I had the honor to meet one of the greatest investors of all time, Jean-Marie Eveillard (Trades, Portfolio), on the day that the winter storm hit New York City. The weather was inclement, but Mr. Eveillard offered the warmest welcome to a young value investor he barely knew. In a conversation that lasted a more than an hour, I learned why he is such an incredible investor as well as a remarkable human being.
We started our conversation with a discussion on value investing. Mr.Eveillard reiterated that value investing either clicks with your or not and perhaps only less than 10% of the market participants are genuine value investors.The important thing to remember is that value investing works, over the long run. He gave us an example of a Japanese stock that was flat for 4 years before tripling in price. Non-value investors may say too bad it was flat for four years before it worked out. Genuine value investors would say if you think the stock will worth three times 5 years from now, it does not matter whether it triples during the last year or progressively throughout the 5 year period. This way of thinking can not be taught.
Genuine value investors can also tolerate short term under-performance in order to achieve better long term results. Mr.Eveillard cited the example of the First Eagle Fund he used to manage to illustrate this point. During the tech bubble, his fund lagged badly for 3 years in a row and the the fund’s AUM went from $6 billion to $2.5 billion by early 2000. He did what was right for the shareholders and eventually he was proven right. He admitted that it was an extremely difficult time because there were times he thought he was guilty of not understanding the internet companies and how to value them.
We then moved on to the topic of short term nature of the sell-side research, which is often targeted to the 90% non-value investor clients. Value investors often find sell-side research ludicrous but we have to understand that they have to conduct the business that way because the dominating majority of their clients share the short-term bias.
When asked about how he spend his day, Mr. Eveillard said that he spent half of his day just reading books. No surprise here as this is how Warren Buffett (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) spend their days. Mr. Eveillard recalled that Buffett mentioned many years ago that he is a voracious reader and reading voraciously is an advantage developed in the long run. You may not be able to reap the benefits of reading in the beginning but over time you will feel the benefit. A glance at his desk reinforced his point. Newspapers, magazines, books, annual reports, and industry reports took more than half of the space of his desk. Everything is printed out. Nothing digital.
He spent the other half of his day talking to First Eagle’s analysts. The analysts have three duties: keeping track of the current holdings; researching potential ideas from portfolio managers; researching their own ideas. Mr. Eveillard respects his analysts’ ideas and he would gave them the green light to research their ideas most of the time. He said some of the analysts have the preference to analyze complicated ideas and he told them there is nothing wrong to analyze simple ideas. In fact, Buffett’s best ideas were all simple ideas. But again, it is probably human nature to think that you are more likely to gain an edge in complicated situations.
Mr. Eveillard further pointed out that he told his students in Columbia’s value investing program that you don’t have to know everything about a business when making an investment decision. Instead, he instructed the students to figure out the five or six major advantages and disadvantages about the business and ignore the trivial. An inevitable risk with this approach involves missing a key advantage or disadvantage. However, if you get most of them right, the results will likely to be fine. Most of the students found it hard to believe because they think the more they know about the business, the better they can value the business. His experiences have proved otherwise.
Moving on to the topic of the Graham approach and the Buffett approach, Mr. Eveillard opined that Graham’s approach takes less time and involves less judgment, but at the same time less profitable than Buffett’s approach. Buffett’a approach takes much more time and involves more judgment on the qualitative side. However, the biggest advantage of Buffett’s approach is the upside potential created by a marvelous business’s ability to compound returns indefinitely. The best ideas tend to be a Buffett’s business trading at Graham’s price.
We ended our meeting with a discussion of smartphones and tablets. Mr. Eveillard said he never used them. In fact, he does not even have a cell phone, not to mention an email address.
As I walked out of his room, I wondered whether I should switch from my iPhone to a non-smartphone.
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