“A good time to start in [the investing] business is when markets are terrible…. We wait for bad news… I love to read about losses.” --Michael Price
Michael Price (Trades, Portfolio) started out as a $200-per-week research assistant. He went on to become, at one point at least, the 271st richest person in the world.
He went from one end of the wealth scale to the other by becoming an investment manager and outperforming most of his peers. Or, did he?
Who is Price?
The guru was born in 1952. After growing up in New York city, he earned a bachelor's in business administration at the University of Oklahoma in 1973 (26 years later it awarded him an honorary doctorate).
Price’s first job came from Max Heine at Mutual Series, a mutual funds firm. Between 1973 and 1988 he was mentored by Heine, and on the latter's death in 1988, Price took bought the firm. That lasted until Price sold it to Franklin Resources in 1996 for $670 million. Upon selling, he said there was more money than he could successfully invest.
In the meantime, in 1991, he had started his own firm, MFP Investors LLC (although he continued to work at Mutual Series until 1998).
And, just as he had been mentored by Heine, Price became a mentor as well, with guru Seth Klarman (Trades, Portfolio) among those crediting Price as an influential mentor.
Price was fortunate to have not only a mentor, but to have one who must have been very good, given his subsequent successes.
What is MFP Investors?
New York city-based MFP is an investment advisory firm and hedge fund, established in 1991. Also, according to its most recent Form ADV Part 2A, it is owned by Price and a trust set up for members of his family.
The firm's objective is, in its words, "to seek to generate high long-term total return through opportunistic investing and the use of a disciplined value investment approach similar to that previously employed by Mr. Price at Franklin Mutual Series Fund Inc.” Opportunistic and value were also the hallmarks of the philosophy of Heine at Mutual Series.
As with many other hedge funds, MFP gives itself a very broad mandate, which includes “various complex and speculative investment techniques including, short selling, hedging, risk arbitrage and bankruptcy investing.”
It is free to invest in any securities, whether domestic or international, including equities, debt of any credit quality and junk bonds. However, it does not invest in commodities or commodity pools.
According to its Form ADV, the firm had $1.14 billion of assets under management on March 23.
A conventional hedge fund with a broad variety of investment and opportunity targets, all identified through the value lens Price learned from Heine.
What are Price’s investment strategies?
One starting point in evaluating Price's strategies might be that he creates portfolios based on a ratio of two-thirds equities and one-third special situations. Those special situations might include merger-arbitrage trades, activist-influence securities and other event-driven situations. On the equity side, he prefers a diversified portfolio of several dozen value stocks.
These strategies are in line with Heine's ideas. Heine had earlier discovered the potential profits from investing in situations such as bankruptcy and restructuring.
On assessing candidates, Price uses value principles; this includes considerations of intrinsic value based on metrics such as price-book and price-to-cash flow.
Another of his tactics is to look at similar stocks in the same industry. For example, if one company is trading at 10 times EBITDA, he would consider a similar company which trades at five times EBITDA.
He takes a keen interest in management, and determines whether they act in the best interest of shareholders or themselves.
Price likes to virtually disassemble companies to determine the value of each segment.
Buying at a 30% to 40% discount under estimated intrinsic value is his target.
At csinvesting.com, they have assembled several quotations, including:
- "I wait for large discounts; I look for the growth guys selling to the value guys.”
- "Wait for bad news; wait for things (news/events) that can drastically affect the company. Be prepared to act on it. At MFP, we spend all our time determining intrinsic values ('IVs'). Try to lead them. Determine IV beforehand, so you can act quickly when events push prices below IV."
- "I don’t think one or two quarter’s matters or even a year’s worth of earnings reports. Understand what MIGHT HAPPEN not what DID HAPPEN." [Price’s emphasis.]
Unless otherwise noted, the strategies section is based on information from ValueWalk and BeyondProxy.com.
Holdings
This sector profile from GuruFocus shows a heavy bias toward financial stocks:
These are the top 10 holdings in Price’s portfolio of 113 stocks:
- Intel Corp. (INTC, Financial): 9.36%
- Dolby Laboratories Inc. (DLB, Financial): 6.76%
- BMC Stock Holdings Inc. (BMCH, Financial): 6.32%
- Trinity Place Holdings Inc. (TPHS, Financial): 4.14%
- Banc of California Inc. (BANC, Financial): 3.71%
- CIT Group Inc. (CIT, Financial): 3.67%
- Waterstone Financial Inc. (WSBF, Financial): 3.21%
- FMC Corp. (FMC, Financial): 3.09%
- Westlake Chemical Corp. (WLK, Financial): 2.59%
- Atlantic Capital Bancshares Inc. (ACBI, Financial): 2.39%
A top 10 list with several lesser-known names, some no doubt worth following up on for those looking for new ideas.
Performance
Aside from anecdotes about Price’s early successes, Google and Bing provide no sources of the guru’s long- or short-term performance. Certainly, he has had some outstanding years, but whether he has succumbed to the blues that have infected so many hedge fund managers since 2008 remains unknown.
However, there is one set of data that would suggest generally flat performance in the past several years. That is a GuruFocus chart showing his equity holdings since inception (remember this chart is a very loose proxy for actual performance results):
The looseness of the proxy starts with the general principle that outperformance attracts new money, while underperformance leads to the loss of assets under management. However, we cannot be sure that principle holds here, since it does not account for a lag between performance and capital moving in and out. Still, it is the best indicator we have.
Using the equity holdings chart as a proxy suggests:
- Price did well between late 2003 and mid-2007 (see the live chart on Price's profile page).
- There was a very large dropoff in 2008 that lasted until the end of the second quarter of 2009.
- In the second half of 2009 his results took off, and he enjoyed a personal bull run until the end of 2014.
- The three years since 2014 have been generally flat.
Price’s apparent performance profile is not unlike those of many other hedge fund managers; some early, spectacular results, followed by years of up, down and flat performance. Clients who got into his funds at the right time and got out at the right time probably enjoyed the expected hedge fund returns. For those who did not, index funds probably look good in hindsight.
Conclusion
Based on available information, investors should not try to emulate Price. An apparent lack of consistency, including drawdowns, would likely lead to modest results.
There are elements of his philosophy or strategy that are worth remembering, however. Perhaps the most important of them is patience; remember, he said, "I look for the growth guys selling to the value guys.”
A related recommendation is that of knowing intrinsic values in advance. Speed and decisiveness are the keys once an investor has waited long enough to get a targeted price.
Disclosure: I do not own shares in any of the companies listed, nor do I expect to buy any in the next 72 hours.
