Viewing Berkshire as an Opportunity Cost of Capital – Chris Bloomstran of Semper Augustus

Author recalls his development into a fundamental investor

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Sep 10, 2015
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Chris Bloomstran, CFA, founded Semper Augustus in 1998. Bloomstran employs a value-driven research methodology. He evaluates businesses just as a private investor would do when buying an entire company. Semper Augustus is a fundamental investor managing concentrated equity portfolios of well-run, well-capitalized businesses with share prices trading below their conservative appraisals of intrinsic value. They go where the value is.

Currently, Bloomstran is finding opportunity abroad, with two interesting investment ideas in Norway (Orkla [ORK] and Subsea 7 [SUBC]). He’s also finding value in Berkshire Hathaway (

BRK.A, Financial)(BRK.B, Financial). All three companies featured are exceptionally well capitalized and high quality businesses trading at discounts to their intrinsic values.

Tell us a little about Semper Augustus?

Chris Bloomstran: We founded Semper Augustus in late 1998. Massive bubbles in portions of the stock market were obvious, to us anyway, and we were acutely aware that launching an investment firm at that time might go down as akin to building golf courses in 1929. Specific to the late 1990s, a replay of the 1972-1973 Nifty Fifty had developed, with the bluest of the blue chips attracting huge capital flows while smaller company shares were being liquidated. The "tiering" within the market was profound. A parallel and longer lasting bubble in TMT names (Technology, Media and Telecom) was under way as well. The era's insanity was ultimately marked by a hyperbolic mania for everything Internet. To subtly announce to the world that we "got it," that we recognized the folly around us, we named the firm after the most highly valued of the tulip bulbs in 1637 Holland. I had read Charles MacKay's "Extraordinary Popular Delusions and the Madness of Crowds" years earlier and loved the historical and modern day significance of the Tulipomania and other manias over time. It seemed the destined to fail Internet names would go down as the Semper Augustus of the day.

It ultimately turned out to be a great time for our approach. We had clients at the outset who had portfolios of blue chips which had been purchased in the wake of the 1929-1932 stock market crash by a very smart individual. His is a great story in and of itself. This particular client liquidated his family's stock holdings in early 1928, as well as those of his brokerage clients willing listen to a twenty-something investor preaching about a growing stock market bubble. While painful to watch the market nearly double over the next year and a half, he was ultimately right and waded back in in 1932 and 1933 when England and the U.S. went off the gold standard, buying companies like General Electric (

GE, Financial) for less than their unlevered cash on hand. He managed his family's capital for the next six decades, picking up new companies like Walmart (WMT, Financial) along the way. I had the great pleasure of meeting Mr. Smith; he had heard I had serious reservations about equity valuations and a building debt bubble. We spent lots of time together discussing the markets, our respective thoughts on the businesses we each owned, and our respective approaches to investing capital. We shared such a common outlook and philosophy that he ultimately hired me as the first outside advisor to the family, turning over the reins to help intelligently liquidate the low-basis, very overvalued portfolios and reinvest the proceeds in the shares of smaller, better run businesses that were getting cheaper as the market narrowed. He was getting older and wanted someone who could help preserve and grow his family’s assets as he had done for so many years.

With some tax efficient strategies we were able to cull out businesses that had grown less attractive over the years, many with inferior returns on capital and operating in staid industries. Selling businesses like Kodak and the RBOC's for huge multiples to profits and buying smaller, well-run, well-capitalized and growing companies was a no-brainer. It was a great time for us. We managed to have cash at a time when many managers were facing ongoing redemptions for failing to keep up with the mania. By the market peak in 2000, we pegged fair value on the S&P 500 at just under 600 (market price was over 1,500). The rest is history. We, like many value-oriented investors, saw our portfolios significantly rise in value over the next couple years while the markets tanked by 50% for the S&P and 80% for the Naz. It was a privilege to spend lots of time with a great man until his passing in 2002. He was a saint of a man and an outstanding investor. Hearing about his experiences navigating a century of financial and world history was a career and life highlight.

I think my view of investing has evolved pretty similarly to that of many value investors. It's funny to read Mr. Buffett's history of his evolution, beginning with things like candlestick charting. I was a "serious" candlestick charter at the tender age of 20. I had switched to the business school from mechanical engineering when I fell in love with reading the Wall Street Journal. Differential equations didn't spark the same interest as the business paper. I really don't even remember why I started reading the Journal, but it probably had to do with thinking I better figure out how to invest the billions I would make playing in the NFL, a dream that never panned out thanks to a broken foot. I had a tiny surplus from a scholarship, which seemed like a fortune at the time.

I was heavy into charting and had recently become a devotee of Bill O'Neil's CANSLIM method. I wound up interested in a tip from the Heard on the Street column, did my "primary research," which involved looking at a series of quarterly earnings per share numbers and noting the stock of interest had "broken out" and was at a new high. All signals were go. I walked into a small retail brokerage office and found a broker willing to let me put half of my money in a little Norwegian oil shipping company called Nortankers. He advised against it –but still gladly collected the commission which totaled more than 10% of the purchase price. As it turns out I never had to pay the back end of the commission. Shortly after buying Nortankers, the Iraqi army rolled into Kuwait and commandeered two of the company's four VLCC's (Very Large Crude Carriers). The company quickly failed. It was probably the best thing to happen to me. Instead of blaming the Journal, Saddam Hussein or the sophomoric CANSLIM system, I rolled up my sleeves and dug in for the why. I obtained and read several years of the company's annual reports and other filings and was quickly on my way to becoming a fundamental investor. Over the next few years I read every book I could find on investing, working through the CU business library and new releases at the Tattered Cover, Denver's then great independent bookstore. At a point I found "Security Analysis" and "The Intelligent Investor," which ultimately led me to Mr. Buffett.

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