Shares of department store Dillard’s are surging close to 30% on Monday after a regulatory filing revealed that Ted Weschler, one of the highest ranking money managers at Warren Buffett’s storied conglomerate and investment vehicle, Berkshire Hathaway, owns a nearly 6% stake.
Released just minutes after the market-close on Friday, a filing with the Securities and Exchange Commission revealed that Ted Weschler, a Berkshire money manager who many believe could be the firm’s next chief investment officer, acquired shares in late September that pushed his personal holdings past the 5% ownership threshold required for public disclosure.
Weschler now owns 1,081,000 shares of Little Rock, Ark.-based Dillard’s–equal to roughly 5.89% of the firm’s shares outstanding, the filing notes.
Shares of Dillard’s soared as much as 40% on Monday, pushing the firm’s market capitalization well past $1 billion, and settling at about $55 per share as of 3 p.m. EDT, about 30% higher than Friday’s closing prices.
Dillard’s stock is still down nearly 22% for the year, but the retailer is now doing much better than its peers: The S&P 500 Department Stores Index is down about 54% in 2020.
Public filings show that Weschler also has substantial personal stakes in healthcare company DaVita and Liberty Media Corp, which owns stakes in SiriusXM, the Atlanta Braves and Formula One; both are firms in which Berkshire also has large stakes.
Berkshire has no reported stake in Dillard’s.
Like other department stores this year, Dillard’s has been slammed by the coronavirus pandemic. Total sales in the firm’s most recent quarter dropped by 35% year-over-year to $945 million, which was in line with expectations, but the firm’s loss in the quarter, of 37 cents per share, was more than 90% better than Wall Street expected. Wedbush analysts led by Jen Redding note that the company’s tightly controlled inventory has helped prop up the firm’s profit margin despite the blow to revenue, as other department stores, like Macy’s, struggle to get a handle of increased costs.
$59.5 million. That’s the approximate value of Weschler’s disclosed stake in Dillard’s as of 3 p.m. EDT.
“The personal investment by Ted Weschler, investment manager at Berkshire, likely lends legitimacy behind the increasing momentum we’re seeing in Dillard’s third-quarter business,” noted Wedbush’s Redding, who reiterated a neutral rating for Dillard’s stock on Monday, in an email to Forbes, adding that current short interest levels indicate the Monday price increase is likely due to investors previously looking to profit off a dip in Dillard’s stock are now cutting their short positions, meaning they’re buying borrowed shares to cut losses or secure gains on the possibility that Dillard’s shares could actually be on the way up.
What To Watch For
Dillard’s third-quarter earnings. They’re set to be released on November 12. Wedbush is forecasting third-quarter sales of $1.25 billion, down 12% year over year and slightly higher than $1.2 billion consensus estimates.
Rocketship Remakes Early Stage Venture Investing – pymnts.com
Most investors claim to follow the data, which is good investing practice and even better marketing. Besides, no really successful investor is ever going to claim blind luck or gut instinct as their secret sauce.
But letting the data drive one’s actual investment decision-making is a lot more difficult in practice than it is in theory. After all, there’s a lot of data out there, Sailesh Ramakrishnan, a partner at early-stage global venture capital firm Rocketship Ventures told Karen Webster in a recent conversation.
He said the world is awash with data all day, every day – from mobile apps, social media, ratings sites of all sorts, etc. – a stream that generates a constantly shifting sea of information for any investment firm.
But Ramakrishnan said that information breaks down into three distinct types. “There’s a bunch of day-to-day, changing data that come in, things like newspaper articles, employment history, new executives joining, funding announcements and so on,” he told Webster.
On the other end of the spectrum is the static, mostly historical data about a company. And in between is the slow-changing data – quarterly performance results and the like.
“So there’s a whole continuum of data, and not only do you need different techniques to extract information, you also need different ways of combining these different streams to get an entire image,” Ramakrishnan noted.
And that is what Rocketship’s algorithm-based investment model was constructed to do. It sets multiple models keyed into different time slices against the startup ecosystem and gears the firm’s investments toward early-stage firms in their earliest investment rounds (generally the seed, A and B rounds).
The model aims to accomplish the same goal of every early-stage investor: to get in on the ground floor with the next amazing company and disburse the funds entrepreneurs need.
Following The Data To The Unexpected
Rocketship’s models are varied – some compute data every day, some every few weeks and others every few months.
Ramakrishnan said none of these models are perfect, because perfect models don’t exist. But they’re designed to learn and improve over time, filtering data into better guidance and recommendations as to where the firm should be looking to invest.
That doesn’t mean the model gets to make decisions on its own. Ramakrishnan said one of the most important realities of working with mathematical modeling is that it has its limits. Reality is full of intangibles that matter very much to a company’s success, but they’re hard to present mathematically.
“That is why we have not invested in every company that our algorithms identify,” Ramakrishnan explained. “We as human partners spend a lot of time trying to understand that ‘secret sauce’ that exists within the company, and whether that is a sustainable, resilient element.”
But it does mean that when the data point in a certain direction, the firm knows that’s the place to start looking – even if it’s not what Rocketship expected to see.
A World Of Opportunities
That was the firm’s experience almost immediately upon launching its first fund five years ago. The plan was to do what nearly every Silicon Valley investment firm was doing at the time.
Rocketship intended to start local with all the opportunities in the Valley, then down the road push out into the country at large and eventually the wider world. But when the firm actually started running its algorithmic models, Rocketship quickly found that its plan was, in a word, wrong.
What the data told the company was that its own backyard was the wrong place to play. The broader world was full of amazing companies without much regard to borders – in India, the European Union or Latin America.
Ramakrishnan said Rocketship was founded by career data scientists, all operating under one golden rule: “Never impose one’s strategy in conflict with what the data is saying.”
“Data offered us these kinds of global opportunities and we followed,” he said. “We became a global investor pretty much on day one, and were immediately very different from what most other investors were doing.”
Thriving During The Pandemic
Ramakrishnan pointed out that the world of investing is changing all around us, but in ways that play to Rocketship’s strengths.
In a world where a pandemic has shut down face-to-face meetings, everyone on Earth suddenly has to learn something that Ramakrishnan said his firm has spent the past half-decade working on: investing in firms whose founders you’ve never met in-person.
And he added that the investment landscape is still lively in an awful lot of places. For example, firms that enable cloud-shift, FinTechs that enable lending, firms specializing in employee management and neobanks/digital banks are all areas where opportunity is exploding in response to recently skyrocketing demand.
Democratizing Venture Capital
Perhaps even more interestingly, Ramakrishnan said, is that the investing landscape itself is beginning to change as it becomes more globalized and democratized. The balance of power is shifting in ways he believes will ultimately benefit the best, most innovative companies worldwide, without regard to where they were founded.
Ramakrishnan said the next amazing startup might come from Silicon Valley, but it could just as well come from Vietnam, Nigeria, Chile or Colombia. And those firms will come to market better able to build a track record of results without raising capital – which means by the time they’re talking to potential investors, “the dynamic has changed,” he noted.
The money will always be extremely important, but the data-driven investing world of the future is about more than that, he said.
“Everybody’s asking investors, ‘What can you do for me?’” Ramakrishnan said. “[But] it’s not just about if we have the dollars – it’s because of our backgrounds, our data science, our data.”
“We now have to have those reasons why you should take our money from us versus anybody else who’s offering money to you,” he said. “And I think that dynamic – where there is that recognition of the value investors play over and beyond just the dollars – is [an] essential part of this conversation.”
UK manufacturers call for business rates and investment boost to kickstart recovery – Yahoo Canada Sports
Britain’s manufacturing industry has called for Business Rates to be waived or reduced in line with a boost to investment allowances to help kickstart an industrial recovery.
Make UK made the call on the back of the latest Manufacturing Monitor tracker, which shows that while the sector continues to stabilise, firms still see a long road ahead to any kind of normal trading conditions.
The survey revealed that over a third of companies see normal trading more than a year away, while 26.8% believe it will take between six and 12 months.
While those figures are slightly down from the last tracker in September the figures are holding steady suggesting manufacturers have a consistent view of the outlook for the next year and beyond.
Additionally, 24.3% of manufacturers said they were operating at full capacity with just over a third (35%) operating between three quarters and full. A look ahead shows a similar situation going into next year with 25.6% expecting to begin 2021 at full capacity.
Meanwhile, 49.2% of companies have made redundancies with a further 19% saying they plan to do so in the next six months, while 28.5% expect they might do.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Last week, chancellor Rishi Sunak announced a string of new and improved financial support measures, including grants for businesses hit by local lockdowns and more generous wage top ups for part-time workers under the Job Support Scheme.” data-reactid=”30″>Last week, chancellor Rishi Sunak announced a string of new and improved financial support measures, including grants for businesses hit by local lockdowns and more generous wage top ups for part-time workers under the Job Support Scheme.
The UK government has spent £200bn ($261bn) propping up the economy since the onset of the COVID-19 pandemic in March. Over £40bn has gone towards paying furloughed staff’s wages.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="READ MORE: Job Support Scheme could cost UK government £10bn” data-reactid=”32″>READ MORE: Job Support Scheme could cost UK government £10bn
The survey also shows that 23.5% of companies are now stockpiling again ahead of the end of the Brexit transition period.
Of those who are not stockpiling a third (33.8%) said they didn’t see the need, a quarter (24.8%) said they couldn’t afford to because of COVID-19. Meanwhile, just 10.2% thought there would be a deal agreed by then.
Chief executive of Make UK, Stephen Phipson, said: “While the situation continues to stabilise it’s clear that there is a long road ahead to anything like normal trading conditions. This has major implications for companies and policymakers who are going to have to be fleet of foot in adapting to an ever changing environment.
“While Government has quite rightly made protecting jobs the number one priority to date, there is now an urgent need to help employers with their cashflow and measures to boost investment. Business Rates have long been a thorn in the side of companies and a disincentive to invest and now is the moment to provide a shot in the arm for companies by waiving or reducing them.”
The survey of 181 companies was carried out between 12 and 19 October. Make UK has been running its Manufacturing Monitor tracking survey since the start of the coronavirus pandemic.
The industry body, which represents 20,000 UK manufacturing companies of all sizes said that the need for investment now is vital after the Comprehensive Spending Review was cancelled and in the absence of any revamped industrial or economic strategy to boost growth.
“British manufacturers rose to the challenge earlier this year to help the country through a national crisis. They helped keep food and drink on supermarket shelves, adapted production to make vital PPE for our care homes and made sure hospitals had the medicines they needed during the pandemic. This data shows that manufacturing will be hit hard over the coming months unless there are further and sensible steps taken to smooth the path ahead,” Phipson added.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Watch: What is the Job Support Scheme and how has it changed?” data-reactid=”40″>Watch: What is the Job Support Scheme and how has it changed?
Exclusive Interview with Aamer Khan of Qualivian Investment Partners – Yahoo Finance
Qualivian Investment Partners is nearly a 3 year old long-term oriented investment firm with a very solid investment philosophy. The firm generated a cumulative return of 47.4% during its first 2.5 years and outperformed the S&P 500 Total Return Index by 25 percentage points. You are probably surprised to hear about an investment firm that managed to beat the market by double digits.
Most hedge funds and mutual funds fail to beat the market because of their large fees or hedges. Qualivian Investment Partners is long only and charged only 2.4 points in fees over the last 2.5 years (its gross return was 49.8% and net return was 47.4%). A typical hedge fund that charges 2 and 20 would have taken away 5 percentage points in management fees and another 10 percentage points in performance fees, leaving investors with only a 35% net return.
Two months ago we have obtained a copy of Qualivian’s 2020 Q2 investor letter and shared its views on its top and bottom performers. Its top two performers were PayPal (NASDAQ:PYPL) and Amazon (NASDAQ:AMZN), and its bottom three performers were TJX Companies (TJX), Brookfield Asset Management (NYSE:BAM), and Adobe Inc. (NASDAQ:ADBE). You can read their views on these stocks by clicking the link above. We reached out to Aamer Khan to understand Qualivian’s investment philosophy and find out their top 3 highest conviction ideas. Sure, Amazon.com and PayPal are some of the best performing stocks this year, but are they among Qualivian’s top 3 ideas today?
Aamer Khan of Qualivian Investment Partners
Here is the first part of our interview with Aamer Khan:
Insider Monkey: Can you tell us about yourself?
I have a bachelor’s degree in mathematics from Harvard College and a master’s degree in applied mathematics from Oxford University. I then worked in banking for 4 years, before getting my MBA from the Wharton Business School. Immediately after my MBA, I spent several years in management consulting, mostly at the MAC Group/Gemini Consulting, where I gained insight on how businesses work from the inside, assisting them in strategy formulation and problem solving. However, during that time, I spent most of my spare time reading about, and engaging in, investing. I gradually realized that investing was my true calling. I then worked for the Principal Financial Group for three and half years as an equity analyst and got my CFA. I spent the next 16 years at Eaton Vance Management in Boston with the bulk of my time spent as an equity analyst and a portfolio manager on five equity funds. I co-founded Qualivian Investment Partners in 2017.
Insider Monkey: When and how did you decide to start an investment fund?
In 2017 I linked up with a former colleague from my consulting days, Cyril Malak, who had worked for Putnam Investments. We both had similar thoughts about the dysfunction of the current asset management model and felt a better approach existed. Our Archimedean point was the proposition that wealth creation in equities is ultimately the result of the power of compounding of capital. Therefore, the correct investment model should be based on maximizing the power of compounding and minimizing those frictions which reduce it. We cleared our minds of the current “conventional wisdom” about asset management, took a blank sheet of paper, and started from first principles. Out came a model that addressed the defects we had identified.
Insider Monkey: What is wrong with active management today?
In a Nutshell: Asset management started out as a profession, evolved into a business, and, in an increasing number of cases, has mutated into a racket. Initially, fund companies’ and portfolio managers’ primary role was to create wealth for their investors, and, in the process, they would create some wealth for themselves. In a strange twist, this is now reversed: asset management companies’ and portfolio managers’ primary role now is to use investor funds to create wealth for themselves and, in the process, they create some residual wealth for fund investors. It is a bizarro world. This is partly due to increasing institutionalization of asset management by large firms, which has led to growing misalignment between the interests of the fund investor, the portfolio manager, and the asset management company.
Asset Management Companies: Large investment firms have become asset gathering companies, with a primary focus on growing the asset base and, secondarily, creating competitive investment returns. Their core competence is marketing, not investment management. They convince many investors to invest in funds with average or poor returns and high expenses, even when many better alternatives are available. Surely that is good marketing! They incubate many funds, kill the poorly performing ones, and then advertise the best performers. The performance is stated on a time-weighted basis, which is not the actual return experienced by most fund investors. The dollar-weighted basis is better correlated with actual aggregate investor returns. Active fund investors get fleeced twice. First their funds underperform versus the lower cost passive index funds. Then fund investors underperform the funds they have invested in by over 200 basis points, because they are persuaded to get in when the fund is doing well and fear causes them to jump out when it is doing poorly. Mutual fund boards have a fiduciary duty to put the interests of the fund investors first, not the interests of the firm advising the fund. Given that there is an epidemic of funds with above market fees and below market performance, are they really doing their job?
Portfolio Management: From a fiduciary viewpoint, portfolio managers should be optimizing risk/reward in the portfolios they manage. This is not what they do. Instead, they optimize their own career risk. This leads them to (1) prefer stable returns over higher, but less stable returns, and (2) avoid short-term underperformance which makes them look bad and could impact their year-end bonus and careers. These tendencies amongst many portfolio managers leads to suboptimal risk aversion: they take the right amount of risk for their careers but not the correct amount for their clients’ portfolios. For example, fund managers would rather buy a stock with an 8% expected return and 5% standard deviation than a stock with 15% expected return but 10% standard deviation. These errors of omission are far more costly than errors of commission.
Disadvantages of Large Institutions:
– Short term focus: The greatest advantage an investor has is a long-term focus, given that large swaths of the market are focused on the short term. Publicly traded asset managers, because they are judged by quarterly results, want to look good in the short term so they tend not to think long term. The same holds true for privately held asset managers who fall into a similar trap.
– The larger firms tend to have multiple levels of hierarchy, which leads to undue complexity, excessive information loss, bureaucratic politics, and unnecessary resource expenditure to manage internal boundaries.
– Hierarchy also leads to a deference and conformity to those in positions of power and attenuates independent investment thought and action. The investing frameworks of senior management were formed early in their careers when financial markets were very different. They are less likely to reassess and reformat their frameworks as financial conditions change, especially with the current structural shifts and disruptive transformations accruing from the digital revolution. They rely on fully amortized intellectual capital and are not likely to be challenged by more junior employees.
– Adverse selection occurs: the best analysts become portfolio managers, when competence as an analyst does not necessarily imply competence as a portfolio manager. The best portfolio managers become head of investment groups and spend much of their time on marketing and administrative tasks and less on investing.
The Current Portfolio Management Model and How to Improve It:
Current Practice 1: Diversify broadly across the entire universe of stocks that meet the investment mandate.
How to improve it 1: Realize that the vast majority of value in the market over the long term is created by very few (less than 4% of the total) stocks which are characterized by structural and competitive advantages, high returns on capital, and excellent capital allocation. The research effort should be focused on these stocks.
Current Practice 2: An average portfolio has more than 60 names and high turnover, so over 100 names come in and out annually, many making cameo appearances. This causes cognitive overload for the portfolio managers, leading to a poor understanding of, and conviction in, many of their holdings. Stocks get “rented” rather than owned.
How to improve it 2: Concentrate the portfolio to a limited number of the highest conviction names so the portfolio managers have familiarity with each name.
Current Practice 3: Trade extensively on incremental information. Look and act “busy.”
How to improve it 3: Realize that almost all incremental information is noise. Ignore it and hold the quality compounders. Activity is not progress, often generating frictions that detract from performance.
Current Practice 4: Analysts present candidates to portfolio managers. Portfolio managers pick and choose.
How to improve it 4: Portfolio manager does his/her own work leading to conviction. Conviction cannot be outsourced to analysts.
There are lots of things broken in the field of investment management today. Happily, at Qualivian we are free of the many distractions and perverse incentives suffered by the massive institutional asset gatherers. We enjoy the freedom to approach the fascinating challenge of investing in our own way, which borrows, I might add, from many of the master investors we know of.
Insider Monkey: What is your approach to investing?
What Cyril and I have built at Qualivian, and do every day, is simple … but not easy. We try to focus on only a few good ideas that come to us irregularly and hold on to them, barring a change in the investment thesis.
– We cut out the noise …the majority of what passes for investment news in the general and investing media is noise, and very few decisions create most of the value over the long run.
– We focus on finding quality compounders and do not worry about which Morningstar box our portfolio is in.
– We do our own work. Conviction can only come from us. Everything else is speculation.
– When we find a quality compounder, we buy a lot of it. We do not dilute our portfolio and research process with low conviction names.
– We believe in concentrated portfolios. The goal of an intelligent investment process is to find situations where it is safe to concentrate. Diversification is driven by lack of conviction. Furthermore, academic studies have shown that one can accrue the benefits from diversification with 15-20 names
– We realize the human mind is designed to understand linear growth, not exponential growth. It consistently underestimates the result of consistent growth compounding returns over long periods.
– We seek to compound and do not feel the need to interrupt such compounding. We hold for long holding periods and trade rarely.
– We firmly believe that trees can grow to the sky… if you let them.
Insider Monkey: Why is it possible to buy quality compounders at a discount? Why are markets inefficient in this regard?
It is rare for quality compounders to trade at a discount, but since the markets have pockets of inefficiency, opportunities arise for several reasons.
– Market myopia: Markets focus on the short term, not the long term, so quality compounders with long term, visible value creation growth get inefficiently priced vs their long-term growth rates.
– Optionality: Many quality compounders have positive optionality which is not priced in. Investors focus on the visible and tangible. Firms with market dominance, plentiful cash flow, and innovative management continually think of new business possibilities that are less apparent but very possible. Investors should not just count the seeds in an apple but should also focus on the number of apples in a seed.
– Scarcity value: In an era of disruptive change, like today, the average stock will be more subject to disruption and investor estimates of their long-term earnings will be more likely to be mistaken. So, the scarcity value of stocks with wide moats, long growth runways, and resulting visible, sustainable economic earnings growth should increase because they are less likely to be disrupted. This is still not fully factored by the market into their valuation.
– Cognitive bias: Human beings are cognitively wired to think linearly. Quality compounders are subject to exponential growth, so existing valuation frameworks misprice them.
– Intangibles: Many quality compounders invest in potentially durable and long-lived intangible assets, which are expensed and not capitalized. This implies that GAAP earnings understate economic earnings. The stock is cheaper on economic earnings than GAAP earnings, but many investors miss this because they focus on GAAP earnings.
Persistence of High Returns on Invested Capital (ROIC): Quality compounders tend to have high ROIC’s. In the past, high ROIC’s mean reverted to average levels. However, around 2005 this stopped happening, and high ROIC’s have tended to persist for the top performing ROIC cohort. The causes of high ROIC persistence are industry consolidation, the emergence of platform businesses, the greater scalability of intellectual capital, changes in anti-trust policy, and other factors. Many investors still reflexively assume that high ROIC’s will mean revert and have not factored high ROIC persistence into their valuation models. This undervalues high ROIC companies, which includes quality compounders.
Click to read the second part of this interview and see Qualivian’s top 3 investment ideas for the next 3 years.
Disclosure: No positions. This article is originally published at Insider Monkey.
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