The text below is from an October 11, 2011 interview with Steven Dotsch of Value Talk / Dividend Income Investor. The link is here.
Today we’re joined by Jeffrey Towson, who was Head of Direct Investments Middle East/North Africa and Asia Pacific for HRH Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud – grandson of King Abdulaziz Alsaud, founder and first ruler of Saudi Arabia.
Prince Waleed is arguably the world’s no.2 investor and nicknamed by Time magazine as the “Arabian Warren Buffett”. Prince Waleed’s distinctions include: the world’s 4th richest person (2004, Forbes), the largest foreign investor in the USA, the largest shareholder of the world’s largest bank (Citigroup, 2007), and the world’s second largest media owner after Rupert Murdoch.
Jeffrey Towson, a specialist in global and cross-border value investing, has developed over $15bn of investments across multiple geographies (US, China, and the Middle East) and industries (real estate, hotels, banks / financial services, insurance, healthcare, retail, technology, petrochemicals, energy / infrastructure, etc.).
Between 2000 and 2009, Jeffrey Towson was one of five core investment staff at Prince Waleed’s Riyadh headquarters. A few of Jeff’s major projects include the development of the world’s tallest skyscraper (maybe one mile in height), the turnaround of Saks Fifth Avenue stores, the development of a potential new mortgage company in partnership with GE Money, the development of a potential new energy / infrastructure company with GE Energy Financial Services.
Jeffrey is currently Managing Partner of the Towson Group, an investment firm based in New York, Dubai and Shanghai. He is a Fellow at Cambridge Judge Business School, University of Cambridge, and co-head of the Chinese Strategy and Investment courses at Beijing University Guanghua (Beijing) and
CEIBS / Jiatong University (Shanghai).
Best selling author of value investing books
Jeff is a best-selling author focused on global value investing strategies. His first book on investment strategy was published in late 2010, called What Would Ben Graham Do Now?: A New Value Investing Playbook for a Global Age which we will review in due course.
Jeff has a second value investing book coming out next year. It’s on global stock picking strategies that anyone can do (the working title is 10 Global Value Strategies Where the Little Guy Wins.)
Jeffrey Towson a global value investor
Jeffrey, how did you get started in investing? What attracted you to value investing? About how old were you?
I was in my late 20’s when I really started investing. My training was in mathematics / physics (Stanford Linear Accelerator Center, graduate program in Stockholm, biophysics at Stanford Medical School) and then I eventually moved into investing.
Even today, investing is still mostly just a math problem for me. Value investing’s focus on rational modelling of phenomena in the physical world is really similar to most scientific approaches. So I don’t really see it as different discipline – just a lot more profitable.
I really formally jumped in when I joined Prince Waleed at Kingdom Holding Company in Riyadh. He was on the Forbes list as the world’s 4th richest person at that time and I was struck by how easily he walked between investing in the West and in emerging markets.
A three month project turned into 8-9 years and I found myself in the fortunate position of both being very comfortable in the emerging markets and being pretty strong at uncertainty analysis (which is the key skill for value strategies in places like China). So as the emerging markets began to really take off in the last 5 years, I found myself in a good situation.
What would you describe as your investment philosophy?
How has it developed over time?
Are you a long term investor?
When do you buy? When do you hold? When do you sell?
I am typically bucketed as a “global value investor” which in the West means someone who can also go into the emerging economies. However, in China, it means someone who can also do distressed Western acquisitions. In Dubai, it just means investing (because everything is global when there are few local opportunities).
I spend most of my time on the ground in China and the Middle East now. And my focus is 50% public equities / 50% private transactions – with a strong preference for going long.
Like most, the preference is to buy and hold great companies and then capture the rising economic value per share over time. Buffett has pretty much shown that to be the most profitable approach over a career.
However, how do you apply this to developing economies which are by their very definition uncertain (i.e., developing). Governments are active players. Competition is dynamic. Markets are emerging. Rule of law is limited. Regulations are nebulous. And so on. All of these factors increase uncertainties and this is a direct challenge to the preferred “buy and hold” approach.
In response to these perceived (and some real) uncertainties, most value folk switch to “buy and sell” (abandoning Buffett’s approach), wait for a ridiculously low price (which is impractical), or just stay away (very common). Global value investing is often mistakenly thought of as US value investing with a bunch of additional problems on top.
I think that’s a mistake. Because if you can crack the above problem (how to buy and hold on uncertain terrains) then there is an incredible pay-off.
The very uncertainties that are the problem also make things wildly mispriced. Recall, Buffett’s first China investment (Petro China) which made him 8x his returns in 3-4 years?
When was the last time a classic value investor bought the largest company in a market and made an 8x return? These markets are wildly mispriced. And there are thousands of companies popping up in them.
So for me the holy grail of global value investing is re-adapting Buffett’s “buy great companies and hold” strategy to uncertain emerging markets.
Introducing “Value Point”
Within this overriding goal, I am actually transitioning my strategy at the moment. For the past 8 years, it has been Value Point (my own term). That’s a re-application of Graham’s thinking to various emerging economy situations. It also incorporates a lot of lessons learned working for Waleed (who is incredibly successful at emerging market value investing).
But Value Point mostly targets value-added private transactions – as that is where most of the emerging market action has been for the last 10-15 years (stocks are still a new and shallow phenomena in most places).
Can you explain?
I wrote a whole book on Value Point called What Would Ben Graham Do Now?: A New Value Investing Playbook for a Global Age which basically lays out a solution to the Buffett problem mentioned above.
You structure surgical private transactions that solve your 5 main problems in emerging markets:
- limited access
- increased uncertainty in the current intrinsic value
- increased uncertainty in the long-term intrinsic value
- a weak or impractical claim on the asset
- various foreigner disadvantages
The approach eliminates the uncertainties and lets you confidently buy and hold great companies almost anywhere in the world.
In practice, this approach includes everything from designing the world’s tallest skyscraper (an old project recently covered by the Wall Street Journal), to fixing distressed hospitals, to creating mortgage joint ventures between emerging market and Western companies, and so on. It’s ridiculously profitable.
Since exiting Prince Waleed’s company, I have shifted my approach to a mix of public stocks and opportunistic private deals. That was a reflection of being on a smaller platform and the fact that there is now enough depth in the China market (and a few others) for straight stock picking. So we are now doing 50% buy and hold great stocks and 50% Value Point.
In terms of stock picking, we focus on all the situations that make big Western investors nervous. We are based in Shanghai, not the US. We do on the ground research (anything that won’t’ show up on a computer screen in New York). We like smaller and medium companies in changing environments. We don’t read anything that is published in English. I generally think of it as “how to beat Buffett and Russo in the emerging markets”.
It’s a classic deep value approach. I have a second global value investing book coming out on this next year. It’s on global stock picking strategies that anyone can do (the working title is 10 Global Value Strategies Where the Little Guy Wins.)
What is your track record?
Ask me in a year. I can’t really discuss past Kingdom Holding deals.
What type of investment research do you undertake?
How do you typically find ideas and what is your selection process before an idea gets added to your portfolio? What types of questions are on your investing check list?
I think most of the big value opportunities in the emerging markets are still in value-added private transactions. It’s the most logical and broad approach for developing economies. But I will answer for public stocks as it is probably more relevant to your readers.
There are the common “global value” stock approaches. Such as buying multi-nationals with emerging market exposure (say Tom Russo buying Diageo) and hunting for the big emerging market giants (Buffett buying Petro China or BYD).
Both are good approaches and have a long successful track record – but they are also very limited. There are thousands of companies in China, India and Brazil. Limiting oneself to just a handful of multinationals is at best a short-term solution. You wouldn’t go after American opportunities by looking only at French companies with a presence there. I see these as a way of avoiding most of the uncertainty problems mentioned.
For the first one (buying great multinationals with value in the emerging markets), we look for something being misunderstood in the inbound development process.
Why is Chivas doing well in China but Google never had a chance? Why are the expenditures on marketing and distribution going to pay off in few years in one case but not the other? Recall, Danone went home from China after almost 10 years with nothing.
Understanding that inbound developing process is an area where deep research can pay off. And if you can capture one of these great multinationals at the right price its pretty great asset for the portfolio.
I think the much more interesting approach is when you start looking at medium and small emerging market companies.
How do you buy a developing company (whose fundamentals are changing) in a developing economy (whose fundamentals are changing)? I think that is the heart of emerging market value investing. It’s about understanding real changes in companies before others.
This is somewhat similar to strategies in Joel Greenblatt’s You Can be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits.
We are looking at new economic events in a company we already understand. Not just a mispricing on its own. And in the emerging markets such new events are the norm, not the exception. This sort of emerging markets version of special situations investing is the deep well of opportunities.
Do you invest wherever you see value?
Do you use any specific metrics like ROE, P/B, ROC, other when evaluating equities? Which don’t you use?
Western investors typically like long historical earnings or cash flow that they can track (for reversion to the mean or current value strategies). And they typically use qualitative factors (competitive advantages, industry structures, demographic trends, etc.) for projecting forward beyond 2-3 years.
We can’t really do either in emerging markets. We usually have a short, and rapidly changing, history. For example, BYD had all of 13 years of history when Buffett bought in. During which time it went from 0 to 200,000 employees.
So not a lot of reliable historical earnings there. And the future can be pretty unpredictable as well. Again, it’s about uncertainty analysis.
However, we do have strengths that developed economy investors do not have. Petro China’s government granted monopoly / duopoly is about as sustainable a competitive advantage as you will find anywhere. Large consumer populations (i.e., 2 billion Chinese and Indians) tend to give you tremendous downside protection going forward.
We are also big into balance sheet analysis – with less focus on detailed earnings projections than in the West. Most emerging markets are not service economies today.
They are more similar to the US in Ben Graham’s time: lots of utilities, infrastructure, real estate, etc. Lots of assets on the balance sheets. That is usually a good starting point for opportunities. It also gives us our most stable (least uncertain) point for understanding a company’s current value.
Typically, we want to see a mispricing of the current balance sheet that eliminates the downside. And then we want a qualitatively attractive picture for the upside earnings.
Any sector preferences, currently?
Do you invest in any particular sector?
In theory, yes. We can invest in any geography and in any industry. But in practice we have fairly limited bandwidth. So we focus on companies with Chinese operations and a significant global component. Taiwan companies with manufacturing in China and customers globally. Multinationals with significant presence in emerging markets.
These cross-border situations tend to be misunderstood both by the local investors (they don’t get why BYD has 50% of the global cell phone battery market) and by foreign investors (such as reverse US listed Chinese small caps).
How many positions do you typically have in your portfolio?
20 positions is the target (5% each) but we’re not there yet.
Who are your top investment heroes?
Which value investors do you admire most and why? Which book(s) would you recommend an aspiring value investor should read, and why?
I tend to read a lot of Richard Feynman such as his Lectures on Physics. It’s both simple and amazingly advanced modeling at the same time. I think he set the bar in terms of accurately modeling unclear aspects of the physical world.
If you can master this book, you can model any investment, anywhere, anytime – and probably better than 99% of the investors out there.
For me, this is the high water mark of mathematical modeling of the real world.
A more popular read is . . .
Joel Greenblatt’s You Can be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits is the closest thing I’ve read to emerging market investing. The focus on good or great companies in special situations (not just mispricings) is most of the emerging markets game going forward.
I like the focus on special situations – as opposed to company valuation. Micro-fundamental analysis is too often interpreted as company fundamental analysis. I still think that the micro-fundamentals of special situations and complex combinations of simple assets is the heart of value investing.
For China focused investors . .
Jonathan Woetzel’s Capitalist China: Strategies for a Revolutionized Economy is a really good bottoms-up understanding of Chinese industries and how they are developing. Also includes interviews with leading multinational CEOs in which they share their personal experiences and insights on doing business in China.
Not an investment book but a really deep detailed understanding from Dr Woetzel’s 15 years with McKinsey on the ground in China.
Final wise words?
Assume everyone else is smarter than you. Not just as smart, but significantly smarter. And also that they work a lot harder than you.
I find this posture forces me to build real, concrete advantages at the deal level. It’s the only way I can win if others are smarter. A lot of the structure of our group (on the ground in emerging markets, deep research focused, long-term capital, etc.) follows from the need for such structural advantages.
Thank you very much, Jeffrey.
Jeffrey Towson is at Jeffreytowson.com
Have any questions for Jeff, ask them below.