Thursday, June 21, 2007

Oak Value Interview: Meet the Managers

Learning to Invest

David Meier: Tell us a little bit about yourselves, how you got interested in investing, and when you realized that value investing was the right thing for you?

David Carr: I was fortunate to meet one of my former partners in high school. His uncle had been a classmate of Warren Buffett's at Columbia and studied under Benjamin Graham. So early on, he took us under his tutelage and began to teach us a bit about value investing. Fortunately, our first exposure was to Buffett and to thinking about investing in that format.

Larry Coats: I came at investing from a completely different angle. I grew up the son of a small-town banker and developed an interest in finance. After graduate school, I worked for Andersen Consulting, now Accenture, and learned about detailed business analysis working there.

Part 1 Interview


Oracle and eBay are ones that at the right time and the right price met our parameters. In both cases, they have reoccurring revenue streams, very strong cash flows, very high returns on equity, and extremely strong moats and franchises. They also leverage network effects, where as you layer on additional business, you get extremely high and extremely beneficial margins as well as the ability to layer a business on around the world. We have done all the work. You see a lot more value-net people in a number of the names in those arenas nowadays.

If you look at the predictability of the business today looking out five years compared to the predictability five years ago looking till today, the biggest difference is the component of the revenue stream represented by ongoing revenues, the ability to drive annual maintenance and service fees as opposed to the dependency on upfront licenses, and that transition over the last five years while they have continued to grow the install base on the core database side. These are what gave us the ability to understand and value the business and what has given us the opportunity to say we have a higher degree of confidence in our valuation equation.

When you combine that with, as David indicated, the fact that we bought the stock around $13, it was trading at basically somewhere between 13 and 14 times forward earnings on a cash basis, and we believe that was a pretty attractive valuation. The stock has been certainly a good solid performer for us in here, as it has demonstrated the merits of the business model as reflected in the transition of the revenue stream that it gets from the service that it provides to customers.

Part 2 Interview


David Meier: How does eBay (Nasdaq: EBAY) stack up?

LC: For eBay, we have studied the business models for years. The most surprising part about eBay and the part that in a lot of ways most intrigued us and convinced us that the visibility of management and the driving force of management, that the power of these integrated business models was clear, was PayPal. PayPal was an acquisition that people were not fully sure why or what it was doing, and PayPal is turning out to be a tremendously brilliant acquisition. We understand the business model of payment processing very well through American Express (NYSE: AXP), as well as through Fidelity Information Services and other companies that have had global payment processing networks.

DC: But I will tell you, one of the things we have wrestled with often is when you find a good company, if you find a great company -- and in many ways you have talked about your interest in eBay, and I think we would all probably agree, it really has many of the characteristics of a great company.

Valuation is the hard part. We run a worst case, a best case, and a base case. We do our work using a base case of what we think is a very reasonable, rational, and what we usually find to be a very conservative thought process of what will unfold. The risk to us is that if we find a really great one, and there are not that many really great ones, we have to spend lots of time on the maintenance part of our research to understand and make sure we are properly valuing it. We want a good understanding what it really is worth, because we don't want to sell too early. But when it does get to our intrinsic value, we do move on even if it is a great company.

Part 3 Interview


Larry Coats: In his article "The Superinvestors of Graham-and-Doddsville," Buffett said there are a lot of people out there who have taken a common set of principles and applied them through varying processes to all yield above-average or very attractive results, and he cites some examples there. So as David talks about some of these people, they are people who share a common set of principles, but the processes that all of us use are slightly different. We may come to the same conclusions or slightly different conclusions, and there are a lot of our "brethren," as he puts it, in this business whom we have a lot of respect for, we just disagree with the conclusions that they draw on individual companies and individual prices relative to our charge to the shareholders that we manage money for. So it is a large universe in many respects, but it is also a relatively small family that is focused on these principles.

Part 4 Interview


David Carr: One of the reasons we always demand the margin of safety is we have been through severe alligator-biting times, and we have seen our rear ends hanging out there, and we have the bite marks to prove it. That experience is valuable, and I am not sure it can ever be passed on without having been experienced.

Part 5 Interview


Final thoughts

DM: You get one final parting shot here. If people want to become better investors, what do you think is the first thing they should focus on?

DC: I think the service that you all provide and the effort that you make is important in trying to educate people, because there are so many people saying you must do something now and time is going away quickly, and I think the ability to be able to think long term and to understand is a nice perspective. So I would say, maintain perspective.

LC: There is a quote by Ben Graham where he says, "Investing is most intelligent when it is businesslike." And so, have the same perspective when you look at investing in businesses, even though you are only buying a hundred shares or a thousand shares or a million shares, or whatever you are buying. Recognize that you are buying a piece of a business, and pursue it with the same diligence and thought process and analysis that you would if you were going to buy the entire business.

Part 6 Interview

Source: Thank you Lincoln Minor

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