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3i Launches "Activist Investment" Team

James Quinn writes in the Daily Telegraph:

British private equity house 3i has hired Bruce Carnegie-Brown to lead its new push into activist investing in large quoted companies.

Mr Carnegie-Brown is to head a new team which will focus on taking stakes in companies where it is not appropriate to launch a full-cash offer.

His appointment is something of a coup for 3i chief executive Philip Yea, as this is the first role Mr Carnegie-Brown has taken since standing down as the chief executive of insurance broker Marsh earlier in the year.

3i's initial push will be in consumer and industrial firms with market caps of more than US$1 billion. And Yea says 3i is seeking "private equity-style" returns:

"There are some opportunities where the all-cash offer may not be delivering for other people, where a different approach might work," Mr Yea said. "We see this as a medium-term value creation journey, it's not a trading position."

Financing for the team will initially come from 3i's own balance sheet, although it is thought possible that a specific activist fund could be raised in the medium term dependent on the team's success.

Brandes and Value

This piece on visiting with the Brandes firm in California is authored by Bob Thompson, an investment advisor and strategist with Canaccord Capital in British Columbia. It's more about value investing than Brandes, but seems like an interesting article anyway.

One thing I like is that Thompson's piece reminds us that investing is as much art as science. I've read where Peter Cundill has said the same thing. And ties into Walter Schloss saying you never really know a stock until you own it.

Anyway, back to Thompson's article on value investing:

There are two keys to doing it well. First, an intrinsic value has to be determined for the company, based on the attributes of the business, independent of the stock price.

Once this is determined, this value can be compared against the stock price to see if there is a Margin of Safety (MOS). In other words, can the stock be purchased for 30 per cent, 40 per cent, or 50 per cent below its true value?

It is more difficult than it seems because first it takes a lot of skill to come up with an intrinsic value for the stock, especially when it may be different from the view others come up with.

Second, and the reason that value investing works, is that investor emotions get in the way of people making logical investment decisions. As Ed Blodgett of Brandes said “People are inherently wired up improperly to make money in the market.”

He referred to the fact that people have a fight or flight response that allows us to run when faced with danger. In other words, when we see a bear in the woods, we run or try to get away.

Rising Demand, Fewer Assets

You've read me say it seems like stock market bargains are anything but plentiful. I'm still mostly invested and hardly sitting in cash. But I'd like to buy a few more things and haven't found anything to pounce on.

I've got a list of candidates. Yet they've almost all had price increases by the time I learn of them.

David Rosenberg is prominently mentioned in this Globe and Mail piece. His comments focus more broadly than just stocks:

David Rosenberg, chief North American economist at Merrill Lynch & Co. Inc. in New York, argues that supplies of "financial assets" -- stocks, bonds and other securities -- have been shrinking, while demand for them has been growing. This tightness helps explain why stocks and bonds have maintained historically high prices despite the fact that "real assets" -- primarily real estate and commodities, which typically move inversely to financial assets -- have also hit unprecedented peaks.

"Whether it be REITs, corporate bonds, high-yield emerging markets -- everything is hitting either new cycle highs or multiyear highs in terms of price," Mr. Rosenberg wrote in a report. "What we know from our Economics 101 is that the price of everything is determined by the interaction of two curves: supply and demand. In the case of financial assets, the demand may well be fuelled by rampant global liquidity. . . . At the same time, the supply growth of financial assets . . . has either been stagnating or declining outright."

Further down the article:

"If you're a classic value investor, you're just standing on the sidelines scratching your head," he said in an interview yesterday. "There's nothing out there that's undervalued.

"You just have a lot of money chasing slowing growth in assets."

I wonder if Meryl Witmer's remarks during the Barron's conference in October will prove true. Recall she said that her firm, Eagle Capital Partners, was 50% cash, which is about the most they ever carry. She also said whenever their cash level has gotten that high in the past, something happened to bring the market down in the following six months to a year.

Witmer looks at things from the bottom-up perspective, while Rosenberg may be taking a more top-down view. I'm not a big picture guy myself. Others do it wonderfully well. It's just not my area of competence.

It is safe to say that stocks aren't dirt cheap.

Schloss Archives for Value Investing

By way of Value Investing News, I see that the Walter Schloss archives are housed at the Heilbrunn Center for Graham & Dodd Investing at Columbia Business School.

Some of the archives aren't available to the general public, but plenty of good stuff is available online for anyone for free. I particularly enjoyed an interview with Walter Schloss and his son (and managing partner) Edwin from April 2003, when they were winding up the Schloss partnership.

I've been a huge admirer of Walter Schloss ever since I first read Warren Buffett's "Superinvestors of Graham-and-Doddsville" in the mid-1980s. But the man has never been what you'd call a publicity hound, and articles on him don't appear frequently, to put it mildly. (Even though I posted about him earlier this month.) I'm sure that will be even more the case since he's closed shop on his partnership.

ArmorGroup in Nigeria's Oil Delta

You know I think portfolio holding ArmorGroup International (ARG/LN or AMGPF/OTC) may turn out to be a good way of playing any long-term commodities boom.

That's because much of the exploration for these much-needed products takes place in dangerous parts of the globe. Places that need security services such as those provided by firms like ArmorGroup.

Such as Nigeria, as you'll see in this Associated Press report via Forbes:

The drama of foreign oil workers kidnapped for ransom in restive southern Nigeria plays out so often that it seems the hostage takers, the oil giants and the army follow a script - one that usually ends peacefully with the captives released unharmed.

But not always, and the death Wednesday of a British oil worker during a hostage rescue attempt in the Niger Delta made clear that doing business in Africa's oil leviathan is deadly serious. Analysts said Thursday the risks are set to increase as the West African nation prepares for an OPEC conference next month and nationwide elections in April.

Then this quote from ArmorGroup's manager in the country:

"There has been a big increase in the number of hostage-related incidents this year ... and a buildup of tension ahead of the elections. No doubt we'll see that continue," said Peter Sharwood-Smith, the country operations manager for ArmorGroup, a private security consultancy with many clients in the oil industry. "Various different movements that are present in the delta will want to get their point across before the elections and influence the result."

It's a tough business. And the stock is definitely unloved by investors right now. But ArmorGroup's shares remain undeniably cheap for those who understand the risks of owning the company. And they yield 5%, for those willing to be patient.

With GM a Cost-Cutting Story, Will Kerkorian Cut and Run?

Bill Smith of SAM Advisors says something I agree with in this Wall Street Journal report:

Mr. Kerkorian in the past has sold GM shares only to turn around and repurchase the same amount. He made such a move last January, when he bought back 12 million shares he sold in December. Less than two weeks after disclosing that move, Mr. York was awarded a seat on GM's board.

However, Bill Smith, president of SAM Advisors in New York, said it's more likely now that Mr. Kerkorian plans to continue selling. GM's turnaround "is still a cost-cutting story, and [Mr. Kerkorian] doesn't want it to be," said Mr. Smith, who owns GM shares.

My hunch is that Kerkorian is in the process of unloading his General Motors (GM/NYSE) position. It's just that -- a hunch -- and nothing more. But I'm thinking he probably hasn't been able to get the company's other major shareholders to join his crusade.

Remember, the top five or six GM shareholders controlled the majority of the stock as of a few months ago.

So even if he couldn't sway the Board of Directors, he could still wreck havoc on GM management during any proxy fight. IF he had the votes. It's looking like he doesn't.

But my investment in GM isn't based on Kerkorian being bullish or bearish on the company. Long time Controlled Greed.com readers know I bought the stock BEFORE Kerkorian came on the scene. And I'm prepared to continue holding should he leave it.

One thing in the linked WSJ report that popped out at me is this:

Tracinda disclosed the GM share sale in a filing with the Securities and Exchange Commission. The firm said it agreed on Monday to sell 14 million shares in a private transaction for $33 a share, and that the purchase will be settled today. It was unclear who bought the shares.

I wouldn't mind knowing who bought that block of stock.

Happy Thanksgiving

Here's wishing all of you in the US a Happy Thanksgiving on Thursday. I'm staying in town as usual. To all of you traveling, stay safe and hopefully the roads and airports won't be too hectic. It's a great time to be with friends and family. So take your time and make sure you get to where you're going -- and back home again.

To our friends in Canada, I extend my belated good wishes for a Happy Thanksgiving, which you celebrated in October. And for readers everywhere, stay tuned and lets continue the hunt for value after I have the chance to recover from eating way too much turkey and stuffing and mashed potatoes and Yorkshire pudding and, well, you get the idea. ;-)

Google Topping $500

When I came across this Ticker Sense post on Google topping $500 a share, I thought about a couple of things.

First, my memory is that everyone was going ga-ga over Google about the time I launched Controlled Greed.com in April 2005. My first stock pick on this blog was General Motors (GM/NYSE). And, let me tell you, if you wanted to start a blog at that time with hopes of building a large readership fast, you couldn't kill your chances any quicker than by recommending the Detroit dinosaur that many forecasted was headed for extinction.

Especially when Google's stock price was growing by leaps and bounds by the day, if not by the hour.

Now, I'm not saying my investment in GM has or hasn't performed better than Google. I don't know. And I don't really care.

The fact is, I'm constitutionally incapable of buying the Googles of the world. Even when traders I'm familiar with say "it's like shooting fish in a barrel." God bless 'em and I hope they make a mint. It's just not my game.

But GM was and is. Yes, it could still be a loser. Heck, it could still go bankrupt -- if the UAW decideds to commit suicide. I don't think that's going to happen. And I'm content to maintain my position because I think this baby still has room on the upside.

The second thing that came to mind reading about Google topping $500 was this. You see, the Ticker Sense post listed all the companies with a smaller market cap than Google. Look and you'll see some impressive names.

So I remembered reading an interview with the guys at Tweedy Browne. Gosh, it must have been about 1991. At the time, Wal-Mart was all the rage on Wall Street. And the Tweedy Browne folks played a game in their office called something like, "What can I buy for my Wal-Mart?"

They took Wal-Mart's market cap and listed all the world-class companies you could buy for that amount. I wish I'd clipped the article, because it'd be fun to look at again.

Today, many view Wal-Mart as a value stock. I wonder if investors will say the same about Google in 15 years time?

Michael Decter: "Homespun Value Investor"

Andrew Allentuck of the Globe and Mail profiles Michael Decter, manager of several Canadian mutual funds:

His Redwood Diversified Income Fund posted a 21.3-per-cent return for the 12 months ended Oct. 31, about double the 11.2-per-cent average of Canadian income balanced funds. His Redwood Diversified Equity Fund did a bit better with a 23.6-per-cent return, more than double the 10.1-per-cent average return of Canadian balanced funds.

Mr. Decter tends to hold 80 per cent in equities and 20 per cent in fixed income in his balanced funds. He not only holds long positions in anticipation of share price increases, but also does a modest amount of short selling when he thinks selected stocks are due for a fall. The combination of short sales and a higher stock-to-bond ratio than the 60/40 mix usually held by balanced funds explains part of the superior performance of the funds.

By George! The Festival of Stocks is being hosted by Fat Pitch Financials

George over at Fat Pitch is hosting this week's Festival of Stocks. My contribution is my post from a week ago discussing the amount of cash being held by several value investors.

You'll also find lots of good stuff by a wide variety of blogs, so be sure to stop by Fat Pitch Financials and check out the action.