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His name is John Huber. He is the portfolio manager for Sabre Capital Management and he also has a really popular blog. It is called Base Hit Investing. It was funny because Hari got on in the net and he just started talking to John here when we all got connected. Of course, those two already know each other because Hari works at LinkedIn so he knows everybody and is connected to everybody.
So thanks guys for making time to come on for the Mastermind discussion. John Huber Likewise. Even though, the market is very high, sky high pricing right now, Shiller PE is at about a Your first in the shoot, John.
Fire away. John Huber Alright, guys, thanks for having me on. Stig and Preston, I really enjoy the shows. You guys do great work and your podcast is always really informative and always a lot of fun to listen to. I appreciate you letting me tag along on this one.
Very quickly before that, I thought what might be interesting is I will preface this with a few general comments that I think relate in some ways, specifically to this investment and then more generally to my investment philosophy. Obviously Tencent is the large cap stock. So, those fluctuations obviously provide opportunity. Then, in terms of my approach to investing, I focus on good businesses. I look for things like predictable earning power and high returns on capital, good management.
I look for investments of all sizes. So Tencent is an internet holding company in China. All of which are benefiting immensely from the rapid rise of the Chinese consumer and the expanding middle class there. Tencent has got a lot of investments in many different areas. I categorize the largest businesses, or at least the businesses that are large right now and I think have a lot of potential going forward are video game publishing, mobile advertising, e-commerce, mobile payments, and music and video subscription.
So collectively, these are great businesses. Most of them take very little capital to grow. All under one roof. All rolled into one. So, a lot of great businesses. So many refer to WeChat as the super app. WeChat is primarily in China. Almost exclusively in China. It started to expand a little bit, but mostly in China.
So on the surface, what is WeChat? So there are all these apps within WeChat that allow you to perform all different kinds of everyday functions like calls, text messages. In some cases, they just call through WeChat. They just communicate via Wechat. WeChat started as a communication tool, but then it also blossomed into this monster app. That really created a whole new [way]. It took the app to a different level. Now, people can use WeChat for everyday payments.
You can help cabs on WeChat. You can pay for movies on WeChat. You can buy goods online. You can make payments in physical stores. Basically anything that involves a commercial transaction can be used through WeChat. WeChat Pay is actually now one of the larger global payments platforms in China. So WeChat is a really incredible platform that has a strong network.
Billion users attract a lot of businesses. There are now I think , businesses that accept payments via Wechat. Also along those lines, one of the most incredible statistics, I think, is that over one third of WeChat users spend four hours or more on this single app. And that, of course, attracts a lot of businesses that want to sell things to those users.
A large portion of that is mobile advertising. I think sizeable cash flow, really strong network effect, plenty of room for growth in industries like mobile advertising, mobile payments, e-commerce, and Tencent has, as I said, a small fraction of those markets. So, the stocks have a lot this year. It looks expensive on the surface at around 40 times earnings, as the 40 times the amount of cash flow that I think the company will produce this year.
However, I think it could actually still be undervalued. Also, you look at the returns on incremental capital that produces, and again, the growth potential that it has. I think you can make a case that the company will continue to grow its earnings and its intrinsic value. I think the stock price will likely correspond more or less to those gains in earning power and gains and intrinsic value over time.
Stig Brodersen John, could you tell us more about the valuation? You mentioned that it looks somewhat expensive right now. How do you make a model? How do you make your projections of the future cash flows, whenever you justify the current valuation? I mean, the way I do valuation is usually back of the envelope.
The company is a complicated beast. So some of the capital gets diverted towards those investments. You then sort of have to make a view about how good you think the company is as a capital allocator. Preston Pysh Just as a note to the listeners, we first came in contact with John because I sent out a tweet.
Maybe three weeks ago, two weeks ago, or something. I completely agree with that when I look at the financials, and I see the free cash flow on this thing. So, this is the type of business that you know all of us really like to own. The issue that I have really goes to the heart of what Stig was getting at, which is, what are we using as the growth rate moving forward because that is what it all comes down to here as far as the valuation on it.
So these are like massive numbers. I think that is this in the realm of possible? So, a drastic difference in the intrinsic value. I guess I have such a hard time buying that. I really liked your comment, John, because you said this is one to watch. I totally agree with that.
John Huber Yeah, I think, obviously, the current growth rates, although they have remained high, in fact, in some cases, actually accelerated slightly in recent quarters. But the Chinese economy is very large, and the industries that they operate in are so large. One of the things that Bezos talked about in his recent letter to Amazon shareholders was how important it is to focus on these big trends.
He called them, I think, these big, external fundamental trends that are sweeping major economies, and I think he talked about artificial intelligence. One of the trends that I think the company benefits from is the rapid rise of the middle class. If you look at the numbers, and the sheer volume of people joining the middle class in China each year, the numbers are really astounding.
Tencent is really well positioned to capitalize on that. It has million subscribers, the paying subscribers to various news subscriptions and online video and music. Not many people know about it, the video game business is obviously producing a good share of the profit right now and a good share of the revenue.
So, I think the growth is not going to continue at these rates. But this is a capitalist business that I think will be valued depending on where interest rates go, and general valuations go. Maybe even half that would give you a pretty nice return over time.
Hari Ramachandra John, thank you for sharing your views on Tencent. Just to add to what Preston said, I was one of the folks who tweeted him in half an hour. John Huber I appreciate you getting me on here. I also want to highlight the fact that one of your bets, probably is one of your significant bets, is Apple. For folks, John was very modest, when he was talking about his performance.
A couple of questions regarding Tencent and WeChat, as you said, are phenomenal. I have seen that making inroads even into the US and Europe. However, from a risk perspective, a couple of things that I wanted to clarify is even though Tencent is making foray into mobile payments and advertising business to business and customer to business, B2C, one observation is that more than half of the revenue still comes from gaming. Recently, I think in March or some time around that, the Central Bank of China suspended virtual credit cards and barcode scanning for mobile payments and stuff like that.
I wanted to get your thoughts on these two risks. How significant are they for Tencent and what are some of the steps Tencent is taking to address that? I think, in a market economy, if it were a complete market economy as opposed to a planned economy, I think the growth would be much more certain.
One of my questions is how big will the party allow this company to be? How much money will they allow it to make? One of the risks is that they just go to these cash rich companies and use them as piggy banks to sort of finance the growth that the country will certainly need. There are going to be bumps in the road and there might be kind of cycles that sort of work against that.
Xi Jinping is in an election year in China and he is accumulating power. A lot of people are concerned about that and rightly so. I think so in some ways they might be temporarily moving away from that. I think these big companies are in some ways on the other side of the coin, viewed as national champions in China. I also think these companies will continue to do well, but you certainly outlined a risk and that is certainly a risk that you have to think about and address.
Stig Brodersen I know that soccer is probably not a big sport there for my American friends, but soccer is a huge deal here in Europe. One of the interesting things that had happened since Xi Jinping, the Chinese President, came into power is that a lot of money is flowing into Chinese soccer at the moment. Why would corporations pay so much to see a soccer player?
In he spoke at the MicroCap Conference in Philadelphia, which can be found here. In this talk, he was asked to speak about his approach to value investing. His key focus: Businesses that are growing their intrinsic value over time. There are three buckets of companies: 1. Companies growing their intrinsic value per share — Focuses on this bucket 2. Companies shrinking their intrinsic value per share 3.
Businesses you understand 2. Businesses that are growing their value per share and reinvesting their earnings at high rates of return 3. Businesses with durable cash flows — Will survive economic downturns, shocks, etc, which will inevitably occur and ideally they can take market share when this does occur 4. Capital allocation - They think like owners rather than employees 5.
Need to have value — a gap between current share price and intrinsic value per share The goal as an investor is to build a part ownership in easy to understand businesses that will be earning more in the future. You will never eliminate errors but this mindset will help reduce errors. Getting an Edge Everyone is trying to buy good business at cheap prices. So to build an edge you can: 1. Analytical advantage — Taking the same information but interpreting it differently.
Time arbitrage — Taking the same information but using that information in a different time horizon such as thinking long-term when the market is thinking short-term. Most of his investments. However, this approach is much harder today. Now there are so many people are looking at spinoffs it is not the hidden playground for value investors it once was.
There are structural reasons why spinoffs still work and reasons he looked at them but every large hedge fund in American probably has a dedicated analyst reading every single form 10 that is filed. However, the challenge is that today it is much easier to gather information. For example, some hedge funds pay for satellite imagery of farm fields and Costco parking lots to get an advantage. For example, Apple.
The largest stock in the market.
How did you get to where you are? My father was an engineer by trade, but was very active in the stock market investing his savings and by extension, I became interested in stocks. But I came to the world of investment management unconventionally. I began my career in real estate, and I established a few small partnerships with family members and friends to begin buying undervalued income producing property. We bought residential properties as well as small multi-family properties.
About ten years ago, I began studying the work of Warren Buffett. Like many value investors, the simple logic of value investing really resonated with me right from the start. I set a goal early on to establish a partnership that was similar to the partnership Buffett set up in his early days. After a number of years, I was fortunate to build up enough capital to support my living expenses while also seeding my investment firm. Saber Capital Management was established in as a way for outside investors to invest alongside me.
Saber runs separate managed accounts, so clients get the transparency and liquidity of their own brokerage account. Our goal is to compound capital over the long run by making concentrated investments in well-managed, high quality businesses at attractive prices. Dev: I know you focus a lot on having a process-oriented approach towards investing. I think developing an investment philosophy is very important. There are many different investment approaches out there — even within the value investing category.
Look at Benjamin Graham and Charlie Munger as an example. An approach that worked for Ben Graham was a completely different approach that ended up working for Charlie Munger, yet both were fantastically successful. But they both had different skill sets and preferences. Graham loved numbers, he loved the mathematical aspect of investing. He thought of a portfolio like an underwriter would think of the insurance business—buying stocks for less than their net asset values worked collectively as a group over time, but any one individual situation was difficult to predict just like insuring automobile policies with a given set of underwriting criteria would lead to very predictable results—although on a case by case basis it would be very difficult to predict which driver would end up making claims.
On the other hand, Charlie Munger became fascinated by great businesses. He wanted to own companies that could compound at high rates of return over long periods of time. He loved thinking about the intangible qualities of great businesses. He once asked an associate to write up an investment thesis on Allergan, and when the associate came back with a list of Graham-esque metrics, Munger told him to forget the numbers and research why the company had such an advantage over its competition.
He was interested in brands, pricing power, predictability of earnings, high returns on capital — things that produced growth and compounding value over time. Neither were right or wrong in their approach, but both managed money according to their personalities. Dev: How to generate new investment ideas and more importantly, how to filter those Ideas? John: I used to do a lot of screens and other mechanical methods to generate ideas, but I find the best way to look for good investments is just to read as much as possible, build watchlists of good companies that you feel you can understand, and then patiently wait for opportunities to buy stocks on that watchlist.
Inevitably, if you have a list of 50 or so businesses, there are almost always opportunities on at least a few of them to make an attractive purchase of an undervalued stock. So most of my time is spent reading about companies and trying to always increase my understanding of the companies I follow, while also slowly expanding my circle of competence.
I read a lot of company annual reports, but I have also found a lot of value reading books about businesses, or books about general industries. I also read numerous newspapers, and the Economist. Often, investment ideas come from situations that occur within companies on my watchlist that I already know well. Other times I read about a special situation or corporate event in the news that might offer an interesting investment idea.
And why am I paying him? Also, during a period of underwhelming performance, it can be difficult to stick with this approach. As Hempton says, these times can be extremely productive from a learning point of view: But mostly I would have been just idle. So in the midst of underperformance a client might ask me what I did last year and I would say something like a I read 57 books b I read about sets of financial accounts c I talked to about 70 management teams and d I visited Italy, the UK, Germany, France, Japan, the USA and Canada This is such a great point.
Instead, I can conduct my research efforts each and every day, and wait for opportunities. That said, I can improve on focusing more on my best ideas, and I try each year to get better at this. The Concept Matters Let me say that the concept is what is important here, not the actual number of punches. Buffett selected 20 as an example. Obviously, Buffett has made hundreds of investments over the years.
He once said at an annual meeting that his partnership from made somewhere around investments in various stocks. The key for Buffett was not his batting average, but his slugging percentage. He hit a lot of home runs in the stocks that he took big positions in. By that point in his career, he was fully implementing the punch card approach, probably in large part because of his review of his partnership where he realized only a few big ideas were responsible for the entire performance record.
But again, there is no magic number that should be focused on. Great ideas are rare, should be patiently waited on, and should be capitalized on when they come. Easy to say, hard to do—especially when there is a built-in bias toward activity.
This confounds me a bit. Either way, it was an interesting commentary, and one that I really agree with.
Oct 04, · John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing . May 30, · Long Feedback Loops: Writing vs. Getting Published. What motivates me the most in business (and in other areas of life) is the continuous pursuit of self-improvement. I . A Saber Capital investment journal. Click to read Base Hit Investing, by John Huber, a Substack publication with tens of thousands of readers.