James Tisch Investment Philosophy and Some Thoughts on Loews

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Buy when everyone else is selling and hold until everyone else is buying.” -J. Paul Getty

I recently came across a transcript of a talk that James Tisch gave to a group of students at Columbia. Tisch runs Loews (the conglomerate, not the home improvement store). Loews (L) has struggled in the past few years, but the long term investment record is outstanding. The stock price has compounded at 17% over the past 50 years.

I’ve never invested in Loews—the operating results of the equity investments they control and the returns on capital of the businesses they own have never been attractive to me, but I have high respect for the Tisch family and I read their annual reports each year. They have proven to be disciplined, prudent investors over the years, and have done a superb job compounding shareholder capital over the long term. They are also a company that Charlie Munger would refer to as a cannibal—constantly “eating” away at their own share count by steadily buying back stock. Over the years, Loews has reduced their share count from around 1.3 billion (adjusted for splits) in 1971 to around 370 million today.

Maybe at some point we’ll take a look at the operating businesses under the Loews “hood”, but it’s interesting to note that while Loews has been a compounder through successful investments and steady share buybacks over the years, the businesses and equity investments themselves often have been more opportunistic in nature—in other words, Loews is led by contrarian bargain hunters.

My own style of investing consists of an interplay between high quality businesses that are compounding intrinsic value and the plain bargains that are blatantly mispriced relative to normal earning power.

Stocks in the former category are my favorite types of investments. They are the longer term investments in companies that do the work for you. They generally are businesses that are able to produce consistently high returns on shareholder capital and often have reinvestment opportunities within the business—a dynamic that leads to growing earning power and a compounding effect over time. When these companies become available at cheap prices, it’s time to load up.

However, the latter category also provides really interesting investment opportunities. These are the bargains—the special situations that involve some sort of a corporate event, a misunderstood business division, or maybe a misunderstood event that is driving a gap between price and value. Sometimes these situations arise out of neglect, other times they arise out of disgust. Cyclical companies might fall into this category as well—stocks that fall in and out of favor depending on the economy or industry specific trends.

Loews often gets lumped in with the Berkshires, the Markels, the Leucadias, the Fairfaxes of the world simply because it’s another conglomerate led by value oriented management. But unlike some of these other investment vehicles whose management have tended to focus more on using the business model of insurance and float to acquire growing businesses at fair prices, I would describe the Tisch family as investors who have done more work in the second category—the category of bargains and special situations—specifically the cyclical businesses. Insurance, shipping, drillers, pipelines, hotels, and a variety of other cyclical industries have been represented in Loews’ portfolio of businesses and equity investments over the years.

Buying Bargains

In this talk to the Columbia students, Tisch talks about a few of his common sense simplistic approaches to investing. Basically, as Paul J Getty said, Tisch spent a lot of his time buying when everyone else was selling. He talks about the supertanker supply glut of the 1970’s when these ships were trading for less than scrap values:

“Let’s go back to 1975, when there was a building boom in supertankers, brought about by relatively low oil prices that had caused large increases in oil demand. A few years later, in the late ‘70s, there was an oil embargo and resulting oil price hike, which drastically reduced the amount of oil coming out of the Persian Gulf – much less oil, but still lots of tankers, now just bobbing in the water.

It was soon afterward, in the early ‘80s, that we started thinking about buying tankers. We had seen from reading newspapers that the worldwide supply of tankers was vastly overbuilt; according to quoted estimates, the market required only 30% of the ships that were afloat. As a result, ships were trading at scrap value. That’s right. Perfectly good seven-year-old ships were selling like hamburger meat – dollars per pound of steel on the ship. Or, to put it another way, one was able to buy fabricated steel for the price of scrap steel. We had confidence that with continued scrapping of ships and increased oil demand, one day the remaining ships would be worth far more than their value as scrap.

We were sure of three other things: First, by buying at scrap value, there was very little downside. Second, we knew that the ships would not rust away while we waited for the cyclical market to turn. And third, we knew that no one would build more ships with existing ships selling at a 90% discount to the new build cost. We were confident that the demand for oil, particularly from the Persian Gulf, would ultimately increase with worldwide economic growth and so the remaining tankers would ultimately be worth much more than their scrap value.”

He references a similar dynamic in the late 80’s after OPEC tough-talked the oil market causing prices to plummet and US production to slow (sound familiar?)—creating an oversupply of offshore drilling rigs. Tisch stepped in to buy his first rig at a price well below replacement cost, knowing that at some point the business would come back. This was the beginning of what is now Diamond Offshore.

Tisch also goes into how Loews got into the pipeline business, and discusses his overall contrarian investment philosophy.

Being a contrarian in and of itself doesn’t guarantee success, but when investing in cyclical industries, or in stocks in general, bargains often come about when “everyone” is selling and pessimism reigns supreme.

I personally don’t get excited about some of the investments that Loews has made over the years, as the businesses they own tend to produce mediocre returns on capital and that becomes a drag on the compounding ability of the conglomerate if these businesses are owned for a long time. Time is the friend of the wonderful business. Markel continues to grow intrinsic value because of its ability to reinvest sizable amounts of retained earnings at above average returns on capital. An offshore drilling business, a hotel chain, or a pipeline tend to throw off cash, but produce low returns on capital and have limited reinvestment opportunities. That’s not necessarily a bad thing for a company like Loews that might have alternative investments elsewhere, but those businesses themselves tend not to compound value of time.

An example would be to look at Diamond Offshore. Just glancing at the stock price will show periods where the stock was presumably trading at bargain levels, and there were certainly opportunities for astute contrarian investors to capitalize at various points in the cycle, but over the past 20 years, the internal returns on capital of the offshore drilling business are average, and lead to an average long term result from owning this business:

Diamond Offshore

Again, there are times when bargains abound in cyclical businesses, and Loews has been able to find a number of them. But as Joel Greenblatt once said, when it comes to stock picking, I’d prefer to “trade the bad ones, invest in the good ones”. Cyclical stocks often become incredible bargains, but these bargains should be sold at fair value because over time the stock price tracks the underlying business results, and cyclical businesses tend to produce average returns on capital over the full business cycle.

So while I love the bargain approach to buying ships below scrap value, drilling rigs when it was unprofitable to drill offshore, and pipelines when no one else wanted them, I wouldn’t be excited about owning them permanently. But then again, neither would most investors and that’s probably why the Tisches have been able to make money–. Reminds me a lot of one of my favorite investors—Walter Schloss—who made a lot of money out of junk over the years.

As an aside, Loews stock happens to currently be trading at a level that implies it’s out of favor itself. The stock currently trades at less than 70% of book value—a valuation level that has rarely been seen throughout the history of the company, possibly in part due to its recent operating results or maybe because of its exposure to energy. The operating results of the subsidiary businesses have been relatively mediocre over the past few years, leading to a subpar stock price performance in the last decade relative to their historical numbers. Nevertheless, I enjoy reading the annual reports and like the simplistic philosophy that has been the foundation of the firm for 50 years.

But regardless of whether you prefer quality compounders, bargains, or maybe a combination of both depending on the situation, I think it’s always interesting to listen to what someone like Tisch has to say.

Here is a transcript of the talk referenced above.

9 thoughts on “James Tisch Investment Philosophy and Some Thoughts on Loews

  1. John,

    Nice review of L. And thanks for linking to a speech by Mr Tisch.

    However, their businesses are nothing to be excited about – CNA, DO and BWP in particular.

    When I look at the historical performance of tobacco companies like Altria, it has been really good over the past 60 years. I am not sure to what extent were the returns of L helped more by its ownership of tobacco company Lorilard between 1968 to 2008, than management brilliance and superior timing.

    I have looked at L precisely for the consistent share buybacks over time. However, it would be nicer to have an internal compounding engine, coupled with a strong history of buying back stock ( sort of like AZO), not just buying back stock in a company that has not grown revenue and net income since 2009…

    As for DO, I think stockcharts shows a closer approximation to Total Return Performance in the chart below since 1996 ( morningstar shows price only)

    http://stockcharts.com/h-sc/ui?s=DO&p=W&st=1996-01-02&en=(today)&id=p02705257815

    1. Yeah, buybacks for the sake of buybacks aren’t necessarily valuable. I do think they’ve added some value to L, but you’re right, if you’re buying back stock of an underlying business that is not creating (or worse, destroying) value, then the buybacks themselves aren’t creating value. Like any other investment, if they aren’t done below intrinsic value, then they are not creating value. Good points…

      And yep, as I mentioned in the piece, the underlying businesses that Loews has invested in historically, and the current subsidiary companies, have not historically produced great operating results.

      To me, if you’re buying fabricated steel for the price of scrap steel, you need to sell that steel when then price reverts to a more normal level. Otherwise you’re going to own a hunk of steel that will fluctuate widely in value but won’t necessarily compound for you over time.

      1. And not only a hunk of steel, a hunk of steel that people know how to make more of, and will when its desirability rises, lowering the value of yours. I’m reminded of that moment in The Simpsons where the broker shouts, “Homer, you knuckle-beak, I told you a hundred times: you’ve got to sell your pumpkin futures before Hallowe’en! Before!”

  2. I think it is kind of bizzare that 2008-2009 they could not find any bargains, if you read the conference call scripts from that time, it is kind of obvious they have no idea what is going on… I am not so sure the university presentation is not a lot of mambo jumbo, maybe someone pushed them hard to invest at the time, dont forget it is the father that handed the next generation the business.

    To say during 2009 that there is nothing to do so we do nothing… kind of mind boggling

    1. Yeah good points. I also went back and looked at the last 50 years of L’s performance. In recent years their relative outperformance has been very modest. I think a good share of it occurred early on. Their overall record is still good, but yes, I agree that it’s strange that they couldn’t find anything to do in 2009. I guess each investor has their own style and circle of competence, but you bring up good points.

  3. Hi John,

    a bit off topic to Loews, but I d like to know your take on the following subject. Virtually all investment articles are devoted to what and when to buy, and very little to the other side of the coin, when to sell.

    It is said that stocks should be sold for the following 3 reasons:
    – fundamentals have changed
    – better opportunities are present
    – stock has reached its fair value

    In respect to the third one, do you always sell when in your opinion, it did reach its fair value, or do you take into account a certain momentum? And what values and metrics/ratios do you consider?

    Thanks. Dave

    1. Hi Dave, that’s a good question and one that might deserve a separate post to discuss in more detail, but yes, I tend to sell at fair value (or around the level where I think fair value is). It’s never an exact science, but if you’re buying a bargain and it appreciates to a level where you feel it’s no longer a bargain, then it is worth considering selling. Compounders are different, as they can continue to grow over long periods of time, but in my own portfolio, I tend to be very opportunistic and I’m always trying to maximize the risk reward of my overall capital, and so I tend to try to stay invested in the most undervalued securities at any given time. Each situation is different, and I think you have to understand what type of company it is. If it’s a bargain or special situation that you bought because of a valuation gap, and that gap closes, I think you need to sell. If it’s a great company that is growing over time, you probably can be more patient as value continues compounding for you. Probably not the specific answer you might be looking for, but it’s hard to be specific on this type of topic–each situation deserves its own analysis. Thanks for reading.

      1. No, thanks, thats good enough. I was precisesly talking about the valuation gap that closes. It so happened several times though that while it was closing, the momentum kept the stock going much higher then would warrant a fair valuation, and it was a bit painfull to see it double after I sold, even though eventually it did come back to thoses fair values. I guess the pendulum was just swinging to the other extreme before coming to rest and we always need to constantly reconsider the risk-reward you are mentioning.

        I will be looking forward to the Sell post from you. Keep them rolling, your articles are great. Cheers.

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