“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.
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:
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.