We continue this series with a classic interview with Chris Bloomstran, President and Chief Investment Officer of Semper Augustus Investments Group. Chris writes a wide-ranging and informative annual client letter that has become must read material for many value investors. In this conversation, we explore some of the important topics that Chris has written about as well as his investment approach.
Chris has three decades of professional investment experience with a disciplined, value-driven approach to fundamental equity and industry research. Semper Augustus manages concentrated equity portfolios of well-run, well-capitalized businesses with share prices trading below conservative appraisals of intrinsic value.
Prior to forming Semper Augustus in 1998 — in the midst of the stock market and technology bubble — Chris was a Vice President and Portfolio Manager at UMB Investment Advisors where he managed the Trust Investment offices in St. Louis and Denver and the Scout Balanced Fund from the fund’s inception until he left to found Semper Augustus.
Chris received his BS in Finance from the University of Colorado at Boulder, where he also played football. He served as President of the Board of Directors for the CFA Society of St. Louis from 2006-2007 and as a Director on the Board from 2001 to 2021. Chris served as a member of the Bretton Woods Committee in Washington DC. He has also served on various not-for-profit boards in St. Louis. He earned his CFA designation in 1994.
This interview was conducted by Tyler Howell of MOI Global in 2019.
The following transcript has been edited for space and clarity.
Tyler Howell: I’m joined by Chris Bloomstran, president of St. Louis-based Semper Augustus Investment. Is the company named after the tulip?
Christopher Bloomstran: It is. Loosely translated from Latin, Semper Augustus means “always majestic.” This was the most inflated of the tulip bulbs in 1637 Holland, in a way representing the first iteration of bubbles. Some of it was fanciful, and it’s hard to know how much of it was an honest-to-God bubble, but you did have a bubble in real estate and trade at the time. One Semper Augustus bulb would go for the equivalent of almost $1.5 million in today’s terms. The interesting thing is that, ultimately, it was a flawed tulip. It was deep scarlet red blended with white, which indicated a flaw where the bulb itself couldn’t reproduce.
I read Kindleberger [ed. note: Economic historian Charles Kindleberger (1910-2003) wrote more than 30 books, among them Manias, Panics, and Crashes, which dealt with speculative stock market bubbles] way before starting Semper. I always figured I’d start a firm and hoped somebody else wouldn’t latch on to it. Come to think of it, what are the odds of somebody latching on to an obscure tulip bulb from the 1630s in Holland? We launched the company at the height of the internet bubble and felt that the name epitomized the mania at the time. I thought there were parallels between the bubble from centuries ago and many of these dot-com businesses doomed to run out of cash and fail, so what better time to start a money management firm than at the height of a mania? At the time, I felt the name was fitting. It’s funny because, over the years, a handful of people have figured it out. Often, you have to tell them the story, but the oddballs have gotten through.
Howell: What in your background led you up to Semper Augustus?
Bloomstran: I started at the Air Force Academy for half a year with the intention of meshing football and academics. It turned out the academy was heavy both on military and academics, while all I really wanted to do was play football. I wound up transferring to the University of Colorado to study mechanical engineering, thinking it was more fun. For whatever reason, I had started reading The Wall Street Journal, and it appealed a lot more to me than differential equations. I moved to the business school and caught a bug early on, developing an interest in investing. I started picking up all the books, candlestick charting, got into Bill O’Neil’s CAN SLIM. I was doing these hand charts and thinking that a stock breaking out on earnings news was what mattered a lot. A whole iteration later, I wound up running money for a bank trust company for about eight years. We launched Semper 20 years ago, and we’re still on the learning curve.
Howell: You have developed a reputation for writing excellent annual letters addressing a lot of topics. Maybe they’re not brief, but they’re very informative and fun to read. I wanted to walk through some of the topics, starting with certain mistakes you have made. In the latest letter, you detail those in what you call “The school of hard knocks” or “The University of Ross.” I want to go straight to the namesake, Ross. You mention you’ve let that one go a little too early. Can you describe the case and tell us how it has informed your process since then?
Bloomstran: I’d rather not spend every letter we write focusing on all the mistakes we’ve made over the years, but there is a learning aspect to the business and cumulative knowledge and wisdom to it. You make enough deep mistakes that ideally you can learn from, so I thought it’d be fun to take three or four of what I consider some of the biggest mistakes I’ve made professionally as an investor over the years and talk about them. I named that section of this year’s letter “The University of Ross” specifically for Ross Stores, which was a huge error of commission.
It’s odd because we bought the stock in early 2000, when the market had become extremely bifurcated. Large-cap stocks, the blue chips, were very expensive in 1998, then you had the whole tech bubble, which raged until March 2000. If you were a small cap value fund manager, you were getting redemptions for a couple of years. You’d show up at the office, loving the stocks in your portfolio, and you’d be liquidating due to the redemption cycle. Around 1998, you had this tiering in the market where the GEs and the Coca-Colas were trading at 35x, 40x, 45x, or 50x earnings. However, developed underneath that was a plethora of smaller mid-cap businesses, little thrifts, little banks, fire truck manufacturers, and retailers.
We had done some work on Ross Stores and loved the concept. We bought Ross in maybe the middle of 2000 at 10x free cash earnings. The company was running under 400 stores at the time, around 350 to 375, and the unit economics were terrific. We envisioned a very long runway to open stores and probably with scale, as the business grew. Who could have known that all that small and mid-cap stuff we owned and other good value managers had migrated toward would have made so much money in 2001 and 2002? Our stocks were up on the order of 35% when the market fell 50% during that three-year period. A lot of it was simply the value disparity fixing itself. We wouldn’t have believed we’d make so much money in a nasty bear market, but we did, and it was businesses like Ross, which we bought at 10x earnings.
The company was earning high-teen returns on capital and worth far more than 10x. In short order, over the next couple of years, we made about 2.5x our money on Ross. The stock was pushing 20 to earnings. When it gets to 400 stores, distribution changes, and management might have to change, so I thought we’d made enough money on this thing – we would sell it and come back to it when it got cheaper. We sold the business having made 2.5x, and subsequent to the sale, the stock was a 20 bagger. The business compounded at 20% per year for the next almost 20 years, so it was a hugely expensive error to be out of that position.
We’ve learned there aren’t a lot of compounders and businesses with durable moats and long runways, in this case, to add the units with scalable economics. We’ve made some good investments in the wake of exiting Ross. You would say you made 2.5x your money, and there is nothing wrong with that, but we left a lot of money on the table on a business we knew extremely well. You learn. If you own a business with higher returns, the traditional value metrics may not apply. Certainly, to the dyed-in-the-wool value investor, pricing things on price-to-book, price-to-sales, price-to-cash flow, and dividend yields, you learn a lot of lessons when you watch a business like that compound on unit growth for a long time.
Howell: The title topic of the letter is “Addicted to Loans.” You walk through the level of global indebtedness, making a really interesting reference to Tennessee Ernie Ford’s song, 16 Tons, which is an entertaining way to sum that up. Can you give us your broad view of where we are and what the systemic risks are?
Bloomstran: Doing what we do, we spend the vast majority of our time looking at businesses and turning over rocks, thinking about competition and industries. I think you can’t not have a macro view in today’s world. In the wake of the great recession, we watched the Federal Reserve grow its balance sheet from $850 billion to $4.5 trillion. We watched various levels of consumer debt grow and grow and grow. We watched for decades a progression where it took $4 to $5 and then $6 of debt to grow GDP by $1. In the United States, we’ve been sitting with on-balance sheet debt levels at 350% of GDP. Japan is much higher. We look at what’s been an increase in corporate debt, particularly post the great recession. You had household bankruptcies and foreclosures, mortgage debt had gotten very high, and you saw consumer debt get better for a handful of years. Then you had the ballooning of government balance sheets here and abroad. It’s out of control.
We look at debt across the whole system, and we’ve seen debt balances now. If you strip financials out of the equation, debt on balance sheet equates to equity on balance sheet. In the last 10 years, you’ve seen businesses spend more than 100% of their profits paying dividends but then buying back shares, even having to borrow money to buy back their shares. I think we’ve seen underinvestment in things like capex in places. We took the theme of the letter and took the macro snapshot of where debt levels were. That was just on-balance sheet debt – forget about the massive problem of off-balance sheet liabilities we’ve created for social contracts like social security, Medicare, and Medicaid. A theme we utilize in our thinking is that it’s more likely than not for interest rates to stay low for a much longer time than people think. This goes into things like the valuation equation and economic growth.
Howell: As you point out, a lot of value investors tend to say, “I don’t have a macro view.” However, it’s important, as you note, and you can’t not have a view. How does that trickle down into your analysis? Is it just in the background of your thinking, or does it come all the way down to when you’re doing research?
