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Searching for Value in the Stock Market - Part 1 - Interview with Whitney Tilson, Co-founder and Chairman of Value Investing Congress

Searching for Value in the Stock Market  - Part 1 - Interview with Whitney Tilson, Co-founder and Chairman of Value Investing Congress

Hello and welcome to Zing Talk, where Benzinga brings you the biggest names and brightest minds from Silicon Valley to New York City.

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Today our guest is Whitney Tilson, the co-founder and Chairman of the Value Investing Congress, CNBC contributor and a widely-followed investor and money manager. How ya doing today Whitney?

Great, thanks for having me.

Could you start off by telling us a little bit about yourself and what brought you into finance and investing?

Well, as a child of one of the first couples to marry and meet in the Peace Corps, it was certainly not preordained. My parents were both teachers - I certainly wasn't pushed to this path by them. Basically I got interested in business during college, and I sort of, decided I wanted to be an entrepreneur.

As for the reason I fell into investing - it was almost an accident. I was managing my savings - perhaps $5,000 to $10,000. I was successful in the bull market of the late 1990s, and I thought to myself “I'm loving this, this is my passion” and so I hung out my shingle as the smallest and least experienced hedge fund manager, and I had three investors.

Did you have any businesses prior to your own fund?

In college I was one of the first people to join Teach for America, then a couple years at Boston Consulting Group, and then in business school started a research project with Michael Porter, guru of competitiveness and strategy. We did the project on the competitiveness of inner city businesses. I spent a great deal of time with little grubby manufacturing and restaurant businesses and learned a lot of competitiveness and strategy. So it wasn't as much of a crazy career shift to switch from that to a hedge fund. But it was definitely a leap.

Now you've made a name for yourself for taking a “value” approach to investing. Could you briefly outline your strategy and what you look for when picking your investments?

It really is as simple as buy cheap stocks and sell overvalued stocks. But what is simple in theory is harder in practice. We apply the timeless principles of value investing - intrinsic value and margin of safety. We try to take the value of the entire business as reflected in the stock price, and look for undervalued companies - we're looking for the 50 cent dollars, more or less. And then margin of safety - you don't want a 1 ton truck to go over a 1.1 ton bridge. We want a margin of safety. The key is to be patient for offers that aren't slightly in your favor, but rather massively in your favor.

What brought you to this strategy? Did you ever try your hand in other shorter-term “swing” styles?

Very early on. I bought a couple little stocks based on stock tips from a friend of a friend, and fortunately lost my money, and realized it was stupid. I can easily see how a smart person can get caught up in very foolish behavior. This is why whenever I teach investing, I make sure to teach about behavioral finance elements of it. Behavioral finance is the study of how we're irrational when it comes to money. Basically, we're hard-wired to act illogically and against our self interest when it comes to investment. It takes discipline to overcome those urges.

Very quickly after losing money doing foolish things, I discovered Warren Buffett and it made so much sense. I had a modest childhood, and my parents were cheapskates - so when I found the cheapskates way of investing - I figured why wouldn't I do that in the investing world?

What about people who say buy and hold is dead?

Well, I hope everyone listens to them because people who do, create opportunity for me. As a self-interested investor, I hope as many people as possible become day traders and follow Mad Money. As someone who cares about investors as a whole - I'd say it's complete nonsense. I am not pounding the table and saying you should buy things and hold them for ten years. The answer is that it depends. Anyone who tries to buy something on a day and sell it for higher - any normal individual - is a sucker at the poker table. Oh I know there are some people, like Nobel prize winning mathematician Jim Simons at renaissance technologies, who builds computers to take advantage of small anomalies, but they're few and far between.

And day trading is exciting. Humans are attracted to things that cause adrenaline, that are immediate. People want to get rich quick. It's more exciting to get rich quick than to get rich slowly. But methods of getting rich quick are a sure route to the poorhouse.

The alternative is - say to buy Berkshire Hathaway, we feel it's both safe and moderately cheap. I am not saying buy Berkshire Hathaway and hold it forever. The B shares are at $83 and we think they're worth $100. But we feel that Berkshire Hathaway is growing high single digits per year, say 8-10%. You should make 8-10% per year, until the amount between stock price and intrinsic value closes. At that point you should probably sell it. If we find a stock that is worth $10, and we value it as ultimately worth $20, it usually takes several years to reach that point. But if it reaches that value in three months, we sell it. People say we're not buy and hold then - and we're not. We buy things when they are deeply undervalued and sell them when they're valued.

Alright Whitney, give us your three favorite “value stocks” available in today's market.

Well, I just mentioned Berkshire Hathaway and you might say, well that's only a 17% undervalued - that isn't a large margin of safety. And I will admit that currently Berkshire Hathaway is the least cheap stock in our portfolio, but it is also the safest. But we are first interested in safety, and then only what our upside is.

So a couple of examples of safe stocks that are undervalued - for example, Microsoft. It has one of the strongest balance sheets. There is a large disconnect between the conventional wisdom, that Microsoft is a dinosaur and it is going out of business, yet it is growing its earnings 50%, year over year. I wish I owned more dying businesses like that. So we're delighted to take advantage of the disconnect. Microsoft seems very safe from both a balance sheet perspective and an earnings perspective. At least over the next year. This, however, isn't a 5 or 10 year bet. The technology companies - the world changes quickly enough that you have to inherently have a shorter time horizon.

Okay, let's talk about how the Value Investing Congress started. Could you tell our listeners what sparked the idea and how you got it all going?

Well, first off, I learned investing at the feet of the masters. If you want to get good at investing, you have to get experience, it is an experienced based business. You can either go out and do it yourself, or learn from someone else - ideally someone more experienced, who will share their experience without you having to endure the pain. How does someone get to be a great surgeon? You go to school and learn some basic skills. Do they immediately put you in the operating room and have you do brain surgery? No, they have you been an apprentice to a more senior surgeon. How do you do this in investing? Exact same process.

I wasn't apprenticed to an experienced hedge fund manager, so I just started investing, and lost some money doing it. But I'm a fast learner. What else did I do? I realized I could learn from experienced investors in other ways. I read very one of Warren Buffet's annual letters, and went to all of his annual meetings. Same with Charlie Munger. Whenever Seth Klarman or a well known investor was coming to speak at a class in Columbia business school, I would sneak into the class. Joel Greenblatt I owe a great debt of gratitude - he allowed me to sit in the back of the class in Spring semester 2000, when the internet bubble was in full craziness.

So the idea behind the Value Investing Congress - what would be the perfect conference for me? We would invite the world's greatest investors to come. And we wouldn't put them on a panel, which dumbs people down - we'd instead give them the stage for 40 minutes, and invite them to teach and share a few stock ideas. Teach our audience to fish, and give them a few fish. And since we've started it, it has been a hit. We've been fortunate enough to get some of the world's greatest investors to speak, and I think our line up next week is our best ever.

And the event has been wildly successful since it began, attracting major speakers like John Burbank, who we actually had on Zing Talk this summer, and Bill Ackman and David Einhorn. What do you think the impact of the Value Investing Congress has been on the broader financial landscape?

That's hard to gauge. We've certainly had market moving stock picks from our more noteworthy investors. Bill Ackman has talked about certain stocks that have moved. But in terms of larger market impact? It's hard for me to see any evidence that value investing - the core of what we teach at the Value Investing Congress is becoming more popular. In fact I think there's a lot of frustration out there, as everything seems to be correlating - particularly in the past few years, if you correctly foresaw that the world was going to hell in a bucket, you did well. It almost didn't matter what stocks you owned, just what your overall long and short exposure was. And my view is that that period was a once in a generation event - sometimes it is true over a one or two or three year period, the macro stuff matters. But over the course of decades, 80%+ of the time, being a good business and industry analyst is what really matters. And only 20% of the time, albeit that's whats been the case in the past couple of years, does it pay to be a good macro prognosticator.

To see part 2, click here.


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