Value – it’s all about perception

I missed Gary Channon of Pheonix Asset Management speaking at the 2013 London Value Investor Conference last week (the train in from Edinburgh is fast but even the 5:40 only gets you in at 9:40) but I did catch one of his final comments.

Value investing, he said, is the art of arbitraging “the difference between perception and reality.” The problem is that sometimes perception can change reality.

Take a bank. It can be not bankrupt, but thought to be in iffy condition. That can make it cheap. However, if everyone thinking it is iffy leads to a bank run, it isn’t cheap, it’s bankrupt. Perception has changed reality. It all sounded very clever.

I also know about Channon’s rather good investing record (over 9% a year since 1998), so I grabbed him for a chat. We talked about how he started out. In the beginning, he says, he thought that what he really wanted was to “live Warren Buffett’s life”. Really? I asked.

It has always seemed to me that managing a wife and a mistress and whizzing around on private jets playing bridge with Bill Gates, while making it clear you are not interested in a rich man’s lifestyle, must be rather exhausting. Turns out that’s not what he meant.

He had wanted to invest in value companies and move on to buying whole companies just like Buffett. But it turned out to be rather too hard – endlessly dealing with management and so on takes away from the actual business of investing.

Buffett was “a product of his opportunity set”, and the rest of us, rather than imitating him, need to find our own set. In Channon’s case, this has involved investing in good businesses for the long term.

It is high conviction stuff – about 15 stocks, with the top five making up 60% of the portfolio. There is no over diversification here, but there is bravery aplenty (one of the things most of the speakers at the conference agreed on is that a good trade starts out as a really uncomfortable trade). An example? He bought Barratt Homes at the bottom.

I’ll talk to Gary at greater length again soon, but one comment he made during our talk struck me in particular: “watch out for the miners”, he said. 30% is something of a magic number for the FTSE100. When technology, media and telecoms companies made up around 30% of it, disaster soon followed. When banks made up 30% of it, disaster soon followed. Today the miners make up around 30% of it.

Finally, a stock tip.

Most of the speakers offered up a long-term investment idea – Channon’s was GlaxoSmithKline. People are so worried about patent expiry that they have failed to notice that global healthcare spending (which pretty much always only rises) is the real driver of profitability. Perception and reality don’t match – again.

  • Barry

    Just caught end of his presentation also – Howard Marks was the highlight for me – nice to meet you at event Merryn

  • Matthew

    Miners make up 9% of FTSE weighting right now. Add in energy and you get to 28%. BP represents 5.2% of that, and the two Shells, 8.4%.. are they over valued as well..?

  • AshT

    Glad you had a chance to talk to Gary – I worked for him briefly as a graduate trainee back in 1993. Back then he was trading index futures in both the European and Japanese markets, leaving about zero hours for sleep.. no doubt value investing is a slightly more relaxed lifestyle!

    Ask him what he thinks of David Harding style quantitative/statistical strategies. The annualised return is pretty much the same but with far better worst case drawdowns.

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