The Consigliere Creed

Thanks to my blog benefactor Felix Salmon, my post on the Berkshire Hurdle got a lot of attention (thanks also to Seeking Alpha, AbnormalReturns.com, and their partners).   If I now have some new readers because of it, let me take this post to reintroduce myself and this blog:

My name is Nadav Manham, and I'm the president of Elera Advisors LLC, a money management firm in New York.  Elera and I--the company is just me, no armies of analysts yet--do two things:

1. I manage a small number of separate accounts for individual investors, mainly friends and family as well as my own capital, in a concentrated value style.
2. In addition, I've very modestly set myself the task of becoming the world's expert on today's professional value investors, in particular those who are younger, not American, and less well-known.  My goal is to expand my activities into money manager selection for individual and family office investors.

What do I mean by a value investor?  Everyone has their own definition of the term.  My definition is essentially "the kind of investing Warren Buffett has done throughout his career," by which I mean the following:

• You invest in businesses, not pieces of paper.  Your job is to understand a business and predict its future, not to predict the macroeconomy or short-term price movements of securities.
• You want to buy something for less than it's worth, i.e. less than its intrinsic value, the sum of all its discounted future cash flows.  If you're shorting, do the opposite.
• You look for a margin of safety.  Avoiding permanent capital loss is the first consideration.
• You're long-term oriented.  The idea is to increase purchasing power measured over a period of years and decades, not weeks and months.
• You're not too diversified.  There is a scarcity of good investment ideas out there, so concentrate your bets on them when you find them.
• You think like a principal.  Returns after taxes and fees are what you care about.

By my definition, a value investor need not be restricted to investing in publicly traded securities.  So you don't have to be a hedge fund or mutual fund.  A private equity fund can be a value investor, as can, I will argue in a future post, a venture capital investor.  Value investing is not confined to equities, private or public.  A distressed debt investor can often be a value investor (when I worked at a hedge fund I did mostly distressed debt).  A value investor can be a completely passive minority owner of securities, or a 100% owner-operator of a business.  He can invest in "good businesses" like Buffett does now, or "bad businesses" like he used to do.  A publicly traded investment company like Berkshire Hathaway or Leucadia can practice value investing, but so can a "regular" company that does only one thing: to me Sam Walton was one of the great value investors--his only investment was "build more Wal-Mart stores" but the returns on those investments have put most hedge fund managers to shame.*

So value investing and its practitioners is my specialty.  By happy coincidence, I believe that the value investing strategy is the most congenial home for the surplus capital of most individual and family investors.  I believe this for the following reasons:

1)  First and foremost, it works!  Take it from the master.

2)  The idea of margin of safety should be especially appealing.  As Buffett says, "you only have to get rich once."

3)  Value investing, especially in its "later Buffett" form--long holding periods, low turnover--tends to be tax efficient.

4)  It's easy to understand.  In fact, chances are you (or an ancestor of yours) are already a value investor and don't even know it.  Most individual and family fortunes come the from the long-term ownership and growth of one business that is eventually sold.  Read my definition of value investing and ask yourself if that's how you built your family fortune.  Why should you trade away all the business expertise you've accumulated to enter a field like momentum investing or macro or quantitative investing where you have no edge?

There are of course exceptions to this rule.  I know of a man who met James Simons in college and invested some of his family's money, derived from a group of industrial companies, in Simons' quantitative hedge fund Renaissance Technologies.   He may not have known what exactly Simons was doing, but he didn't regret it.  Nor did the European investors who invested with George Soros before anyone knew what macro investing was.  If you can identify a Simons or a Soros you don't need my help or anyone else's.

Thank you for reading and for visiting the blog.

*Please allow me to rant a little:  This is probably my biggest pet peeve about my fellow members of the finance profession.  In general, they look at "finance and investing" as one thing and "business" as another.  Finance, i.e. running a hedge fund, even a mediocre one, is sexy, something to be done by Masters of the Universe.  Meanwhile, running a retailer from Arkansas is for the little people.

When I was in college I was involved in a club that invited Fortune 1000 CEOs to speak on campus. At the time my college sent about 20% of its graduating class to Wall Street (including consulting), about 1,000 students per class.  So you'd think there would have been a large ready-made audience for these kinds of events.  After all, these CEOs would be their future clients and the future stewards of their and their limited partners' capital.  Not true.  It used to drive me crazy.  When the 28-yr old vice president from Lehman Brothers came to campus to give a talk called "How to write a resume" it was standing room only.  But I remember having to cancel an event with the CEO of Walgreen's, then and now a fantastic company, due to lack of interest. Eventually we had to resort to bribery and ask the CEOs to bring free samples of their products to hand out.   That was a little embarrassing.  OK, rant over.  Just keep in mind that there are about 100 billion reasons why Sam Walton (not to mention all the "little people" who owned and held Wal-Mart stock from its early days) was a better investor than you are.  And he didn't need 2 and 20 to get there.