Street Capitalist: Event Driven Value Investments

A few hours ago, Zhao Danyang won the Glide Foundation’s auction for lunch with Warren Buffett. The lunch auction is always an interesting thing to watch because of the eclectic groups of people who bid. The 2007 lunch, which actually took place a couple days ago, was won by value investors Mohnish Pabrai (Pabrai Funds) and Guy Spier (Aquamarine Capital Management). Here is what Mohnish Pabrai had to say about his lunch:

Becky Quick:

$650,100 is what you two paid to have a 2-1/2 hour lunch with Mr. Buffett. Was it worth it?

Mohnish Pabrai: Every penny. I think we would have been willing to pay a lot more than that. Well worth it. We were here with our families and it was just fantastic.

Lunch With Warren Buffett “Worth Every Penny” at $650,100 (CNBC)

It looks like Pabrai was not the only person who seemed to think a lunch with Buffett would be worth in excess of the $650,000, since Zhao Danyang bid a record $2.11 million. So far the news on him is a little sparse, but from what I’ve been able to dig up, he sounds like a very value oriented investor from China.

According to Terrapin he began his investing career in 1996 and took the lead in promoting the philosophy of “selecting security investment from the view of an industrial investor.” To shed some more light on this philosophy I took a look at the website of his fund, the Pureheart China Growth Investment Fund:

We do not follow stock index and price-volume analysis. We rarely use individual stock charts as the basis for investment decisions. We only partly agree to fundamental analysis. By taking a long-term view, we believe that the share price of a (well managed) enterprise will undoubtedly reflect its intrinsic value over time. Our selection criteria are quite simple. We seek enterprises that can survive. These enterprises have been established usually for a decade or more and have relatively high success track records. We strongly believe that if we own part or most shares of these enterprises, our investment will grow and breed success together with the companies.

The themes described here are very inline with some of the ideas preached by Warren Buffett and Charlie Munger. Rather than simply looking for cheap companies, the fund seems very oriented towards investing in industry leaders and businesses with wide moats to give them long term competitive advantages.

The fund also aggressively utilizes a margin of safety:

Based on quantitative benchmarks, we input data into our evaluation model to calculate its intrinsic value. The market price is then compared with the intrinsic value of the companies. If the market price is traded below to the fair intrinsic values—that is half of the value or even lower—only with sufficient safety margins would we consider taking a position. We continue to monitor all businesses conditions faced by the business and adjust the parameters every quarter according to the real market environment.

We do not invest rashly. We value patience and aim for an ideal price. We would rather lose the opportunity rather than take on un-necessary risks. In the capital market, we believe that survival should always be the first consideration. Controlling risk is the key to smart investing.

This means that Zhao holds the preservation of capital at the utmost importance and I think it’s nicely reflected in this Asia Times article that discusses the liquidation of his funds.

“We would rather miss an opportunity than blindly take a reckless move under whatever [market] circumstances,” Zhao wrote in a letter to his clients before the liquidation. “To survive in each investment decision is always our priority.”

“So far, the A-share and H-share markets are beyond our understanding.” Zhao wrote in his letter, with H-shares referring to Hong Kong-listed mainland-related stocks. “The bottom and peak of the indexes are always a riddle. Now, we can’t find any proper investment targets which meet our investment criteria and have enough margin of safety as well.”

It takes a lot of courage to liquidate funds during a bull market period (the funds were liquidated on January 2, 2008). Not only do you struggle with having to dissent and break from the herd, but you also have to cope with operating in an environment with few investment opportunities while being responsible for the capital of others. The fact that Zhao did not compromise with his investing philosophy tells us a lot about his character as a fund manager and makes him someone we should keep on our radar screens.