I’d spent 10 years flitting from one investing approach to another, including stints drawing fancy charts - by hand, no less - and “momentum investing”. That all changed when I picked up Buffett: The making of an American capitalist, by Roger Lowenstein, 14 years ago. It still retains top billing on The Intelligent Investor’s recommended reading list.
Lowenstein weaves the value investing philosophy deep into the fabric of this eminently readable biography of (arguably) the world’s greatest investor. By its end, I was hooked.
Value investing made inherent sense to me and Warren Buffett’s investing career, along with other successful value investors mentioned in the book, provided proof of its efficacy.
Only one Bond
In my teenage years I’d spend many hours studying the BRW Rich List. Chartists, or “technical analysts” as they are sometimes known, never featured on it. But many fortunes were built with a value-based approach.
Kerry Packer was a great example. People talk about his “good timing” but it was more a function of buying something when it’s cheap and selling it when it’s not. Despite his emotional investment in the Nine network he was famously willing to sell to Alan Bond for $1.055 billion, of which $200 million was in the form of preference shares in Bond Media.
Bond combined the Sydney and Melbourne stations he bought from Packer with his Brisbane and Perth television stations, and other radio licences, and floated the lot just before the 1987 sharemarket crash.
After, Bond companies were sitting on total debts of about $US10 billion, including the $200 million owed to Packer. Bond was unable to pay and Packer took back the Sydney and Melbourne stations plus the Brisbane station in exchange for the preference shares.
In the wash-up, Packer netted $855 million in cash and got the Brisbane station for free. As he said after the sale in 1987, “you only get one Alan Bond in your lifetime, and I’ve had mine”. It was a classic value play.
Somewhat less famously, in 1986 Packer bought Valassis, the largest American publisher of advertising inserts for magazines. It was an unloved company struggling against competition from Rupert Murdoch, among others. His private companies made the purchase so it’s difficult to ascertain an accurate price but the oft-quoted figure is $US365 million.
He set about cutting costs and restoring profitability before selling 51 per cent in a 1992 public float for $US375 million and the remaining 49 per cent in 1997 for $US500 million. Including dividends it’s probable that Packer made almost $1 billion from Valassis, although some put the profit as high as $2 billion.
Gambling on Crown
In late 1996, Crown Casino moved from its temporary Galleria site to its present location at Southbank in Melbourne. Building the casino was a long and expensive process so a separately listed company was set up to make the investment.
The two largest shareholders were Packer’s Consolidated Press and his mate Lloyd Williams’s development company, Hudson Conway. Trading at the temporary site was not strong enough to cover the costs of development and financing, so the company reported losses until well after the Southbank complex was established.
The 1998 financial year was the first full year of operation at the Southbank site. Sales were up 51 per cent to $977 million, cash flows were $102 million, but a net loss of $350 million was reported including asset write-downs, interest and depreciation. With net debt of $900 million and large headline losses, the share price was languishing.
Packer took advantage of the pessimism with a takeover offer using a combination of cash and shares in his listed vehicle, PBL. With an outlay of about $1.7 billion, he gained control of one of the world’s largest casinos and PBL went on to make billions out of this transaction as the value of the casino soared.
Packer, like Buffett, had a temperament suited to buying when the price of an asset was depressed, whether because of a short-term issue or because of depressed markets in general. That’s an approach we’d all do well to cultivate.
Reading Roger Lowenstein’s excellent biography of Warren Buffett may well give you a push in the right direction. It certainly did for me.
