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EVALUATION: Investing Insights Brought to You by the Students of NYU Stern December 2013 EVALUATION Inaugural IssuePage 1 December 2013 EVALUATION: Investing Insights brought to you by the Students of NYU Stern LETTER FROM THE EDITORS INSIDE THE ISSUE One thing that NYU Stern students know really well is financial James Rosenwald III: valuation – that is, determining the intrinsic value of securities. Perspective from a Global Renowned NYU professor Aswath Damodaran teaches several courses on the subject matter, ensuring that all Stern students (as Value Investor…Page 2 well as those who follow his blog) have a solid understanding of how to value stocks and bonds. But investing is not just about Professor Aswath valuation – it’s about the evaluation of a number of quantitative and Damodaran: qualitative factors, including price, value, risk and return, in the Valuation Expert…Page 6 context of an ever-changing investment opportunity set. Hence, the name of NYU Stern’s inaugural investment newsletter: Albert Hicks: EVALUATION . Young Alumnus on the Buy-Side…Page 9 It is our pleasure to introduce the first issue of Stern’s student- run investment newsletter, covering a range of topics, from global value investing to sector-specific commentary. Inside you will find Cleveland Rueckert: interviews with industry participants and academics alike, Young Alumnus on the Sell- perspectives from seasoned professionals to young alumni, as well as Side…Page 11 student-submitted work. We hope that you enjoy, and take away a few new ideas! Christopher Dixon: Entertainment & Media Finally, we would like to thank our interviewees for their contributions, as this would not be possible without their valuable Guru…Page 15 insights. With that, happy reading! Roderick Wong, MD: Your EV Editors, Healthcare Investor…Page 17 Mike & Bryce NYU Investment Conference Summary…Page 19 Student Investment Write- Ups: CHTR and UG.PA …Page 21 Source: The New Yorker (Lee Lorenz) December 2013 EVALUATION Page 2 James Rosenwald – Perspective from a Global Value Investor Mr. Rosenwald is Co-Chair of the Management Committee and Senior Portfolio Manager of Asian Equities at Dalton Investments. Dalton is a disciplined, value- oriented, global investment management firm committed to capital preservation and long-term growth. Mr. Rosenwald is a recognized authority in Pacific Rim investing with more than 30 years of investment experience. He holds an MBA from New York University and an AB from Vassar College. He is also an Adjunct Professor of Finance at New York University's Stern School of Business, where he teaches Global Value Investing. The course involves students researching and pitching value investment ideas into a $1 million NYU endowment fund, gifted by Mr. Rosenwald. James Rosenwald III EVALUATION (EV): When did you first foreign exchange, which provided them with become interested in investing? What was significant fee based revenues on top of their your first investment? high quality lending business. These investments performed brilliantly in the 1970’s and were James Rosenwald (JR): I first became interested held for seven years. I sold them to buy my first in investing when I was 12 years old. I would car and travel to Europe. discuss investments with my grandfather who was a securities analyst at Nikko Securities. EV: If you had to describe value investing in a While on vacations we would discuss the balance few words, what would you say? How sheets of corporations and how accounting important is investing with a margin of differed in Japan and the US. I was instructed on safety? how to reconstruct income statements using a first generation calculator and a 12 column JR: Each value investor seems to have their own accounting pad. philosophy and way of interpreting Ben We define a margin of safety as something trading at 50 percent of its private market value. We look at companies the same way a private equity shop would, but we get to buy at a discount! Graham's basic principles. At Dalton we My first investments were made in 1970 in Kirin emphasize three components which represent Beer and Bank of Tokyo. Kirin was the first value investing: the first critical component is export beer from Japan and was growing at high the quality of the business and its defensible double digit rates due to increases in beer competitive position in the marketplace. We consumption in Japan as consumer demand rarely if ever buy cigar butts in order to get the expanded. The Bank of Tokyo at that time had a last few puffs! We especially like growing monopoly on conducting businesses that have pricing power. Second, we must see a clear alignment of interest between December 2013 EVALUATION Page 3 the enterprise’s management and shareholders. Thailand and Malaysia, on its way to Indonesia, We tend to refer to state owned enterprises as Korea, Hong Kong, China and Japan. In life it is “zombie” companies as the management has better to be lucky than smart! absolutely no alignment of interest with the shareholders. We avoid zombies while being EV: How did you get interested in investing in drawn to family and entrepreneur led Asia? Were Korean life companies your initial companies. Finally, we must have a clear margin segue into Asia? of safety to invest in a company. We define a margin of safety as something trading at 50 JR: I was interested in Asia due to my percent of its private market value. We look at grandfather’s advice and counsel. After visiting companies the same way a private equity shop Japan in 1962 with the New York Society of would, but we get to buy at a discount! Security Analysts he decided to invest the vast majority of his accumulated assets in Japan. He EV: It is sometimes said that value investors felt that Japan, being a non-nuclear country, either “get it” right away, or never do. Do you would sit out the Cold War and supply both agree with this notion? sides. I found Asia fascinating and still feel that the region will grow faster than North America JR: I believe that certain people gravitate to or Europe in the coming decades! value investing because its simplicity and elegance resonates immediately. With this said, I EV: How important is it to have a structured have tried to make money trading currencies and investment process? Do you have a checklist options with mixed results, while value investing of things to review for each new opportunity has provided long term results and great at Dalton? How did you first develop your satisfaction. I put a premium on sleeping well at process? night so for me value investing fits this need and desire to a "T". JR: Everyone on the Dalton team is a generalist. We look at each company with the same three EV: Can you talk a bit about your experience criteria – 1) is the company a great business with as an outside advisor to George Soros from pricing power and a moat? 2) are the managers 1992-1997? interests aligned with our clients? 3) does the current price provide a margin of safety for JR: I became an outside Fund Manager for Soros investors? These three criteria are the Fund Management's Quantum Emerging Growth foundation of each analyst’s research! Fund in 1992 and to the Quota Fund a few years later. The expectations at Soros were extremely EV: What is your typical framework for short term and it was clear from the outset that valuation? you made money for the fund within six months or you were fired! My timing was lucky as the JR: We use private equity valuation models to Korean market was just opening to foreign generate our target prices for each security investors after having declined dramatically purchased. Each valuation model is specific to after the heights reached during the Korean the industry, although many companies can be Summer Olympics of 1988. I am eternally valued using traditional models available to all – grateful to George Soros for giving me the like Professor Damadoran's models! opportunity to earn my first seven figure performance fee! I retired from Soros and sold EV: How do you think about portfolio my interest in Rosenwald, Roditi & Co Ltd in May construction at Dalton? What percentage of 2007, just as the Asian crisis was rolling through December 2013 EVALUATION Page 4 time is spent reviewing existing holdings vs. sourcing/analyzing new ideas? JR: The best investments ever made, other than marrying my wife and paying for our children's JR: Most of our analyst time is spent searching education, have been 1) in Korea as foreigners for new ideas. But we also spend a reasonable were allowed to invest in 1992, 2) in Russian amount of time reviewing existing holdings. The equities when there was blood in the streets portfolio is created from the bottom up, and we before the Russian Presidential election of 1996, don't construct portfolios using anything other 3) in California multifamily real estate in the mid than bottom up research. Amazingly we end up 1990's, 4) in distressed debt and equities during with a very diversified portfolio of securities! the Asian crisis in 1997, 5) in Chinese residential real estate during the SARs epidemic of 2003, 6) EV: Peter Lynch said that you should “go for a in Berlin real estate in 2005, and 7) most business that any idiot can run - because recently, in RMBS beginning in the summer of sooner or later, any idiot probably is going to 2008. Each of these investments was the "best" run it.” Warren Buffet said that “when a as I learned about various asset classes, management with a reputation for brilliance geographies and cultures in the process.
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