David Herro - Value Investor

"The world ,as we know it, is ending" - David Darst (Morgan Stanley chief investment strategist).

This is the first time I have republished a video that was posted on somebody else's blog. This video appeared on Dah Hui Lau's blog yesterday. I am cheap enough to grab his video and post it myself as it was interesting. I am in good, cheap, company as WealthTrack, who publish the video, are themselves cheap enough to preamble it with some good wholesome advertising, followed by sponsorship - after all while you are waiting for the video to start you could be coming to some (subliminal) decision about products to buy. And why not?

David Herro is a Value Investor who achieves 9-10% average returns. The interview covers his investing philosophy gives some insight into his style. Here are a few points I picked up from the video:

• News is getting much more rapidly priced into stock. David finds that he holds onto stock far shorter (half the time) than he used to. He did not say if the discrepancies between cost and value are smaller. If they are not smaller then he should become more efficient as a value investor as Mr Market is less sluggish in figuring out that there is value.
• He sees a much greater market volatility and believes that it is here to stay. The volatility he sees washes across different sectors (asset classes) of the market. Presumably volatility is what you seek as a value investor as volatility implies that there will be times when stocks will be attractively priced.
• He sees an acceleration of economic expansion in developing world and decellaration in the developed world.
• He seeks to buy quality stocks.
• He is investing in Japan and now sees Japan as a home of improving corporate governance, and that there is good value. He currently holds Diawa Securities. Personally from what I have understood of corporate governance in Japan, (gleaned from Aswath Damodaran's lectures) is that the cross-holding structure corrects when there is an individual management failure in a single company but it is resistant to any kind of management cultural change. Additionally there is the curious practice that stock buy backs enable the company to vote for the shares that it bought back.
• He invests in Europe and points out (living in the UK this is no news to me) that Europe far from homogeneous boasts a wealth of economic policies, labour laws etc. But, of course, there is value to be had across Europe - Titan Cement in Greece (is an example). And he likes the corporate governance of Sweden as often a Swedish company will have part of its employees pension invested in the company and have a trade union presence on the board. To me this is a fantastic way of reigning in any recklessness in the board room and getting the employes to think of themselves as owners as well as the management.
• He is currently wary of Emerging Markets - and cites high prices and a great deal of lousy corporate governance. You should price this corporate governance in (it's risk after all) to your valuation. He sees the macro effect of demand (growing 10%-12%) from the emerging markets as a source of demand and a driver for global economic growth. The developed world OTH has lots of debt, low savings rates and therefor can not pace-up demand.
• When evaluating a company he looks at the macro influences on where the company makes its money. This is different from, my understanding, of the Buffett Munger approach where you look for outstanding companies and pay little regard to the macro picture.
• He invests in Small Caps and cites them as outperforming the market by 1-2%. This is consistent with Guy Spier, and Cale Smith (a value investors I particularly like) who hunt out small caps. Guy, as I remember, says that smaller more volatile stocks can represent better value. Francois Bonnin put it as "The greater the liquidity of an asset the greater the amount of information that is embedded in the price".

And what would an interview be without a tip? David recommends Diageo. As people age they transition from beer to spirits. Profit dynamics great - good return structure and good at allocating capital 10x cashflow. And my opinion what-do-you-know the middle class (and out there as the world develops boy is it growing) likes to drink, amongst many other things.

Enjoy the interview.

"People abandon common sense when macro trends disrupt them."