2017 Value Investing Conference | Value Investor Panel: Arnold Van Den Berg

Summary of "2017 Value Investing Conference | Value Investor Panel: Arnold Van Den Berg"

Short Summary:

The main concept discussed is the importance of "getting the worst case right" in value investing, emphasizing the need for a margin of safety beyond typical intrinsic value calculations.
Key points include:
- Determining a "worst case" scenario for a company's stock price, factoring in factors like inflation and commodity prices.
- Using historical data and multiples to identify potential downside risks and calculate a buy point.
- Recognizing that buying at the "maximum pessimism" point, when the market is most bearish, can lead to significant returns.
This approach helps investors make informed decisions about portfolio allocation and manage risk effectively.
The speaker outlines a detailed process for determining the worst case scenario, including analyzing historical multiples and identifying the lowest points in a company's performance.

Detailed Summary:

1. Introduction and the Importance of Margin of Safety:

Arnold Van Den Berg emphasizes the importance of Benjamin Graham's concept of margin of safety, which provides a buffer against inaccurate future estimates.
He shares his personal experience navigating the 1974 bear market, which reinforced his belief in the value of this principle.

2. The Worst Case Scenario Approach:

Van Den Berg introduces the concept of determining a "worst case" scenario for a stock, going beyond simply calculating intrinsic value.
He explains that the worst case should encompass potential bear markets, recessions, and company-specific distress.
He uses a hypothetical client case to illustrate how this approach can help investors make informed decisions about portfolio allocation, even with limited capital.

3. Determining the Worst Case:

Van Den Berg outlines a process for determining the worst case, involving:
- Analyzing historical data over 20-30 years to identify consistent multiples (e.g., price-to-book, EV-to-sales).
- Identifying the three lowest years in a company's performance and averaging the relevant multiples.
- Applying these average multiples to the current book value to calculate the worst case price.
He emphasizes the importance of considering inflation and commodity prices in this analysis.

4. Maximum Pessimism and Buying at the Bottom:

Van Den Berg discusses the concept of "maximum pessimism," when the market is most bearish and the stock price is at its lowest.
He argues that this is often the best time to buy, as the stock is likely to rebound quickly.
He uses a real-world example of a cyclical company to demonstrate how to identify maximum pessimism by superimposing the stock price on top of the company's book value.
He highlights the importance of timing and suggests averaging down into a position rather than buying the entire position at the absolute bottom.

5. The Value of Buying at the Worst Case:

Van Den Berg emphasizes that buying at the worst case can lead to significantly higher returns than buying at a higher price.
He uses the analogy of an elevator and a plankway to illustrate the concept, highlighting the reduced risk associated with buying at the bottom.

6. Conclusion and Ben Graham's Legacy:

Van Den Berg concludes by acknowledging the current economic challenges and drawing parallels to the time when Ben Graham retired.
He emphasizes the enduring value of Graham's principles, particularly the margin of safety, in navigating volatile markets.
He encourages investors to consider incorporating the worst case scenario approach into their investment strategies.

Notable Quotes:

"The function of the margin of safety is in essence that of rendering unnecessary and accurate estimate of the future." - Benjamin Graham
"Price determines your return." - Benjamin Graham
"The Bible says that love covers a multitude of sins; in the stock market, price covers a multitude of mistakes." - Arnold Van Den Berg
"Always invest at maximum pessimism." - John Templeton
"Sound Investment principles produce generally sound results." - Benjamin Graham