Buffett in Beijing Report May 2012

1 | May 2012 www.towsongroup.com

May 2012

"Mimicking the herd invites regression to the mean." – Charlie Munger

"Wealth does not pass three generations." - Chinese Proverb

Global Value Investing Interviews and Insights

Value investors target Indian mortgagesAn interview with Hemant Amin of Asiamin in Singapore

Applying "private market value" in a global ageInterview with Markus Matzsuk, former Partner at Gabelli & Company.

What most of the world calls global investing, investors in Singapore simply call

investing. With a limited home market, they have always been forced to operate globally. And as necessity is the mother of invention, they were among the first investors to develop successful cross-border value strategies.

This month we spoke with

Singapore-based Hemant Amin about his global approach. Hemant is Managing Director of Asiamin, a Singapore family office focused primarily on real estate and equities. We spoke with Hemant about how he deals with investing in emerging markets from a distance – and where he thinks the most attractive opportunities are today.(Continued on page 2)

Mario Gabelli’s well-known private market value approach makes a lot of

intuitive sense when in places like China and Saudi Arabia. In many ways this approach is more applicable to these rapidly developing environments than traditional buy-and-hold value investing techniques. Developing economies are by definition developing. They are rapidly advancing. And this advancement occurs mostly through mergers, acquisitions,

inbound development deals and so on. These are all situations in which undervalued companies can move to their private market values in the near term. A private market value approach is particularly useful in these situations.

This month, we spoke with Markus Matuszek (CFA, MBA), a former partner at Gabelli & Company. About the private market value approach. However, unlike other interviews, we did not discuss specific company names – only general approaches.

Jeff: How wo u l d yo u d e s c r ib e your approach? Your geographies, industr ie s , va lue, m is -pr ic ing, growth, event driven? How would you characterize yourself?

Markus Matzsuk: Well, we’re basically value investors. We take the fundamental approach that is a value approach. So we understand management, balance sheets, earnings power and cash flows. (Continued on page 9)

Buffett in Beijing RepoRt INVESTOR INSIGHTS

www.towsongroup.com2 | May 2012

(Continued from page 1)Interviewer: How would you describe your overall approach by geography, industry, mispricing, great companies… how would you identify your primary strategy?

Hemant Amin: We run a family office out of Singapore. Apart from two operational businesses, one in Singapore and one in India, we manage a portfolio, which is invested roughly 30% in properties and 70% in equities.

Equities are what we research on a daily basis in terms of trying to get new ideas. What we look at is something that we understand and opportunities which compound over a few years out - rather than doing a classic value play, which is to buy really cheap stuff and then hopefully sell it at full value.

We haven’t had much success in that, because over the years, we’ve found that those types of companies have extremely low chances of moving up from a small cap to a mid cap - or a mid cap moving up to a large cap. They usually stay within narrow bands of valuation, irrespective of the business per se because the business environment adversely affects their earnings quality and they don’t really have a moat to increase earnings quality. Generally, we have moved away, over the last 5 years or so, specifically, to focus on quality, quality, quality. We want to be part owners of a high quality business, which is able to compound its

high quality earnings, and run by a high class management - but we want it at a reasonable price, with the key factor being high quality recurring earnings.

In India, we are looking primarily at FMCG, the fast moving consumer goods markets. We are looking at small and medium sized mid caps in India below a billion dollars in market cap. We are looking at half a billion and a billion US$ range market cap companies. We also like mortgage companies. Those two sectors seem to have the biggest investment from our end. These are companies which typically you would have a reasonable chance of seeing earnings compound, in a risk free manner probably over the next 5, 10, 15 years.

Management quality is key in everything we do also. A doggy management can screw up the greatest of companies. We want to align ourselves with good quality companies run by great rational thinking management who are shareholder-focused and understand the value of increasing earnings per share year on year without taking on risk that is not proportionate to what they get in terms of earnings per share increases. We look at their history of allocating the

capital of the company.The management mind-set, especially

in mortgage lenders as we’ve seen in 2008, if you don’t have the discipline in lending and you just want to increase your EPS at any cost, you can do it on a short-term basis, but you will go broke long term. The 3 or 4 companies we have invested into in India, we equally focus on the risk the management takes on and the mind-set of the management. Are they growing at any cost? Are they pricing their services and products properly? Are they getting a decent spread? Obviously, we also look at things like loan to value that they carry on in their books. As long as we feel comfortable with management, the growth prospects, the risk profile and

earnings compounding year after year, as well as the loan to value remaining in the 50% to 70% range, we have no problems in continuing to keep money invested in those companies.

That’s broadly how we look at it, whether it be in India, whether it be in Asia.

In short, it is our objective, as business analysts, to research, understand, invest in and to partner with, for the longer term, select listed companies, with superior business models and durable competitive

Management quality is key in everything we do also. A doggy management can screw up the greatest of companies.

Value investors target Indian mortgagesAn interview with Hemant Amin of Asiamin in Singapore



advantages. Having predictable and growing corporate cash flows, which are run by shareholder focused and competent management of high integrity. Resulting in superior returns on equity and compounded returns for investors.

Interviewer: How about geographical focus? India versus Asia versus China?

Hemant Amin: Presently, we are invested about 50% in India and 50% ex-India. Of the ex-India portion, 80% would be in Hong Kong & Singapore and the rest in the U. S. So India is a big focus, as is Asia. The focus is really on understanding business models that have really worked well in developed countries like the U. S. and hopefully we get to invest in companies in India which follow similar models and strategies and benefit over decades with the benefit of a vast population needing similar products and services as the West. Hopefully they can ride on the same wave of growth potentiality, as what their counterparts in the U. S. have done over 2 or 3 decades.

Interviewer: What would get you moving quickly into an opportunity?

Hemant Amin: We usually don’t rush into stuff. We take our time to study We need to have comfort that the data we have at hand really is genuine. That it has a track record of quality earnings, rather than someone giving us future predictions. On the contrary, we have stayed away from deals and / or delayed our entry into deals that have come to us in a hurry.

HDFC Bank Limited provides banking and financial services to individuals and businesses in India. HDFC operates a network of 1,986 branches and 5,471 automated teller machines in 779 cities. The company was founded in 1994 and is based in Mumbai, India.

HDFC Bank Ltd. (HDB) - NYSE

Prev Close: 28.57Open: 29.01Bid: 29.00 x 200Ask: 29.00 x 1001y Target Est: 36.50Beta: 1.23Next Earnings Date: N/ADay's Range: 28.90 - 29.3852wk Range: 24.47 - 36.80Volume: 88,490Avg Vol (3m): 729,465Market Cap: 22.62BDiv & Yield: 0.22 (0.80%)

(Source: Yahoo Finance)

HDFC Bank Ltd.On one occasion, we declined a private equity deal in India and we went back a year later and paid twice the price that we were offered previously, simply because we found more comfort in the numbers than we did 2 years ago. It’s a multi branded, consumer franchise food business in India. We are more comfortable on missing out on the early rise. We would rather be sure of earnings quality and sustainability than jump into investments. Being very active in the investment world is counter productive I believe.

Interviewer: Do macro themes drive your ideas?

Hemant Amin: Not really. I personally don’t seem to have any edge. The question I ask myself is what do I bring to the table when I am considering investment opportunities? What do I know that the world doesn’t know, for example? At any point in time, several things in the world may seem to be going wrong. Most people including very highly paid Economists get predictions wrong even when armed with sophisticated data and predicting models.

To evaluate an investment idea from what is happening on a macro and then looking at opportunities, I have found it personally very difficult to get right.

Rather, what we focus on, is to keep a tab on 50 to 70 businesses we really like. We think we love the businesses. We love the type of numbers that they are turning out, but maybe the valuations are not right to really press the buy button.

Yes, from a macro perspective things

may affect valuations which in a sense provides us investment opportunities, but we wouldn’t necessarily look at the macro and then try to paint a picture of where things are going.

Because our investment decisions aren’t for a year or 6 months, potentially,



forward, hopefully these down turns will be minor, if at all. Also we can afford to remain invested in bad times if we are not heavily leveraged. Otherwise it is very easy to go bankrupt in the investment world if you are leveraged and have to sell when prices are really low due to margin call pressures. Most intelligent people go broke because of leverage.

For investments into India, one of the first things we have in our mind is we need to account for a 5% currency depreciation per annam. That is the history over the last 30 years and that will probably continue into the near future. Therefore, you need to get a return figure at least 5% to 7% per annum above anything else that is on the radar screen, for us to convert dollars into rupees and then invest into India. If it is in a country like Singapore, you would be more comfortable with currency risks with the quality of the government and its ability to protect purchasing power of its currency. The systems, the processes, the confidence in the currency is way stronger, and therefore if we are able to

get a 10% to 15% return in Singapore as opposed to a 20% return in India, we would be neutral to the two opportunities in India versus Singapore, for example. We evaluate our performance in US$ as a base currency and hence currency depreciation is an important factor that can affect compounded returns.

short term guesses don’t really play an important part in the investment decision process. We are looking at 3 to 5 to 10 year type of opportunities, where we are able to compound reasonably at 25% to 30% year on year. Those will come about with great businesses that are temporarily mispriced by the market. Many medium size businesses with very good fundamentals are mispriced because of macro concerns at some point or the other.

Interviewer: How do you deal with downside risks? One of the issues of emerging markets versus developed economies; you often don’t have the history to go by. There is a lot of uncertainty in the present, and the future is really unpredictable. How do you deal with risk in that situation?

Hemant Amin: With great difficulty, if I can say that. Take for example with what happened in 2008. That was an event not many expected. If you ask me what my down side protection was, it was probably to just sell everything and to stay liquid. Because you don’t have that type of data, you usually stay fully invested, hopefullyin businesses that will be able to meet adverse conditions, be it currency depreciation or temporary down turns. Because as long as you can see 5 to 10 year type of compounded growth

Having a strategy of being fully invested and then divesting completely presumably thinking that you know something, I don’t think is a viable one. It hasn’t helped us in anyway. We remain exposed to fluctuations in Indian economics and in Indian politics, and global events, as such.

As I said, if a portfolio is being evaluated on a compounded basis on a 5 to 10 year period hopefully you should be able to absorb short term fluctuations. We were down in 2008, but in 2010 we were way up from our low point. We had beaten the high water mark in 2010, so to speak. That’s generally how we look at it, we haven’t been successful at all, or found a reasonable strategy in which we can mitigate risks, inherent to emerging markets, which is a lot of volatility. You could argue the U. S. is equally risky today, including a depreciating U. S. dollar. So what do you do? Be fully hedged? How many different decisions would that involve and how many are you likely to get right?

Our escape from risk is to invest in a focused group of high quality business we understand, which have pricing power due to some durable competitive advantages, are scalable and which are run by highly ethical management who allocate capital well and are building their business on recurring revenues

Most intelligent people go broke because of leverage.

What attracted us to the mortgage business is the pricing power - the ability of a business to pass on increased costs.



which result in compounded returns over a period of time.

Interviewer: In terms of mortgages, could you walk us through an investment case? What do you look for? What got your attention? How do you view it moving forward?

Hemant Amin: What attracted us to the mortgage business is we looked at the pricing power - the ability of a business to pass on increased costs. In countries like India, you have inflation growing at 5%, 8%, 10% so, therefore, you need to make returns over and above your inflation rates and above what you would make if you were to keep your money in the bank which is roughly 8 to 9% per annum. So you really need to have returns in excess of that and for that pricing power becomes a very important factor, especially if you are an investor looking for returns over a longer time period.

We found that pricing power in a

book effectively determines the profits of the business. In this particular case, it is a subsidiary of one of the big housing finance companies in India. You have a management that even though it is pushed to increase growth rates, is not willing to increase growth rates if the quality of the balance sheet gets adversely affected. To me, that is the exact mind-set I want in someone running a financial institution. Management that can grow earnings, but not if the pricing is not correct to make a decent return and to keep the quality of the balance sheet.

So once we find that type of business, we obviously look at valuations closely. This particular one has an average loan per customer of roughly US $11,000. The loan to value of the property is roughly 60% to 65%. You also have unique trends in a country like India where people are loan averse.

They do not like having loans. The first spare money they have, they will go down and pay the mortgage off in India, as opposed to what has transpired in the West where people were over-leveraging themselves rather than reducing leverage.

The mortgage customer in India does not want debt if it can be avoided, and trying to pay back debt early, has a huge benefit on the delinquencies. From the housing finance companies’ point of view, it means they have to work harder to get the next loan out, because people are

particular sector, small non-banking finance companies. NBFC’s are not banks, but they do financing of things like gold loans, small businesses, mortgages, motorbikes etc. They usually trade at almost book valuations - a price to book of one or so. We saw a history of the management compounding adequately at 20% to 25% year on year for 4 to 6 year periods. If you look at the history for 4 to 5 years, there is nothing wrong with what the management has done, or the types of risks they have taken. Also, they were managing in a manner where they were focused on long term funding. the management very minutely watched the liability mix.

In a mortgage business and any lending business, managing the liability

The mortgage customer in India does not want debt if it can be avoided, and trying to pay back debt early has a huge benefit on the delinquencies.



repaying the loans they presently have. It’s an important dynamic in keeping the balance sheet in good condition. The risk profile per customer continues to be reduced as he pays off the loan early.

The housing finance company then has to make efforts to go out and give another loan to the next customer. Looking at the entire demographics of the country, where today the effective affordability of buying a house is the highest in the last 30 years. It takes an average of 4.5 years of annual income to buy a house. That is the lowest it has been in 30 years. It is a combination of rising income levels, interest deductions from taxes, and better supply of housing. The borrowers are going out and buying their first houses to have a roof over their heads, rather than as in investment. Housing finance companies can do profitable business for decades looking at the low mortgage to GDP ratio of around 6% in India compared to 20% in China and 101% in developed economies like Denmark.

On the other hand, these companies are growing so well and they are giving out dividends, I am actually trying to get in touch with some managements that we know, asking them not to pay out dividends. Because I cannot compound money as high as these business are compounding. They are reporting returns on equity of 25%. They are reporting earnings per share growth year on year of 25% to 35%. It is better for me as a shareholder that they retain the money and compound it at 25 % per annum, in a business that requires capital to grow. You require money to

grow the business, as opposed to paying a dividend tax of 16% and paying it back to me as a shareholder. Then a few years down the road when the business expands more, and they make a call to us to pay more cash into the company via a rights issue to support the growth. It doesn’t make sense for a shareholder to have your dividends after tax being returned to you and then being asked to put it back into the company to support further growth. I would rather they leave it in the company, reduce the dividends and they use the money to compound it further. However a company has several shareholders. There are small shareholders who depend on dividend for a living. There are institutions that won’t invest unless dividends are paid out. The management thinks it is a good discipline to release a certain amount of money as part of an overall strategy every year to shareholders. So, you have various needs of people, but at the end of the day it’s balancing growth versus what

you are really paying out. The mind-set of a management that can think in that direction, should make shareholders comfortable enough to leave the money invested in the company for a 3, 5, 10 year period.

Interviewer: What company really gets your attention within that space? Who do you think is the best of the best, if there is one?

Hemant Amin: On a world wide basis, if you were looking at a pure housing finance company, I would probably say HDFC in India, as having the best management and the best track record, of making money with minimal risk.

It has an extremely disciplined line of ethics running through the company with an extremely disciplined lending policy. I had my own example where I bought an apartment in Bombay, and looked at mortgage options, because I thought I would do better by investing the money



rather than paying it down completely for a mortgage free apartment. In India, I don’t’ have a job as such, with a regular income, I have a reasonable personal balance sheet there but not a job traditionally showing a regular income coming in, which is what housing finance companies like HDFC focus on. I was turned down for a mortgage by HDFC, but virtually no other bank turned me down for a mortgage.

The value of the property I was buying was 10% of what our personal portfolio was, of the money we had in stocks and shares out there. But they were very categorical that they do not look at the asset base of borrowers. They look at regular monthly income, and they judge their lending policies on that rather than on what assets you have. That once again, reiterated to me the discipline that this company has in dishing out money for an asset. Because they have a history of over 30 years, you can see the performance over a long period. You can see they have discipline. You can see the value system the company lives by. It has the lowest cost to income ratio that I know of any financial institution. Their cost to income ratio is about 7%. So they know how to leverage the opportunity very well in terms of getting people to market the

mortgages for them rather than opening 1,000 different offices in the country, and yet able to make a decent spread on loans, using management time to manage the liabilities book of the business rather than focusing on the next sale or the next mortgage. If the liability book is well managed, combined with a disciplined lending policy, profits will automatically materialize in a finance business.

It’s a great combination of where the business is right. The pricing power is right. Also usually in the West once interest rates rise, mortgage installments also rise. You will get a notice from the bank saying from next month your mortgage payment per month is going up. If increases are high, you will find people getting into payment difficulty, defaults increasing, the housing cycle slowing down, because of people not being able to pay mortgages etc.

What happens in India, is that because it’s difficult to communicate with people

in a speedy manner due to poor postage reliability etc, what lending companies prefer to do for housing loans is instead of increasing monthly mortgage payments, every time the interest rates increase, they extend the duration of the mortgage by a few months. Hence the monthly payment they make to the mortgage company

remains almost the same. That helps the affordability quotient.

It helps them to continue paying that mortgage over a longer period of time even in an environment where interest rates have actually moved up. That plays a huge roll in keeping delinquencies in check. The value of the properties is being maintained or is up marginally. Risk is also being reduced from a property market that is not collapsing. These types of companies are lending to first timers, and people are buying for the first time in their entire bloodlines to have a roof over their head. Lenders are reasonably assured it is not for speculative purposes and it is not for the 2nd, 3rd, or 4th property they are trying to buy to benefit from the housing market as such. So you have a number of in built safety valves, so to speak. Starting from management quality to the ability of the business to pass on increases in costs like interest rates to the borrower etc. They

have a network effect where you have a low cost of income ratio. All of these things at the end result in compounding returns for shareholders over a reasonable period of time, and the ability to get some dividends out of it as well.

Interviewer: Last question. Given

On a world wide basis, if you were looking at a pure housing finance company, I would probably say HDFC in India, as having the best management and the best track record, of making money with minimal risk.

Mortgage to GDP ratio of around 6% in India compared to 20% in China and 101% in developed economies like Denmark.



the turbulence of the last years, how do you keep your balance mentally when things get erratic?

Hemant Amin: I try to listen to people more intelligent than me. Looking at what great investors have done during turbulent times. One of the down sides you have to accept in the money management business, being invested in equities, is that there will be periods where it will be extremely difficult for you to justify being in a money management business, because everything around you is collapsing. There will be periods where markets haven’t grown or markets aren’t performing, which isn’t helping the market valuation of your businesses. That’s where your mental ability to comprehend the situation comes in. Managing money for me at least, is 90% psychology and 10% of whatever financial qualifications you may have. Be it a CFA or what have you. 90% of the game is the psychology that you

bring to it. If you do not have the mind-set to take

on fluctuations, I think it is the wrong business for you. As long as you know the strategy is right and you are focused on strategy, valuations don’t play a critical part because you have great businesses. But if you bought them at a wrong price you will be in trouble. Take Facebook for example. With $100 billion market cap and $4 billion in revenue, you have to have a lot of faith in the valuations and the growth being compounded at 100% over the next 3, 5, 10 years to justify investing.

People like me are much more comfortable waiting for the game to come to you rather than going out and chasing deals. We rather have a checklist and a 50 stock watch list which we like to monitor and wait for opportunities.For example, if a crash happens for whatever reason, or maybe one earnings quarter has been missed or some contract has been lost etc. But the core of the business is rock solid. If you are able to see the

picture 2 or 3 years down the road, you could be picking up something, which is at a very good valuation today but is mispriced by the market.

Caution at all times is the key. I personally have succeeded more from waiting for quality companies to slip up, rather than looking at the low quality low valuation businesses, which may have a lot of junk in it. A lot of them continue to remain junk because it’s extremely difficult, in my view, for businesses that are either in small or mid cap brackets, for them to come out of those valuations.

For example, for a small cap to come out and grow into a medium cap and then to a large cap, it needs a lot of factors in place such as high quality business, high quality of earnings, pricing power, extremely good management in place etc. 5 or 6 factors must be rock solid in place, for it to make the leap from a small to a medium, and then to a large business. Poor quality businesses will have profits up 20% one year, down 50% the next, up 40% the next year. After a 5-year period if you analyze it, you probably haven’t made any money from the start as a shareholder. Valuations remain stagnant as profits have gone up and down but haven’t increased over a period of tine and price earnings multiples have not expanded due to low quality earnings. We stay away from such businesses. But when we find a good business, we back up the truck and put in a decent amount of the portfolio into our highest conviction ideas.



(Continued from page 1)In terms of geography, we basically

look worldwide, so it’s not that we are focused on Europe or on U.S. or on Asia. We just look at what our interests are in topics or ideas, and then basically have a 30,000 foot view.

The methodology, you can call it event driven. Once we have the value in place, it’s about what is the catalyst for the current price to move closer to what we believe is the intrinsic value of that company. So that’s why we say, it’s the so called PMV or private market value of the catalyst. That’s how we phrase it at least.

Jeff: Do you look for value that’s just not being recognized, or is it a matter of actually seeing a change in economic value through some event that will additionally be recognized?

MM: I mean the list of events or catalysts is pretty broad. You can take very short term hard fact catalyst, which could be a merger, or a potential merger. Or you can also say, on a very long term basis, that macroeconomic fundamentals basically will lead to some sort of changes in the economics.

So we have a huge list of events or catalysts, which we can look at, and then we allocate on a risk adjusted basis - how much capital for an idea, depending on

if it’s short term or quantifiable low risk or whether it’s a bit more risk. But I’m basically out for the future. So that’s kind of how we look at the things.

Jeff: What kind of situations catch your eye?

MM: It’s everything. You see that once you’ve done the fundamental analysis of something. You realize that it’s basically everything that catches the eye. It can be simply that a company is, if you look at the individual pieces, 2/3 or 80% of the business is for free. Just by simply doing sum of the parts - obviously that will catch our eye. And we’ll ask ourselves, “Why is that the case?”

It can be that we say, “Okay. What are the fundamentals in that industry? Is it sustainable in the long term to have

that many players?” Maybe they have to consolidate because the cost pressure is coming or because the industry basically has completely changed. To give you an example, automotive in the U.S., after those bankruptcies, obviously, those industries will not stay the same. And

also the auto suppliers will not stay the same, right? Interestingly enough if you look at who is profiting from that, who has strength to survive, who might be a target, and you start to think about what are the dynamics of those industries.

Jeff: H ow ab o ut a t t h e m a c r o level? How much of that drives your thinking?

MM: Difficult to quantify, I would say probably a third, because it you look at the high-level ideas, you say, okay these are the macroeconomic changes, so therefore XYZ could happen. Then you have to very simply translate it and understand which company would benefit from those macro-economic changes.

So a place to look at, if interest rate changes occur, obviously is the insurance

industry. Maybe the financial industry. In volatile times, you might look at the stock exchange, because that’s where you have volatility reflected.

Macroeconomics always translates into ideas. Those ideas you have to catch on the stock-specific level.

I think the approach we have, it's pretty bullet proof. So it works in a down time, it works in an up time.

Applying "private market value" in a global ageInterview with Markus Matzsuk, former Partner at Gabelli & Company.



Jeff: How have the last several years played out for you? Has the financial crisis impacted your strategy? Does the world look different now in terms of your strategy?

MM: Strategy, no. Thinking, yes. I think the approach we have, it’s

pretty bullet proof. So it works in a down time, it works in an up time.

I think the strategy is bullet proof because you know it has been applied for several decades and actually has returned profits for investors. What has changed maybe is the way you identify ideas or maybe the way you communicate things. That’s the first thing. The second thing

is because of all the financial issues you have much tighter regulations. This impacts the structuring of your funds, where you find ideas, where you find investors, how you communicate, and that sort of stuff.

Jeff: How do you start looking at a company? Do you buy starting p o s i t i o n s? H ow d o yo u b e g i n the process?

MM: Well, we have a process, where we just discuss and talk about ideas. What might be an interesting idea, and then before actually discussing it internally. We say, “Okay. What are the basics of that idea.” So we either lay out the numbers or have some sort of documents ready so that we can discuss the idea. And then once we think collectively that, “Okay, this is an interesting idea,” then we actually say, “Okay, Why don’t we dig into it.”

Jeff: C a n y o u t a l k a b o u t a n investment case in general terms?

MM: One recent case was a straight forward sum of the parts for a European company. If you look at the individual pieces of the business, you see the stock trades at 19 Euros per share. And if you

take two investments the company has classified as to be disposed over the next 12 months, if you actually, just simply take the market value of those or the actual transaction based multiples of those, you come up with that the same value. Those two actually already represent 21 Euros

You don't have to be a magician to understand that you get the entire business for free.

“Gabelli is best known for its research driven, value-oriented equity investing expertise which is based on principles of Graham & Dodd – that is, investing in undervalued companies that have a high probability of achieving their intrinsic or private value over time.

Gabelli’s overall philosophy is a value oriented investment strategy based on a bottom-up approach to stock selection to earn a superior risk-adjusted return for its clients over the long-term by providing value-added (alpha) products for high net worth individuals, institutions, qualified pension plans, and to a family of mutual funds. The company’s asset management business is supported by its institutional brokerage services that distributes its mutual funds and publishes investment research. While Gabelli is known for its value oriented investment strategy, the company has developed a diversified product mix to serve the financial objectives of a broad spectrum of investors.”

— Cited from Gabelli’s website

Gabelli & Company

Mario Gabelli

The question on the risk return matrix is how long does it (the catalyst) need to materialize - until we actually can cash in on that idea.



per share, so more than actual stock is trading at right now.

So you don’t have to be a magician to understand that you get the entire business for free. On the entire business we’re talking about almost 8 billion in sales; we’re talking about roughly 12% EBITDA margin.

So you might disagree on the values, you might disagree on the earnings power those, but basically when you boil it down to what you have at play, you have the operations for free.

The question on the risk return matrix is how long does it (the catalyst) need to materialize - until we actually can cash in on that idea. So that idea even today is probably 12 months from realization because of the financial market and the turmoil in it, because the company is European.

And it’s a very simple question of at what point in time do you find a good entry point?

A good entry point you can look at from all angles. If you do analysis of the shareholder structure, you actually find out the majority shareholder needs the dividend. And once you do the math, you find out you’re going to get a dividend of 8%, 9% or 10% depending on the entry point you’re choosing. So you can play with options. You can play

it by just simply waiting until the right entry point is there, then you just take the position. And protect the down side with the dividend, and get your upside by the spinoffs.

Jeff: How do you view management within that investment structure?

MM: The problem is that there is a limited liability partnership. And the majority owner is also the CEO. Actually, you cannot fire the guy. He owns shares. You have to live with him, and you have to understand how he ticks and how he decides. So it’s important to understand him, but it’s also more important to understand the divisions and division CEOs and what they are saying, because ultimately those guys are delivering the value in the whole company.

And there I would say, the track record is mixed, because some people have a great track record, because they have been in this company for a long time. They have an M&A track record for decades. They have a track record of integrating acquired businesses. They have a record of delivering margins and profits. And then there are the other ones. They have a track record of doing M&A, but at disastrous prices and with zero integration capability.

So the track record overall I would say is mixed, which obviously increases the risk. But I think you can live with it, by simply knowing that dividends have to be paid. And that they have those investments, which they want to sell. But it does have business risk, yes.

Jeff: L e t m e a s k yo u o n e l a s t question. You’re in Europe in an arguably interesting time. How do you keep your balance when the ground seems to be shaking, both portfolio wise and in terms of temperament?

MM: Well, we go by individual ideas. The question really is if the ideas in the portfolio still make sense. So if you have like 200-300 ideas in the portfolio, if they hold 80-90% of the value, obviously you should be fine. You might have some volatility in it, but you should go over fine.

The other thing you can do is overlay additional index trackers, not being long or short. Just basically for balancing out the portfolio, the volatility of the portfolio. But this is more of a tactical approach. This has nothing to do with a strategic approach.

You can play it by just simply waiting until the right entry point is there, then you just take the position. And protect the down side with the dividend, and get your upside by the spinoffs.

JEFFREY TOWSONBuffett in Beijing RepoRt


Letter from Editor-in-Chief

This month, I attended the 2012 Berkshire Hathaway shareholders’ meeting in Omaha. And, as this was my first time attending, I enthusiastically did the whole

“Buffett in Omaha” experience. The day before the shareholders’ meeting, I went to the

Nebraska Furniture Mart. I bought Sees candy. I took a stroll by Buffett’s office at Kiwiet plaza. I even went shopping at Borsheims (which may have been my first time shopping for jewelry). I went to all the “Buffett companies”.

The day of shareholders’ meeting, I woke up early and stood in line at 6:30am outside the convention center (I also got into an argument with a guard about bringing Starbucks inside). Inside, I sat with 30,000 other people and took notes for 8 hours as Warren Buffett and Charlie Munger answered questions on everything from politics, to investing in China to the current stock price of Berkshire Hathaway.

Overall, I was a quasi-groupie for a day. It was fantastic – but not my most dignified weekend.

Flying home to Shanghai, I really did start to re-think some of what I was doing. My self-reflection was briefly interrupted by a stop in Tokyo to see a Lady Gaga concert (I now claim to be the first person in human history to see Warren Buffett and Lady Gaga in the same week). But overall a pretty powerful experience.

A few of my take-aways:

1. When in doubt, copy Buffett. It’s impossible to listen to Buffett talk and not think about

my own ambitions. Especially my hopes for my own company. It’s not that my strategy is wrong. But it became clear to me that it’s not as powerful economically as Buffett’s. It hasn’t been surgically honed down to the single most efficient way to create wealth. My take-away was that when in doubt I should just copy Buffett. I’m probably going to end up gravitating to his strategy over time anyways.

2. The US value crowd is much more globally focused than before - but still not that knowledgeable.

In virtually every investment discussion, China and the other developing economies came up as factors. Why isn’t Sees Candies expanding in China? How much of the intrinsic value of Coke is ascribed to emerging market consumer growth? This is a big shift from five years ago. And as soon as these questions come up, the room goes silent. The knowledge and familiarity just isn’t there. Now having spent 10 years on the ground in Saudi Arabia, China, Dubai, etc., I am more and more convinced my nomadic years are a great competitive edge for me.

3. When it doubt, just let it rip. Ok, that is more of a take-away from Lady Gaga. But

better to try. Better to just do things. Better to be outrageous. You either succeed or fail (usually) but either way you learn a tremendous amount in the process.

4. The Nebraska Furniture Mart is overrated. My apologies to Buffett fans (and Rose Blumkin). But it’s

true. The Nebraska Furniture mart may be an Omaha icon and a cash machine as an investment - but it is really nothing compared to your typical China Wal-Mart.

----------------A final thought. Our little newsletter is starting to get

some traction. And we’re getting smarter at this. As we keep digging into value strategies for emerging market situations, we are slowly focusing more and more on the right questions. And we’re also starting to build out an operational team so the quality should improve (yes, I know it’s much needed). My thanks to everyone for giving this a read and especially those who sent us feedback.

Sincerely, Jeffrey Towson

May 2012

Buffett in Beijing RepoRt


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Buffett in Beijing Report May 2012

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