Episode Summary
Executive Summary: David Samra, managing director of Artisan Partners and founding partner of the International Value Team, discusses his journey from blue-collar roots to becoming a renowned value investor. He emphasizes the evolution from traditional value investing (focusing on cheap stocks) to a modern approach that prioritizes high-quality businesses with strong balance sheets and competitive advantages, bought at a discount. Samra shares insights on international investing, risk management, and specific portfolio holdings like European banks and Compass Group, while addressing the future of value investing in a low-interest-rate environment.
Main Topics: David Samra's Background and Education (Priority: 3/5): Samra grew up in a blue-collar family in Massachusetts, studied accounting and finance at Bentley College, and later earned an MBA from Columbia Business School. His early interest in value investing was sparked by analyzing a troubled stock (A.H. Robbins) versus a growth stock (Merck). Evolution of Value Investing Philosophy (Priority: 5/5): Samra contrasts traditional value investing (focus on low multiples and asset protection) with a modern approach that emphasizes high-quality businesses with strong competitive advantages, capable of compounding wealth. He credits Charlie Munger's influence on Warren Buffett for this shift. International Investing and Market Inefficiencies (Priority: 4/5): Samra's career began in international investing in 1993, a less efficient market. He highlights the importance of visiting companies, building relationships, and understanding local governance and accounting standards to gain an edge. Risk Management and Balance Sheet Strength (Priority: 5/5): Samra emphasizes avoiding leverage and focusing on companies with strong balance sheets. During crises, such companies can deploy capital to gain market share, accelerating value creation. He also discusses the trade-off between price and quality during market dislocations. Idea Generation and Research Process (Priority: 4/5): Samra describes using screens (low P/E, high ROIC, profit warnings) and 'knowing your markets' through extensive travel and company visits. The team monitors potential investments electronically, acting when prices fall within 10% of their buy target. Case Study: European Banks (Bankia) (Priority: 4/5): Samra explains why he invests in select European banks like Bankia, which trade at deep discounts to book value (40%) due to past crises but have strong management, clean balance sheets, and potential catalysts like regulatory capital relief. Future of Value Investing (Priority: 5/5): Samra argues that value investing remains mathematically sound, but low interest rates have favored growth stocks. He warns against passive investing driven by liquidity, emphasizing that active managers who understand fundamentals will continue to generate returns.
Key Arguments: Value investing has evolved from focusing solely on cheap stocks to prioritizing high-quality businesses with strong competitive advantages and balance sheets. International markets, especially in the 1990s, offered significant inefficiencies that could be exploited through direct company visits and information gathering. Strong balance sheets allow companies to use crises to gain market share, accelerating value creation for investors. The trade-off between price and quality is crucial; during crises, investors may sell high-quality holdings to buy deeply undervalued securities. European banks like Bankia, trading at 40% of book value, offer attractive risk-reward due to clean balance sheets, strong management, and potential catalysts like regulatory capital relief. Low interest rates have inflated growth stock valuations, but value investing's fundamental principle of buying below intrinsic value remains valid. Passive investing driven by liquidity flows is a threat to active management, but skilled active managers who understand businesses will persist.
Data Points: Bankia's price-to-book ratio: 40% of book value - Bankia trades at a significant discount to book value, indicating potential undervaluation. Bankia's price-to-earnings ratio: 9 times current earnings - Low P/E ratio further supports the undervaluation thesis. Potential capital relief for Bankia: 1 billion Euros - If ECB approves a new capital model, Bankia could free up €1 billion on a €5.5 billion market cap. Compass Group's purchase price: 13 times earnings - Bought in Q2 2009 at 13x earnings with operating margins around 5.5%. Compass Group's operating margins: 5.5% to 6-7% - Margins improved over time due to restructuring and execution. Number of companies visited per trip: 30 companies over two weeks - Samra's team visits companies intensively to build knowledge. Years Samra spent at Harris Associates: 5 years - He worked as an analyst and later co-portfolio manager before joining Artisan.
Pivotal Quotes: "I don't know why I'm wired the way that I am. It was just much more attractive to me to look at something and see that, well, if the liability associated with this product ends up being far lower than what's being implied in the share price, I'm basically getting Robotusin at a very low earnings multiple." — David Samra: Explaining his early attraction to value investing, analyzing A.H. Robbins' undervalued Robitussin brand despite legal liabilities. "The best of all worlds is achieved multiple on depressed profits. And as the profits grew, the margins went up, the revenue grew, and the multiple went up. That multiple expansion is wonderful. You get super-powered returns out of companies like that." — David Samra: Describing the ideal investment scenario where both earnings and valuation multiples expand, as seen with Compass Group. "I don't think that the value of a business is the present value of its future cash flows is ever going away. And I don't think buying an A.H. Robbins below what it's really worth is ever going to go away as a very strong, disciplined system to generate returns and manage risk over time. It's financially and mathematically impossible for it to go away." — David Samra: Defending the enduring relevance of value investing despite market trends favoring growth stocks.
Implications: For investors, this podcast underscores the need to evolve from traditional value metrics to a focus on business quality and balance sheet strength. It highlights opportunities in unloved sectors like European banks and warns against passive investing. The future of value investing lies in deep fundamental analysis and understanding competitive dynamics, especially in a low-interest-rate world.
About Value Investing with Legends
Value investing is more than an investment strategy — it's a fundamental way of thinking about finance. Value investing was developed in the 1920s at Columbia Business School by professors Benjamin Graham and David Dodd, MS '21. The authors of the classic text, Security Analysis, Graham and Dodd were the very pioneers of their field and their security analysis principles provided the first rational basis for investment decisions. Despite the vast and volatile changes in the economy and securities markets during the last several decades, value investing has proven to be the most successful money management strategy ever developed. Value investors' success over the second half of the twentieth century proved not only the validity of the value approach, but its preeminence over even the most widely taught and practiced modern investment theory, which was developed in the 1950s and '60s and remains dominant even today. Our mission today is to promote the study and practice of Graham & Dodd's original investing principles and to improve investing with world-class education, research, and practitioner-academic dialogue. In this podcast you will hear from some of the world's greatest investors, their views on the investment management industry, how they developed their investment process and how they see the field changing over time.