Charles Brandes, a closely followed value investor, is the chairman of Brandes Investment Partners. He started his career in 1968 as a broker trainee.
In the late 60s and early 70s, growth investing in the U.S. was the rage. But Brandes was not impressed with the Nifty-Fifty mania or the Go-Go era. Nifty Fifty refers to 50 popular blue-chip stocks that were listed on the New York Stock Exchange and widely regarded as solid growth stocks which investors paid extraordinarily high prices for. The Go-Go era refers to the meteoric rise of growth stocks in the 1960s. The "go-go" stocks plunged in the devastating market crashes that followed in the 1970s.
During that period, a chance yet inspiring meeting occurred with Benjamin Graham who visited his office. After meeting the father of value investing and talking with him personally, Brandes decided that it was time to start his own business based upon the value principles of Benjamin Graham and David Dodd. In 1974, he founded Brandes Investment Partners in San Diego. He encapsulates smart investing by these words: "A stock price can fluctuate a lot more than the actual value of the business it represents. That's why it's just smart investing to take advantage of the stock market's inconsistencies to buy businesses at very big discounts to the their intrinsic value."
Rudy Luukko with Morningstar Canada caught up with Charles Brandes. An excerpt from the interaction is reproduced below.
Earnings growth is what ultimately drives stock prices. So, it's interesting that you would opt for value especially at that time with growth being en vogue. So, why is that? What are the merits of value investing?
The merits are that it actually works better over a long period of time than growth investing. It has a lot to do with the behavioural aspects of the stock market and being able to take advantage of the stock market during various times [when] prices get much cheaper than the actual underlying value of the business that you actually own.
At the same time there are pitfalls associated with value investing. Can you tell us about some of the things that you need to be cautious about in being a value investor?
Yes, and it sounds simple, it sounds like all you need to do is look at a company and decide what it’s worth. Then when it's trading in a public stock market cheaper than that [you buy it]—Benjamin Graham has talked about two-thirds discount from the intrinsic value of the business—and that’s all you do. Well, it becomes very difficult in some ways; one of the ways is that you have to be very patient because when you're buying companies that are out of favour, they're not necessarily going to come into favour right away. So you have to have an unhuman tendency to be very patient with what you're investing in. And you also have to be aware that you cannot predict the future. You don't know in every single case how these companies are actually going to perform earnings wise in the future.
But if you have a good diversified portfolio, and you've bought these companies at a big discount, then the odds are in your favour that your portfolio over a long period of time will work out. You could have some things that go against you and human tendency is to be very disappointed about that on the short-term. And you can't do that and you have to think differently than everybody else and you have to be assured that you at least have the odds in your favour.
There are lot of big picture things that can happen that can affect stocks and there are some managers that spend a lot of time looking into these macroeconomic factors: inflation, GDP growth, and political changes. And that’s never been a key part of your approach has it?
No, it hasn’t. However, you have to take those things into consideration. We start off with the company itself. We take a look at the basic economic fundamentals of that company and then [determine] if we can see it at a discount. It doesn't really matter at the beginning exactly what country or what industry or what region that company is in. But then when we are determining what we really think that company is worth we have to look at those macro factors. So, we do that secondarily and not primarily.
Your approach, your various mandates, they embrace all of the major equity categories. Does bottom-up value investing work better in some markets and countries, than others?
Work better? I don't think so because it's so fundamental and basic. The way I look at things and the way we do it at Brandes Investment Partners is that it doesn't matter where the location is; it matters [about] the nature of the business and the nature of the industry. So we found over the last 40 years that there has been—outside North America—some better opportunities because there is not quite as much detailed research being done. So, anywhere outside of North America we found that to be true. I can even go into a long explanation of why even in Europe it’s true compared to the Far East; it's true in emerging markets, but to make a long answer short basically it's the same.
Some value managers tend to be more concentrated in their picks than others. What's your approach?
We've been holding between 50 to 75 different companies depending on what opportunities we can find at the moment, which in the institutional world is considered fairly concentrated. In the mutual fund world also, you are going to see portfolios of 100 or 200 and being deep value our portfolios are more concentrated.
Value style is a patient style of investing and that's been your style. If you're buying out of favour unloved stocks they might stay like that for quite a while. The question is, how long do you have to wait?
Anywhere from six months to one year to 10 years.
If you take the active route, as against passive, and you put together a portfolio that’s a lot different from the market, you are either going to do one of two things: outperform the market, which is good, or lag the market, which is not so good. So, there is market risk.
If you really want to do well you can't be doing what everybody else is doing. There's only one other thing to do well and that is to be fundamental. Because there is so much that goes on in the investment world that is not fundamental [such as] short-term oriented trading, derivatives, all sorts of things that are not really fundamental to what builds new wealth. And so you can stick to things that are fundamental, buy companies that build new wealth and get them at reasonable prices and over a period of time you are going to do very well.
