You are on page 1of 37

Graham & Doddsville

An investment newsletter from the students of Columbia Business School

Inside this issue: Issue XXXI Fall 2017

Omaha Dinner P. 3
Value Investing Oaktree Capital Management
Reception P. 4
Since the formation of Oaktree in 1995, Mr. Marks has been
Howard Marks, responsible for ensuring the firm's adherence to its core
CFA P. 6 investment philosophy; communicating closely with clients
Student concerning products and strategies; and contributing his
experience to big-picture decisions relating to investments and
Investment Ideas P. 13
corporate direction. From 1985 until 1995, Mr. Marks led the
Paul Sonkin and groups at The TCW Group, Inc. that were responsible for
Paul Johnson P. 15 investments in distressed debt, high yield bonds, and
Howard Marks convertible securities. He was also Chief Investment Officer for
Jeremy Weisstub
and Damian (Continued on page 6)
Creber, CFA P. 27

Editors: Pitch the Perfect Investment


Abheek Bhattacharya
MBA 2018
Paul D. Sonkin is an analyst and portfolio
Matthew Mann, CFA manager at GAMCO Investors/Gabelli Funds.
MBA 2018 He is currently a co-Portfolio Manager of the
TETON Westwood Mighty Mites Fund, a value
Adam Schloss, CFA fund which primarily invests in micro-cap
MBA 2018 equity securities. Prior to joining GAMCO in
Ryder Cleary 2013, Sonkin was for 14 years the portfolio
manager of The Hummingbird Value Fund and
MBA 2019 Paul Sonkin 95 (left) & the Tarsier Nanocap Value Fund. He holds an
Gregory Roberson, Esq. Paul Johnson (Continued on page 15)
MBA 2019
David Zheng
MBA 2019
Aryeh Capital Management
Visit us at: Jeremy Weisstub is the Portfolio Manager &
www.grahamanddodd.com Managing Partner at the soon-to-launch, Toronto-
RolfManagement.
based Aryeh Capital Heitmeyer Prior to founding
www.csima.info
Aryeh, Mr. Weisstub was an Analyst at Greenlight
Capital, a Principal at Redwood Capital and an
Analyst at Perry Capital. He began his career in the
private equity group at Oak Hill Capital and in M&A
at The Blackstone Group. Mr. Weisstub holds an
M.B.A. (Arjay Miller Scholar) from Stanford Graduate
Jeremy Weisstub (left) School of Business and a Bachelor of Arts in
& Damian Creber 16 Economics (summa cum laude with Distinction) from
Yale University.
(Continued on page 27)
Page 2

Welcome to Graham & Doddsville


We are pleased to bring you Marks, the founder and of their fund in Toronto, and
the 31st edition of Graham & Chairman of Oaktree Capital the evolution of each of their
Doddsville. This student-led Management, and discussed investment styles. They pro-
investment publication of Co- developments in the invest- vide their views on cycles,
lumbia Business School (CBS) ment management industry, and how to take advantage of
is co-sponsored by the Heil- especially the rise of passive them. They talk about deter-
brunn Center for Graham & investing. If passive and quan- mining when to dive deeper
Dodd Investing and the Co- titative strategies proliferate, into an idea versus when to
lumbia Student Investment what will price discovery and move on to another oppor-
Management Association second-level thinking look tunity, and explain why they
Meredith Trivedi, the (CSIMA). like? Howard also opines on dove deep into a business
Heilbrunn Center Director. separating oneself from the called ServiceMaster Global
Meredith skillfully leads the Since our Spring 2017 issue, herd and investing in emerg- Holdings (SERV).
Center, cultivating strong the Heilbrunn Center hosted ing markets.
relationships with some of the seventh annual From Gra- Finally, we continue to bring
the worlds most experi- ham to Buffett and Beyond Paul Sonkin 95 of GAMCO you pitches from current
enced value investors, and Omaha Dinner. This event is Investors and Paul Johnson students at CBS. In this issue,
creating numerous learning held on the eve of the Berk- of Nicusa Investment Advi- Madina Baikadamova 18,
opportunities for students shire Hathaway shareholder sors are excited about their Sowan Cha 18, Jean Cui 18,
interested in value invest- meeting and features a panel of new book, Pitch the Perfect and Claudine Fernandez 18
ing. The classes sponsored renowned speakers. Investment: The Essential Guide share their idea, Spirit Aero-
by the Heilbrunn Center to Winning on Wall Street. systems (SPR), which they
are among the most heavily In this issue, we were fortu- They share their inspiration pitched at the MBA Women
demanded and highly rated
nate to speak with five inves- for writing the book and why in Investing (WIN) confer-
classes at Columbia Busi-
tors who provide a range of pitching is such an integral ence organized by the Cor-
ness School.
frameworks and investment part of the investment pro- nell SC Johnson College of
styles. All of these investors cess. The authors describe Business.
focus on understanding down- the four essential questions
side risk, developing a differen- every pitch should address. As always, we thank our in-
tiating view, and studying his- They also offer their thoughts terviewees for contributing
tory. Additionally, each inves- on the evolving use of data their time and insights not
tor has a strong passion for and specialization. only to us, but to the invest-
teaching and the learning pro- ment community as a whole.
cess. Jeremy Weisstub and We thank you for reading.
Damian Creber 16 of Ar-
We caught up with Howard yeh Capital discuss the launch - G&Dsville Editors
Professor Bruce Greenwald,
the Faculty Co-Director of
the Heilbrunn Center. The
Center sponsors the Value
Investing Program, a rigor-
ous academic curriculum for
particularly committed stu-
dents that is taught by some
of the industrys best practi-
tioners.

Mario Gabelli 67 and Professor Tano Meredith Trivedi with Professor Bruce
Santos, Co-Director of the Heilbrunn Greenwald
Center for Graham and Dodd Investing,
at the 2017 Omaha dinner
Volume I, Issue
Page23 Page 3

From Graham to Buffett and Beyond Omaha Dinner 2017

The fun starts right at registration Mario Gabelli 67 mingling with other
investors in Omaha

Mario Gabelli 67, Paul Hilal 92, and David Samra 93 Cheryl Einhorn enjoying the panel

Panelists conversing with Tano Santos


Page 4

2017 Value Investing Program Welcome Reception

Alexander Burnes 18, Aniket Nikumb 18, Kevin Nichols Jade Lau 18, Eunice Lee 18, and Claire Jin 19
18, Gustavo Campanha 18, and Adam Schloss 18

Tano Santos, Juliana Bogoricin 15, A group of second-year students posing with a few alumni
and Chad Tappendorf 18

Current and former students from the Cooper/Luft section of


Applied Value Investing posing with the class Stanley Cup
Volume I, Issue
Page25 Page 5

SAVE THE DATE


21st annual Columbia Student Investment
Management Association Conference

January 26, 2018

A full-day event featuring some of the most well-known


investors in the industry, including keynote speakers:
Joel Greenblatt of Gotham Asset Management
Paul Hilal 92 of Mantle Ridge, LP
Jody Jonsson of Capital Group
Seth Klarman of Baupost Group
Jamie Zimmerman of Litespeed Partners
Presented by:
The Columbia Student Investment Management Association
and
The Heilbrunn Center for Graham & Dodd Investing
Visit our website for updates: http://www.csima.info
For inquiries contact:
Harsh Jhaveri HJhaveri18@gsb.columbia.edu
Justin Charles JCharles18@gsb.columbia.edu
Page 6

Oaktree Capital Management


Domestic Fixed Income at investment philosophy and a few hundred million dollars,
TCW. Previously, Mr. business principles is holding so I don't think its addition is a
Marks was with Citicorp up, so I don't think there's a transformation.
Investment Management need for change. We're trying
for 16 years, where from to roll with what the market In 1978, when I left the
1978 to 1985 he was Vice gives us. We have no research department of
President and Senior alternative. Weve probably Citicorp they asked me, What
Portfolio Manager in grown in assets since then by do you want to do next? I
charge of convertible and maybe $60 billion and were at said, Ill do anything except
high yield securities. about $100 billion today. We spend the rest of my life
Between 1969 and 1978, have some new products. I choosing between Merck and
he was an Equity Research think we have evolved, but I Lilly. I stand by that comment.
Howard Marks, CFA Analyst and, subsequently, hope we have not changed. Its not the fact that if
Citicorp's Director of We hired a CEO three years something is an equity that
Research. Mr. Marks holds ago. When he arrived, he sent makes it efficient; its the fact
a B.S.Ec. degree cum laude a memo to the staff saying that that its well-known, well-
from the Wharton School he was not there to change followed, and understood. If
of the University of Oaktree, only to make it we can find exceptions to that,
Pennsylvania with a major better, and I hope that's what we can find superior
in finance and an M.B.A. in we've done. opportunities for risk
accounting and marketing adjustment and returns.
from the Booth School of G&D: Equities are one area
Business at the University youve expanded in since 2009, G&D: A lot of active equity
of Chicago, where he especially the value equity managers are now worrying
received the George Hay strategy. Youve said before about investors move to
Brown Prize. He is a that the stock market is a little passive investing. What are
CFA charterholder. Mr. more efficient than other areas your thoughts on this debate?
Marks is a member of the you've historically been in. Has
Investment Committees of your thinking about equities HM: I arrived at the University
the Metropolitan Museum evolved? of Chicago for graduate school
of Art and the Edmund J. 50 years ago next month. I was
Safra Foundation; a HM: No, but my previous taught about the efficient
Trustee of the comment about efficiency market hypothesis and my
Metropolitan Museum; pertains primarily to what I reaction then was that it made
Chairman of the Board of would call mainstream equities. sense. Why should something
Trustees of the Royal The process that produces be cheap, and people look at it,
Drawing School; and an efficiency in those mainstream study it, and understand it, and
Emeritus Trustee of the stocks starts with the fact that it stays cheap? It doesn't make
University of Pennsylvania a lot of people are looking at any sense. Efficiency makes
(where from 2000 to 2010 them. If you can find some much more sense than that. It
he chaired the Investment equities, either a sector or a took eight years after that for
Board). country, where not many Jack Bogle to start his index
people are looking, then the fund, and it took 45 years for
Graham & Doddsville assumption of efficiency could passive investing to get to 20%
(G&D): You last spoke to go out the window. of all equity mutual funds.
Graham & Doddsville for the
Fall 2009 issue during a more I wouldn't say we've done a lot Yes, active managers have
stressful time for markets. more in equities. We now gone through a tough time.
How has Oaktree changed have maybe less than $5 billion They've been losing assets, and
since 2009, and what do you in equities out of the total passive has been gaining assets.
think youve learned since $100 billion, so it's not a major But the one thing I know about
then? transformation. If you go back investment markets is that
eight years ago, we already had there's no such thing as a
Howard Marks (HM): I emerging market and Japanese permanent good idea. The
hope we havent changed equities. Value equities is only definition of a good idea
much. The foundation of our (Continued on page 7)
Page 7

Harvey
OaktreeSawikin
Capital Management
changes as the market changes, HM: Theres no way to know. and amass money for a new
as prices change. There have Theres no way to know how hedge fund? The answer is that
been factors about the market much of the active money has the compensation has been
that made actives perform unfair on average, and people
badly for the last dozen years, have caught on. I wrote a
but that doesn't mean it's going ...the one thing I memo about hedge funds in
to be that way forever. If 2004, and I said that when I
people take their money out of know about first heard about hedge funds,
active management, then active investment markets is which is probably about 1974,
managers would fire all their there were 10 hedge funds run
analysts, and then the market that there's no such by 10 geniuses. When I wrote
would not stay efficient. Then that memo in 2004, there
the necessary condition is thing as a permanent were 8,000 hedge funds, and I
satisfied for active to work. doubted they were run by
The point is, I don't think this good idea. 8,000 geniuses. They shouldn't
move is permanent, I think it's all be paid like geniuses. That's
rotational. to go to passive before the the bottom line. None of this
things I'm talking about happen. stuff is hard, only being a
Now, having said that, over the Today, 37% of the equity superior investor is hard.
last 50 years, from time to mutual fund assets are passive.
time, people put too much I would think if it got to 60% G&D: Do you think the fee
faith in investment managers. or 70%, that would change structure needs to change in
They gave them too much things. I could be wrong. accordance with some of these
money to manage and they pressures?
paid them too much to do it. I G&D: Along with the
believe the average mutual movement to passive, there HM: On equities, I don't think
fund, which has high fees and has been pricing pressure for the structure has to change,
expenses, didnt earn them, on actively managed strategies. perhaps just the absolute level.
average. Doesn't make any Do you think that some of that I mean, you could move to
sense; now, people are pressure will make its way into incentive compensation for
catching on. other asset classes? equity management, although
thats a little harder for things
One of the astute things I was HM: The general principle that like mutual funds where
taught is that on average, the people should have to add individual investors put in
average investor does average value to be highly paid should money. Right now people are
before fees, and below average be applicable to everything. putting large amounts into
after fees. Why should the Passive fund management is a private equity hoping it will
average investor, or low-value-added strategy with work. If it works, theyll
investment manager, be highly low fees. It makes sense. The probably keep their fee
paid? Doesn't make sense. thing that doesn't make sense structure. If not, there might
That idea took 40 years to sink is low-value-added strategies be a call for change.
in but has been responsible for with high fees. If another
the recent exodus from active. strategy, lets say private Hedge funds may have to
Thats not to say that there equity, has high-value-add, then change their structure. Five
can't be exceptional managers, it can command high fees. years from now, people may
and that they cant be worth it. write memos saying, Isnt it
I think one of these days well So it would be an crazy that people got to keep
head that way again. oversimplification to say all the 20% of the profits in the good
fees in investment management years, and they didn't have to
G&D: Youre suggesting that are coming down. Its only for give it back in the bad years,
some of the move to passive is the ones that don't earn it. and they got remunerated
cyclical. Do you have a sense Why is so much money every year, and there was no
of where we would be in that flowing out of the hedge fund hurdle rate? The fund made
cycle? industry? Why is it so hard to 5% and the manager got 20%
start a hedge fund these days, of it. That level may not hold
(Continued on page 8)
Page 8

Harvey
OaktreeSawikin
Capital Management
up as having been reasonable. let the people who know the that many of the others have
strategies best make the done merger transactions that
Hedge funds went from being a decisions. We provide a lot of have significantly changed their
cottage industry to a big guidance as how to behave vis- profile. I dont know why they
industry around 2003-04, -vis the macro, and what did these mergers. If they did
because they did well in 2001- philosophy and approach to them for good client-centered
02. Too many people were adapt. But the portfolio business reasons, then that's
protected by the pricing. Too decisions are decentralized. fine. If they did them to please
many people got 2 and 20, in Wall Street and make the
my opinion. I think theres G&D: Has going public stock go up, I dont think that's
going to be a washing out of changed Oaktree? as good. I cant make a
that. However, in that memo judgment about what they did,
in 2004, what I said was: I HM: The only change I could because I dont know their
think in the coming years, the point to is that weve had to motivations.
average hedge fund will make hire a bunch of people to
5% or 6%, and eventually handle the administrative G&D: Youve written a lot
people will get tired of paying burden. In terms of the over the years about market
2 and 20 to make 5% or 6%. operation of the firm, I dont psychology. Any new thoughts
Guess what? Barron's did an think theres any change. these days?
article saying that over the Were still investing the same
next 10 years, the average way, were still employing the HM: Theres a chapter in my
return on hedge funds was same philosophy. What I was book, The Most Important Thing,
5.2%. It took a long time for concerned about when we that says that the most
people to realize that they went public was that the important thing is knowing
were not getting what they clients would worry about where we stand. I start the
were paying for. how we deal with the interests chapter by saying, As to the
of the unit holders versus the macro, including the level of
G&D: What is it about mutual interests of the clients. Would the market, we never know
funds that dont allow them to we have a conflict of interest? where were going, but we
have incentive fees? We got asked that a lot, and I sure as hell ought to know
felt very strongly, and I still do, where we are. Its not so hard
HM: It's complex. Number that there is no big conflict of to know where we are; the
one, I dont know if the SEC interest. question is where were going.
permits it for mutual funds.
Number two, I think it would Were a fiduciary for our I advocate a two-pronged
be challenging to compute the clients. We have to put their approach. First, you look at
incentive fee every day, when interests first. If we put their valuationsprice-earnings
retail investors go in and out. interests first every day, then ratios, yields, yield spreads,
we will succeed in the long transaction multiples, cap rates
G&D: Could you talk about run, and maximize the value of in real estateand you ask
how Oaktree structures its the units. If we put the are they high or low relative
many strategies? interests of the unit holders to history and relative to
first, and try to maximize our interest rates? You gauge the
HM: Each strategy has its own profits in the short run, then appropriateness of valuations.
process. The people who run our work on behalf of the Thats entirely quantitative.
the various strategies have clients will go to hell, and well Then, theres the qualitative.
generally been here a very long minimize the value of our How are people behaving? Are
time, and they have the units. To me theres no people euphoric or depressed?
complete confidence of me and conflict: clients first. Are they skeptical or
my partners. We do not have unquestioning? If a new fund
an overview committee. In G&D: Do you have a view on comes out, is it oversubscribed
some firms, every investment other publicly traded asset overnight, or does it go
must come to the investment managers? begging? All these kinds of
committee. We dont have things. What are they saying
that. Its decentralized, and we HM: The main difference is on TV? What are the
(Continued on page 9)
Page 9

Harvey
OaktreeSawikin
Capital Management
newspapers saying? Take the yield bonds are at their lowest G&D: Speaking of cycles, a lot
temperature of the market. yields in history, emerging of investors today havent gone
market debt is yielding still through a bear market. What
Look at the behavior around less, private equity is raising would you recommend to
us, thats the key. Warren the most money ever, Softbank these investors?
Buffett says, The less is raising a $100 billion fund for
prudence with which others technology investments. Each HM: There's no lesson like
conduct their affairs, the of those things suggests a hot experience. You can read
greater the prudence with market, where people are about it, and you can talk to
which we must conduct our happy to trust the future. All old timers, but theres nothing
own affairs. In other words, of them together should be like living through it. The most
when other people are something that people pay important lessons in investing
carefree, we should be attention to. You cant argue are learned in the tough times.
worried. When other people that things are languishing I started in 1968, and we came
are panicked, we should turn cheap today, you have to across tough times right away,
aggressive. As an analyst, if you adjust your behavior. and I learned a lot of very
could only ask one question valuable lessons. You can read,
about pricing, I think it should and there are a lot of books.
be how much optimism is When theres a lot of For example, I read A Short
incorporated in the price. History of Financial Euphoria, by
When theres a lot of optimism in the price, John Kenneth Galbraith, and
optimism in the price, number number one theres that was very, very helpful. It
one theres not too much talks about the excesses of
further to go, and number two, not too much further psychology.
theres a lot of air that can
leave the balloon if the to go, and number G&D: Theres a lot of capital
optimism is disappointed. If in passive strategies, which are
theres no optimism, then all two, theres a lot of air driven to some degree by
the surprises will be on the computers. Do you think that
upside. You cant have less that can leave the changes how the market
than zero optimism, so we try balloon. handles risk?
to figure that out.
HM: Because every dollar that
By the time this Graham & Remember what Mark Twain goes into a truly passive fund is
Doddsville issue comes out, Ill said, History does not repeat, invested on autopilot, the fund
have put out a new memo but it does rhyme. Things are must buy the stocks that satisfy
which talks about my views on never the same from cycle to its criteria, and thats without
the state of the market. I think cycle in terms of the details. regard to value. That suggests
theres a lot of credulousness, The things you look at today to me that prices can go
and not much risk aversion, are different than the things farther in diverging from value
and I think thats a cause for you looked at 20 years ago. before they get corrected.
concern. The memo is entitled Twenty years ago, there was Think about what would
There They Go Again . . . no CNBC and no Internet. happen if 95% of the money
Again. It talks about whats The things you look at change, went into index ETFs or index
going on todaystock market and you have to stay current, funds. Who would be setting
valuations are high, VIX is at but the process, the goal, and prices? Theres something
the lowest reading in history, the principles of trying to take called price discovery, and its
and the FANGs are adored. the temperature of the market done by thoughtful buyers and
The market leaders are being doesnt change. I'll have a book sellers. The price of a security
sucked up by ETFs in a kind of out next year about cycles, and in the marketplace is set by
virtuous circle, where they go thats most of what the book buyers and sellers coming
up in price, which makes will be about, trying to together, and seeing if they can
people buy them, which makes understand where we are in find a place to transact where
them go up in price, which the cycle. the buyer thinks it has good
makes people buy them. High upside, and the seller thinks it
(Continued on page 10)
Page 10

Harvey
OaktreeSawikin
Capital Management
doesnt. Who provides that with a golden intuition or gut? I
function if all the buying are on don't know, but well see. G&D: Do you think investing
autopilot? People put their timeframes have materially
money in index funds, with the What would happen, though, if changed as a result of the
presumption that theyre there were a thousand information age?
minimizing error, but how investors in the world, and
much of your money do you they all used the same screen? HM: Well, I don't know if its
Tripp Blum 08 (left) and want to have managed in a Then prices would be set, because of the information age.
Kevin Oro-Hahn 10 at the fund where nobodys thinking since every seller and every I think a lot of it is because of
2017 Value Investing about the price of the stocks buyer is guided by the same the pressure on investors for
Reception or the weightings within the screen; that means prices performance. We used to
portfolio? would be set the way the think about holding stocks for
screen says it should be. That five years, and at the end of
The thing about investing is means the goal would be to the year, it took a week or
that the efficient market find the things that the screen two before the bookkeepers
hypothesis says that price hasnt thought of. Thats what figured out what your rate of
equals value. Active second-level thinking would be return was for the year. I may
management is about the here: thinking different from be exaggerating, but then it
assumption that price the herd, and better. became a matter of an hour,
sometimes deviates from value, then it became a matter of a
finding those deviations, and If the whole herd is directed by minute. Today, everybody has
then taking advantage of them. a screen, youve got to find their performance every
It seems to me that the fewer something that the screen second in real time, and in one
the people who are looking at hasnt thought of. I believe that of the biggest mistakes that
value, the higher the likelihood will always be possible, took place in this process, the
that price can diverge from because one important thing clients decided to put a lot of
value. But thats just a to remember is that the emphasis on short-term
hypothesis. actions of investors change the performance. It tells you
market. When all the investors nothing. In fact, if you put a
G&D: With the age of the use a given screen, that fact manager on probation because
quant, should a value investor will change the market, he had a bad quarter, if he sells
change anything about first- meaning things the screen the stocks that are down and
level, second-level, or even hasnt thought of determine buys the stocks that are up,
third-level thinking? attractiveness. you have forced him into a
poor decision. But it has
HM: Artificial intelligence is Other aspects that the screen happened, and now everybody
probably a threat to all of us. has not been set up to look for wants to know how you did
We just dont know how. I will become the determinants last quarter. Nobody says,
believe great investing is as of success. Its all kind of how did you do in the last ten
much art form as science, and I circular, and kind of zen. I years? which is what matters.
dont know if a computer can exaggerate by saying Every manager and every
be taught to paint a everything thats important approach has times when he,
Rembrandt, but maybe it can. about investing is she, or it is out of favor.
A computer beat the greatest counterintuitive, and
chess player. We were told everything thats obvious is In theory, an investor who
that Go, the Asian game, is not wrong. The question is, can a skillfully changes his approach
scientific, and that unique computer, a spreadsheet, a and keeps up with the
intuition prevents a computer model, a screen, be taught to demands of the marketif
from succeeding at Gobut make counterintuitive that person existedcould do
now computers beat the best judgements? I dont know. well all the time. Very few
Go players. It seems clear to Can a computer, or AI, figure people, if any, satisfy that
me that a computer could out which companies will be criteria. Most great investors
probably be programmed to best managed and which new stick to an approach through
beat the average investor. Can technologies will succeed? thick and thin, and yet every
it outperform the best investor Well see. approach goes out of favor
(Continued on page 11)
Page 11

Harvey
OaktreeSawikin
Capital Management
sometimes, which means that greatest quote in my book is HM: Well, nothings very
every investor has periods in from Charlie Munger, who attractive. Some things are less
the dog house. To be a great said, None of this is meant to unattractive than others. In the
investor, you must have an be easy, and anybody who whole world, its hard to find
approach, and you have to thinks its easy is stupid. All what we call a beta market,
stick to it, despite the times this stuff is really complex. Its that is an open, public, scale
when its not working. If the easy to talk about, but its hard market that represents a
clients look at the to implement. How do you tell bargain. Whats cheaper than
performance every six months, the ones who are good but others? Non-prime real estate
three months, month, week, unlucky, from the ones that is cheaper than prime real
then it becomes harder for the are bad? Its not easy. It takes estate. I think that private debt
judgment. Thats why I believe is cheaper than public debt.
Theres no lesson like that this whole thing can never Emerging markets are probably
be completely computerized, cheaper than the developed
experience. You can because I think exceptional world. I think that Japans
investment success requires cheaper than the United
read about it...but judgment, and I dont know if States.
AI can be taught to make those
theres nothing like
judgments. G&D: How do you look at
living through it. The emerging markets these days?
G&D: Do you have any advice
most important lessons for folks that have trouble not HM: I go to India for a day or
being able to step back from two, and I come home and
in investing are the noise, especially in an everybody says, What do you
environment where there is so think about India? This is hard
learned in the tough much scrutiny on short-term stuff, and anybody who thinks
performance? they can go to a country and
times.
after two days have a superior
manager who wants to keep HM: Number one, every insight into its future is nutty.
the account to stick to his investment manager who When I was in equity research
approach. Instead you start manages money for other in the 1970s, I started to
buying the things that have people must spend a lot of develop a very jaundiced view
gone upwe call that chasing. time on client education, and of plant visits. You go to a
You sell the things that have you have to explain to them factory, and the CEO walks
gone downwe call that the error of putting pressure you around. Is a clean plant
puking. That can't be the right on managers and acting in better than a dirty one? Is a
formula. response to short-term pretty one better than an ugly
performance. You must one? I think these are not the
Most investment management convince them to figure out things that matter, and the
clients give more money to the who the good ones are. Stay things that matter cant be
manager whos been doing with the good ones, get rid of assessed by some visit and
well. Very few have a program the bad ones, and put more looking at physical things most
of giving more money to the money with good managers of the time.
manager whos been doing who are down. Thats
poorly. Thats what you should counterintuitive and hard to G&D: But you were recently
do, though, because thats how do. It means resisting in India. Did you develop a
you buy the things that are out emotions, and it requires a view?
of favor. Obviously, you have certain degree of stalwartness,
to separate the ones that are which many people dont have. HM: I have a thought on India,
good at their job but may be I have a bias. I think it has
out of favor from the ones that G&D: Is there an investing potential. It has a lot of people,
are just bad at their job. Thats strategy or industry that is it has a high birth rate, which is
not easy either. looking very attractive to you very important for creating
right now? GDP growth. It has a lot of
None of this stuff is easy. The unmet needs, it has a lot of
(Continued on page 12)
Page 12

Harvey
OaktreeSawikin
Capital Management
people who would like to get projections, and opinions, and theres a lot of randomness.
into the middle class. I believe intuition, and hunches. I always Those things make it
it has a work ethic. When I see say that to deal with the interesting. Its an intellectual
the poorest of the poor, future, you need two things. puzzle with partial information.
theyre impeccably groomed. Most people think you need The process is messy and
That impresses me. That one thing: a view of whats imprecise. To me, thats
suggests standards, aspirations. going to happen. But I think fascinating. You can have
Of course, India is famous for you really need two things: a guidelines developed over a
corruption and bureaucracy. view of whats going to career, but they sure dont
Those are the negatives, but happen, and a view of the work every day. I love it for
the question is can the former probability that youre right. that reason.
overcome the latter? I believe We should accept the fact that
so. I hope so. some of our opinions have a I think your classmates should
higher probability of being right pursue investing if theyll love
Indian equities have gone up, than others. it. Thats why you should do it.
but everything in the world has The main reason you shouldnt
gone up. I think Indian equities I wouldnt bet a lot of my do it is to make a lot of
are at full multiples, but that's money on my positive opinion money, because number one,
true everywhere. We may be on India, but Id bet some. Im money isnt everything.
at similar multiples in the no expert on predicting the Number two, I predict the
United States. I would ask you future of nations. I havent investment management
20 years from now, which will done it much in my life. As I business is not going to remain
have had higher growth, the said in my memo, Expert as remunerative for everyone
U.S. or India? If India has higher Opinion, what happens is if you as it has been in the last 35
growth, which I would bet it make a few good investments, years.
would, and can avoid the and if you exhibit some
occasional crisis that tend to intelligence, then people start My favorite quote comes from
befall emerging markets, then asking your opinion about all a British author named
my guess is that investors in kinds of things you know Christopher Morley, There's
India will have done well. nothing about. only one success: to be able to
live your life your way. I
When people ask me about G&D: There is one last believe you shouldnt let
this stuff, especially about opinion we want to ask of society determine what your
China, what I tell them is youwhat would your advice way is, and you shouldnt let
Europe and Japan are senior be to an MBA student trying to money determine what your
citizens, past their prime. The enter investment management way is. If the proposition of
U.S. is a mature adult, still today? investment management is
good, but its best decades are interesting to someone, then
behind it. The emerging HM: I think that investment they should do it, because
markets, China, probably India, management is fascinating, theyll have a great deal of fun.
are adolescents. If youve ever because its not easy; its Not everybody has the
had an adolescent in your challenging. In Fooled by intuition you need to be
house, as I have, you know Randomness, Nassim Taleb successful, to be a great
that its chaotic, volatile and talks about the difference second-level thinker. Warren
tempestuous. What did my between investing and Buffett says he tap dances to
daughters dean call it? A dentistry. Theres no work every day. But not
hormone meteor shower. randomness in dentistry, and if everybodys Warren Buffett.
you do the same things to fill a
The point is the adolescents tooth, youll be successful This business isnt a lot of fun
future is ahead of it. My gut every time. when youre not successful,
tells me that the outlook for but it sure is when you are.
China and India is positive. I Thats not true of investing.
certainly would not hold First of all, theres no magic G&D: Thank you for your
myself out as an expert, thats formula. There are no physical time.
just a hunch. We have laws at work. Number two,
Page 13

Spirit Aerosystems (NYSE: SPR) - Long


2016 Women In Investing (WIN) Conference

Madina Baikadamova Sowan Cha, CFA Jean Cui Claudine Fernandez


MBaikadamova18@gsb.columbia.edu SCha18@gsb.columbia.edu JCui18@gsb.columbia.edu MFernandez18@gsb.columbia.edu

Recommendation
Madina Baikadamova 18 We are long on Spirit Aerosystems (SPR) with an end of Trading Statistics (as of 11/11/2016)
Madina is a 2nd year student
2017 price target of $72, offering 31% upside from
Share price $55.02 52 Week High $55.02
at CBS. Previously, Madina 11/11/2016s price of $55.02 and an attractive upside/
Dil. Shares O/S 127 52 Week Low $40.50
worked at Verno Capital as downside ratio of 1.4x. We believe there are 1) favorable
an equity research analyst in industry dynamics and reliable backlog demand, 2) high Market Cap $6,988 Dividend Yield 0.73%
Moscow, Russia. In summer Plus: Debt $1,097 Shares Short 8.07
2017, Madina interned at customer captivity protected by high barriers to entry and
Brandes Investment Partners. switching costs in the industry, and 3) growing profitability Less: Cash -$670 Short Interest 6.64%
from maturing 787 and A350XWB programs. All of these Enterprise Value $7,414 Days to Cover
advantages are driven by Spirits immense cultural trans-
formation.
Business Description
Spirit Aerosystems is a leading independent manufacturer of commercial aerostructures for OEMs. Aerostruc-
tures are typically major components of airframes and include the fuselage, nacelle, wing flaps, and slats. Spirit
has long-term, exclusive contracts with Boeing that cover every Boeing commercial aircraft currently in pro-
Sowan Cha 18 duction. Last year, Boeing accounted for 84% of Spirits total revenue while Airbus accounted for 12%.
Sowan is a 2nd year student
at CBS. Previously, she was a
Investment Thesis
Senior Financial Analyst at 1) Favorable industry dynamics and reliable backlog demand
Vince and an Investment Spirit is operating in a market backed by favorable industry dynamics and reliable backlog demand. Global air
Banking Analyst at Citi. In
traffic is expected to grow at a 4.9% CAGR through 2035 and projected to double by 2030.
summer 2017, Sowan in-
terned at Evercore ISI.

Jean Cui 18

Jean is a 2nd year student at


CBS. Previously, she worked
as a consultant at McKinsey &
Company, in internal strategy
and analytics at zulily, and as a
Pre-MBA investment intern at
T. Rowe Price. In summer
2017, Jean interned at
BlackRock (Active Equities).

As of December 2015, Boeing and Airbus combined backlog totaled $47B. Net fleet demand is expected to
double from 22K aircraft by 2035. Additionally, 17K current aircraft will need to be replaced by 2035, increas-
ing SPRs potential market. That implies visibility of deliveries of 10+ years for Airbus and 8+ years for Boeing
at current production rates.
Demand for civil aircraft remains solid (the International Air Transport Association sees ~5% CAGR) driven
Claudine Fernandez 18 by above average traffic growth and increased airline demand for new aircraft. Airline backlog cancellation
Claudine is a 2nd year stu-
rates and deferral activity have remained within historical averages and below peak cancellation rates of 10%
dent at CBS. Previously, she seen during the 2008 financial crisis.
worked as a Strategy and
Corporate Development 2) High customer captivity protected by high barriers to entry & switching costs in the industry
Analyst at Voya Financial and In addition to strong guaranteed demand from backlog, Spirit enjoys high customer captivity. The company
as an Investment Banking
Analyst at RBC. In summer has supply contracts for most of its products for the full lifespan of an aircraft program. Spirit is also currently
2017, she interned as an the exclusive supplier under many of its contracts with Boeing and Airbus.
Equity Research Associate at
Jefferies.
**Editors note: SPR originally presented in November 2016 at a share price of $55.72 with a
target of $72, representing 31% upside**
Page 14

Spirit Aerosystems (SPR) - Long (Continued from previous page)


Spirit has invested heavily in developing customized manufacturing capabilities for both clients and specific programs. Spirits substan-
tial PP&E balancethe replacement value of its buildings and equipment has been valued at $6.9Bacts as a strong barrier to entry
as other firms cannot replicate Spirits capabilities without significant investment costs.
Effectively, Spirits clients have no true or easy substitute for Spirits products.
3) Growing profitability from maturing 787 and A350XWB programs
Spirits margins will expand due to economies of scale in its currently unprofitable maturing programs. For example, Spirits largest
maturing program, the Boeing 787, will have 8% gross margin by 2017 and 10% gross margin by 2018 as compared to a current
gross margin of 0%. As with the mature programs, the significant backlog for the maturing programs helps secure future revenues.
4) Immense cultural transformation
Over the past 10 years, the company has evolved from a subdivision of Boeing to an independent company and from a price-taking
cost center to a negotiating cost controller. Primary research reveals that former CEO Larry Lawson made bold investments in
human capital to attract and retain top talent and to drive employees to strive for excellence. This cultural shift resulted in opti-
mized supply chain management through more aggressive negotiation with suppliers. It also emphasized a focus on innovation in the
engineering department, leading to the development of efficient, industry-leading manufacturing processes and a subsequent compet-
itive advantage in cost. New CEO (and former COO) Tom Gentile, who previously held a succession of leadership roles at GE, will
continue to drive Spirits cultural transformation and long-term growth.
Valuation
Both DCF and multiples analysis show that Spirit Aerosystems is undervalued while bear/base/bull analyses reveal an appealing risk/
reward. Our base case price target of $72 offers ~31% upside. In the DCF base case, we assume:
EBITDA margin expansion from 15.7% in 2015 to 16.6% in 2018 mostly driven by 787 program gross margin improvement from
0% to 10%. Consensus EBITDA margin is under 16%.
2015-2021E operating profit CAGR of 4.4% before reaching terminal growth of 1.5%.
Improved future inventory management due to maturing 787 & A350XWB programs.
2015-2018E net income CAGR of 6% compared to consensus CAGR of 3.4%.
Our DCF bear and bull cases imply share prices of $43 (22% downside) and $85 (55% upside), respectively.

In our multiples analysis, we use the 10-year historical average as our assumption for one-year forward P/E (13.5x) and EV/EBITDA
(7.2x) multiples and derive end of 2017 target prices of $67.40 and $62.60, respectively. Our base case DCF valuation implies 14.4x
one year forward P/E and 8.2x one year forward EV/EBITDA. We believe the DCF method reflects recent structural changes which
justify target multiples 7% and 14% higher than historical averages. Our DCF method projections are still on the conservative side
recent acquisitions in the sector involved far higher EV/EBITDA multiples.
Key Risks and Mitigants
1) High customer concentration: Spirit is the exclusive supplier for most of its programs and the industry has high barriers to
entry and high switching costs, mitigating the risk from high customer concentration. 2) Execution of new and maturing pro-
grams: Spirit has a conservative number of maturing programs, with two key maturing programs only one year away from generat-
ing positive cash flows. Additionally, Spirit has over 85 years of industry expertise with an emphasis on innovation in product devel-
opment and manufacturing. 3) Cyclicality and sensitivity to commercial airline profitability: Spirits contracts with Boeing
and Airbus are long-term arrangements. 78% of Spirits backlog is either pre-production or has been in production for less than 15
years and will be not affected by short-term cyclicality. Furthermore, historical backlog cancellations have been minimal even in
times of financial crisis. 4) Rising pricing pressure from key clients as competition escalates: Spirits strong management
team, negotiating power, and proprietary manufacturing processes, combined with the lack of direct substitutes for Spirits products,
protects the company from rising pricing pressure.
Page 15

Pitch the Perfect Investment


(Continued from page 1)

MBA from Columbia Schools Executive MBA Paul Johnson (PJ): Weve
Business School and a BA program as well as the known each other for a long
in Economics from Adelphi 2017 Columbia Business time. We met in 1994; Paul
University. For 16 years, Schools Deans Prize for was my student, then he was
Sonkin was an adjunct Teaching Excellence. He my Teaching Assistant for a
professor at Columbia received the Gabelli while, before he started
Business School, where he School of Business teaching his own class in 1996.
taught courses on security graduate-level Deans Then in 1997, we co-taught
analysis and value Award for Faculty the Value Investing class during
investing. For over 10 Excellence in 2017. Bruce Greenwalds sabbatical.
Paul Sonkin 95 years, he was a member of Johnson was a contributing Weve been personal and
the Executive Advisory annotator to The Most professional friends for more
Board of The Heilbrunn Important Thing than 20 years. We started the
Center for Graham & Illuminated, by Howard collaboration on the book four
Dodd Investing at Marks, co-author of the years ago, at the Heilbrunn
Columbia Business School. history of value investing Centers Graham & Dodd
Sonkin has extensive in Columbia Business Breakfast in fact. After that
corporate governance School: A Century of Ideas, breakfast, we were just
experience having sat on and co-author of The chatting and catching up, and
six public company boards Gorilla Game, Picking Paul said he was writing a
and is the co-author of Winners in High Technology. book. I responded, Yeah, Ive
Value Investing: From He has an MBA in Finance always wanted to write a book,
Graham to Buffett and from the Executive but I know it will take too
Paul Johnson Beyond (2001). Program at the Wharton much time and energy. I then
School of the University of asked, What is the name of
Paul Johnson has been an Pennsylvania and a BA in your book? And he said, The
investment professional for Economics from the Perfect Pitch.
more than 35 years and University of California,
currently runs Nicusa Berkeley. I thought that was funny,
Investment Advisors. because I had always wanted
Previously, he was a top- Due to increasing to write a book called, The
ranked sell-side analyst, a frustration from not having Perfect Investment. Paul
hedge-fund manager, and a good book to assign to suggested that we should work
an investment banker. As a their students, they co- together, which I initially
portfolio manager, he authored Pitch the Perfect thought was a crazy idea.
invested in virtually all Investment. In their book, However, we started emailing
sectors of the economy which was released by John back-and-forth that morning,
and has participated in Wiley & Co. in September, after we returned to our
more than 50 venture they give the reader the offices, and quickly discovered
capital investments during tools to decipher a that our two books were
his career. Johnson has portfolio managers opposite sides of the same
taught 40 semester-long schema. These tools will coin. Before long, we had
graduate business school help in selecting a security agreed to write Pitch the Perfect
courses on securities to pitch that captures the Investment, which we decided
analysis and value investing audiences attention, in would be a combination of our
to more than 2,000 determining whether a two books. Although I didnt
students at Columbia genuine mispricing exists, fully understand what Paul
Business School and the and in showing how to meant when he first said that
Gabelli School of Business, generate a true edge. the pitch is the architecture
Fordham University. He of the research process, I
received the Commitment Graham & Doddsville learned to appreciate his
to Excellence award in (G&D): How did you two first insight over time while
both 2016 and 2017 from meet and come up with the working on the book. Paul
the graduating class of idea for a book? argued that if you cant pitch
Columbia Business the idea successfully, then you
(Continued on page 16)
Page 16

Pitch the Perfect Investment


havent done the proper and random newspaper no training on Wall Street, so
research on the idea and if you clippings. However, there most young analysts are just
get the pitch right, everything never was a single source that thrown into a situation where
else falls into place. I believed addressed the topics we they dont know which end is
at the time we started working wanted to cover in class. Paul up. We wrote our book to be
together that the goal was to and I decided to write a book a survival guide. It addresses
find the perfect investment and for that audience because 80% of what they need to
the pitch would take care of nothing existed to fill the gap. know, in a single, distilled
itself. I have come to realize volume.
that Pauls view is correct and Paul Sonkin (PS): As Paul
my view was incomplete. said, one of our motivations The MBA student looks a lot
was that we didnt really have a like the college student with,
A lot of people think of as Paul said, perhaps a little bit
pitching as persuasion or more experience. But I think a
selling. But in our view, My thought was large percentage of people that
pitching is making a convincing go get their MBAs are career-
case why the market is wrong always, why do my switchers. Their needs are
and you are right. We dont similar to the college student.
think of the pitch as selling, students have to make And this book gives them
rather, the pitch is the everything they need to
opportunity to explain your
the same mistakes I survive and thrive on Wall
recommendation in a way that made?....Why not learn Street.
the PM understands the
opportunity and wants to from the mistakes I PJ: Ive been teaching at
adopt the idea. The pitch is the Columbia for 25 years. My
culmination of your research and others have thought was always, why do
process. my students have to make the
made. same mistakes I made? Why
G&D: Most investment books does every one of them need
are targeted at seasoned good book to assign to our to reinvent the wheel as they
practitioners. Why did you students. We also tried to start their career? Why not
choose younger analysts as avoid targeting the practitioner learn from the mistakes I and
your primary demographic? as our primary audience for others have made. Everyone
the book because practitioners will make your own
PJ: Early on, Paul said to me, think they already know mistakesthat, I promise you.
Since we both teach MBAs, everything. We didnt want to But why should everyone have
why dont we write a book for get into a debate with them to re-learn basic lessons? This
them? There is no book for about how much they already is ridiculous. Besides, Wall
the college or MBA student, or knew, or thought they knew. Street has become more
recent college or MBA We still think that every competitive and the stakes are
graduate, and its desperately practitioner will learn a lot by much higher now to develop
needed. We felt that college reading the book, but they are the necessary skills more
and MBA students are similar. not our primary target quickly. My approach to
Although the MBA student audience. teaching has always been to
usually has more experience, bring people up to speed as
they have similar challenges in Rather, our target is the quickly as possible. Then let
acquiring the necessary skills college or MBA student that is them leverage what they
to be successful in the pitching a stock for a job learned in school to be
business. interview, a stock pitch successful in business.
competition, or a student-run
And, we both taught our investment fund, or the analyst PS: During my 16 years
investing classes at Columbia that just graduated from teaching at Columbia, my
by piecing together an eclectic college or business school who approach was the same. In my
collection of articles, chapters is new to the job. These are class, I tried to simulate the
from books, journal articles our primary audiences. Theres real worldpitching a stock to
(Continued on page 17)
Page 17

Pitch the Perfect Investment


a portfolio manageras much in our collaboration that Paul he had created to explain an
as possible. We wrestled with has this unique and wonderful insight or new perspective he
a lot of difficult investing ability to see stuff very had overnight. I would look at
concepts, trying to pin them to differently than I do, and what he sent me and say Paul,
the ground in the process of differently than most people that idea alone is worth the
writing this book. We dont do. price of the book. He usually
feel our book is the definitive responded, Oh you like it?
treatise on the subject, rather, Pauls job was to come up with And I would respond, It
we are just trying to move the crazy ideas and my job was doesn't matter whether I like
ball down the court. Were help filter out the best ones. I it, the visual explanation is
just trying to advance the urged Paul not to self-edit. awesome. The chart is going
discussion and contribute to Dont ever say, This idea is into the book.
the investment communitys too crazy to share with PJ. I
understanding of these critical told him regularly, I want you We both gravitated toward
issues. to tell me everything that small and microcap stocks
comes into your mind on these because that's where we
G&D: Both of you focus a lot topics. I want your unique thought we had an edge. In
on small-cap stocks. Is that one perspective on these issues. that way, we are similar. We
reason why you were able to Let me filter. That became both grew up in that universe
collaborate successfully on a our partnership. and our approach to the asset
book? class is similar. We agree that
it would be fun to be able to
PS: What works about our figure out what Google is
We feel strongly that
collaboration is that first off, worth, but you would be
we both have a lot of working all investors need a competing with 500 other
knowledge of the domain. But analysts and portfolio
were very complimentary better understanding of managers who are each trying
because Im all over the place to figure it out. We both
in the way I think about the the difference between concluded that all those
issues. With my gift of investors are probably really
attention deficit disorder, I the two concepts [risk smart and are formidable
came up with all these crazy competition.
and uncertainty].
ideas and examples, and then
Paul and I worked together to As a result, we both tried to
distill them down. find situations to analyze with
The fact that weve known fewer smart people to
PJ: Paul will come up with, say, each other for a long time and compete with. We both got
10 crazy ideas, two of which were trained in a similar way into small caps because that
are like, Wow, thats the probably helped, but I think sector of the market was the
craziest thing Ive ever heard our shared passion fueled our least efficient. However, other
we cant write that and those collaboration. Certainly, our investors figured that out and,
would get kicked away pretty mutual respect, natural unfortunately, even that part of
quickly. Four or five of them chemistry and all those things the market has become
were a creative take on help the relationship, but at fiercely competitive.
something thats conventional, the end of the day, its a
which often changed our view collaboration focused on trying G&D: What are the
on a specific topic, many of to figure this stuff out, working theoretical concepts about
which are embedded into the to make it clear, and writing it investing you discuss in the
books core principles. And to share with other people. book?
two or three of the 10 ideas
would blow me out of the I always thought I was a visual PS: (laughing) What concepts
water. I often said in our thinker, but Paul is that on dont we discuss in the book?
discussion, Can you repeat steroids. There were countless
that? I am taking notes as fast times hed get up in the PJ: One of my favorites is our
as possible. I recognized early morning and email me a chart discussion of risk and
(Continued on page 18)
Page 18

Pitch the Perfect Investment


uncertainty in Chapter 9. We of uncertainty, but not a lot of perfect pitch, why do you think
feel strongly that all investors risk. the pitch is so central to this
need a better understanding of industry?
the difference between the PJ: Lehman bonds after their
two concepts. bankruptcy filing is another PS: If you want to go into
example. Lehman bonds were investment management,
For example, if I gave you a trading at eight cents. A couple youre going to have to go on a
lottery ticket, it is uncertain of really smart investors did job interview. I dont think
whether youll win. I think that the analysis and concluded that theres any other way you can
is clear to most people. get the job. And the portfolio
However, is there any risk? I First, you have to manager doesnt really know
gave you the lottery ticket for how to conduct an interview,
free, so there is no risk. Now think about whom so theyll look at your resume
what if you bought the lottery and ask some basic questions
ticket with your own money? youre pitching to. to break the ice. And then,
Now there is uncertainty and when they have run out of
risk: the uncertainty of winning
Portfolio managers are patience, theyll ask what they
and the risk of potentially busy and theres better really want to know, Whats
losing the money you spent on your best idea?
the ticket. There may be a lot than a 50/50 chance
of uncertainty, but there is no PJ: Every interview is
risk without committing that they have ultimately a stock pitch. We
capital. Although this is a wrote the book with the goal
simple example, it attention deficit of showing the student or
demonstrates that risk and recent graduate how to come
uncertainty are not the same
disorder. You need an to the interview with an
thing. Uncertainty is usually idea that is going to investment idea that will get
what everyone talks about the portfolio manager to say,
when they discuss the different capture and hold their Im going to end the interview
possible future outcomes or here so that I can start
scenarios, although they often attention very working on this idea now.
mislabel uncertainty as risk. Perhaps this goal is too
quickly. ambitious, but that is what we
Theres uncertainty in the want the student thinking
future, but risk only exists if although there was a lot of every time they prepare for a
someone commits capital and uncertainty as to what would job interview. They need to
is only the part of uncertainty be the final outcome for the understand that their pitch
that could potentially cause bond holders, the worst case needs to be so persuasive that
harm to the investor. We feel in their estimate was 22 cents. the manager wants to end the
that this distinction is an They couldnt come up with a meeting early to pounce on
important subtlety for all scenario where they got less the idea.
investors to appreciate. As we than 22 cents. But they had no
show in the book, uncertainty idea when the bonds would be PS: For the book, we felt it
and price is what determines redeemed, so they didnt know was critical to reverse
risk. There are a lot of their expected return. In the engineer the managers
situations that are highly end, the bonds were cognitive process. We thought,
uncertain, and the uncertainty redeemed for 41 cents. There Okay, what would be the
spectrum may be quite large, was a lot of uncertainty, but elements of an idea that would
but if the price is low, then limited risk, and a terrific motivate the PM to clear his or
there may be little to no risk. return in the end. Those her desk? First, you have to
investors were rewarded for think about whom youre
PS: One of the cases we understanding the difference pitching to. Portfolio managers
discuss in the book involves between risk and uncertainty. are busy and theres better
Herbalife bonds. It was a than a 50/50 chance that they
situation where there was a lot G&D: Before we discuss the have attention deficit disorder.
(Continued on page 19)
Page 19

Pitch the Perfect Investment


You need an idea that is going resonated with me the most. investors who speak in the
to capture and hold their We wanted to write a book Value Investing class are the
attention very quickly. We that explains the behavior of same way. What we tried to
thought, What response are these great investors. do was distill their knowledge
you trying to elicit from the and processes into a generic
portfolio manager? What is the PJ: That's why writing the framework that one can
best possible outcome other book took so long. understand and learn from.
than he just hires you on the And we think we achieved that
spot? In our research for the PS: If you look at some of goal.
book, we spent a lot of time these super-investors, like
thinking about the entire Michael Price, Warren Buffett, G&D: What are the big
processfrom the first time Seth Klarman, Mario Gabelli or mistakes that young people
the portfolio manager lays eyes Walter Schloss, all these guys make when they pitch stocks?
on you until he decides to put have different, yet successful
the idea in his portfolio. approaches to investing. PJ: A couple of things.
Nonetheless, our framework Number one is
PJ: We also think that stock explains exactly what they are overconfidence, which is a
pitch competitions have lost doing. We think our model little tricky because you need
their way, at least the ones we provides a lens to show how to be confident in this
have attended. For many of they gain an investment edge. business.
them, the competition has
become an exercise in showing PJ: It is important to PS: We have heard countless
the judges how much work emphasize that the world has students say, I know the value
youve done and how many changed a lot in the past 40 of the company. In fact, I know
slides you can put in your years. For instance, investing the company better than the
presentation, rather than has gotten significantly more analysts following it because
finding a compelling investment competitive, which we talk a Ive worked on it nonstop for
idea. I think the judges have lot about in the book. And we an entire two weeks! We
also been trained to look for argue that unless you have a were both judges at a stock
the person who did the most good roadmap, youre going to pitch competition earlier this
work and has the best slides, have problems. year. We were sitting next to
as opposed to the most each other during the
interesting investment PS: The other challenge with presentations and whispering
opportunity. these investors is that while back and forth about how
they have so much expertise, awful the pitches were. We
G&D: What does this book most of their knowledge has were shocked at how bad they
bring to the table that is become tacit and they have were.
different from all the other trouble communicating it
value-investing books out effectively. The biggest mistake we see is
there? that students spend 90% of
PJ: Would you want to take a their time figuring out what
PS: In addition to teaching my basketball lesson from Michael they believe is the intrinsic
own classes at Columbia, I also Jordan? Youd might want to value of the company. Maybe
graded papers for Bruce play basketball with Michael 95% of the time. And they say,
Greenwalds Value Investing Jordan, but you probably dont Okay, I think the stock is
class for six years. During want a lesson from him. And worth $50, its trading at $42,
those six years, I attended you probably dont want a therefore it's a buy. They
most of the lectures from the tennis lesson from Roger spend 95% of their time
super-investors Bruce invited Federer. These individuals are explaining why its worth $50,
to speak in class. In addition, great performers, but they are but dont address why its
probably lousy teachers. trading at $42. They do not
Ive read the same books as Theyre fantastic at what they explain what the market is
everyone else. I formulated do, but we have found that missing. They dont explain
my investment strategy on the they cannot explain their craft why the mispricing exists.
ideas from those investors that very well. The legendary
(Continued on page 20)
Page 20

Pitch the Perfect Investment


PJ: One of the key messages in that because that is the four questions. A variant
our book is that if you inverted investments risk. perspective means you have a
the time allocation and spend view that is different from the
90% of your time explaining PS: Then the third question is, consensus and you are right.
what the market is missing and Why is it trading at $42? The farther away your view is
why the stock is mispriced, from the consensus, the bigger
rather than 90% of your time the price difference is going to
Kenneth Chan 18, Kevin trying to justify your valuation, be and the greater the
Nichols 18, Aniket we believe that the portfolio The biggest mistake opportunity, but the harder it
Nikumb 18 and Jacob manager will listen intently and, is to prove that you are right.
Doyle 18 at the 2017 might, in fact, clear his desk to we see is that students To emphasize the point: to
Value Investing Reception eagerly research your stock. If have a variant perspective
spend 90% of their
you start your pitch by saying, means that you have a view
The stocks trading at $42 time figuring out what that is different from the
because investors believe X, Y, consensus and you are right.
and Z are true. Ive done a they believe is the You need both to be true.
bunch a work to know why X,
Y, and Z are not true and here intrinsic value of the PJ: Howard Marks states this
is why consensus expectations well in his book, The Most
are wrong, the portfolio company.They do Important Thing, when he says,
manager is going to give you A forecast only has value if its
not explain what the
his full attention. You then different than consensus. But it
need to walk through why X, market is missing. has to be right. The key to
Y and Z are not true. If you making money in the stock
take that approach, the market is to be both different
portfolio manager is going to PJ: You need to explain to from the consensus and to be
get highly interested in your the portfolio manager what the right. Both are hard. Being
recommendation and theyre market has interpreted different than consensus is
going to say to themselves, If incorrectlywhat the market never easy, but being right is
hes right, this stock's going to is missing. Youre a young kid, more important.
$50. Now the focus is figuring youre brand new to the
out why youre right and why business. Youve figured out G&D: How do you think
the market is wrong. the stock is worth $50 but the about a catalyst closing the gap
rest of the market thinks its between the analysts variant
In the book, we explain how worth $42? Why? How have perception and the markets
every pitch must answer four you been able to figure this view?
questions, two of which I out, but the market hasnt?
highlighted in the example You need to answer this PJ: People throw the word
above. question fully or the portfolio catalyst around all the time,
manager will assume your but we struggled with the
PS: The first question the estimate of intrinsic value is definition for four or five
portfolio manager wrong and the market is months. We kept asking,
subconsciously asks himself is, probably right. If thats the What exactly is a catalyst? I
How much can I make? case, he will quickly lose think we finally figured it out: a
interest in the nameand in catalyst is any event that starts
PJ: If its trading at $42, you. to get the consensus to realize
explain to the portfolio that the current set of
manager why you think its PS: Then the fourth question expectations is wrong and
$50. That gets him excited. is, How's the market going to begins to move expectations
That gets his greed going. figure it out so the stock toward your non-consensus
reprices? point of view. The fourth
PS: Then the second question question can be rephrased as,
is, How much can I lose? We use Michael Steinharts whats the catalyst? We
framework of variant think there are different types
PJ: And you better address perception to address these of catalysts. Time can be a
(Continued on page 21)
Page 21

Pitch the Perfect Investment


catalyst, which we call a soft listen to 10 pitches a day from or trading advantage, which
catalyst. Or there could be a companies. Gabelli is having means that you can transact in
specific event or their aircraft supplier a security where others cant
announcement, which we call a conference tomorrow. There or wont. When Warren
hard catalyst. will be 12 companies there. Buffett bought Goldman Sachs
That's 12 stock pitches. Most preferred shares during the
Most pitches dont spend much wont resonate with me, but 2008 financial crisis, he was the
time on questions three and one or two may. I always ask only one offered that deal. He
four. I like to use a retailer, myself, Okay, what gives me had a structural cost advantage
such as The Gap, as an the warm fuzzies? And then I and generated alpha from it.
example. Lets say that the big try to reverse engineer what For him, the security was
issue for the company is that led to that feeling I had. That is mispriced.
as they get near the end of the what weve done in the book:
season, they write everything reverse engineered the How do you get an analytical
down because they cant get portfolio managers cognitive advantage? An analytical
the merchandise right and process. advantage is where you look at
their profitability always the exact same data set
disappoints investors as a G&D: What part does market available to everyone else but
result. Thats been the issue efficiency play in your process you see something that other
for years and is what everyone of repricing? people dont see. Thats your
is worried about this year. But, variant perception. And thats
I was walking through one of PS: In our book, we start with where behavioral finance
their stores and thought the the work of Eugene Fama and comes into it. If everybodys
merchandise actually looked conclude that for a stock to be fixating on one piece of
pretty good. I started calling efficiently priced information information and ignoring other
store managers around the needs to be adequately information in the public
country, and, sure enough, disseminated, processed absent domain that you find
they said, No, this is the best any systematic bias, and then important, there could be a
season weve ever had. incorporated into the stock mispricing. We devote a
price. An error in any of those significant section of the book
You can highlight this three areas can produce a to these principles: market
information in an interview or mispricing. You can have an efficiency, behavioral finance,
a stock pitch. You lead with I edge or advantage only if it and gaining an edge.
talked to 23 store managers addresses one of the three
across the country and they steps in the process. You G&D: Do you think the
said this is the best season either have an informational markets for large-cap U.S.
theyve had in years and the advantage, an analytical stocks today are much more
markdowns are going to be advantage, or a cost or trading efficient than it used to be 10
dramatically lower than they've advantage. Theres no fourth years ago? If so, what would
ever been before. I have a advantage. your book have been like if
variant perspective and I have you had written it then?
information other people don't PJ: We discuss market
have. It takes two minutes to efficiency at length in the book PJ: I think the market has
tell that story. because it explains the three become much more efficient.
reasons the stock could be As an example, think about the
PS: Between the two of us, mispriced. World Series of Poker. The
weve listened to thousands problem you have in poker
and thousands of stock pitches PS: You could have a piece of these days is that just about all
over our careers. We've heard information that no one else the rules have been worked
stock pitches from students in has, and youve obtained it in a out. The pros have simulated
class, during stock pitch legal way so its OK to trade the game on computers and
competitions, from sell-side on it. Thats a pure information determined the optimal
analysts, CEOs, and corporate advantageyou know strategy. The great poker
Investor Relations. Weve gone something the market does players have written books and
to conferences where well not know. Then theres a cost given you all the tricks. If I
(Continued on page 22)
Page 22

Pitch the Perfect Investment


decide I want to become a to building better models. That vertical on these services had
great poker player, I can read skill no longer gives you an an advantage. Then, when all
the important books on edge. the big guys had it, you needed
strategy and then play 1,000 it as the ante to stay in the
hands a day online. The PS: Lets say youre an analyst game. Now, if you don't have
process of becoming an expert following Best Buy, Home it, you're at a disadvantage.
has become simpler and faster. Depot or some other big
As a result, the game has PJ: We believe that
become a paradox of skill: You can have an information gathering has
anybody whos not highly become very sophisticated. As
proficient has been chased edge or advantage for an analytical advantage,
away. Only the greats are left youre competing against very
playing the game. There are no only if it addresses smart, well-trained and highly
more fish for the sharks to motivated investors and
feed onthey are gone. As a one of the three steps analysts. And, it is now very
result, it is sharks feeding on inexpensive to trade.
in the process. You
sharks. Everything has advanced in the
either have an last 10 years and the three
Its the same in investing. I am ways an investor can get an
shocked at how much more information ad- edge have weakened
efficient the markets have substantially.
become in the last 10 years. vantage, an analytical
Everybody talks about the fact PS: Another issue is the US
that it has become very hard advantage, or a cost listings gap. In 1996, there
to generate alpha. Youve seen were about 8,000 companies
or trading advantage.
some great investors leave the trading on organized
business. They are closing shop Theres no fourth ad- exchanges in the U.S. Based on
because they dont want to GDP, that number should be
compete against other sharks. vantage. 10,000 today. The actual
Thats the biggest change in 10 number of listed companies is
years. retailer. Ten years ago, RS only 4,000. One of the reasons
Metrics didnt existbut they the market has become more
I think the second biggest do now. RS Metrics flies efficient is that you have a lot
change is alternative data sets. satellites over retailer parking of smart investors, with access
Now there are sophisticated lots on a daily basis and takes to the latest technology,
programs that scrape the web, pictures. Then they have chasing fewer and fewer names
monitor social media, and computer programs that count with more and more money.
generate alternative the number of cars in the
information like credit card parking lot and compare the G&D: Given this, where
exhaust, which is secondary results against other satellite should practitioners and
or meta data, and satellite photos that theyve taken a students focus?
imagery. Alternative data has week before, a month before,
come a long way in the last 10 a quarter before, a year PJ: If youre young and starting
years and smart investors are before. They can tell traffic out in the business, you should
using these unstructured data patterns from that analysis. If focus on trying to develop an
sets to get an edge. you are analyzing Home informational advantage. Since
Depots stock and you dont you have the time and energy,
Also, information is now have that information, youre dig, dig, dig. Call as many
released on the web to at a huge disadvantage. potential sources of
everyone at the same time. information that you can find
You even have services like Its the same thing with expert and keep thinking of new
Capital IQ and others that will networks. When expert sources to contact. Be creative
build your financial models for networks came out, the about what kind of information
you. When I was a young investors who could afford to is important to uncover. For
analyst, there was an advantage spend $100,000 per industry instance, young analysts
(Continued on page 23)
Page 23

Pitch the Perfect Investment


understand the power of social companies effectively. I think create shareholder value over
media. See if you can use it to that private ownership is time. Thats the only real
gain an edge. Then, as you get growing because of the ability difference between the two
more experience, work to to control that piece of the markets.
expand your analytical skills so governance problem. Fixing
you can develop a more the agency problem is truly PS: I recently had lunch with
accurate variant perspective. I one of the last vestiges of alpha the chairman of a public
think thats the natural generation. Its very possible company. He had just bought a
evolution in the business. that in the future we will see private business at 6x EBITDA.
When youre young, be very only two types of public There was a strategic buyer
creative on your information companies: the mega that was willing to pay 10x. So,
sources and then as you get companies and the living why did the owners of the
older, develop a more dead companies. Every other company sell to him for 6x
insightful analytical process. company will have been bought when they could have sold to
by private equity. I worry the strategic buyer for 10x? It
For the practitioner, you need about the gutting of U.S. public was because the two founders
to be able to take raw markets; the listings gap that were in their 90s and had 180
information and couple it with Paul referred to may only get families who were dependent
sophisticated analytics. Only worse. on their company, since they
then will you have developed a were the biggest employer in
powerful skill set. You also International investing is tricky. the town. The purchaser had
need to understand what is Many countries have proper to sign something as part of
your variant perspective for disclosure rules, but the the deal saying that he would
any investment that interests financial numbers the keep the employees on for a
you, which changes the companies disclose are fake. certain number of years. That
questions you need to ask and Therefore, there can be a huge part of the deal wasn't
the type of information you opportunity to obtain an disclosed, but thats an
need to gather in order to get informational advantage in example where the buyer who
an edge. I think thats the key trying to verify a companys paid 6x had a structural cost
to investing. actual economic performance advantage over the strategic
against the financial results buyer in a private market.
G&D: How do you apply they report. I think gaining an
these theories to private informational advantage can PJ: A friend of mine in the
equity and international potentially be a very big venture capital world, who
markets? advantage outside the U.S. read an early draft of our
That said, you had better be book, said young analysts in
PJ: Lets separate the two on the ground, speak the venture capital have the same
questions because I think the language, understand the problem with pitching that
answers are different. In non- political environment and read public stock analysts have. Its a
public markets, I think theres the local newspapersyou slightly different pitch as there
enormous alpha to be need to be a native to is usually an auction price
generated at the management compete effectively. instead of a market price. He
level. Not the management of said if you substitute those
money, but the management of Theres a lot in our book thats pieces however, its the same
companies and people. relevant for both private equity challenge. In the end, whether
and venture capital. Certainly, it is a VC investment or a
If you look at corporate pitching in private equity or stock, the goal is to
governance and how venture capital is very similar understand what the portfolio
companies are managed you to the public markets. Stock manager wants, what they look
will find that theres an prices are given in the public for in an investment, and how
enormous amount of markets; therefore, you need they determine value.
inefficiency. Governance in the to figure out if the crowd is Whether its venture capital or
U.S. is a joke and many CEOs wrong. In the private market, private equity, the pitching
do not have the necessary its the price youre willing to parts matched perfectly.
experience to manage their pay and how you are going to
(Continued on page 24)
Page 24

Pitch the Perfect Investment


G&D: Often, when listening to market efficiency, second-level good for students to read is
a pitch, it can be hard to thinking and risk. I think our Peak, by Anders Ericsson. Its
separate a persons charisma risk discussion is better, but about how to build expertise.
and confidence from the we got to write it after he did. The way to survive in this
quality of their idea. If I am an I think Joel Greenblatts books business is to build up domain-
analyst, how do I compete are a great way to think about specific knowledge. And the
with someone who has that value creation and buying only way to really become an
charisma? Do you address that compounders cheap. Ben expert is to live, breathe, and
in the book? Grahams Intelligent Investor, or eat the stuff for a long time.
at least some of the chapters,
PS: As we discuss in Chapter are worth reading. PJ: Deliberate practice, like
12 of the book, there are the Jiro Dreams of Sushi.
factors of credibility, capability, PS: Especially chapters 8 and
and likeability that the G&D: The Netflix
portfolio manager is documentary about the sushi
The process of
subconsciously assessing when chef in Tokyo?
sizing up an analyst and their becoming an expert
idea. PJ: Yes, I was watching it this
[in poker] has become week and love how Jiro talks
PJ: Someone who is very about his strategy for success.
charismatic is very likable, as simpler and Hes been making sushi for 65
we humans tend to gravitate years and is considered the
towards people like that. faster.Only the best sushi chef in the world,
Someone whos very confident yet says he tries to get a little
greats are left playing
comes across as very capable. bit better every day. Thats
We tend to like that as well. the game. There are pretty impressive.
So, if youre competing against
someone who has more charm no more fish for the PS: The concept of deliberate
than you, I would say just focus practice is critical to
on the four questions and sharks to feed on understand. Watching soccer
youll blow everybody away. games for 20 years will not
they are gone. As a make you a good soccer
PS: Proper stock selection and player. And not even playing
result, it is sharks
a true variant perspective soccer for 20 years will make
beats charisma every time. In feeding on sharks.Its you a good soccer player.
fact, as we all know, many of Deliberate practice, which
the most successful portfolio the same in investing. Ericsson talks about, is how
managers lack even basic social you become good. Really
skills. 20. Well, chapter 1 also. focusing on what youre doing
and constantly pushing yourself
G&D: Except for your book, PS: Michael Shearns book, just beyond your capabilities
what are your favorite The Investment Checklist, is also and then getting direct
investment books? very good. But as we feedback from an expert coach
mentioned, the reason we is the way that you build up
PJ: Howard Marks book, The wrote this book is that there expertise and improve over
Most Important Thing Illuminated was no single book to time.
is very good. recommend. When asked the
same question in the past, we PJ: I'll teach my 40th and 41st
G&D: Are you saying that would have to recommend a semester-long course at
because you annotated it? chapter here, a chapter there, Columbia Business School this
or perhaps some journal academic year. Ive been
PJ: As Ive said many times, I articles, but we could not teaching for 25 years, but I
wish I had written that book. recommend a single book, or spent 50 hours this summer re
That is, until this book. Marks frankly, a whole book. -doing most of the material in
is great when he talks about Another book I think would be the course. And thats crazy
(Continued on page 25)
Page 25

Pitch the Perfect Investment


because this class has been PJ: Then theres the argument wanted to go do something
ranked as one of the top to be made that you should go else. I said to him, Youre
courses in the Executive MBA into the industry that no one nuts. You have a pole position.
Program for the past few else wants to go into. Think Youre the highest-ranking
years. But I wasn't happy with about the sector usually person of your generation in
it. That's why I watch Jiro. He's classified as Technology, Media the industry. Stay where you
been doing it for 65 years; I've & Telecom. Everybody wants are. We spent four or five
only been doing it for 25. to do TMT. I convinced my months talking about his
son to do something else options and he decided that he
PS: Bruce Greenwald is because TMT is so crowded. wants to remain the senior
starting to talk about the He did and hes delighted person in that industry. And I
importance of specialization, because hes one of the few think hell be able to pull that
and its a shame that hes going people in the industry hes off.
to be retiring because I think currently specializing in. Its a
that if this were 20 years ago, tricky balance between what G&D: When you talk about
he could explore and develop everybody else is doing and specialization, does pattern
the concept of specialization your natural interest. Ive recognition help in other
even more. In a market which always been interested in basic industries? If youve seen
is extremely efficient and industrial companies and health something play out in one
getting even more efficient care services, but Im really a industry as a specialist are you
every day, I think that tech guy. I have been following more likely to spot it in
specialization is going to be that industry for 30 years. I like another?
very, very important. And the reading about it, it's fun, its
only way to get specialization interesting. I argue with people PS: Pattern recognition is a
is by living, breathing, and in the industry, I have an term that gets thrown around
eating whatever domain youre opinion. a lot, but we think about it
in. very differently.
As the market becomes more
G&D: When you think about efficient, you have to specialize. PJ: Paul and I believe that
people our age specializing in There are probably not going there is value in developing a
investing, what ways would to be any generalists left. skill in recognizing patterns
you push them to specialize? Is Specialization is the rule in across industries. What we are
it in a market cap, is it in a most industries. No pilot is an working on as part of the next
style of investing? expert at flying every kind of book is the notion of story
airplane and no doctor is an scripts. Its the idea that we've
PS: No, I think it needs to be expert in every kind of seen these events before in
industry specialization. We will surgery. Theres always some another industry or at a
discuss how one becomes an specialization. different company, and we
expert in the next book we noticed a pattern but the real
will write, which will probably PS: You want to go where no concept is much more nuanced
come out in four years. one else is because thats than simple pattern matching.
where youre going to find
PJ: They might not be able to inefficiencies. If you go into a There are some hedge funds
wait that long for the answer. career fair and theres one here in New York that go
table that everyones at and through the mental exercise of
PS: I think in order to another table thats empty, you looking back at industries and
perceive mispricing cues you want to head towards the scenarios in the 1970s and
have to really understand empty tableit might be 80s. They ask how one
whats going on in a specific empty for a very good reason industry in the 1970s unfolded
industryyou have to be an but that should be your search and why it unfolded that way.
expert in that industry. The strategy. Next, they look at another
caveat is that you need to pick industry in the 80s and ask the
the right industryone thats PJ: A former student of mine same questions. Then they ask,
going to be around in 40 years. is a senior specialist in the How do they compare?
maritime industry and he Theyre trying to find meta
(Continued on page 26)
Page 26

Pitch the Perfect Investment


patterns or what we call story G&D: Ha. You are predicting
lines that repeat and then that tattoos will soon go out of
apply those insights to the favor?
present day.
PJ: We have never seen
G&D: What other advice anything like the inked fad
would you share with today.
students?
More seriously, people ask,
PJ: I would specialize early, What skill set should I learn if
just so I have a differentiation. I want to become successful? I
Then Id start to build the skill say, Learn how to manage
set around that specialization. I people. My friends from
would then start to read business school that have had
outside the domain and try to really interesting careers are
expand my knowledge base. the ones that learned to be
For instance, if you study great managers. People want
healthcare, youre going to end to work for them. There is a
up either going into healthcare real shortage of people who
technology, because thats a know how to effectively
piece of it, or into healthcare manage people. I told my son,
services. After that you might Learn how to manage people
venture into biotech. and you will have won the
world, particularly with your
However, if you do financial generation, because people just
services, youre not going to don't want to manage others.
do biotech and financial You can take this expertise,
services. That would be a possibly get equity in the
weird skill set, its too far business, and help drive value.
apart. You do one area and If you really want to get rich,
then broaden out your to me, that's where the
expertise to an adjacent area. I inefficiency is today: managing
think energy is going to be a people.
fascinating industry in the
future. If you have a good PS: The other thing is that you
understanding of the energy have to be creative. Creativity
industry thats fine, but is defined as coming up with a
renewables are ultimately product or idea that is novel
going to have to be a larger and has value. If you just create
part of that industry novel stuff or come up with
ecosystem. novel ideas that dont have
value, it doesn't go anywhere.
PS: I told my son when he Creativity on Wall Street is
went to college that, If I were variant perceptionhaving a
a freshman in college, there novel view that is different
are two domains that I would from the consensus and then
become an expert in. being right.
Dermatology and chemistry. I
would figure out a way to G&D: Thank you both for
remove tattoos painlessly. your time, its been a pleasure.
Because I think if you can
figure that out and patent it,
you could be looking at a
multibillion-dollar industry.
Page 27

Aryeh Capital Management


(Continued from page 1)

Damian Creber is the tremendous amount about School and its renowned Value
Head of Research & Co- professionalism and Investing Program brought me
Managing Partner at Aryeh preparation. I took that to my to New York, where I was
Capital Management. Mr. next role in private equity at fortunate to connect with and
Creber was most recently Oak Hill Capital, where I work for Jeffrey Altman at Owl
a Senior Analyst at Owl learned about depth of Creek.
Creek Asset Management. diligence.
Prior to that, he was in the Similar to Jeremy, each stop in
private equity group at My public-markets career my career has been a
Onex Partners and in the began in 2005 when I joined formidable learning experience.
Jeremy Weisstub Leveraged Finance Group Perry Capital after earning my Onex taught me the
at RBC Capital Markets. MBA at Stanford. At Perry, I importance of a world-class
Mr. Creber holds an MBA learned about probabilistic investment process and the
(Deans Honors and thinking as well as how to be power of strong culture and
Distinction) from opportunistic across the capital retaining good talent. At Owl
Columbia Business School, structure. When I moved to Creek, I observed Jeffs
a Bachelor of Commerce Redwood Capital, I was able to remarkable ability to get to the
from the University of augment my experience in heart of an idea, pull out the
Toronto, and is a CFA distressed investing by training relevant information, and
Charterholder. under one of the great understand the path forward,
distressed investors, Jonathan regardless of whether that idea
Graham & Doddsville Kolatch, who instilled in me is in equity or credit, long or
(G&D): Can you tell us how the confidence to know how short. Jeff has a tremendous
Damian Creber 16 you got to this point in your to take advantage of large track record and I believe he is
careers, and what inspired you market dislocations. At unique in the way that he has
to launch Aryeh Capital? Redwood, I was also given a trafficked across the capital
platform to develop and structure with great success
Jeremy Weisstub (JW): fundraise for a targeted fund, over a long period of time.
Above all, Damian and I are at the Redwood Loan
this point because we had the Opportunity Fund. JW: Aryeh Capital was
good fortune of having great inspired by a long-standing
mentors. We apprenticed My most recent experience dream to build an investment
under extraordinary talents at was with Greenlight Capital, firm of my own in Toronto.
our previous firms and we where I worked with David With all the experience I had
absorbed what made them Einhorn for over six years. picked up, it was time, and
successful investors and Learning from David pushed when I met Damian, I knew I
leaders. my knowledge of the equities had found a partner who
business to the next level, and shared my vision. As we got to
My background is CanadianI we had a great run together, know each other, it became
was born and raised in with particular success in out- clear to me that Damian was a
Toronto. My interest in the of-favor situations such as CIT truly special talent, and was
markets and in economics Group, Delphi, General someone I wanted to build my
came early, inspired by my Motors, and Sprint. business alongside.
grandfather who was with the
Bank of Canada. I decided to Damian Creber (DC): Like G&D: How exactly did you
work for a stock brokerage for Jeremy, I was born and raised two meet?
a year between high school in Canada. I studied business at
and college to test my interest, the University of Toronto and JW: There arent many
and it stuck. I studied then started my career in Canadians in the New York
economics at Yale and then investment banking at RBC hedge fund community, so we
joined Blackstone in 1998, Capital Markets, where I all tend to know each other. I
when it was still a boutique focused mainly on the credit had a sense that Damian was
firm. Blackstone exuded a business, before moving to someone who could be a real
culture of excellence that was Onex to work in private partner, a sounding board for
unmatched, and I learned a equity. Columbia Business all investments, and provide
(Continued on page 28)
Page 28

Aryeh Capital Management


incredible leverage to the advantage, combined with the feel set Aryeh apart.
investment process. Damian is capital base we have already
truly all of that and much raised, means the business is First, our judgment and
more. fully funded for the next seven experienceinvestment
years without the need to raise success comes with sound
DC: For me, the desire to any additional capital. That judgment, and I'm certainly
build my own firm was equally proud of my record as an
strong and meeting Jeremy investor. At the same time,
confirmed that. His experience ...Toronto is removed there have been plenty of
is a true complement to mine mistakes that Ive learned from
and we are able to play off
from the noise. The and those have also made me
each others strengths well. geographic distance better and stronger over time.
Second, we believe the
G&D: Why Toronto? What supports our ability to duration of our capital will
about establishing your firm allow us to exploit time
there differentiates you? build an independent arbitrage in a way that few
investment firms can.
JW: The first advantage is mindset, which is
reflected in our capital base. Third, we have specific
critical to investing.
We have deep roots in Canada expertise in distressed debt
and with that has come a circle stemming from having worked
of business people who have stability out of the gate allows with some of the greatest
known us, and grown to trust us to invest all capital as if its distressed investors. While we
us, over many years. Our our own. We can capitalize on think that the current credit
anchor investor is a well- volatility in ways that few opportunity set is not
respected Canadian others can. particularly robust, when the
businessman who has opportunity arrives in the
committed $75 million for DC: The other thing I would credit cycle, we expect to act
seven years. We built upon add, as it relates to being based on it aggressively. We are
that and have secured in Toronto, is that Canada prepared, and will not be
sponsorship from over 30 gives us enormous recruiting capturing that opportunity set
investment professionals in advantages. We are able to reactively but rather with our
both Canada and the New attract both world-class best foot forward.
York hedge fund community. professionals in Canada who
Currently, we have raised over are interested in moving to the Fourth, concentrationwe
$125 millionwith an average public markets, for whom the will only invest when we have
duration of over five years options are otherwise limited, high conviction, and our
before beginning a formal as well as expatriates in New portfolio will consist of 15
marketing process. This is a York or elsewhere who want core longs. We strongly
huge vote of confidence for us to come home but have few believe that concentration
as we launch Aryeh. choices. delivers outstanding
performance over time. Lastly,
The second advantage is that G&D: What else differentiates our capped fund size puts us in
Toronto is removed from the you? a position to be nimbler as it
noise. The geographic distance relates to both equities and
supports our ability to build an JW: We have spent a credit.
independent mindset, which is tremendous amount of time
critical to investing. thinking through this, and feel G&D: Its rare in this
very strongly that our environment for startup funds
The third is value for money. competitive advantage is not to get as much capital as you
In Toronto, we are able to one single thing but rather a have, for the length of time
operate a firm with top-tier unique combination of things. that you have, on Day 1. What
talent and infrastructure for In addition to the advantages about your philosophy or
half the cost of doing so in related to Canada, there are strategy stood out to your
New York. This cost five other elements that we investors?
(Continued on page 29)
Page 29

Aryeh Capital Management


JW: I think, first and foremost, specialty technology business, JW: We anticipate putting on
it was about trust. Our anchor even after months of diligence. up to 20 shorts, although in
investor is a long-standing Those go in the too hard smaller sizes than our longs. A
relationshipsomebody who bucket and we move on. large short for us would be 2%
has enormous comfort with of the book, whereas a large
both my character and my G&D: What about the short long would be 10%.
ability as an investor. For other side?
folks who have committed Taking all these together, we
before our formal marketing DC: We view shorting as a plan to construct our portfolio
effort has begun, I think it is a core part of the portfolio. We by taking a bottoms-up view of
function of longstanding think it should only be done in investments, calibrated to the
relationships as well as an a situation where youre opportunity set. And by that, I
appreciation for the drive and actually generating dollar mean two things. First, we
set-up of our team. We are returns for your partners, not think about our net exposures
positioned to take advantage of over a market cycle and plan
opportunities across the ...the ideas that make to position our portfolio
market cycle given our accordingly in that context.
experience in both equities and it into our portfolio Second, our exposure to
distressed credit. equities and credit will range
boil down to two based on the opportunities we
G&D: Do you plan to focus see. As an example, right now,
your portfolio on Canadian questions: Is a our net exposures would be
ideas? more conservative, and the
situation dislocated or portfolio would be more
JW: No. Our portfolio will be misunderstood? And is heavily weighted towards
concentrated and comprised of stocks; however, as the credit
primarily U.S. securities. it analyzable? cycle turns, we would expect
to be more heavily weighted
To take that up to a higher as just a hedge on your long towards distressed credit.
level, the ideas that make it performance.
into our portfolio boil down to G&D: How are you building
two questions: Is a situation Our short ideas typically fall up the team?
dislocated or misunderstood? into three different buckets:
And is it analyzable? The first, structural shorts, as JW: Two junior analysts, both
Fundamentally, were looking you would imagine, are your Canadian, have already joined
for good businesses that have standard broken business Aryeh. Our investment team
been discarded or are modelswe think there are of four is a good size for an
misunderstood for one reason segments of U.S. retail that are organization with a portfolio of
or another. Within credit, in this bucket today. Second, 15 core longs. We are
were much more focused on cyclical shorts, is where you modeling ourselves after a very
dislocationsituations in see the market confuse a select group of investment
which we think theres cyclical upswing for a secular firms that have had long-term
technical pressure temporarily change. And the third bucket is success with a high-caliber, but
mispricing something in the credit-driven shorts where we reasonably small, team. Similar
market. either feel the credit or equity to those organizations, we
market is missing some want to keep it simple. The
That said, our industry idiosyncrasy associated with team will likely grow modestly
backgrounds and experiences the credit on a levered name. over time, but it will never be
are critical to understanding an One example includes equity a large organization.
investment scenario, and if we investors occasionally ignoring
cant analyze it, then we wont important information on DC: We deliberated about the
invest in it. We just will not be balance sheets; another is right people to fill these roles,
able to develop a highly shorting unsecured bonds and in particular needed to find
differentiated view in some trading at par for businesses investment analysts who
sectors, such as biotech or a that have real challenges. understood that our process is
(Continued on page 30)
Page 30

Aryeh Capital Management


modeled after private equity, the right ideas that could meet JW: Neither of us have used
which tends to be different our two core questions of the exact model we are
from how most people either being misunderstood or incorporating today at
approach public markets. Our dislocated, and being Aryehwe blended our
process demands a significant analyzable. The second phase, worlds in this sizing model.
amount of time to research which is about a week of Some of the elements are ones
ideas, and that depth of work, is meant to deepen our that you would expect to see
research we believe is unique. conviction. This is where we from any investment process.
Having the right people for this dive deep into the business, The core of our risk-
kind of process, who also the industry, the numbers, and management philosophy
exhibit intellectual where were constantly asking revolves around downside
horsepower, work ethic, ourselves the same questions, protection, and so as we think
curiosity, passion, and but with a more substantial about how to size any
judgment, was an important degree of rigor. And the third investment, the first and
mixture for us. We feel very phase, which can take up to a foremost consideration for
fortunate to have found that. month of work, is where we both of us is framing our
do the largest portion of our downside. Our largest
G&D: How will you divide primary research, which investments will always be our
responsibilities among the includes visiting the company lowest-risk investments.
team? and its facilities, calling
customers, suppliers, attending G&D: How do you generate
JW: The team works very industry conferences, and ideas?
collaboratively; however, I am working with the management
the sole Portfolio Manager of team to dive below the DC: As mentioned, first and
Aryeh. Damian is the Head of deepest layer of the financials. foremost we focus on
Research. All investments are securities that we understand
going to be discussed as a In each phase, we write a to be dislocated or are ripe for
group. And since we are a detailed memo that goes out potential misunderstanding.
small team working in close to the entire team, which Drilling down from there, we
touch day-to-day, it is a very effectively gives the entire naturally gravitate towards
cohesive process. team all the relevant ideas that come from existing
information to analyze the knowledge gleaned from prior
DC: The investment process is idea. Everybody is encouraged investments or industries we
designed to achieve certain and expected to weigh in. know. For example, both
goals. The first is that we want Jeremy and I have spent many
to try to get to a kill decision JW: We then sum all that years trafficking across global
very quickly. Second, if we do work weve done into industries, with Jeremy
end up getting to a yes quantitative criteria for our spending much of his career in
through the process, we portfolio, which is how we industrials, real estate, and
should have enormous determine sizing. Though I financials, while I spent chunks
conviction in those ideas. And cant share those criteria here, in each of industrials,
so, while the investment team because we view them as a consumer, and healthcare. So,
consists of four people, we core part of our intellectual we have good familiarity with
plan to work in pairs as we go property, its safe to say that businesses in those industries,
through the research process we think they reflect the most and when a stock is down 20%
on an individual idea. We important characteristics of on one day, we know if that
divide the process into three any investment. We layer can be interesting to us.
phases that we reference as a these quantitatively onto our
day, a week, and a month research process. We also do quantitative
internally. screening that can surface
G&D: You mentioned the some interesting situations,
The first phase of looking at an quantitative model you use for particularly smaller-cap names
idea involves a day of work, sizing. Have you used that we havent looked at
which is designed to ensure something like that in the past? before. Historically, we have
that were spending time on both worked at larger firms
(Continued on page 31)
Page 31

Aryeh Capital Management


with greater liquidity member of the team to invest We really like misunderstood
constraints. their own capital into the fund. situations where were able to
We are entirely aligned with buy a quality asset at a
JW: On the credit side, its our investors. discount, and where we have
important to be ready when real comfort in the quality of
dislocations present G&D: You mentioned you the business. In these cases, we
themselves so we are on the often pick stocks that are get two things: We get an
Jonah Stowe 10 (left) and lookout for situations that misunderstood. Can you immediate re-rating when the
Ben Mellman 09 at the have the potential to be future clarify? Isnt almost all investing bear case or bull case falls
2017 Value Investing away as the controversy is
large restructurings. Often, capitalizing on someone elses
Reception
there are companies that you misunderstanding of a story or resolved. Second, the
know run the risk of getting situation? underlying value of the dollar
into trouble in the coming that we bought at 50 cents is
weeks or months. In those JW: Yes, you could say that now growing, so the business
instances, the securities that even a growth stock is a form is inherently getting cheaper
are relevant to potential of misunderstood security. But every day on an intrinsic-value
investment may not look cheap the way we mean it, and the basis.
yetthey may still be closer to way weve succeeded with
par than 50 cents on the misunderstood securities, The reason were attracted to
dollarbut you want to be misunderstood or dislocated
ready to buy on the way down. quality is that, if were wrong
You want to be ready to step The investment in our analysis of the dollar,
in when there are a lot of folks process is designed to and its only 80 cents, the 80
looking for liquidity. Once the cents is growing. This is one of
wave of selling is absorbed, its achieve certain goals. the biggest lessons Ive
typically much less liquid on personally learned in terms of
the way back up. In building a The first is that we mitigating downside risk.
position, you often want to be Thats why situations where
there on the way down. want to try to get to a the dollar has dislocated to 50
cents, but where the
G&D: Given the small, kill decision very underlying business is still truly
cohesive team, do you have quickly. growing, are our Holy Grail.
any tactics to avoid groupthink
once youre involved in an involves controversy over G&D: What are some other
idea? what the business really is and investing lessons from your
how the path forward looks careers?
DC: Yes, we have designed for that business.
precautions into the JW: One of the key lessons
investment process to address DC: Misunderstandingsor that I learned was from the
exactly this. The pair that is controversycan evolve from financial crisis, through which I
not the lead on a specific many areas such as spinoffs or learned to appreciate the
investment will be involved multi-segment businesses enormous opportunity cost of
during the memo process and where people are overly illiquidity during periods of
they are encouraged and focused on one segment and market stress. One common
expected to have real push- miss the forest for the trees. way to reach for yield is to
back. We incorporate check- Complexity or news events or accept increased illiquidity for
ins with the pair that is not change, whether its the sake of getting a little bit of
going deep into the research management change or capital incremental return. The issue
on a specific idea in order to allocation change, also tend to is that illiquid credit can cost
keep us on track as a team. drive misunderstandings. The you enormous upside from an
market, for the most part, opportunity cost perspective
Weve further enhanced this thinks linearly in these because its critically important
concept by compensating the instances but businesses tend to be able to migrate to the
team on firm-wide to move nonlinearly, and that best opportunities when
performance and asking every creates our hunting ground. markets are the cheapest. For
(Continued on page 32)
Page 32

Aryeh Capital Management


the same reason, cash provides ServiceMaster is a collection of appealing because it had many
the ultimate form of three somewhat disparate of the elements of investments
optionality. businesses. The first is with which I have had success
Terminix, a high-quality in the pasta dislocation,
Another lesson is that, when termite and pest-control followed by a clear
companies run into trouble, company that is the market misunderstanding, all of which
talking to management teams leader in the space, which takes time to resolve itself in
can hurt you. Typically, we are represents 55% of EBITDA. the marketplace.
very fundamental, private- The second is American Home
equity-style investors who like Shield (AHS), the market DC: The dislocation occurred
to speak to management leader in home warranties, because Terminix had shown
teams. But in those which represents 35% of decelerating organic growth
circumstances when theres a EBITDA. And the final bit, over a few quarters, and there
lot of uncertainty around a which is 10% of EBITDA, is a were some very vocal bears
business, speaking to a franchise business that does suggesting the business had
management team typically been broken by prior private-
results in one of two things: equity owners in a way that it
Either theyre going to tell you One of the key could never recover. We came
a story that is overly optimistic to the conclusion that not only
or they will have no answer. lessons that I learned did the Terminix bear case not
Neither scenario is helpful to was from the financial have substantial merit, but also
our process. that all the bears were missing
crisis... the enormous the truly amazing business that
G&D: What happens if youre is American Home Shield.
a major holder of a company opportunity cost of
and that stock tanks because of The research process involved
some perceived trouble? If the illiquidity during spending countless hours
management team proactively speaking to former employees,
reached out to you and other
periods of market competitors, suppliers,
investors, would you stick to stress. customers, and management.
your philosophy of not talking We concluded that Terminix
to them, regardless of what everything from residential and had stubbed its toe around
they had to say? commercial cleaning, to natural certain operational issues but
disaster restoration, to home that none of these were
JW: In that scenario, when a inspections and furniture structural and all of them were
business is in trouble, you have repair. in the process of being fixed.
to recognize the likelihood of This is a business that is in a
misinformation and approach JW: We generally like market that is growing 4-5% a
managements ideas with complexity because it often year organically, and has the
caution. scares off other investors. ability to tack on very
When Damian introduced me accretive M&A. It just needed a
G&D: What is an idea that to SERV, we were both little love to get back to this
you think embodies your type attracted to three main growth rate.
of investing? factorsthe complexity, the
combination of very high- More interesting, however,
DC: We are currently very quality assets, and a stock price was AHS. AHS is a well-
excited by a business called that had fallen from slightly moated business. Its strong
ServiceMaster Global Holdings over $40 to $32 in the span of competitive advantage is its
(SERV). Its a reasonably a few months. All three of scale, allowing it to source
complex company, whose ServiceMasters businesses effectively from its suppliers. It
stock got dislocated in the have market-leading positions, has grown revenue 10% a year,
middle of last yearand high margins, and limited as home warranties have
dislocations, as we talked cyclicality, yet the market continued to penetrate the
about, pique our interest. hadnt given these qualities market of homeowners, and
much credit. It was also has very attractive incremental
(Continued on page 33)
Page 33

Aryeh Capital Management


margins. All of these factors ground. A few years ago, the existing route results in
rolled up to where we could market started to shift additional revenue yet almost
see ServiceMaster growing free towards what people call no incremental costs. The
cash flow per share by 15-20% termite bait. This bait third moat is the ability to
per year for at least a handful involves installing what looks stand behind and guarantee the
of years, and at the time SERV like a sprinkler in your lawn, productthat if you were
was trading at a 7.5% FCF where you put poisoned treated, but the termites still
yield. We have a bias for termite food, which the caused damage, you would be
attractive cash flow yields, and termites eat and die. All the reimbursed for the repairs.
certainly attractive cash flow competitors had shifted to this Mom-and-pops cannot afford
yields that grow each day. product, but Terminix was not to take that risk.
sure about its efficacy for some
Almost a year later, the shares time, and so it continued to G&D: Whats the moat for
stand at about $47a nice run offer liquid instead of bait and AHS?
from $32 last summer. But we this caused a slowdown in
think theres substantially more gross customer adds. DC: AHS is 40% of the home
left to this story, particularly as insurance market, and it has
weve seen Terminix organic The second reason was that effectively no competitors. The
growth re-accelerate and AHS the company had a technician competitors that do exist are
growth hold. retention challenge after typically either very local, small
changing the compensation guys, or subsidiaries of the title
The most interesting piece of plan, causing some customer insurance companies. On AHS,
the story from here is that satisfaction issues. It was clear the moat is distinctly its scale.
management has decided to from the research that these Their size allows them to
separate AHS and Terminix by two reasons were being negotiate lower rates with
spinning off AHS in order to addressed and that Terminix contractors and pass that along
unlock value for shareholders. wasnt permanently broken, to customers.
The spinoff is expected later in but had just fallen down for a
2018 and we think thats the period. Say you have a home warranty
next catalyst for the business for which you pay a $575 fee
to continue to unlock value for G&D: What distinguishes per year, and then you pay a
shareholders. We think the Terminix from competitors? small deductible if you have a
stock is worth $60 today claim. AHS takes care of
based on conservative sum-of- DC: There are two large everythingit sends
the-parts math. players in the market, contractors to your house, if
Terminix and Rollins, that something has to be repaired
G&D: Why exactly did together account for they repair it, or if it needs to
Terminix decelerate and why approximately 60% of the be replaced they replace it.
was that a misunderstanding? termite control market and AHS uses the scale to
35% of the pest control guarantee contractors a
DC: Terminix had decelerated market. The remainder of the minimum amount of work, and
for two reasons. The first market includes small mom- that allows AHS to negotiate
relates to the type of product and-pop operators. Rollins and much lower rates from these
that they were using to treat Terminix have limited contractors where no one else
termite infestations. advantages against each other, can compete effectively. AHS
Historically, youve treated for but have massive moats then shares these savings with
termites by walking around a compared to the mom-and- the customer so the customer
home, digging a bunch of holes, pops. The first moat is lower both saves from using this
and pouring in a liquid. The procurement costs on the product and has the peace-of-
liquid is not toxic, but people termite and pest treatments. mind knowing they are
have discomfort with it and The second moat, and perhaps covered.
theres no recourse if a the most powerful advantage,
customer cancels the ongoing is their network density, which G&D: Why arent the large
maintenance feeyou cant matters because adding more financial institutions bigger in
take the liquid out of the customers to a drivers this business?
(Continued on page 34)
Page 34

Aryeh Capital Management


DC: This is a business that G&D: Fast forward to today, do you think the market thinks
requires a reasonable amount are there advantages for SERV about such events for the
of logistics to organize. You in owning all three of the overall business?
effectively have to have a businesses? Perhaps in the
network of many thousands of logistics needs for both DC: Thats a great question,
contractors, and many Terminix and AHS? and I think this relates to some
thousands of customers. of the misunderstanding with
Were now at a point where DC: No. The businesses are SERV. Every time you speak to
AHS has created the famous run almost entirely distinctly. an investor, they know about
Bezos fly-wheel: the only The contractors at AHS are Terminix, sometimes they
reason you can offer the not employees, they are know about AHS, but rarely
warranty at the price you do is independent contractors. AHS has anyone spent time on the
that youve negotiated much sends them to a job, but franchise business. This is an
lower costs with the extremely high-quality
contractors by guaranteeing [American Home business, with recurring
them work. If you dont have revenue and high margins, and
scale, you cant guarantee them Shield] has created impressive growth. Last year,
work, you cant get lower the famous Bezos fly- the fires in western Canada
costs, and you cant offer the were a big driver for this
price that you do. wheel. If you dont business, as the hurricanes will
likely be this year. These arent
G&D: How did these three have scale, you cant big dollars, but it is a very
businesses end up under the profitable segment that people
same roof at SERV? guarantee just arent focused on.

DC: The original business was [contractors] work, G&D: Whats Terminixs
actually the franchise business you cant get lower pricing power like?
going back to 1947 as a moth-
proofing company founded by costs, and you cant DC: These are recurring
Marion Wade. Over time, revenue businesses. For
ServiceMaster bought up a offer the price that example, imagine turning off
bunch of different businesses, your pest control services as a
including Terminix, some of you do. restaurant in downtown
which made sense together but contractors are responsible for Manhattanits just not an
mostly it was just a holding the actual logistics. At option. So the businesses have
company for services Terminix, the people who real pricing power. It is a
businesses. Clayton, Dubilier & show up to fight termites are relatively low-cost product but
Rice (CD&R) took the whole employees, and SERV handles one with an extremely high
company private in 2006, at the logistics. There is cost of failure, and such
which point the largest theoretically some cross-sell businesses can exhibit pricing
segment within ServiceMaster opportunity over time, but we power. SERV has taken
was TruGreen, a lawn care havent really seen that somewhere between low and
business. The TruGreen happen, and we think thats mid-single digit percentage
business was very cyclicalit why management recently price increases per year for a
was effectively a luxury to have decided these businesses made very long time, but theyve
someone come over and mow more sense as separate been smart in that theyve
a lawnso that unit got hit entities. never gouged their customers.
hard when the business cycle
turned in 2009. CD&R then G&D: Hurricanes have been G&D: Are you concerned
carved out TruGreen, and particularly punishing in the about the debt?
took the remaining business U.S. this season. How would
public, and thats how you that affect SERVs franchise DC: Right now, SERV has ~4x
ended up with the SERV segments, including leverage, which some people
portfolio that youve got today. ServiceMasters disaster may balk at. But its all long-
restoration business? And how term debt, as the company
(Continued on page 35)
Page 35

Aryeh Capital Management


recently refinanced, shifting to competitor in Europe has been months or years, is that
75% fixed rate and moving the more aggressive around M&A seasoning that you see as the
maturities beyond 2022. This and is paying higher and higher company comes out of
capital structure makes us feel prices for those businesses. reorganization. Sometimes it
comfortable, but we also think We dont think that this will takes a while for a situation to
all debt/EBITDA metrics arent break the thesis, but it could properly re-rate as the
created equal. ServiceMaster certainly make the 15-17% FCF enhanced business quality from
has monster cash conversion growth a little bit lower if it a restructuring is
due to very limited capital remains true for an extended underappreciated until a new
requirements and a negative period. set of buyers warms up to a
working capital model such story. Delphi came out of a
that there are really no G&D: What are your holding bankruptcy at $20 a share in
concerns for us about the periods in general for such 2011; its at nearly $100 today.
companys ability to service investments, on both equities If you look at how Delphi
debt. and credit? unfolded, there was value
created for investors through
JW: I would add that debt can JW: We expect our average every part of its restructuring
really cause you pain in cyclical period to be two to three and post-reorganization.
businesses but ServiceMaster years. In some cases it could
has almost no cyclicality. be much longerand there With ServiceMaster, we see a
Perhaps the best way to are some situations that may similar pattern. This equity
illustrate this is to tell you that resolve much soonerbut story started with a dislocated
both AHS and Terminix grew were certainly not aiming for security that was out of favor
in 2009. Leverage is a real risk high turnover. Were making and cheap. As we began to
as it relates to businesses of investments with what we really understand the business,
cyclicality, especially if you hope are good companies that it has now migrated into what
have covenants, but we hope to be invested in for we might think of as a more
ServiceMasters portfolio some time. event-driven opportunity, with
doesnt exhibit those the coming spinoff. That leg of
characteristics. We think the Credit and equities can our investment thesis hasnt
market misunderstands the sometimes have similar yet played out.
risk from the companys features, in that there are
optically high leverage and various phases to the G&D: What advice would you
thats another reason were investmentand each has the give MBA students interested
attracted to the opportunity. potential to create real value. If in investment management?
you invest in a credit
G&D: What could derail the restructuring, the first phase DC: Though this sounds a
story? has maximum uncertainty, little clich, we both think its
when theres effectively a food very important to work for a
DC: One risk is that Terminix fight as everyone figures out firm and with someone with
stubs its toe again around whos getting what. Just the whom you truly click. This
organic growth. People may clarity that comes with that industry is one where you can
then say that this business is resolution can be a catalyst. be successful in many different
perpetually stubbing its toe, The second phase is the ways, but success only comes
and then it will always receive company issuing new from being in an environment
a discount to where it should securitieseither plain equity that resonates with you. Find
theoretically trade. or a combination of equity and the type of investing you like
debtas those securities are to do, and work for someone
JW: The second risk involves distributed and valued who sees the world the same
Terminixs M&A. This segment separately in a market with way you do.
has so far allocated capital very often more liquidity, we see
attractively for ServiceMaster, another leg of value creation. JW: My best piece of advice is
as it bought out small players That takes some time as well. to think of CBS and the Value
for under 5x pro-forma Investing Program as only the
EBITDA. Today, however, a The last phase, which can take beginning of your investing
(Continued on page 36)
Page 36

Aryeh Capital Management


education. The investment
business is one of lifelong
learning and requires passion,
so it is important to figure out
a way to get better every
single day.

G&D: Thank you.


Get Involved:
To hire a Columbia MBA for an internship or full-time position, contact Dan Gabriel,
Director, Employer Relations, in the Office of MBA Career Services at (212) 854-6057 or
valueinvesting@gsb.columbia.edu.. Available positions also may be posted directly on the Co-
lumbia website at www.gsb.columbia.edu/jobpost.

The Heilbrunn Center for Alumni


Graham & Dodd Investing Alumni should sign up via the Alumni website. Click here to log in.
Columbia Business School
3022 Broadway To be added to our newsletter mailing list, receive updates and news about events, or volunteer
Uris Hall, Centers Suite 2M6
New York, NY 10027 for one of the many opportunities to help and advise current students, please fill out the form
212.854.1933 below and send it via e-mail to valueinvesting@gsb.columbia.edu.
valueinvesting@gsb.columbia.edu
Name: _____________________________________

Company:____________________________________

Address: _____________________________________
Visit us on the Web:
The Heilbrunn Center for City: _____________ State: _______ Zip:_________
Graham & Dodd Investing
www.grahamanddodd.com E-mail Address: _____________________________
Columbia Student Investment
Business Phone: _____________________________
Management Association (CSIMA)
http://www.csima.info/
Would you like to be added to the newsletter mail list? __ Yes __ No

Would you like to receive e-mail updates from the Heilbrunn Center? __ Yes __ No

Contact Us:
ABhattacharya18@gsb.columbia.edu Graham & Doddsville Editors 2017-2018
MMann18@gsb.columbia.edu
ASchloss18@gsb.columbia.edu Abheek Bhattacharya 18

Abheek is a second-year MBA student and a member of the Heilbrunn Centers


Value Investing Program. Hes spending part of the school year interning at Fire-
fly Value Partners, and worked for Davis Selected Advisers over the summer.
Hes done stints previously with Indus Capital and Hound Partners. Prior to
Columbia, he wrote for the Wall Street Journal in Hong Kong, most recently for
its flagship Heard on the Street investment column. He studied philosophy at
Yale University. He can be reached at ABhattacharya18@gsb.columbia.edu.

Matthew Mann, CFA 18

Matthew is a second-year MBA student and a member of Columbia Business


Schools Private Equity Fellows Program. During the summer, he worked in the
Investment Banking Division at Goldman Sachs & Co. LLC. Prior to Columbia,
he was a Portfolio Manager at ClearArc Capital, Inc. focused on foreign currency
and emerging market debt. Matthew studied finance at Grand Valley State Uni-
versity. He is a CFA Charterholder and a 2018 McGowan Fellow. He can be
reached at MMann18@gsb.columbia.edu.

Adam Schloss, CFA 18

Adam is a second-year MBA student and a member of the Heilbrunn Centers


Value Investing Program. During the summer, he worked for the Intrinsic Value
Team at UBS. Prior to Columbia, he worked for T. Rowe Price and Lincoln In-
ternational. Adam graduated from the University of Illinois at Urbana-Champaign
with a BS in Finance. He is also a CFA Charterholder. He can be reached at
ASchloss18@gsb.columbia.edu.