Graham & Doddsville

46 Pages·2014·3.77 MB·English

by  David M. Kessler

Graham & Doddsville
An investment newsletter from the students of Columbia Business School
Issue XXI Spring 2014
Inside this issue:
CSIMA
Philippe Jabre—Following the Steps to
Conference P. 3
Investment Success
Philippe Jabre P. 4
Arnold Van Den Berg Philippe Jabre ’82 is the founder and Chief Investment Officer of
Jabre Capital Partners, which runs three investment funds – a
& Jim Brilliant P. 12
multi-strategy fund and two long-only funds. Prior to launching
his own firm in February 2007, he was a top money manager at
Pershing Square
GLG Partners. Jabre Capital Partners recently won
Finalist Pitches P. 22
Philippe Jabre
(Continued on page 4)
Eric Rosenfeld P. 32
Women in
Century Management—The Value of Discipline
Investing P .37
H. Kevin Byun P. 38
Arnold Van Den Berg founded Century
Moon Lee Prize P. 45
Management in 1974. He is a principal of the
firm, the Chief Executive Officer, co-Chief
Editors Investment Officer, and a portfolio manager.
Arnold has no formal college education but
Chris Brigham
gained his market knowledge through rigorous
MBA 2014
self-study, tremendous dedication, and over 45

years of industry experience. Prior to starting
Jackson Thies
Century Management, he worked as a financial
MBA 2014
Arnold Van Jim

Jason Yang Den Berg (Continued on page 12) Brilliant
MBA 2014
Eric Rosenfeld—The H. Kevin Byun—Special
Matt Ford
MBA 2015 Evolution of an Activist Situations Investing

Peter Pan
H. Kevin Byun ’07
Eric Rosenfeld is the
MBA 2015 founded Denali
President and Chief
Investors in 2007.
Executive Officer of
The firm employs
Crescendo Partners, a
Visit us at:
an opportunistic
www.grahamanddodd.com New York based
special situations
www.csima.org investment firm
and value oriented
focused on activist
framework. Denali
investing. Prior to
seeks to identify
forming Crescendo in
catalyst-driven
1998, he held the
Eric Rosenfeld situations that will H. Kevin Byun
position of Managing
unlock value. He
Director at CIBC Oppenheimer and its
was a triple major at Rice University
predecessor company Oppenheimer &
and has an MBA from Columbia Busi-
Co., Inc. for fourteen years.
ness School.
(Continued on page 32)
(Continued on page 38)
Page 2
Welcome to Graham & Doddsville
We are pleased to bring you Eric Rosenfeld shares his With this being our final
the 21st edition of Graham & evolution as an activist in- issue as editors of Graham &
Doddsville. This student-led vestor and how his firm, Doddsville, we want to
investment publication of Crescendo Partners, identi- reflect for a moment on our
Columbia Business School is fies potential investments. time shepherding this publi-
co-sponsored by the Heil- Eric also delves into cation. It has been a privi-
brunn Center for Graham & Canadian laws and how they lege to act as stewards of
Dodd Investing and the Co- facilitate shareholder the legacy of value investing
lumbia Student Investment activism. at CBS and to share the
Management Association insights of such talented
(CSIMA). H. Kevin Byun discusses investors with our readers.
the nuances of special situa- These interviews will be
Heilbrunn Center Director
For this issue we spoke with tions investing and how he among our fondest memo-
Louisa Serene Schneider
five unique investors cover- searches for opportunity in ries at Columbia Business
’06. Louisa skillfully leads
the Heilbrunn Center, culti- ing a range of different per- spin-offs, liquidations and School. We leave Graham &
vating strong relationships spectives and investment transformative M&A actions. Doddsville in the highly capa-
with some of the world’s styles. He also discusses some of ble hands of Matt Ford and
most experienced value the opportunities he sees in Peter Pan. Apparently we
investors and creating nu- Philippe Jabre recounts the market today. have to grow up now, but
merous learning opportuni-
how he began his career in we look forward to reading
ties for students interested
convertible arbitrage and This issue also contains pic- the interviews they conduct
in value investing. The clas-
how his firm, Jabre Capital tures from the 17th annual in future issues. We are
ses sponsored by the Heil-
Partners, searches the world CSIMA Conference, which deeply grateful to those
brunn Center are among
the most heavily demanded for attractive investments. took place on February 7th investors we interviewed
and highly rated classes at at Columbia University, fea- during our tenure – none of
Columbia Business School. Arnold Van Den Berg turing Bill Ackman and Joel this would be possible with-
and Jim Brilliant emphasize Greenblatt as keynote out their willingness to
the value of discipline in speakers. share their wisdom. Finally,
investment management, and we thank you, dear reader,
explain the importance of Lastly, this issue includes the for your continued interest,
building a framework and finalist pitches from the Per- loyalty, and suggestions.
mental database around your shing Square Challenge
experiences to improve deci- which took place on April - G&Dsville Editors
sion making. 23rd.
Professor Bruce Green-
wald. The Heilbrunn Center
sponsors the Value Invest-
ing Program, a rigorous
academic curriculum for
particularly committed
students that is taught by
some of the industry’s best
practitioners.
Julia Kimyagarov, Louisa Serene The first-place team and judges at the 2014
Schneider ’06, and Marci Zimmerman at Pershing Square Challenge
the 2014 Moon Lee Prize Competition
IVssouleu mXeX II, Issue 2 PPaaggee 33
2014 CSIMA Conference at Columbia Business School
The audience listens as Bill Ackman answers student Student conference coordinators Joe Fleury ’14, Taylor
questions with a mix of candor and humor. Davis ’14 and Ivan Dias ’14 deliver opening remarks.

Kyle Bass (L) of Hayman Capital speaks on the Best Mark Cooper moderates the Behavioral Investing Panel with
Ideas Panel with Tom Gayner (R) of Markel William von Mueffling ’95, James Montier, Michael Mauboussin
Corporation. and Kent Daniel.
Bruce Greenwald moderates a discussion with Joel Greenblatt. Bill Ackman discusses his GSE investments.
Page 4
Philippe Jabre
(Continued from page 1) G&D: When you were at when they start school. I
EuroHedge’s Columbia, were there any don’t even know if there
Management Firm of professors who were was an investment club
the Year award for 2013. particularly influential for when I was at Columbia in
Mr. Jabre received an you? Or any courses that 1980. Maybe there was...I
MBA from Columbia stood out in your mind? had no clue.
Business School in 1982
and serves on the Board G&D: And when you
Philippe Jabre
of Overseers. graduated, where did you
start your career?
Graham & Doddsville
(G&D): Can you start by PJ: I joined JPMorgan in
talking about how you New York for an internship
became interested in “Today, students in asset management for
investing? nine months. And that was
are much more very useful because it was
Philippe Jabre (PJ): I was my first contact with the
at Columbia Business School prepared and real world of managing
from 1980-82 and part of equities, bonds, convertible
focused when they
the interest came from bonds, and warrants.
classes I was taking in start school. I don’t
international investments. I Then, after the nine months,
was also reading a lot of even know if there I went to Paris to work for
books which helped me a bank named BAII, which
grow into it. Of course you was an investment later became a subsidiary of
don't know at age 20 or 22 BNP. It was still in the very
that you're going to be club when I was at early days for investments.
successful, but gradually it In those days, the stock
Columbia in 1980.”
evolved into what I'm doing market would open and
now. have only one quotation a
day. So I was in Paris
G&D: And were you managing money for
investing before Columbia? international clients while
the whole French domestic
PJ: I did invest. I lost my market was not allowed to
shirt. I borrowed money PJ: In the first two invest offshore. Those were
and told my investors I'd semesters, you don't know the early days in 1983.
share in both losses and all the classes that exist. Things have progressed a
profits. It's not like hedge And by the last two lot.
funds today where profits semesters, you try to catch
are for the manager and up as much as you can. G&D: You started in
losses are for the client. It There was a guy named convertible arbitrage – how
cost me a fortune. So when Francis Finlay, an Englishman would you say convertibles
I left Columbia Business who was teaching investing has changed since
School, I had lots of debt. investments. Professor when you started in the
But for me, the lesson Adler had a course on 1980s?
behind it was important. It international trade. I was
was a steep learning curve. fascinated by anything linked PJ: In the early 1980s,
My time at Columbia to international investments. people used to value
Business School was a great converts as a substitute for
learning experience in how Today, students are much stocks. Now people value
you can maximize your more prepared and focused
(Continued on page 5)
losses.
IVssouleu mXeX II, Issue 2 PPaaggee 55
Philippe Jabre
(Continued from page 4) of event driven, emerging what are our expectations.
them on implied volatility markets, foreign exchange,
compared to historical and fixed income. Then I'm I think the real game today
volatility and there is more running two long funds or becomes optionality. Where
of a credit markets aspect absolute return funds where we can make money is on
to it. In the earlier days, we I buy cheap stocks or the increase in volatility if
used to have broker loan convertibles. So the same the stock has sharp moves
rebates. If you put your trades that I do in the hedge up or down. One needs to
shorts and longs with them, fund, I can do in the long take a view. If you take no
they would give you a funds but I just don’t hedge view, you make no money.
credit. So let's say the two them.
year treasury was at 6%, G&D: How was it moving
they would give you 6% plus from convertibles into
the coupon on the bonds equities and other types of
less the dividend on the investments?
stock (if any). So we were
looking at convertible PJ: Convertibles are made
arbitrage with a 3-5% of four variables. On the
positive carry on the trade. fixed income side, it's made
Converts were excessively “One needs to take of credit and the interest
cheap at the time. They rate. So one needs to know
priced in very little value for a view. If you take what is happening there on
optionality and didn’t the macro side. And on the
accurately price the no view, you make equity side, it's made up of
potential for the stock to an option on an underlying
no money.”
explode or to collapse. stock. So basically when you
Black Scholes was very good look at convertible bonds,
at pricing short-term you have to be familiar with
options—three or six or what's happening with
nine months. It was not interest rates, credit
good at all for 3-5 year spreads of your underlying
optionality because you had instruments, the valuation of
a different set of data. And the stock, and the value of
so, for ten years, it was a The reason why I have the optionality.
very profitable environment those three products is
to invest in. Today you have because I always look for At times, the first two
convertible bonds coming the catalyst. If you fully variables, interest rates and
with 0-1% coupons and hedge a convertible bond by credit, get their days of
already pricing in large hedging the credit, selling glory like in 2008 or 2011
implied volatility. The the stock, and locking in the when interest rates were
market is just much more implied volatility, you make under pressure and credit
efficient. no money if you have a spreads exploded. But in
hedge. So people like myself eight years out of ten, all
G&D: How would you look for catalysts on you need to worry about is
describe your investment stocks – earnings, events, your stock valuation. Today,
philosophy? positive or negative companies have a lot of cash
surprises. This is why and interest rates are at
PJ: I’m currently running I've developed long-only zero, so there is nothing to
three funds. One is a multi- expertise. It brings hedge there. The real hedge
strategy fund which has a additional layers of is on the equity part. So
convertible arb portion, a information on why a stock over the years we
long-short equity portion, should go up or down and
(Continued on page 6)
and then a smaller section
Page 6
Philippe Jabre
(Continued from page 5) concept that you learn with Today, you don't have that.
developed knowledge on time. Banks don’t really provide
the equity side. That's how that platform anymore. So
we became investors in to develop that track
stocks. record, you might go to a
long-only manager, which is
G&D: Can you talk about a very different world. Or
“Before you start a
deciding to start Jabre you would need to go to a
Capital? hedge fund you hedge fund, spend 6-7 years
doing analysis, and then
PJ: Before you start a have to follow the manage a pool of capital as
hedge fund you have to part of a larger hedge fund.
follow the right steps. I right steps. I always
always tell people it's the Ten or fifteen years ago,
same as if you are a doctor, tell people it is the you might need $20-40
architect, or lawyer opening million to cover the costs of
same as if you are a
a practice. I first joined a starting a hedge fund.
bank, then after ten years I doctor, architect, or Today, that number is
joined Lehman Brothers. probably closer to $100
Then, with a group of four lawyer opening a million because regulations
partners, we spun off from and controls are much
Lehman Brothers and practice...You more intense and, as a
created GLG. And then result, you need a lot of
after that, I created my own follow the steps so people just for compliance.
fund. You follow the steps So it’s become much
people will follow
so people will follow you. harder, which is good for
you.” funds that already exist
I remember after business because the barriers of
school I wanted to create entry are getting even
my own fund at age 25. My higher. We can maintain a
father told me if you want higher alpha because banks
to lose money, go lose don't really speculate
money at other people's G&D: What are the anymore, many hedge funds
expense. You can't become challenges for someone who have closed down over the
a fund manager unless might want to start their past five or six years, and
you’ve lost a lot of money own fund today? there are very few
and survived. So JabCap was newcomers. So whoever
a normal evolution when I PJ: It's getting much harder has survived in our industry
started it seven years ago. A for a number of reasons. is able to develop high
lot of clients followed First, banks used to be a margins, at least on stocks.
because I had a very good platform where you would If you look at fixed-income
track record at my prior get exposure to a variety of or at algorithmic traders,
funds over the previous areas. So you could do the performances are much
fifteen years and that made capital markets, M&A, you lower because there is a
it easier. But you need a could be a trader or an huge amount of money
track record and you need arbitrageur. It used to be there. Most became too big
to have clients. The barriers like a school. And then the and the market doesn't give
to entry are very high today brightest would have their them the same
and what people look for is own book and then after a opportunities. So it's a
a track record and the few years with a track rotation and, for the
experience of managing record they could set up moment, it is much harder
money unsupervised. And their own fund.
(Continued on page 7)
that's a very difficult
IVssouleu mXeX II, Issue 2 PPaaggee 77
Philippe Jabre
(Continued from page 6) There's always something people asked me if we were
for young people to create a happening or an area in investing in Russia. I told
hedge fund. I think people which the market is not them the fund had no
need to have at least 8-12 focusing enough attention. emerging markets exposure
years of experience, so This presents interesting and no intention to add any.
maybe by age 37-40 you opportunities, and our They asked what it would
start to think about setting agility can help us take to change my mind. I
Students talk with Bill Ack-
up your own fund. But it outperform because in the said if you have a collapse in
man at the 2014 Pershing
takes time and it’s much bigger investment valuation, then we will jump. Square Challenge.
harder than before. management firms, they Several weeks ago there
have fund managers was a collapse so I went and
G&D: Can you talk about specialized by area. They bought Russia. I put 10% of
how the Jabre Capital team have a value guy, a growth the fund there. Colleagues
is organized? guy, a mid-cap guy, or a guy who cover emerging
who only does oil and gas. It markets said you’re crazy.
PJ: I have an investment is hard for these guys to be But I said why? I told you I
team of 15-17 people up to speed on all areas. would invest when things
working with me out of a Things slip, and this is where collapse. They have
fund with about 50 people. I a hedge fund can be a bit collapsed. There are names
have analysts looking after faster – faster to recognize, that trade around 3x P/E.
certain geographies – one faster to buy, faster to sell, They said yes but everyone
looking at Asia and Japan, faster to understand. I think is selling. I said it is already
two looking at Europe, and that's what we do. in the price, just give it time.
one focused on the US. You can’t invest based on
Then I have product news stories of what

specialists. So I have a credit Obama and Putin discuss on
person, and a person who their phone calls. You need
trades converts and a something based on
research specialist for valuation and you need to
converts. Then I have an “A hedge fund can forget about the noise.
event-driven team with a
specialist in risk arbitrage, a be a bit faster – A second example would be
specialist in emerging our Japan investments. In
markets, and a series of faster to recognize, November 2012, I was
traders for the US, Europe, invited by a bank to make a
and Asia. These traders and faster to buy, faster presentation in Japan for
specialists bring interesting institutional investors. Two
to sell, faster to
situations to my attention weeks after my visit, the
or to the attention of the understand.” parliament was dissolved
other fund managers. By and there was talk of a new
organizing this way, and government. I’ve followed
covering different strategies Japan over a long period of
and products worldwide, we time so I knew what the
have great flexibility. implications of that might
Sometimes we buy value be, and thanks to that
stocks, other times we buy experience, I immediately
growth stocks. Last year, for G&D: Can you walk us went overweight a market
example, we bought a lot of through a past investment where I previously had no
Chinese internet stocks and that you think illustrates exposure. Japan was thought
gambling stocks in Macau. your investment approach? of as a market that was
These investments were going nowhere in those
quite new in our portfolios. PJ: Earlier in the year,
(Continued on page 8)
Page 8
Philippe Jabre
(Continued from page 7) made 50% net of fees. The down 10% every month. For
days. In December 2012, main thing was to have eight months in a row, we
our equity book was up 10% Japan and Europe going had volatile moves up or
because I was quite early from an underweight to a down. So you either had the
compared to others in market-weight position feeling that the market was
understanding the changing during an extraordinary going to collapse or that the
dynamic in Japan. And that period. So you have to market was going to go up.
positioning worked out very recognize you are in that The S&P finished flat on the
well in 2013. type of extraordinary period year but it cost most active
and deploy money ahead of fund managers money
Another example: in 2009, others. because of the volatility.
everyone hated banks in
America. But I heard the But in addition to that, I had
CEO of Citigroup and the exposure to mining and
CEO of JP Morgan talk in inflation-protection stocks
Q1 2009 about how their in 2011. That cost the fund
banks were making money, a lot of money because all
not losing it. And that was the industrial materials,
the biggest signal to buy US mining, and gold stocks
banks that I ever saw. We “The key thing is to really struggled. It was one
bought a lot of them in the of those periods where you
US and we finished the year find things that had to experience your
up 80%. stock going to zero before
have done nothing
it bounced back.
A similar thing happened in for ages and
Europe. Last June, European Even though we will
banks were trading at suddenly there is an implement a stop-loss when
60% of book value and we have a bad investment,
suddenly the ECB came in event that you need 2011 became the worst
very strongly to support time to stop-loss you could
them. And so we bought a to be the first to think of because we would
lot of ETFs on the European stop-loss an investment and
understand or
financials and they ultimately the market would go right
went up 60% or so. appreciate how back up. But in 2008 when
we did stop-loss, the equity
Having the cash, having the things will change.” fund finished up for the year
openness of mind, not being because after I lost 10%, I
caught with bad invest- went out of the market in
ments – all of that was the equity funds. Then I
important. bought bonds the last three
months and the fund
So the key thing is to find finished up 2%. So as much
things that have done as that model of stopping
nothing for ages and your losses works in
suddenly there is an event G&D: Can you talk about extraordinary periods, it can
that you need to be the first any investments that didn't hurt you a lot when the
to understand or appreciate. work as well or where you market is going through
And this is where you have learned from a mistake? erratic moves but with no
a huge opportunity to definitive trend. And so the
outperform. Last year, our PJ: In 2011, I had a very conclusion is that when you
equity fund, which is difficult year because the start to lose money, you
unlevered and has a market was going up and
(Continued on page 9)
maximum exposure of 130,
IVssouleu mXeX II, Issue 2 PPaaggee 99
Philippe Jabre
(Continued from page 8) very disciplined. If we go period we ever had because
should get smaller and trade through a period where we had the cash and
less, because you can’t catch we’re down 10% in a stock, investors behind us.
the market properly. we're very disciplined about
cutting exposure because Take that strategy we
Over the past 15-18 there's something wrong followed compared to value
months, it's been a much that we don’t understand. funds which got very badly
easier market because every hurt in 2008 because cheap
dip was an opportunity to stocks got cheaper, and
buy. So one could increase some even went bankrupt.
Scott Ostfeld ’02 of Jana
leverage and create great A lot of value funds got Partners speaks at the
performance. All of this was decimated by sticking to 2014 CSIMA conference.
exactly the opposite of their model of buying cheap
2011. The lesson is that you stocks like Bear Stearns,
need to identify the cycle Lehman Brothers, or
and the trend and try to Countrywide. So it was a
apply the right investment very difficult period and the
strategy according to the “The world is full of thing that helped was the
trends. stop-loss.
investors that miss
G&D: Aside from stop- But now we're okay, there's
losses how do you think the big move no more systemic risk in the
about risk management, market where we face
because they
position sizing, and the extraordinary dangers.
amount of cash that you overreacted to

hold? G&D: Would you rather
headline news or to hire someone who has a
PJ: The big difference trading type of background
between someone that short-term profits.” or a traditional asset
comes from asset management type of
management and someone background?
who comes from a trading
environment in a bank is the PJ: Asset management. An
sizing of the portfolio. I have asset manager will survive
met so many traders who cycles provided they have a
put too much weight on good trader behind them to
some ideas and if the idea protect them. I think finding
doesn't work, they find a good manager who
themselves either stopping The combination of these understands valuation is
them lower down or not constraints helps us survive much more valuable than
generating any return difficult periods and gives us finding a good trader
because they missed the the cash to take advantage because over the years,
more interesting ideas. of better periods. I took a that’s how you avoid buying
Since I come from a more stop-loss in my long fund in too early and selling too
traditional investment the summer of 2008 and early. The world is full of
management background, moved money into fixed investors that miss the big
we're more diversified and income bonds. And in early move because they
have very strict limits on 2009, the equity market overreacted to headline
how long or how stabilized and we had the news or to short-term
overweight we want to be cash to buy cheap banks and profits.
in some situations when we cheap growth stocks. It was
find great, cheap the most extraordinary
(Continued on page 10)
opportunities. And we're
Page 10
Philippe Jabre
(Continued from page 9) AIG goes from 28 to 50 in a period to buy and hold
In 2013, for example, fund straight line in a year. When compared to that period.
managers of my generation that happens, you feel stupid The challenge now is to buy
were able to make 40-60% if you buy it at 28 and sell it the right stock, because if
type returns, because we at 35. But you need you bought a Cisco or Intel
had a price target for what experience to avoid making or an IBM, you went
that mistake. nowhere. So you have to
identify the right stock, the
So I think what you need is right sector, and the right
a good fundamental fund growth story so that you
manager and an excellent don't waste your money on
trader. You need both to underperforming names.
“The challenge now have experience because
the market is continuously G&D: What metrics do you
is to buy the right repeating and the key is to focus on when evaluating
figure out what type of stocks?
stock, because if
period we are in and where
we are in it. That's the most PJ: First, you have to look
you bought a Cisco
important challenge. at the macro because if you
or Intel or an IBM, buy a great stock in a
G&D: You mentioned the horrible environment, you
you went nowhere. cycle. What is your typical make no money. For
time horizon for example, Japan has the right
So you have to investments? environment right now
because you have central
identify the right
PJ: Since the macro bank monetary stimulus and
situation stabilized in June a weakening of the yen. So
stock, the right
2012 when the ECB decided you need to have a macro
sector, and the right to do whatever it takes to view which will help you
stabilize the euro, we develop a micro view. What
growth story so that moved from a risk-on/risk- we do is look sector by
off macro environment sector and analyze which
you don't waste where correlation was very sectors to focus on and
high to a stock-picking which ones to avoid based
your money on
environment where on where we are in the
correlation is very low. In cycle and the macro
underperforming
the period before, it was backdrop.
names.” very hard because the
market was not reacting to Then each sector will have a
fundamental valuation. It different metric. If you want
was reacting to the possible to buy financials, you’ll want
breakup of the euro, to to understand Tier 1 capital
sovereign downgrades, to ratios and price-to-book
the shutdown of the US metrics. If you look at real
we owned and would stick government, to a possible estate, you need to
to it. The younger crisis in China. It was more understand cap rates, price
generation of managers, on of a macro, high-correlation to NAV, and trends in real
the other hand, would tend market. So it was very hard estate. If you look at export
to realize their investments to hold on to stocks before. companies, you need to
much faster, making 10- But since June 2012, people understand foreign currency
15% and then moving on. like us who pick stocks have exposure. So they will all be
But doing that, you miss the had a much smoother
(Continued on page 11)
big move when a stock like