Memo to the 3M Investment Club…
Members, do you recall me buying Wesco Financial this summer? I mentioned that it was trading below book value–meaning that if you liquified its assets, paid off debts and divided the asset among all shareholders, each shareholder would receive more cash than their shares were worth. The funny thing is that its assets are mostly liquid stocks. They’re a huge shareholder of Proctor and Gamble, for instance.
I don’t normally watch short term stock prices, but somebody (with very deep pockets) has just figured out the same thing we did.
Check out this very unusual chart:
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8 comments
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Kevin@InvestItWisely says:
August 29, 2010 at 12:19 am (UTC 8 )
Interesting… maybe markets are not so efficient after all? At least, there’s a time delay component involved. I’m curious, though, cause you would think that in this day and age, there would be computer algorithms that could instantly see things like a stock trading below book value.
Andrew Hallam says:
August 29, 2010 at 7:21 am (UTC 8 )
Hey Kevin,
In Benjamin Graham’s day, there were plenty of companies that traded below book value. Buffett used to seek them out when he worked from Graham/Newman, and again, when he started his Limited Partnership. This is the method Walter Schloss (also a Graham protege) used to beat the market until he was well into his 80s. You can read about the intellectual village of Graham and Doddsville here: http://www.tilsonfunds.com/superinvestors.html
But what Buffett eventually referred to as “cigar butt” investing had its limits. With cigar butt investing, it was like picking up a discarded cigar and getting a few good puffs out of them before letting them go. Companies below book value were often businesses in duress.
Later, he was influenced by Philip Fisher’s writings, and then by Charlie Munger, to look beyond a business’ balance sheet to buy and hold quality—at a fair price.
But back to seeking businesses below book value: they do exist. I come across them from time to time–and I’m sure you could find more if you ran stock screens. You’ll find them during bear markets, not generally bull markets.
And they don’t tend to be healthy businesses. Plus, the liquidation process alone would cost money, especially if the assets were real estate holdings, equipment etc. And how are those assets being valued? Is equipment being depreciated? How liquid is it?
With Wesco, the assets are almost entirely in the stock market itself–fully liquid.
I know that I talk of the stock market being virtually impossible to beat, but I also don’t believe that it’s 100% efficient. I’ve seen enough anomalies to question that. That said, I don’t think a fund manager charging 2.5% annually, then eating up another 1% in trading costs has much of a sustained chance of exploiting the inefficiencies.
But Kevin, I get the feeling that you’re the sort of guy who doesn’t “bandwaggon” on what’s popular. For you, if you keep costs at rock bottom, I think you could beat the market by exploiting anomalies.
In case you’re curious, I see Wesco as a business winding down. They aren’t very active anymore, yet they’re sitting on a pile of liquid assets that are worth more than what the business is selling for. My guess is that Warren Buffett is noticing that it’s trading below book value—without the risk of carrying a difficult liquidation prospect. Also, Berkshire owns loads of Wesco already. It isn’t very liquid anymore; it isn’t on most analyst’s stock screens because of its lack of liquidity on the market itself. That’s why I think one big Buffett purchase shot the stock up. And I also think that he’s going to go in for a second and third helping until he owns it all. Then (I really am stretching my forecasting here) I think he’ll just leave it as is. He won’t sell any of the stocks Wesco owns. But he will collect and invest the dividends. That’s my guess.
The Biz of Life says:
August 31, 2010 at 5:38 am (UTC 8 )
Your portfolio sounds very similar to Warren Buffet’s. Of course, his decision to buy the 20% of Wesco he doesn’t already own will help your returns tremendously. Are you going to take Berkshire stock or cash when the buyout happens?
Andrew Hallam says:
August 31, 2010 at 12:19 pm (UTC 8 )
Hey Biz,
I think we’ll take Berkshire stock. This only happened one other time to me. I bought Anheuser Busch at $45 for my own portfolio, and for the club’s, and then Inbev bought them out. They didn’t have the smart eye for value that Buffett does though. They paid $70 for our BUD shares. Now that was a nice kick!
Where our portfolio really differs from Buffett’s is our pharma content–with Pfizer. Our average cost is about $16 per share–and because Buffett can’t understand patents, thereby not being able to figure out if they have a “durable competitive advantage” he mostly stays clear of pure pharma companies. About 11% of our portfolio is in Pfizer. I suppose I don’t understand patents any more than Buffett does–so I’m just hoping!
Kevin@InvestItWisely says:
September 1, 2010 at 8:42 am (UTC 8 )
Thanks for that explanation, Andrew. Could you consider buying Wesco stock similar to buying an ETF that is trading at a significant discount to it’s net asset value? Or perhaps we can look at it as like buying the stock of a bank, instead of buying a mutual fund from that bank. I remember you did that comparison once, and the stocks kicked the asses of the bank’s own products!
Andrew Hallam says:
September 1, 2010 at 9:02 am (UTC 8 )
@Kevin@InvestItWisely
Hey Kevin,
I think Wesco is a lot safer than a bank stock. It’s far more diversified, and it doesn’t take big insurance risks. In fact, they’re laughably conservative, and if there’s any criticism of this company, that would be it.
It’s say it’s more like an ETF than a bank stock.
BadCaleb says:
September 9, 2010 at 3:40 am (UTC 8 )
Hi Andrew,
I wonder if there is some conflict of interest with Berkshire buying them out. Since I am a BRK-B holder this doesn’t bother me, but if you weren’t and you did hold Wesco, wouldn’t this be cause for concern?
Andrew Hallam says:
September 9, 2010 at 5:49 am (UTC 8 )
@BadCaleb
I don’t think so. Berkshire has owned most of Wesco for ages. Charlie Munger is the chairman–and he’s the vice chairman at Berkshire. On the insurance front, they don’t really do much anymore. But perhaps they will in the future. Berkshire’s specialty is insurance—and they own many insurance companies where the original managers still run the businesses, while they send profits to BRK to invest. In the case of GEICO, Lou Simpson invests those profits….because he’s as good at it as Berkshire.
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