value investing: a global perspective

Value Investing:A Global Perspective

Abdulaziz A. Alnaim, CFAPresident & Fund ManagerMayar Capital Management

VALUE INVESTING:A GLOBAL PERSPECTIVEAbdulaziz A. Alnaim, CFA

Contents

History Value Investing 101 Academic Studies Value Investing Today

4

History of Value InvestingThe principles behind value investing were first codified by Benjamin Graham and David Dodd in their 1934 book, Security Analysis

Graham later expanded on that by publishing The Intelligent Investor (1949)

5

History of Value Investing

Graham taught value investing at Columbia University for 28 years.

Many of his students, such as Warren Buffett and Walter Schloss, went on to apply his investing principles very successfully over many decades

Value Investing 101

“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”

-- Benjamin Graham

Video: Introduction to Value Investing

8

Value Investing 101

Invest in a security only if it is trading significantly below conservative estimate of its intrinsic value.

This is called the Margin of Safety principle

Intrinsic

ValueMarketPrice

Marginof Safety

The most important principle shared by all value investors

9

Value Investing 101

The Margin of Safety serves two purposes:

1. Provides a good cushion should the investor make an error in the estimate of the security’s intrinsic value or some unexpected event changes it

2. Provide excess return as valuation normalizes (from cheap to fair value)

10

Shopping for Bargains

Value Investing =Trying to buy $1 bills for $0.50

11

last year’s fashion

Shopping for Bargains

When shopping for clothes, we can find such “bargains” at outlet malls

50%

Overlookedmerchandi

se

“Slightly” damaged

goodsPureJunk

… Unfortunately, no outlet malls exist for securities

30% 70%

50%

12

Shopping for Bargains

“Be fearful when others are greedy. Be greedy when others are fearful.”

-Warren Buffett

“The investor’s chief problem and even his worst enemy is likely to be himself.”

- Benjamin Graham

13

Shopping for Bargains

Where do we find real bargains? General market decline Whole industry going out of

favor Under-followed companies (not on

the radar of institutional investors - e.g. small companies)

Temporary negative event

Video: Value Investing: Buy Cheap Obscure and Out of Fashion

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Value Investing Works

Benjamin GrahamWalter SchlossWarren BuffettCharlie Munger John TempletonMax HeineMichael Price

Martin WhitmanBruce BerkowitzDavid EinhornJoel GreenblattBruce GreenwaldSeth Klarman

Many of history’s greatest investors were value investors:

They out-performed the market over decades by applying the value investing strategy

Value Investing Works

Source: Value Investing Retrospective, A Heilbrunn Center for Graham & Dodd Investing Research Project conducted by Andrew Dubinsky

Early Studies: One-Dimensional Description of Value • Basu (1977)• Rosenberg, Reid, Lanstein (1985 )

Second Generation: Multi-Dimensional Description of Value • Fama & French (1992)• Basu (1983)• Lakonishok, Shleifer, Vishny (1994 )

Fama & French 3 Factor Model Successes • High Minus Low (HML) factor (1993)• Multi-factor success with LSV portfolios (1995)

Value Investing Works

Source: Value Investing Retrospective, A Heilbrunn Center for Graham & Dodd Investing Research Project conducted by Andrew Dubinsky

In Works in Japan•Lakonishok, Hamao, Chan, "Fundamentals and Stock Returns in Japan", 1991

It works in US, Japan, UK, France, Germany, Italy, Netherlands, Belgium, Switzerland, Sweden, Australia, Hong Kong, Singapore• Fama & French, "Value versus Growth the International Evidence", 1998.

… and tens of other studies over the years

Value Investing WorksCountry Return

High B/MReturn

Low B/MSpread Cumulative

20 yearsUnited States 14.55% 7.75% 6.79% 272%Japan 16.91% 7.06% 9.85% 555%United Kingdom 17.87% 13.25% 4.62% 147%

France 17.1% 9.46% 7.64% 336%Germany 12.77% 10.01% 2.75% 72%Sweden 20.61% 12.59% 8.02% 368%Australia 17.62% 5.3% 12.32% 921%Hong Kong 26.51% 19.35% 7.16% 299%Singapore 21.63% 11.96% 9.67% 534%

Sample period: 1/1975-12/1995Fama, E. and French, K., “Value versus Growth the International Evidence” (1998).

Value Investing Today

Difference in Methods

Redefine elements of Intrinsic Value (starting with Buffett): franchise value, intangibles, growth

Simple “statistical” doesn’t work like it used to

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Elements of ValueU

ncer

tain

ty

Asset Value

Growth

Earnings

Power

Stronger Franchise (“moat”)

Asset Value

Earnings

Power

Asset Value

Source: Greenwald, Bruce, et al (2004). Value Investing: From Graham to Buffett and Beyond. Wiley.

newer elements of value

Value Investing Today

More Global

Bigger universe, more areas to find hidden value

Business is more global competition may come from the other side of the world

Value Investing Today

More Global

Value Investing spread to Europe and more recently to Asia and MENA

Seeing more funds with “value” in their name or description, especially in the hedge fund space

Value investors are still a rare breed in MENA (and elsewhere)

Value Investing Today

Being in New York or London used to have its advantages--and it’s disadvantages.Many great value investors preferred being away from the crowd

Warren Buffett – OmahaJohn Templeton – BahamasCharlie Munger – Los AngelesBruce Berkowitz – Miami

Value Investing Today

History proves that Value Investing gets into and out-of fashion every few yearsI expect to see more of it (and other style-specific investing) in our region going forward

Thank You

Contact Information

Abdulaziz A. Alnaim, CFAaziz@mayarcapital.com

T: +966 3 847 7504M: +966 50 383 5506