In addition to talking about distressed debt, I want to also use the blog as a tool to record my notes on various hedge fund / investor letters.
Our first investor is Mark Sellers. He is currently the chairman of Premier Exhibitions (PRXI) and is managing member of Sellers Capital.
Here are some quotes and takeaways from his last 5 or 6 investor letters:
- "However, if the same pundit’s 2009 prediction turns out to be wrong, he just buries it and the world forgets about it forever. There is big upside to making predictions, and little downside. Keep this in mind anytime you read any prognostications about where the market will go in the short-term (i.e. less than 3 years). Journalists love to focus on this kind of stuff because it sells newspapers, but predictions are typically not worth the paper they’re printed on (and that includes predictions on websites which are not even printed on paper.)"
- "Misjudging or ignoring the worst-case scenario is the most egregious mistake any money manager can make."
- Sellers Capital utilizes three valuation scenarios in their analysis: worst case, most-likely case, and best case – for each stock they own.
- “We aren’t always correct in our stock picks, and often we buy too early, but we try to hedge out the market risk so that we can sleep better during times like this. It hurts during good times and helps during bad times. 2008 is the first year the hedges have helped us, but since the inception of the fund we have now almost broken even on our market hedges.”
- Sellers believes markets do not bottom until analysts ratchet down their earnings estimates. We have seen this in the last few months.
- Does not focus on macroeconomic events. Sellers generally spends all his time looking at individual securities which are out of favor and truly undervalued. He reads 10-ks and proxy statements. He reads the Journal about once a month. He believes investors do not get an edge spending time reading mass media.
- Won’t buy big financials at any price because in the worst case scenario they can lose 100% of their money and as a concentrated fund that is just not a viable option.
- “If you run a concentrated portfolio, don’t buy distressed companies, because at some point it will result in permanent, and large, capital impairment” - That one hurts!
- One of my favorite quotes: “Keep in mind that my only goal is to generate outstanding performance. If I do that, I make a lot of money; you make a lot of money, and everyone’s happy. On the other hand, if I become simply an asset gatherer and the performance of the fund suffers as a result, neither of us will be happy. I take a lot of pride in generating outstanding performance, just as I did when I was a 13-year-old kid trying to get the high score in Pac-Man or Asteroids so I could enter my initials on the screen. The stakes are higher now, but the mentality is the same. I still want to enter my initials and get the high score. The money isn’t that important to me; getting the high score is.”
- "Never listen to the crowd when you make investment decisions. If a crowd knew what was going to happen, we would all be billionaires."
- “We run a very concentrated fund and volatility is unavoidable. As I have said many times before, we do not consider volatility to be risk. We consider risk to be the likelihood of losing money and not being able to make it back. For example, it would be risky to invest in a company whose stock has a chance of going to $0 because of high debt levels; this is money we can’t make back just by holding onto the stock. So we avoid situations like this. We spend most of our time trying to evaluate the risk of permanent capital impairment in every stock we buy. If we do a good job at this, then the volatility doesn’t mean much because we know that eventually we’ll be fine. And I think we’ve done a good job of that despite the quarter-to-quarter volatility.”
- “Most people would agree that a company’s quarterly earnings results aren’t all that indicative of its long-term potential. When looking at a company, a value investor evaluates the balance sheet and the management team and the moat, and tries not to place too much emphasis on each quarterly earnings announcement. Shouldn’t the same be true when analyzing an investment fund? I have never felt good about companies that report smooth, stable earnings growth quarter after quarter, miraculously coming in a penny or two ahead of analyst estimates every time. Many investors take comfort in these smooth results because they like predictability. But it’s an illusion. Business is inherently lumpy, and trying to smooth out those lumps goes against economic reality. I feel the same way about investment funds. Riding out the lumps not always fun and makes it difficult for us to raise capital from institutional investors, but it is intellectually honest and it’s the only way I know how to manage money.”
- Movements in intrinsic value vs. movements in stock prices: “Despite the poor performance of our stocks during the quarter, the underlying performance of the companies in the portfolio was quite good. Value was created, and eventually that value will be factored into market prices.”
- Compares P/E, P/S, and P/CF ratios over historical periods for individual securities