VALUE: After Hours (S08 E13): Why Value Investing Still Works: The Case for Quality Compounders Over Net-Nets

During their recent episode, Taylor, Carlisle, and Mark Cooper discussed Why Value Investing Still Works: The Case for Quality Compounders Over Net-Nets. Here’s an excerpt from the episode:

[Mark] Yeah, I think we agree Japan is really cheap. And if I think about the markets as a whole, it’s probably the cheapest. And we’re value investors.

I do have a long history with Columbia as do many members of our team, but our portfolio is probably more Buffett-like than Graham-like. So we tend to own, especially in a small cap space, I think you can buy a lot of high quality businesses. And we talk about this later, but a lot of quality stocks have been beaten up pretty good, but they’re not paying the premium you used to pay for quality.

And so in my in that environment, you want to favour those investments. We also like businesses that we think are high quality. People have called them compounders, the platform businesses, but we just have a limitation on what we’re willing to pay.

We don’t think that a great business is an excuse to pay 30, 40, 50 times for something, right? So we want the great businesses, we just want to buy them when they’re cheap. And we will and have owned net nets in the past, and we will continue to own those.

But we think one of the key components of being an effective analyst over time is using your time wisely. We think return on time is extremely important. One of the problems with buying a lousy business that trades at half a book value, okay, so you’re right, you do your analysis, it goes up to book value, then you’re going to sell it, you’re going to go find something else.

Whereas if we’ve got a business we think is super attractive, that’s compounding at very high rates, that is still cheap, that research we do today might last us 10 years, 15 years longer, because we’re going to end up holding that position for a lot longer period of time. So we think that’s actually a better use of time than kind of constantly turning over new rocks to find the newest stock that’s trading at half a book value.

[Jake] Sometimes those net nets can sit as a net net for 10 years straight too.

[Mark] Sorry?

[Jake] I said sometimes those net nets can sit as a net net for 10 years as well, can be quite irritating.

[Mark] Absolutely. So we would like the business to be growing in value over time. So we’ve looked at net, we’ve owned net nets and we’ve also passed on net nets where we felt like they were not going to do anything with the cash or it was not growing.

If the business is decaying fundamentally or losing money, it might be trading at half a book value, but if they’re bleeding value over time, then time works against you. We want time to be on our side and we figure if we own a good business that’s growing value at 6, 7, 8, 10, 15% a year, whatever the number is, at least it’s getting more valuable through time. So there time works on our side and it works, if nothing else, it should increase our margin of safety over time.

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VALUE: After Hours (S08 E13): Why Value Investing Still Works: The Case for Quality Compounders Over Net-Nets

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