One of the things that really hurt Apple was, after I left, John Sculley got a very serious disease…It’s the disease of thinking that a really great idea is 90% of the work. And if you just tell all these other people here’s this great idea, then of course they can go off and make it happen. And the problem with that is that there’s just a tremendous amount of craftsmanship in between a great idea and a great product. – Steve Jobs

 

What does Steve Jobs have to do with our investment process and Value Ideas in Action? We believe that Steve Jobs’ concept of the idea disease, as expressed in the above quote, is quite relevant to investors.

Just like the craftsmanship that is required to turn great engineering ideas into successful products, investment success is built on more than great investment ideas. Yet, in many parts of the investment world – and the media that cover it – there is little incentive, time, or competence to devote to the intricacies of the entire investment process, including not only idea generation but also position-sizing and other vital portfolio management decisions.

To make matters worse, even the presentation and discussion of investment ideas is too often superficial and lacking in second-level thinking – to borrow Howard Marks’ important concept. The end result is a proliferation of and obsession with investment ideas that are rarely great and where other vital elements of the investment process are left out. Over time, these developments distort the nature of investing and can lead to inferior capital allocation decisions within a society.

In our view, successful investing is not about hundreds of superficially researched ideas, with little follow-up and no accountability. It is about focusing on the most compelling ideas on the basis of value versus price, making judgments on probabilities and payoffs, deciding on appropriate position-sizing within a portfolio, and then constantly evaluating and adjusting positions according to changes in price, fundamentals and portfolio considerations. In short, investing is a process.

 

Value investing is simple to understand, but difficult to implement.The hard part is discipline, patience, and judgment. – Seth Klarman

 

So, in our view, successful investing starts with great investment ideas (great on the basis of value versus price, not popularity). But, give two investors the same great ideas and they are likely to experience vastly different investment outcomes. We therefore believe that great investment ideas are a necessary but insufficient element of a successful investment process.

Vital additional elements include the initial position-sizing of an idea, deciding when to sell or buy more, how to manage cash, and other portfolio decisions. In order to be successful, an investor therefore needs to not only have great investment ideas, but has to turn these ideas into action within a portfolio. Over time, the performance of this portfolio will ultimately determine the investor’s reality.

These vital elements are what we call the investor’s craftsmanship. We believe the above words of Seth Klarman illuminate the intangible attributes behind tangible actions such as selling a security or buying more of it. In that sense, differences in discipline, patience, and judgment among investors will invariably lead them to have different investment outcomes – even if they start off with the same investment ideas.

Value Ideas in Action is our attempt at this craftsmanship. It represents a framework for turning individual investment ideas into reality in a live model portfolio. The end result, we hope, is not only a better reflection of the nature of investing, but also accountability for performance, an attribute which is too often an afterthought in the investment industry.

If you are an investor seeking not only compelling global equity ideas, but also a framework for turning these ideas into reality, our team at Value Ideas in Action looks forward to sharing our craftsmanship with you and serving you throughout the investment process.

Leadership

Oliver Mihaljevic

I have created Value Ideas in Action based on my personal and professional investing experiences dating back to the 1990s. Major formative influences on my investment thinking include:

  • learning directly from Yale University Chief Investment Officer David Swensen in my senior year as an economics major at Yale - around the time of the dot-com boom and bust (1997-2001);
  • observing first-hand the impact on financial markets from the events of 9/11 and the many US corporate scandals of the early 2000s as an equity research analyst at Credit Suisse First Boston in New York (2001-04);
  • managing European public and private equity investments for Warren Lichtenstein's investment fund Steel Partners as part of a two-person team in London - around the time of the global financial crisis (2005-09); and
  • as equity partner and managing director, helping John Mihaljevic build The Manual of Ideas from scratch into a highly acclaimed investment research service among the world's most successful investors (2009-16).

In addition to co-authoring The Manual of Ideas monthly research publications for more than five years, I had the privilege to conduct long-form interviews with hundreds of investors worldwide about their investment philosophy and approach.*   These conversations have further stimulated my own investment thinking and process. Some of the interviews, or excerpts thereof, are freely available on GreatInvestors.TV and on iTunes.

Perhaps most important to my investment thinking, however, has been going through life with my eyes and ears open. Growing up in communist Yugoslavia in the 1980s, I learned early on that things are not always what they seem.

 *   I have interviewed and learned directly from Sahm Adrangi, Ali Akay, Chuck Akre, Jeff Auxier, Ciccio Azzollini, François Badelon, Brian Bares, Pat Barry, Arnie van den Berg, Rupal Bhansali, Jeroen Bos, John Burbank, Scott Callon, Simon Caufield, Ronald Chan, James Choa, Chris Crawford, Chris Davis, Jeremy Deal, Robert Deaton, Eric DeLamarter, Pat Dorsey, Jean-Marie Eveillard, Frank Fischer, Massimo Fuggetta, Mariko Gordon, Robert Hagstrom, Brad Hathaway, Cliff Hoover, Max Hu, Curtis Jensen, Michael Kao, Chris Karlin, KB Kee, Peter Kennan, Josh Kennedy, Eric Khrom, Alex Kinmont, Benjamin Koh, Georg Krijgh, John Lambert, Bryan Lawrence, Álvaro Guzmán de Lázaro, Chan Lee, Charles de Lardemelle, Paul Lountzis, Atticus Lowe, David Marcus, Howard Marks, Mark Massey, Juan Matienzo, Michael Mauboussin, Tim McElvaine, Sidd Mehta, James Montier, Frédéric Motte, David Nierenberg, Nelson Obus, Dan O'Keefe, Richard Oldfield, Christian Olesen, Phil Ordway, Max Otte, Francisco García Paramés, Chris Pavese, Steven Persky, Wayne Peters, Fernando del Pino, Tiago Guitián dos Reis, Brett Reiss, Matthias Riechert, Sean Riskowitz, Bob Robotti, Jean-Pascal Rolandez, David Rolfe, Jim Roumell, Tom Russo, Christian Ryther, Yusuf Samad, Larry Sarbit, Dave Sather, Florian Schuhbauer, Isaac Schwartz, Michael Shearn, Dan Sheehan, Howard Smith, Jeff Stacey, Todd Sullivan, Chris Swasbrook, Soo Chuen Tan, Josh Tarasoff, Alex Tsukernik, Charles de Vaulx, Timothy Vick, Amit Wadhwaney, Chris White, Stuart Widdowson, Don Yacktman, Jiro Yasu, Seng Chong Yeo and many other investors. I am greatly indebted to all of them.

Investment Philosophy

We are value investors in the sense that our philosophy is rooted in the concept of intrinsic value as pioneered by Benjamin Graham.

Without the concept of intrinsic value, there is no margin of safety because we would not have anything meaningful to compare the market price to. Investing, in other words, would turn into speculating as we would cease to think of equity securities as fractional ownership of actual companies with underlying businesses and/or other assets.

Intrinsic value, of course, is not a number but a range that tends to be quite wide in most cases - and dynamic over time. Rather than obsessing about precise formulas, however, we recognize the inherent challenges of estimating intrinsic value. Our approach is to embrace these challenges by way of probabilistic judgments about future outcomes and related payoffs in the context of a market price and our best estimate of intrinsic values in various scenarios of the future. In most cases, this analysis leaves us with nothing to do. In a few cases, it compels us to action.

To borrow Charlie Munger's words, we look at investing as the equivalent of betting against the pari-mutuel system. That is, we are looking for mispriced bets where, for example, the probability of winning is one in two but that pay out three to one. Of course, the actual probabilities and payoffs are unknowable. We can only apply our best judgment. In this context, we treat idea generation and position-sizing as inextricably linked: we vary the position size to reflect, among other factors, the estimated probability of permanent capital loss (and its likely size).

In addition, the potential magnitude of losing or winning is important to our investment philosophy because, unlike other forms of betting, investing sometimes allows for asymmetric bets where you can win a lot, but where losing doesn't automatically mean losing much, let alone losing your entire stake. Since equities are long duration assets that do not typically "expire" (unlike most other forms of betting) time horizon factors often play into this as well. Identifying and executing on such asymmetric and investment horizon arbitrage bets is at the core of our investment philosophy.

While we cannot do without concepts such as intrinsic value, probabilities, payoffs, and asymmetry, we try to free our investment philosophy from dogma. For example, absolute statements such as 'We only look for high-quality businesses' or 'We would never invest in this industry or that country' have, in our view, more to do with marketing considerations of an investment business than with sound investment principles.

In short, our investment philosophy is that allocating capital is a form of self-expression around the concept of intrinsic value. Value Ideas in Action represents our best effort at this self-expression.

Investment Universe

Our investment universe are publicly-traded equities worldwide. We focus on long-only investment ideas that we think offer asymmetric payoffs with little risk of permanent capital loss.*

Following on from our investment philosophy, we are not dogmatic about company size, industry, country, exchange and similar classifications. On the other hand, we typically look for equities that have at least $100 million of market capitalization and that have listings on one of the major exchanges. What's important to us is that these are not hard rules and that we maintain an open mind about any opportunity that may arise, one company at a time.

While our single company investment ideas are nearly universally in the form of long-only equities, we may include other types of securities in our model portfolio. For example, we may include certain securities that aim to protect our long equity exposure. On balance, however, the performance of the model portfolio over the long term should largely depend on the performance of the long equity positions.

In terms of the sources of our investment ideas, we like to look for trouble and big dislocations. We find most fruitful those situations that exhibit disinterest, uncertainty or outright trouble – whether country, industry, or company-specific. These situations typically have few buyers and many sellers, including, on occasion, forced sellers. The resultant low prices are a good start for our research efforts.

Position-sizing decisions, in our view, are of critical importance to a sound investment process, perhaps especially so when investing in troubled situations. Whereas other investors may restrict their investment universe in search for certainty and liquidity, we remain open-minded  - as long as we are adequately compensated for such uncertainty and illiquidity.

Crucially, however, we think that opportunities that carry a considerable risk of permanent capital loss - but that exhibit a compelling probability-adjusted payoff profile - should not be avoided altogether. They just need to be sized smaller as a percentage of portfolio equity. A related point is that investments which end up losing money may still have been the right bets to make. However, this is true only if their position-sizing reflects the risk of permanent loss.

So, for our large equity positions (>10% at cost), our mantra is: look for trouble, invest in survivors (in terms of the business, balance sheet, governance). For our small equity positions (<5% at cost), our mantra is: look for trouble, invest in multi-baggers (high upside potential, but considerable risk of permanent capital loss). Ideally, of course, one could identify survivors with multi-bagger potential. Absent systemic crises such as 2008/09, however, we think these are extremely rare.

The inaugural model portfolio of Value Ideas in Action – launched on April 7, 2017 – has long investments in eleven equities, of which five have exchange listings in the US, three in the UK, two in Germany and one in Portugal. These equities have major underlying business exposures, among others, to the economies of the US, the UK, Germany, Portugal, Poland, Russia, India, Kazakhstan, Turkey and Brazil. In terms of market capitalization, six of the equities are in the $1-10 billion range, three are between $200 million and $1 billion and two are around $100 million. However, depending on share price movements and fundamental developments, our research focus and investments may change rather quickly.

*   Our portfolio, however, also includes smaller allocations to opportunities that carry a considerable risk of loss but that still exhibit a compelling probability-adjusted payoff profile.

What We Are Not About

We are not here to tell you which ideas to allocate your capital to. We are not constructing our model portfolio to suit your personal circumstances. We are not your investment advisor.

We are not promising returns or particular investment outcomes. We are not free of mistakes. In fact, we are certain that some of our investment ideas will not work out as planned and some may even see their share prices go to zero. Instead of increasing in value, our model portfolio may actually decline over time.

Our aim is simply to express our own investment approach as realistically as possible for educational purposes. We do so by using real-life investment examples and including these in a model portfolio whose performance can be tracked over time. However, our model portfolio is not a real money portfolio and it ignores important considerations, including but not limited to actual trade execution costs and taxes.

While we are free of institutional biases and do not manage other people's money, we suffer from our own biases. In fact, the work we do at Value Ideas in Action is simply an extension of the personal investing approach of Oliver Mihaljevic. We hope that our activity, however flawed in mimicking the allocation of real investment dollars, will be of value to investors.

We cannot guarantee results. However, over time, our goal is to compound the Value Ideas in Action portfolio from $1 million at an average 20%+ annual return (in US dollars), while minimizing the risk of permanent capital loss. In early 2017, with the US equity market at all time highs, we are mindful as ever that the first step to reaching our goal is not to lose money.

Oh, and did we mention that we are not fans of popular stocks? We do not spend our research efforts on companies whose market values are at record highs. Instead, we like situations that others are passively shunning or actively running away from. For example, our personal investing efforts in 2015/16 have led us to pariah markets such as Russia (Sberbank, Etalon), crisis industries such as mining (Anglo American, Lonmin), and company-specific troubles such as Volkswagen (Vz. shares).

We aim to identify similar opportunities in the future and size them appropriately in our model portfolio. We are not sure how right we will be with our investment ideas. But one thing we are certain of: we will be different!