Street Capitalist: Event Driven Value Investments

One of the issues with Street Capitalist is that I don’t think take the time to really introduce new readers to value investing. This can be problematic with someone who is just learning about all of this and feels daunted by the task of somehow soaking it all up. I plan on doing some how-to’s in the future to help with this. For now though, I want to show you some investment cartoons I found from at Mirae Asset Financial Group.

Mirae is run by an investor named Park Hyeon Joo of Korea. I’m always fascinated at finding and learning about value investors who operate in different parts of the world - especially in Asia. Asia in particular is an interesting place for value or even long term investors. Mainly because the region as a whole has a reputation for overwhelmingly favoring short-term investing.

Here’s an excerpt from a Bloomberg article on Park:

The new firm caused a small stir in the business press because its offices didn’t include the wall-sized electronic stock ticker that graces most Korean brokerage offices. In his book, Park says his message to customers was: “Don’t sit around staring at the wall. Let professionals do your investing.” He reeled in clients by lowering the standard fee for stock purchases to 0.029 percent from 1 percent.

In a similar symbolic gesture, Park placed a clock with no hands at the entrance to Mirae Group’s Seoul headquarters — to signify to clients the importance of long-term investment.

Korea’s No. 1 Money Manager Says Genghis Khan Model for Funds (Bloomberg)

The Power of Inactivity

I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.
- Warren Buffett

Circle of Competence

We don’t handle high-tech business because we have no talent in that area.
- Charlie Munger
There are all kinds of businesses that Charlie and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do.
- Warren Buffett

Contrarianism

Invest at the point of maximum pessimism.
-John Templeton

We invest in stocks because stocks are plunging. Since we can buy stocks at a low rate in a bull market, I am nervous in a bull market. When stock market plunges, I’m happy. Crisis is a good opportunity. I know that more opportunities happen when business is dull and disaster & revolution break out.
-Mark Mobius

The quotes may not be anything new, but it’s nice to see the visual representations of these concepts, even in cartoons. They give you a simple way of conveying some often complex and hard to understand concepts and they’re pretty fun.

Here’s an excerpt from an interview with Nassim Taleb at Portfolio:

N.N.T.: A burning building is going to be a lot more anecdotal than a statement about what happened—and a statement about what happened is going to be a lot more anecdotal than statistics of what happens in the world to put it in context. To give you an idea, I go to Beirut all the time. If I watched television, I couldn’t—it would sort of convince me to not go. The risk of death is nothing, right? I mean, it’s minor compared to the risk of being killed in a car accident, you see?

L.G.: So statistically it’s more likely to have a car accident and injure yourself in a Westchester bedroom community than in—

N.N.T.: Than in Lebanon. Iraq is the only place where you’re vastly much more likely to get hurt or killed, but if you count how many people die every year in the States by car versus how many people die violent deaths in Lebanon, it’s minor.

World According to … Nassim Nicholas Taleb (Portfolio)

Taleb’s contrasting of anecdotal information versus factual information is important for investors. The news, especially on TV seems to have a habit of creating manias and panics. Just a week ago I witnessed this when my local news in Houston reported about “Hurricane” Edouard ,which turned out to be just a tropical storm. Instead of giving us credible information to make informed decisions (like the fact that most refineries in the Gulf of Mexico did not shut down) they bombarded us with footage from past hurricanes and gave out emergency precaution information.

Similarly, financial news outlets do the same thing. The minute-by-minute reporting of how the market moves only creates noise and clouds the judgement of investors. I don’t know if you have to turn off the news and stop reading newspapers like Taleb does, but you should know how to tune out and exploit it. The retail sector is a good example of this because they have to report same store sales on a monthly basis. The monthly reporting adds more noise to the market and makes retail more volatile than most. If you let the noise get to you, you’ll sell your positions out of fear because of the wide swings in a stock’s price that with missing one month’s same store sales estimates. But if you understand that the noise is often without merit, you’ll find that there are attractive buying opportunities created by these irrational movements.

In an ideal world, managers at corporations would listen to the ideas that shareholders bring to them. After all, the shareholders are the true owners of a company. Usually though, egos start to fly and things don’t work out that way. When that happens, shareholders often utilize proxy contests in order to replace members of the board of directors and make their voices heard. The problem is that these proxy fights are messy and expensive. You have to obtain extensive legal council and take on the costs of actually mounting a campaign to distribute ballots and get votes yourself. For smaller investment funds the fight just might not be worth it.

The reason I bring this up is that there seems to be a little controversy regarding Sardar Biglari’s reimbursement of $500,000 from Steak N Shake (NYSE: SNS) while also serving as CEO of Steak N Shake (and taking a salary).

In connection with his appointment as Chief Executive Officer of the Company, Mr. Biglari’s annual salary was increased to $280,000. There is no other plan, contract or arrangement to which Mr. Biglari is a party or in which he participates that was or will be entered into, or any material amendment to such a plan, contract or arrangement, in connection with Mr. Biglari’s appointment as Chief Executive Officer. Mr. Biglari does not receive board fees or any other compensation.

On August 6, 2008, the Company’s Board of Directors agreed to reimburse Western Sizzlin and the Lion Fund for expenses related to this year’s proxy contest in the amount of $500,000. Mr. Biglari serves as the Chairman and Chief Executive Officer of both Western Sizzlin and the Lion Fund. This expense reimbursement is being disclosed pursuant to Item 404(a) of Regulation S-K.

Form 8-K for STEAK & SHAKE CO (Yahoo!)

While this looks sketchy, it’s not. Back in January, Biglari publicly disclosed that he would be seeking reimbursement for expenses incurred by having to wage a proxy contest with Steak N Shake. He says here:

The expense of soliciting proxies is being shared pro rata by the Lion Fund, Western Sizzlin and Western Acquisitions based on their pro rata share of the aggregate number of Shares held by all members of the Committee. Costs of this solicitation of proxies are currently estimated to be approximately $[________]. The Committee estimates that through the date hereof, its expenses in connection with this solicitation are approximately $[________]. We intend to seek reimbursement from the Company of all expenses we incur in connection with the solicitation of proxies for the election of the Nominees to the Board at the Annual Meeting. We do not intend to submit the question of such reimbursement to a vote of security holders of the Company.

Preliminary proxy statements, contested solicitations (Steak N Shake)

Had Biglari pulled the reimbursement out of a hat, as a shareholder I’d be angered. But he didn’t. When he began his proxy contest with the company he publicly disclosed that he would seek reimbursement. If shareholders had disagreed with this, they could have voted in favor of company management.

In general, I like to see these reimbursement policies in play. They are enablers for shareholder activism which means that even in the micro-cap/small-cap area, we can see corporate management held accountable to their shareholders.

A great graphic that shows us the change in the number of credit cards worldwide:

via Outside U.S., Credit Cards Tighten Grip (NYTimes)

I have to wonder what the long term effects of credit cards will be in some of these BRIC/Emerging markets. On one hand, the increased access to credit will somewhat help certain individuals within an economy. It’s possible that you could see pockets of increased consumer spending. At the same time, like the article discusses - certain card holders could accumulate too much debt which could lead to protectionist measures by local governments.

The other problem that I see is that many of the countries reporting large changes in credit card numbers are ones with economies tied to the bull market in commodities. If that turns south you should expect credit card usage to go down as well.

Either way, it’s something worth taking a look at when trying to find positive tailwinds for your investments abroad.