Jonathan Boyar, part of the Boyar Value Group, will speak at the 2017 GuruFocus Value Conference. Get registered for the event here.
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This interview originally appeared in Welling on Wall Street (all rights reserved). To learn more about Welling on Wall Street please visit www.wellingonwallst.com.
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Uncertainty. It’s hard to remember already, but that was the dominant trope in the market even before Tuesday’s election upended much of what the chat-tering class (manifestly including me) thought they knew about this fair land’s economic and political outlook.
Which is why I was drawn to interviewing this week’s dynamic duo, the father-son team of Mark and Jonathan Boyar at their eponymous Boyar Value Group. Just a month or so ago, they issued a thought-provoking piece of in-depth investment research, modestly entitled, “Boyar’s Guide to Profiting From Uncertainty.”
Mark, is an iconoclastic value investor of the old school whom I have known, well, forever. Incredibly precise, detailed and thoughtful in his research, he’s stubborn enough to hold onto his painstakingly vet-ted ideas until they bear fruit. Mark has been a securities analyst since 1968 and has been actively managing money since 1975 — accumulating reams and reams of clippings of interviews in Barron’s and all the rest of the financial media-sphere over the years. Not to mention a money man-agement record that has created great loyalty among his clients.
Jonathan, trained as a lawyer but a finance afi-cionado at heart, I only met recently. But he’s been working in the family firm since 2008 — after some early tutelage under Mario Gabelli (Trades, Portfolio) — and seems as much a born value guy as his old man.
The two are convinced they’ve found an enduring edge in scooping up quality assets when they are temporari-ly tossed on the bargain counter by the ebb and flow outrageous fortune. Since we’ve seen a lot of that lately, seems a good idea to listen in. — KMW
I have to say I felt like I was in a time warp as I read Boyar Research’s “Guide to Profiting from Uncertainty.” A tightly argued investment thesis accom-panied with detailed fundamental analysis of a number of stocks is a real throwback.
JONATHAN BOYAR: Yes, it seems that we’re a dying breed, but all this passive investing, I suspect, will eventually give us an opportunity to actually take advantage of the forgotten skill set that is fundamental value analysis.
I know from days gone by that your dad’s skill at spot-ting fundamentally undervalued value stocks established his reputation in the business, but bring me up to date — what exactly is the Boyar Value Group doing these days?
JONATHAN: Right, the Boyar Research part of the firm was started in 1975 — we think we’re the oldest continuously published institutional research service on Wall Street. We have a terrif-ic client base that reads us — from hedge funds to mutual funds to fami-ly offices. Anyone who can afford to be patient and has a value focus. Our research business has undergone significant growth over the last couple of years, really just due to basic marketing. We have a terrific team of four full-time analysts. We tell them they’re paid to read and come up with ideas and they haven’t disappointed thus far. We are agnostic to market cap, we’re agnostic to industry and we write reports on any of them.
Agnostic to market cap? Your institution-al clients don’t pay you for ideas about companies too small for them to invest in, do they?
JONATHAN: No, but because we have been finding such terrific values in micro cap land, we started publishing a separate service in 2010 just dedicated to micro caps. While we recognized that our larg-er clients obviously couldn’t buy a $500 million com-pany in any sort of meaningful way, other investors have more flexibility, so it’s a viable niche.
Then the second part of our business is Boyar Asset Management, which my father started in 1983. We have roughly $200 million in separatelymanaged accounts as well as a small limited partnership and a mutu-al fund, Boyar Value Fund (BOYAX, Financial), that’s been around since 1998. But the majority of our business is in bread and butter separately man-aged accounts, either from high net worth individuals, family offices or some institu-tional accounts.
It’s a constantly repeated truism that the markets hate uncertainty — probably because we’re awash in it — so what advantage do you see in stak-ing the contrary claim and trying to profit from it?
JONATHAN: There’s no doubt that we’re sur-rounded by uncertainty, and not just in the polit-ical arena. The financial markets have been send-ing out lots of conflicting signals, with domestic equity markets bouncing around highs but with few signs of the euphoria among retail investors that often marks tops. The international arena is tenuous, pretty much wher-ever you look. There’s no escaping that uncertainty is just part of the human condition — but we think top-down uncertainty results inevitably in attractive investment opportunities — because pockets of the market where controversies hold sway are fertile hunting grounds for undervalued equities.
Why do you think that is?
JONATHAN: I think the best place to look for that answer is in behavioral finance and the working of the human brain. Actually, the truism you cited, about the market hating uncertainty more than any known negative, is all one really has to know to understand why value investing works. Where uncertainty is present, there will be fewer analysts doing deep fundamental research, resulting in pricing inefficiencies.
Okay. But that’s old news. Why hasn’t that opportunity been arbitraged away?
JONATHAN: Good ques-tion. After all, when Joel Greenblatt (Trades, Portfolio) published,
“You Can Be A Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits” in 1999, he was pretty much single-handedly responsible for a noticeable shrinkage in bargains available in spinoffs. As his book became required reading in the Street, mar-gins of safety in spinoffs narrowed markedly. The thing is, we don’t think talking about uncertainty creating valuation discrepancies can spoil the advantage of value investing because of something fundamental in the way the human brain is wired.
Go on —
JONATHAN: Basically, neuroscience has found that the brain is like a pattern-recognition machine that is constantly trying to predict the near future; it craves certainty so that it can make predictions while conserving energy. If it can’t make predic-tions, the brain has to use dramatically more resources involving the more energy-intensive pre-frontal cortex, and even a small amount of uncer-tainty generates an “error” in the orbital frontal cortex. This is sort of like having a flashing printer icon on your desktop when paper is jammed — the flashing can’t be ignored and until it is resolved, it’s hard to focus on other things. By contrast, any-thing that creates a sense of certainty in the brain is rewarding — it generates an increase in dopamine levels in the brain, which is a reward response.
And this has what to do with value invest-ing?
JONATHAN: Well, you know the Buffett line about “be fearful when others are greedy, be greedy when others are fearful?” Why is that so hard to do, if investors could follow Greenblatt’s advice to pay attention to spinoffs? It turns out that the brain craves certainty using similar circuits as when we crave food and other primary rewards. Information is rewarding and uncertainty about the future sets off a strong threat response, a type of pain to be avoided.
Which has led some to speculate that Buffett, among others, is a sociopath — or that his brain is wired differently.
JONATHAN: Yes, but our research leads us to think that Buffett’s brain isn’t wired differently — he simply uses it differently, creating an advantage for himself when others become paralyzed by uncer-tainty. What if he focuses instead on an empower-ing reward response? By finding wide moat busi-nesses whose stocks are on the bargain counter due to the uncertainty, he puts his mind in a pleasur-able state of certainty because he knows he has history and data on his side supporting the outper-formance of wide moat businesses through crises and beyond.
Actually, he said as much in Berkshire Hathaway’s 1994 shareholder letter, if I can find it here:
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen...Indeed, we have usually made our best purchase when apprehensions about some macro event were at a peak...If we can identify businesses similar to those we have pur-chased in the past, external surprises will have little effect on our long-term results.”
Still, it’s no mean feat to concentrate on long-term rewards, when all around you, Henny Penny is shouting that the sky is falling —
JONATHAN: Absolutely, the brain was wired for phys-ical survival, and we can’t change that. But astute investors need to be aware of that, and try to use their brains to their advantage. Since that’s not easy, however, we don’t expect a substantial portion of investors will ever adopt the change of focus that has allowed Warren Buffett (Trades, Portfolio) to become extraordinarily wealthy — and we expect uncertainty to continue to serve up wide moat businesses trading at substantial discounts to intrinsic value for us to invest in.
I should have asked earlier, when did you join the family business?
JONATHAN: My timing was terrific — in 2008. I had I started my career working for Mario Gabelli (Trades, Portfolio), which was a great learning experience. He’s one of the smartest guys you’ll ever meet. Seeing how he did things was definitely eye-opening. Their style is a little bit different than what we do, but there’s more than one way to skin a cat. But then, I made I guess my biggest professional mistake — I decided to become an attorney.
You didn’t like law school?
JONATHAN: Well, I graduated from Cardozo School of Law and went to work as a litigator for a while in a big firm, but found that I either didn’t like the pro-fession or didn’t like what I was doing. So I ended up working for my father — who had greatly discour-aged me from joining his firm. Against his better judgment, I guess, he let me do so, and here I am, almost eight years later.
Are you two still speaking?
JONATHAN: Still speaking. I think we’re having Thanksgiving together and do all sorts of family things. Family businesses have their own unique set of issues but it’s been great. We both love what we do and it’s a great way to make a living.
Come on. Practicing active money management — as value investors? Investment dollars are fleeing the space.
JONATHAN: Yes. Though we haven’t felt that trend on the money management side of our business yet.
Our client base has been with us for a really long time. Fortunately, my father has done well by them over the long run and they appreciate that. They see that things move in cycles.
I think what we do really resonates with individu-als because they can understand what we do. We want to buy something for less than it’s worth. I mean, anyone can understand that. And we love buying great consumer franchises, so when they see in their portfolio an Energizer or a Home Depot or a Madison Square Garden, or whatnot they get what we’re doing.
Passive investing certainly seems to be taking away share from active strategies like ours, among the younger generation. But I’m not sure how sustain-able that is. Just thinking in terms of our high net worth business, someone who has accumulated over a million dollars of investable net worth — I don’t think they want to settle for mediocrity.
That’s probably not how they’ve accumu-lated those assets —
JONATHAN: Yet that’s exactly what you’re doing — locking in mediocrity — by choosing index funds. And I think that they understand that. As you know, as value investors we don’t claim that timing is our forte. But, at some point, the downside of this passive investing fad and also the increasingly popular “safety strategies” or low volatility invest-ing, are going to come home to roost.
How so?
JONATHAN: In the report we sent you, we quote Jeffrey Gundlach of Doubleline Investments saying that low volatility stock funds are probably the most dangerous thing out there.” Gundlach is a very smart guy and he’s usually pretty good about seeing around corners. He talks about how danger-ous these low-volatility strategies are. As he said, “It’s when you think it’s safe and it starts going down that you get mass selling.” I completely agree with him because they’re being sold on the premise that they’re not going to go down. But if you look at them, what they’re putting in them are the things that worked for the last five years. I mean, I’m someone, and my father’s someone, who believes in mean reversion —
Indeed. You may not be old enough to remember portfolio insurance, but I know your dad does.
MARK: Yes, I also remember the Nifty Fifty and I remember that we were dinosaurs back in the days of the internet bubble. That was a rough period for us, I mean, we underperformed for about four years and I remember people coming to us and saying that we’re dinosaurs and that analyzing companies like we do was passć and was never ever going to come back.
Then in March of 2001, when the unwinding of the internet stocks began — and for the next three or four years — our performance was great relative to the market. Not only did we significantly outper-form for four years, but we wound up having very positive absolute performance over that span.
So I really believe, as Jon said, that the fads du jour — whether it’s ETFs or low-vol funds — will have their day and then something will happen that will cause them to self-destruct. So people will come back — perhaps not in droves as they once did — but they’ll come back to buying a great business at a significant discount to what it’s worth. That’s our mission at Boyar Asset Management, to buy those businesses at a signifi-cant discount and then to hold them for many years, letting the magic of compounding work while delaying taxation.
That sounds so simple, until you consider all the reasons why the market may be low-balling the price of a great business —
MARK: That’s what makes what we do a challenge. But that’s basically what we try to do; we try to find businesses that are selling well-below their intrin-sic value, or private market value. So we take the balance sheet and we tear it apart and we recon-struct it and we place our own values on the busi-ness. If the market isn’t currently reflecting the value we see in the company, our feeling is that either over time the market will come to accurately assess the value of the company, or — if not — somebody will come in and acquire it.
It’s interesting, about 40% of the businesses we’ve either invested in or written about have ultimately been acquired by a third party. Lightening struck again just a couple of weeks ago — when Time Warner (TWX) got the bid from AT&T (T). This is a stock we’ve held — I went back and looked — most of our position, we’d bought back in 2009, when it was selling for around $20 or $21 a share.
Because?
MARK: Warner is a stock I’ve been in and out of numerous times in my career, But in each instance, I held it for very long periods of time.
I remember, we owned Warner Communications before they bought Time. Then they bought Time and for three or four years the stock did absolutely nothing because people looked at it and said, “It’s a silly acquisition.” Then all of the sudden it had its run. That’s one of the things you have to get used to when you’re a value investor; there will be long periods of time when your stocks go down or they do nothing, and then they will have a run. I remember coming into the office in 2001, in January, and hearing the announcement that AOL and Time Warner were going to merge — and see-ing the stock take off on its last leg up.
Did you sell into the euphoria?
MARK: Not that we were smart, but it was a sub-stantial presence in the portfolios — the holding represented about 10% of the portfolio — so that day we sold half of the position. We didn’t sell the entire position, we only sold half of it, unfortunate-ly, because then the stock started going down and down and down —
But when you saw Time Warner at 20, amid the financial crisis, you knew it was as badly mispriced in one direction as it had been in the opposite direction in the AOL deal?
MARK: That’s the advantage we gain from years of doing the fundamental work on corporate valuations. One of the things that people miss out on when they are investing in ETFs or index funds — and one of the things that we like to look for — are stocks that we can hold for long periods of time. And I’m not talking about a year or five years, but 10 years or 15 years, so that compounding can work its magic, if you pick great businesses.
By contrast, if I look to buy all the stocks in the S&P 500, the probability is I don’t know a lot about most of those stocks. Certainly, the index funds don’t know anything about them because they have to buy these 500 stocks. Some are good companies and some are cheap, but some are expensive. And because so much money is gravi-tating to these index funds, there are a whole bunch of stocks within the index funds that have been pushed to over-valuations, simply by being bought as part of the index.
I don’t have to worry about that because what I’m doing is trying to find the cheapest of the cheap. I’m looking for good businesses that Mr. Market, for whatever reason, has abandoned. My feeling is that, over time, I’ll do well with this approach.
If you have preternatural patience —
MARK: Patience is probably one of the most important elements of stock market investing. First, you have to find the great business at a good price, then you have to have patience, the fortitude and the ability to withstand gyrations in the stock mar-ket. That element is critically important.
Looking at your quote machine every single day is hazardous to your portfolio’s health — and I do look at it every day. But fortunately I have the dis-cipline not to act upon what’s going on intraday or react to what’s going on day-to-day. Because by looking at that machine every single day — partic-ularly on days when the market goes down dramati-cally — you tempt yourself to sell, perhaps, when you shouldn’t be selling. And conversely, when one sees euphoria — you’re tempted to buy when you shouldn’t be buying.
The better thing to do is really to turn off CNBC, don’t look at the Bloomberg machine on a daily basis and to know full well that if you own a stock in a good business and you own it for a very, very long period of time, there are going to be years when that stock might decline in value by 50% or 60% or perhaps more. But over time, if you’ve done your valuation work properly, it will eventual-ly reach or come close to the intrinsic valuation that you’ve placed on the business.
How about an example?
MARK: I’ll give you two examples of stocks that have increased by 100% or more over a period of years. A friend of ours, Chris Mayer, who is the CIO of Bonner Private Portfolio, wrote a book called, “100 Baggers: Stocks That Return 100-to-1 rand How To Find Them” in which he agrees that if you pay too much attention to stock swings, in all likelihood you’ll be scared out of even the best stocks. Chris compiled a long list of examples. I’ll just give you one, which is Apple. (AAPL)
JONATHAN: It’s a 100-bagger.
MARK: But its ups and downs are incredible. From the time that Apple went public in 1980 through 2012, Apple was at a 225- bagger. So if you had invested $10,000, it would have turned into $2.25 million over that span. But you would have had to suffer through two 80% declines and several 40% retreats in stock, during that time, without selling, to do that. If you did, you made 225 times your money without having to pay any taxes. But if you sold into any of those drastic declines, you missed out on a spectacular opportunity. And that’s what’s so interesting about a value investor.
What do you mean?
MARK: A good value investor is going to find a great company, he’s going to hold it for a long peri-od of time, he’s not going to wind up panicking and selling at the worst moment. And there’s a high degree of probability that if the stock got cheap enough during his holding period he would add to his position. At some point it’s likely to become one of these outsized holdings that really make him a great deal of money — not only on a percentage increase but on a dollar basis.
In fact, most accounts that have been with our firm through an investment cycle find that a good por-tion of their portfolio is represented by unrealized gains. We effectively postpone paying taxes and allow our clients’ capital to grow at a better rate than if we turned over the portfolio more rapidly, because their partner, Uncle Sam, doesn’t get his cut until we sell their holdings. Sometimes our short-term performance is penalized by using this approach, but over the long haul it has served us, and our clients, well.
JONATHAN: That’s pretty much what we do — or try to do. What I do with the analysts here is not only find the businesses that get mispriced every so often, but I want to find ones where we can see a catalyst, something that’s going to make the stock go up in value over a reasonable period of time.
To avoid value traps?
MARK BOYAR: Sure, we want to avoid value traps, but I also want to see an upward trajectory for us, so that our return is there. When an analyst comes in with a stock idea, I say, “Tell me a story. Tell me what makes that stock increase in value over a reasonable period of time?” Our performance can sometimes be “lumpy” because we don’t try to mimic the indexes in sector weightings in our port-folio. We believe that over the long haul you are better off structuring your portfolio on a best ideas basis, and so it can often look quite different — contrary — to the major indexes. And that suits us just fine. We believe, over time, a well-researched portfolio of high quality undervalued businesses will lead to superior long term appreciation poten-tial — and reduced risk.
If you pick the right stocks —
MARK: That’s also key, of course. The two things that drive long-term success as an investor are time and quality. You have to give your ideas time to work. And you need to buy high-quality assets when the market offers them up at a discount. No amount of time will salvage garbage assets. But if
you combine the two, time and quality, there’s no need to worry about the crazy ups and downs of the markets — or what the Fed is doing — or the state of the economy.
So what sort of catalysts are you seeking?
JONATHAN: One of the best catalysts is find a octo-genarian who owns a significant amount of stock, with no heir apparent. Because over time either he or his heirs are going to wind up selling the busi-ness. No matter how healthy that 80-year-old is the odds are against him, and they are for me, as an investor. That, we believe, works well. Of course, there are all sorts of other catalysts than we can have. But what we always want to know is what is going to make that stock go up.
Like what, besides a doddering owner?
MARK: I’ll give you a couple examples of stocks that we like where I think there is a catalyst. Madison Square Garden (MSG, Financial) is a stock that, on first blush, people say, “I don’t want to invest with the fellows who run the company.”
The Dolans have a reputation for looking out for themselves, at the expense of other shareholders —
MARK: Well, that’s the perception. But let’s go back and talk about our experience with the Dolans. We were holders of some Cablevision and Cablevision always sold at a discount — we called it the Dolan discount, because people just didn’t like them, did-n’t trust them. But it sold at a big enough discount for us to be intrigued.
So we did the work on it and came to the conclu-sion that it was a very inexpensive stock, so we bought the stock and — I don’t remember how long we held it — but we did relatively well in it.
Then the Dolans decided that they were going to try to take Cablevision private. And this is why I became somewhat intrigued by them — because what they said was, “We’ll take it private — but if the minority shareholders vote against it, we won’t.” Remember, they have super-voting stock. So the minority of shareholders voted against the transac-tion, and they didn’t take it private. But what they did shortly thereafter was they levered up the bal-ance sheet and they paid out a $10 a share special dividend.
That was the first real shareholder-friendly thing the Dolans did, other than not taking Cablevision private against the wishes of the minority share-holders. Then they started paying down the debt that they had put on the balance sheet, they started paying a regular dividend, they started repurchas-ing the stock and then they spun out Madison Square Garden and the AMC networks into two separate businesses. As a result, Cablevision stock had a reasonably — not reasonably — had a very, very good run.
Then, last year — or I guess the deal didn’t close until early this year — they sold Cablevision for $36 a share, which is more than we thought we could ever get for Cablevision. And we still own AMC and we own Madison Square Garden.
JONATHAN: As well as Madison Square Garden Networks —
MARK: That’s right. They then took Madison Square Garden and they broke it up into two businesses, the sports networks and the arena and teams. What we did is when they spun them out — and the shares went down — is we bought more shares.
So today Madison Square Gardens sells at roughly $165 a share, it has a market cap of roughly $3.9 billion. It has $1.2 billion in cash, so it has an enterprise value of $2.7 billion. So for $2.7 billion I’m able to buy the New York Knicks, the NY Rangers, I get long-term leases on the Beacon Theater, Radio City Music Hall and they own the Forum in California — they have two entertainment businesses that are starting to show some real growth.
In addition, they own the Madison Square Garden and they own the air rights to Madison Square Garden which are worth, we think, as much as $400 million.
Continue reading part two of the interview here.Â
