I reached my capacity for eating out during the recent Canadian carnival for capitalists that accompanies Fairfax Financial’s FFH-T annual general meeting. Reuniting with friends from hither and yon is always enjoyable, but I confess to having been in need of a diet before the four-day festival and more so after it.
Capacity – of the investment sort – also happened to play a role in Jason Zweig’s talk at the University of Western Ontario’s Value Investing Conference on the remarkable life of money manager Benjamin Graham. The event was held the day before Fairfax’s annual meeting and headed by professor George Athanassakos.
Mr. Graham is widely considered to be the father of value investing, and Mr. Zweig, a personal-finance columnist for The Wall Street Journal, is well placed to talk about him because he edited the revised edition of Mr. Graham’s book, The Intelligent Investor, in 2003. As it happens, Mr. Zweig has been hard at work on a new edition of the book, which is due to be published this fall.
Mr. Graham managed money and was sorely tested by the great crash of 1929. His experience led to the 1934 book Security Analysis, which he wrote with David Dodd. The Intelligent Investor followed in 1949, and Mr. Graham revised both books several times before he passed away in 1976. He also taught at Columbia Business School and founded the successful Graham-Newman Corp., the latter akin to a modern closed-end fund.
In what might be his greatest contribution to the investing world, Mr. Graham taught and hired a young Warren Buffett, who proved to be perhaps the best investor of the past 70 years or so.
Mr. Zweig’s talk tickled my funny bone, because he congenially painted a less-than-comforting picture to a room full of money managers. He highlighted the structural advantages of Mr. Graham’s operations and argued that, without them, today’s managers would have a hard time competing against the rise of low-fee index and exchange-traded funds (ETFs).
Importantly, Mr. Graham kept his fund small; in the 1950s he only managed roughly a hundred million dollars in today’s terms, which goes to the question of capacity. After all, it’s easier to outperform with a relatively small portfolio than a very large one.
Size is a big reason why Mr. Buffett regularly warns Berkshire Hathaway’s BRK-A-N shareholders to moderate their expectations for the firm now that it has grown to a stupendous size. (It had US$561-billion in shareholders’ equity at the end of 2023.) The company is simply too big to benefit materially from investing in all but the largest stocks, which excludes some of the best bargains the market has to offer.
While Mr. Zweig warned that whatever can be an ETF will be an ETF, he pointed to a few areas that might offer solace to portfolio managers, including investing in smaller, less liquid, unpopular securities. Mind you, they also tend to suffer from capacity issues.
All is not lost for the inhabitants of Graham and Doddsville because the conference featured a success story in the form of Scott Barbee, who manages the U.S.-based Aegis Value Fund (AVALX), which had about US$371-million in assets at the end of 2023. The fund focuses on small-cap stocks trading at low multiples of book value and cash flow, which sounds very Graham-like to me. It also checks off several of Mr. Zweig’s criteria.
The fund outperformed the S&P 500 by an average of 3.2 percentage points annually from its inception in 1998 through to the end of 2023 and beat the S&P Small Cap 600 Pure Value index (which doesn’t have as much history) by an average of 2.1 percentage points annually over the 10 years to the end of 2023. So it is still possible for value-oriented portfolio managers to beat the broad market in the modern era.
These days the fund favours energy and materials stocks, including a large number of Canadian names. Mr. Barbee highlighted International Petroleum Corporation IPCO-T and tiny Newcore Gold Ltd. NCAU-X at the conference as being worthy of consideration.
Despite my new diet, my capacity for value stocks goes unabated, and I’ll enjoy perusing Mr. Barbee’s portfolio for unloved stocks trading at bargain multiples. With a little luck, Graham-inspired approaches will continue to perform well over the long term.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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Norman Rothery