Tim Isgro

Author of The Owner's Memo

[Tim Isgro @TimIsgro]

The Owner's Memo #3: Li Lu’s 7x Return on Timberland, Part 1

Today's piece is the first installment of my case study of Li Lu's investment in Timberland, a reconstruction of his 7x return in the late 1990s.

The starting point is Li's 2006 talk at Columbia, where he describes finding Timberland in the fall of 1998, battered by the Asian Financial Crisis, trading at 6-7x earnings.

For the case study, I went very deep:
✔️ pulling the actual Value Line issues from 1998,
✔️ reading the 10-Ks and 10-Qs Li would have had access to in October 1998, and
✔️finding contemporary press on Timberland becoming a hip-hop staple.

I reconstruct what Li was actually seeing at the time.

Part 1 covers the discovery, the brand, and why a stock with strong revenue growth and a 6.6 P/E was down 55% in three months.

Part 2 tomorrow: the four concerns dragging the stock down and the boots-on-the-ground research that gave Li conviction.

https://t.co/8gkuMegUiO

[Tim Isgro @TimIsgro]

@CAronitpereira I’m sure I could ask an LLM for a good summary, but it would be great to have a good piece of writing or a resource to explain to foreigners why the Indian government limits foreign investment (as I understand) and when and how that might change.

[Tim Isgro @TimIsgro]

James Montier's ten tenets of investing from his book Value Investing:

1. Value, Value, Value — Price determines return; no asset is too good to be overvalued, and few are too bad to be undervalued. Always buy with a margin of safety.
2. Be Contrarian — Following the crowd means paying consensus prices. Superior returns require doing something the majority isn't doing.
3. Be Patient — Undervaluation can persist for an inconveniently long time. Cheap stocks can get cheaper, and the value investor's curse is being too early.
4. Be Unconstrained — Forcing a manager into a style box prevents them from exploiting the full opportunity set. Go where the value is, including cash or short positions if that's where the edge lies.
5. Don't Forecast — Even if you're right 70% of the time on four sequential forecasts, you're right overall only 24% of the time. The evidence on the folly of forecasting is overwhelming.
6. Cycles Matter — We can't predict, but we can prepare. Economic, credit, and sentiment cycles all shape asset values, and ignoring them is its own form of risk.
7. History Matters — "This time is different" are the four most dangerous words in investing. Financial memory is short and disasters keep repeating for exactly that reason.
8. Be Sceptical — The best investors' default is non-ownership; they need to be convinced of the merits. Most managers ask "why shouldn't I own this?" and skip the hard questions.
9. Be Top-Down and Bottom-Up — Macro and micro are inseparable. Value investors who ignore macroeconomic context are actually closer to Graham and Dodd than they might think.
10. Treat Your Clients Like You Would Yourself — Ask "would I do this with my own money?" Maximizing assets under management and maximizing returns for clients are often in direct conflict.

[Tim Isgro @TimIsgro]

Leon Cooperman on the role of company management in an investment:

"It’s a factor. Ben Graham in The Intelligent Investor said that you evaluate management teams twice, once through the numbers and once face-to-face. By the numbers, I mean looking at returns on capital, growth rate, market position, gross margins, and so on. When measuring the quality of management face-to-face, you make your own judgment on how they respond to questions and what their integrity is like."

On getting rich:

“You want to get rich quietly. I don’t go on CNBC trying to talk a stock up.”

Source: Graham & Doddsville newsletter, Winter 2018

[Tim Isgro @TimIsgro]

@CAronitpereira Funny how you almost never hear that opinion, “I’m rich already. Why would I want to bother getting down in the mud?”

[Tim Isgro @TimIsgro]

@blondesnmoney * JENSEN HUANG FURTHER ADDS CLUSEAU INVESTMENTS THE NEXT 1MN FOLLOWER TWITTER ACCOUNT

[Tim Isgro @TimIsgro]

From @benthompson’s latest, on why Google may be issuing equity and not debt. Self-recommending, as always...

“…Google [may be] uncertain about the return on investment of all that capex, and would prefer to share the risk (along with the upside). If there isn’t a substantial debt issuance down the road then this might be the right answer.”

That is my working hypothesis at the moment for why Google issued equity and not debt. Google is in the strongest position of all for the coming AI wave. The starkest risk to them, however, is that some development occurs to call their huge capex into question (e.g., improvements in LLM's finally cease or perhaps a recession causes investor attitudes to change).

In that case, big tech will suffer a downturn, and issuing equity will have been a relative win because they will have less debt burden to work through during recovery.

On the other hand, if the capex and AI improvements deliver untold abundance, while issuing equity will probably have technically been the wrong move, the company could be so valuable that investors will excuse management for having done so.

[Stratechery @stratechery]

The Google Capital Company

Google has issued equity to Berkshire Hathaway in a deal that signals far more demand and a future where capital is the ultimate commodity.

https://t.co/IygVOphySV

[Tim Isgro @TimIsgro]

https://t.co/di0A5HUv1n

[Tim Isgro @TimIsgro]

Part 2 of the story of Charlie Munger's investment in Tenneco Automotive is live at The Owner's Memo.

Last week, I set up Tenneco Automotive's situation in 2001: a company that looked headed for bankruptcy with its stock trading near $1 and its junk bonds at 35 cents.

Part 2 reveals the harder question. What did Munger see that the market didn't?

Some of it is typical: two of the most recognized brands in the industry, a profitable underlying business, and a cost-cutting program that was already underway. But the most interesting part of Munger's investment is the bankruptcy calculus itself, thinking through the situation from the lenders' point of view and asking what they would rationally do.

Read today's piece for the full analysis, including the investment and eventual outcome for Charlie Munger.

[Tim Isgro @TimIsgro]

Li Lu on first starting out:

"In January 1998, I started my own company. I had very few supporters, but was able to pool together a small sum of money with the help of a few close friends. I wore many hats, acting as the chairman, fund manager, secretary, and analyst, and used only a cell phone and a laptop. The timing coincided with the 1997 Asian financial crisis and the price of oil dropping below $10 per barrel. I started buying the stocks of many excellent Asian companies as well as the stocks of oil companies in the U.S. and Canada, but the volatility of the stock market that followed created a 19% paper loss that year. This caused some investors to become concerned about future operating conditions and they dared not invest more. One of my largest investors decided to withdraw his investments the following year. Coupled with the high operating costs of the previous
period, my company was struggling to survive."

Source: Foreword to the Chinese Edition of Poor Charlie’s Almanack

[Tim Isgro @TimIsgro]

Seth Klarman on where to find opportunities:

We look for value everywhere and anywhere," he said.

Klarman said he looks for "market-insensitive opportunities". By that he means securities whose prices depend less on the vagaries of the financial markets and more on specific corporate events unique to them, such as emerging from bankruptcy, liquidating the business or solving a major business problem

Last year, for example, he saw value in Technology Solutions Co., a fast-growing computer systems company that ran into a spot of trouble when a large customer reneged on a contract with the company. That bad news caused the stock price to fall to $8 a share from $30. Klarman leaped in and bought 6 percent of the company's outstanding shares.

"The company had a hiccup, but it was still earning 70 cents a share and had $2.50 {a share} of cash on the balance sheet with no debt," Klarman said. "Basically, we bought a high-growth company cheaply." The stock traded recently at $14 a share, a bit too pricey for Klarman.

Source: The Washington Post, "Money Managers: New Faces, Old Methods", 1993.

[Tim Isgro @TimIsgro]

@LibertyRPF Couldn't resist... 😁

[Tim Isgro @TimIsgro]

“So my discovery in investing, and advice to younger ones who would endeavor to is to study markets and invest in long term enterprises which have the potential to vastly outpace other companies and industries and stick with them as long as the theme is intact. Forget about the trading and use the time you would have spent monitoring the trade with your family.

It seems so simple, but few actually ever achieve it.

Here is a prime example of what I am talking about: Back in January 1992 I read the Barron’s Roundtable and Felix Zulauf recommended Potash of Saskatchewan (POT) as a unique way to play the China growth story. . . . It all made sense to me so I took a modest position. The stock did quite well, I recall I bought it for $2/share. I held onto it for 3 years and got a 4–5 bagger out of it. I was pretty impressed with myself at my acute market acumen. It stalled out eventually and I sold it around 1996 as I got tired of it treading water. Now mind you the original premise never changed, it was always intact, yet I craved new action.

If I had held on until the blow off in 2007 I would have had my 100-bagger.”

Source: email received by Chris Mayer for the book 100 Baggers

[Tim Isgro @TimIsgro]

@EarningsB4Hugs Thank you!

[Tim Isgro @TimIsgro]

@sidecarcap 🙏 That is really nice to hear, Sidecar. Thanks.

[Tim Isgro @TimIsgro]

@modestproposal1 I thought you were talking about golf until the word “goalie”.

[Tim Isgro @TimIsgro]

“One of the great tricks in investment is learning to be happy doing nothing.”

- Luke, an investor from the book Free Capital by @guy_thomas

[Tim Isgro @TimIsgro]

“Young people with stable incomes can typically take more risk because their income is equivalent to a very large and safe fixed income allocation.”

💯 Cullen’s point works just as well with retirees who have a stable pension, and it can be difficult to understand if you’re not financially-minded.

Imagine you’re a 75-year-old retiree collecting $50,000 per year from your state government pension and you also have $250,000 of investable assets.

It might not irresponsible to have *all* of that $250k invested in equities. Why? Because you can imagine your $50k pension income as being a coupon payment from a municipal bond.

If municipal bonds in your state pay a 5% coupon, for example, you can think of yourself as effectively owning a $1,000,000 municipal bond (paying you $50k in interest per year).

This way, instead of imagining you have a 100% equity allocation and too much risk, your truer effective portfolio looks much more appropriate:
- $1,000,000 in municipal bonds (80%)
- $250,000 in equities (20%)

[Cullen Roche @cullenroche]

This is something I've completely changed my mind about in recent years. I now think the idea of a subjective "risk tolerance" is a terrible concept.

Everyone gets scared during a bear market. And everyone thinks they won't get scared during a bear market. You will. And it's normal.

Your portfolio risk should be based on your financial risk *capacity* and that is absolutely quantifiable if one correctly assesses balance sheet vs income statement health.

A 65 year old retiree with $500K withdrawing $20K per year has a vastly different risk capacity than a 65 year old with $5MM withdrawing $50k per year. The person with the superior financial health can take more risk because they have vastly less sequence risk in their financial plan.

Young people with stable incomes can typically take more risk because their income is equivalent to a very large and safe fixed income allocation. They should take more equity risk because their income statement health allows it.

Age and emotions shouldn't be the primary driver of risk. Financial health and risk capacity should.

[Tim Isgro @TimIsgro]

Source: Li Lu’s April 2010 lecture at Columbia University
https://t.co/3iCGS5V8xr

[Tim Isgro @TimIsgro]

Warren Buffett gave a lecture at Columbia in the early 1990s. Li Lu was in the audience at the time, young and worried about his student loan debt.

Buffett said three things, as Li recounts:
(1) A stock is a piece of ownership in a company, not a piece of paper.
(2) You need a margin of safety so that if you're wrong, you don't lose much.
(3) Most people in the market are in it for the short term, which gives you a framework for dealing with the day-to-day volatility.

"What I heard that night changed my life," Li Lu said.