Introducing Johan Bynélius and the CAMP BARGAIN framework

Nov 10, 2016 by Shai Dardashti in  Diary

Nearly a year ago this year, I enjoyed the wonderful honor of sitting down with Johan Bynélius, founder of Fair Investments Sweden AB based in Stockholm.  In a far reaching conversation, Johan explained his nuanced perspective on value creation through M&A, which I found very eye-opening.

Johan, in the highlight that follows, teaches from his evolution as a veteran intelligent investor and shares a great mental framework. It is a joy to learn from thought leaders around the world — and the world is now flat thanks to the power of the internet.  I’m sure you will also enjoy:

(slightly edited for readability)

My investment philosophy has evolved in the years since I first started:

 

First, I looked at moats — companies that were predictable, we could easily see how their earnings and free cash flow would grow in the future. Those companies usually had a strong competitive advantage — the usual suspects: switching costs, price advantage, or something else. Rather than choosing companies, I actually took away a lot of companies that didn’t fit into this category; I made my universe a lot smaller by looking at moats.

 

Then, I decided that it is very important to have an alignment of interests in companies that I own. We had a bad experience in Sweden with a company called Skandia; a couple of guys came to the CEO position, gave themselves the salaries that they thought they deserved, actually robbed the company.  I don’t want to be invested in the kind of company — where the management might have a different interest than the one I have.  I have a basic rule: I want management to have seven times more stocks than they have salary, so they depend more on the performance of the company more than on anything else.

 

My thinking has continued to evolve.  If you have a restaurant selling high-end food and you compare that with another restaurant selling fast food — for example, in Sweden we have a fancy restaurant called Riche and a fast food restaurant called McDonald’s — I would prefer to own McDonald’s rather than Riche.  It is easier to put the cash flow the company generates back into the business with McDonald’s rather than with Riche.

 

My thinking continued to evolve even more.  The best thing is if management is not just aligned with my interest but are actually really good at spending the money.  There are so many ways you can spend the money a company generates. The normal thing is to pay out a dividend, and I think a lot of managers pay a dividend because everyone else is paying one — without thinking.  The best thing is to find a manager who, should the stock tank, he goes all-in.  There is also internal reinvestment possibility, building more McDonald’s restaurants.  Company management should always compare these two possibilities, just like an investment manager. In my ideal world, I have very high demands on company management: they should be value investors but also value-creators, meaning, they should be very good at making the operations run as well as possible.

 

Jokingly, I tell my clients that I want all of my companies to have attended to the same summer camp.  The camp is called CAMP BARGAIN.

 

“C” is for competitive advantage — the moat.

 

“A” is for alignment.

 

“M” is for margin of safety — management not buying companies or spending money unless there is a margin of safety, there is capital discipline.

 

“P” is for the potential — the long runway.

 

“BARGAIN” is buying the company cheap, when you buy it.

Howard Marks to Keynote Latticework 2016 in New York City Next Week

Sep 08, 2016

Howard MarksHoward Marks, Co-Chairman of Oaktree Capital Management, is not only one of the world’s greatest investors but has also been one of the most generous in terms of sharing his knowledge and experience with the value investing community. As we look forward to learning once again from Howard Marks at Latticework 2016 next Wednesday, I’d like to reflect on the following insight, one of many, shared by Howard Marks at a past ValueConferences event:

“To me, the most important single question at a point in time with regard to strategy, I’m not talking about tactics, I’m not talking about what’s going to go up tomorrow, I’m not talking about eternity, but for the middle term, let’s say three to five years, the most important thing at a given point in time is how you’re balancing offense and defense… we want to have a lot of offense when prices are low, psychology is depressed and the outlook is bad to most people but we don’t think it’s so bad. And we want to have defense when prices are high, psychology is buoyant and everybody sees a brilliant future, and we don’t think the future may live up.”

What is offense and defense in investing? On page 145 of The Most Important Thing, Howard Marks defines offense as “the adoption of aggressive tactics and elevated risk in the pursuit of above-average gains” And what’s defense? “Rather than doing the right thing, the defensive investor’s main emphasis is on not doing the wrong thing.” While on the surface there might not seem much difference in doing the right thing and avoiding doing the wrong thing, Howard Marks goes on to say that there is a big difference in the mindset needed for one or the other:

“While defense may sound like little more than trying to avoid bad outcomes, it’s not as negative or non-aspirational as that. Defense actually can be seen as an attempt at higher returns, but more through the avoidance of minuses than through the inclusion of pluses, and more through consistent but perhaps moderate progress than through occasional flashes of brilliance.”

So where do we stand today? In 2013, Howard Marks unequivocally stated “we’re in the middle.” The implication being that investors ought to balance offense and defense as that is what successful investors do in the middle. Roughly three years later, we wonder what Howard Mark’s assessment is of the current investment climate.

We are delighted that William Green, acclaimed author of The Great Minds of Investing, has agreed to moderate the Q&A session with Howard Marks.

Howard Marks: Be Aware of the Temperature of the Market

Howard Marks is a keynote instructor at Latticework 2016.

William Green on Howard Marks and the Role of Luck in Investing

Feb 19, 2016

I sat down for a wide-ranging interview with William Green, former Time editor and author of The Great Minds of Investing, in New York a couple weeks ago. William also worked closely with Guy Spier on Guy’s The Education of a Value Investor.

In our conversation, we touched on many aspects of what makes great investors different. We spoke at length about the lessons of Guy’s book. William also shared his insights into some of the investors profiled in The Great Minds of Investing.

Here is William on the role of luck in Howard Marks’ career success:

Riots Force Cancellation of Value Investing Dinner in New Delhi

Feb 20, 2016

Gurgaon riots

The cancellation of a dinner scheduled to take place in Gurgaon (New Delhi) serves as a stark reminder of the volatile political situation in many parts of the world. Imagine scheduling a dinner with a dozen fellow value investors in a Western city, only to have to cancel because the army was called in to put down a riot, resulting in the loss of human life. Surreal.

Yet, in countries like India, such a scenario is still not only a possibility but a reality. Writes Sourabh Soni, organizer of the value investor dinner in New Delhi:

…we are cancelling this event for tonight due to unavoidable­ circumstanc­es (riots on the way from Chandigarh to New Delhi). I will publish the meetup for next weekend. Sorry for [the] inconvenien­ce caused due to this cancellatio­n. Regards, Sourabh

Sourabh followed up with the following message to me:

I have to cancel today’s dinner at New Delhi, because of riots… All buses and trains got cancelled. Army was deployed to calm down the situation, I think people got killed also. It is [a] protest against [the] reservation system. I will reorganize it next Saturday.

The #valueinvestors Meetup group has grown to hundreds of value investors in just a few months, and meetups are being organized by members all around the world. The MIT Investment Management Company recently hosted a dinner for a dozen fellow value investors in Mumbai.

In our zeal to meet fellow investors, learn, and share, we often forget just how fragile the world really is. This makes our engagement and our community even more important: We try to provide a space for learning and personal growth, no matter where you reside or what regime you live under. We believe that each human being has the capacity for greatness, and we are proud to contribute in a very small way to uplifting individuals, even if their own governments have failed them.

The world is unlikely to become less volatile and less dangerous any time soon.

We will keep uniting people around a positive mission of lifelong learning, personal growth, friendship, and respect.

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