies

Primarily, pro-logis

• Restructuring = sale of Chinese and Japanese operators
• Subsequent purchase by Government of Singapore
• Took Global Logistic Properties public: a portfolio of warehouses and logistics facilities

Industry services

• Retail
• Food service
• Consumer goods
• 3rd party shipping

Supply Chain

• Retail (online, brick and mortar)

Agriculture Industry

• Previously, high commodity prices = high levels of agriculture equipment orders
• “” = high planting + supply
• Collapse in prices = significant oversupply

Third Point

Characteristics of Good Business

• Growth orietned
• Long-duration assets
• Strict expense controls
• Avoiding high-risk, undisciplined R&D spend

Case Study: Suzuki

• Low cost manufacturing
• However, has litigation overhang

India Opportunity

• Emerging markets export hub over time
• Only 2% of population owns cars
• low oil prices
• Accommodating monetary policy
• Reform / infrastructure investment of Modi

General, Growth Drivers

• New products
• New geographies

Wedgewood Partners

China Environment

• China Securities Finance Corporation drives investment
• Spend 15% of net assets
• Stopped IPOs