DOWN MARKETS NOTHING TO FEAR: VALUE INVESTOR
When you’ve been in the game as long as Charles Brandes has, investors pay close attention to what you have to say. Brandes sat down with Financial Post investing reporter Jonathan Ratner during a recent visit to Toronto.
Q What’s your investing philosophy and where did it come from?
A I registered as a stockbroker in 1968, and started the firm in 1974, after meeting the dean of Wall Street securities analysts and the father of value investing, Benjamin Graham. He was also the teacher of the best investor of all time, Warren Buffett.
I got to talk about investing with him in the early part of my career. There were some very bad stock markets during that time — 1970 was a very bad one — and I decided his philosophy of value was exactly the way to invest. The long-term record, even in the early 1970s, was superior.
It was basic, fundamental, longterm, conservative investing, rather than all the stuff that Wall Street and Bay Street comes up with — that short-term thinking. With a Graham-Dodd value philosophy, down markets are an opportunity for good long-term investing.
Q What are some of the key take-aways from your approach?
A Famous value investor John Templeton said the time to invest is when there is blood in the streets. In 1974, there was blood in the streets. We’ve been doing the same thing ever since — buying companies at a discount when you look at the company’s long-term intrinsic value, the value of their assets, their cash flow, the potential stability, and the potential growth.
You don’t buy companies as growth investors do, expecting the future to be fantastic and paying up for it, based on a forecast of exactly what’s going to happen with technology or something else. Value investors don’t believe in that.
Q Value has underperformed growth for a longer stretch than is normal. Are things going to change?
A Value is out of favour and had been underperforming for the longest period in my 47-year career. I do see some signs of that shifting, but I don’t know when it will. It is overdue to happen.
There are very few, true Graham and Dodd value investors. We don’t have that much competition anymore because everyone is switching. So the opportunity for value investing right now is one of the best I’ve ever seen, except at the bottom of bear markets, where the opportunities are just fantastic.
Q Where do you see good opportunities these days?
A We’re finding a lot of good values when we look outside of North America. One area that is still very attractive is emerging markets. It had been unbelievably attractive at the beginning of this year, and our emerging market portfolio is up 27.5 per cent in 2016.
It is still attractive because emerging markets got so cheap that they are still the cheapest markets in the world from the standpoint of book value. Our emerging markets portfolio trades at 80 per cent of its book value, and it trades at about 9x earnings, 4x cash flow, and pays a dividend of 3.1 per cent.
Q What emerging markets do you prefer?
A We had been over allocated to Brazil, which is up 70 per cent this year. Everyone hated Brazil, it was blood in the streets, so we decided it was the time, and there are some really great companies there.
South Korea and some of the companies there are excellent and very cheap, and on a limited basis, there are some very good companies that are extremely cheap in Russia.
… When we do things like this, we make sure our portfolio is adequately diversified, and we don’t have a lot of risk based on one country or industry.
Q What type of attributes do you look for?
A Basic fundamental attributes change quite a bit depending on the industry. However, we’re looking for low price to earnings ratios, low price to book values, low price to cash flow, and balance sheets that will be OK if something difficult happens in the future — not too much debt. The more stable the industry, the more we will pay for it.
Q Are there areas in North America you do like?
A We’re finding very limited opportunity in Canada and the U.S. as value investors. The U.S. markets are quite high, and Canada is pretty much the same, except for some special areas in North America. In the U.S., we’re in the banks, and oil and gas.
U.S. banks are quite cheap because of all their regulatory problems and the need to really increase capital.
Q Are there still opportunities in oil and gas?
A We don’t really attempt to forecast the price of oil, because anyone who tries is wrong more than 50 per cent of the time, and they should be right at least half the time. We find that a very hazardous thing to do.
In our analysis of oil and gas, we have to make a few basic assumptions about where the normalized price of oil might end up. That depends on the supply and demand figures, the level of the U.S. dollar, and production. Our assumption is around US$55 per barrel.
We don’t think fossil fuels are going away within the next 10 or 20 years. Eventually they probably will, but we think we have a long-term for oil.
We want to buy energy stocks when they are very cheap, so we own the big Italian integrated oil company, Eni SpA (ENI/BIT). It is trading at about 6x earnings and about 80 per cent of its book value.