Hi every one. We've received the first Audible test portion of "Seeking Wisdom: Thoughts on Value Investing". We can't thank Jonathan Drake-Summers enough for his incredible skill in making the book come alive. Feel free to tell us what you think. We wish everyone a very happy New Year!
“It’s very hard to understand that value investors need to underperform sometimes to outperform later. When we reach highs like we’ve seen over the past half-decade, value investors are likely to underperform. One question that nags at me though is that many, many value gurus have underperformed over the last 10 or even 15 years. Is that the new normal? How do we explain that?”
- Peter Kinkaide
The Horns of a Dilemma
As an investment advisor, long bull markets can both exciting and fulfilling as well as nerve racking and terrifying. It’s the final stages of bull market that can really wear a traditional value investor down. This is mostly due to the fact that by the time markets reach those dizzying heights seen at such a bull’s latter stages, value is almost nowhere to be found. For those who practice dyed-in-the-wool value strategies, these final years can be agonizing for their returns, for their funds’ confidence, and their managers’ psychology.
The bull market which started sometime in 2009 after the Great Credit Crisis has now run nearly 11 years with a few corrections. At Nintai Investments, our average investment partner portfolio has jumped from roughly 25% below fair value to 11% above fair value since 2018. We simply don’t find very much value out there. As an investment advisor, we face several choices when it comes to the allocation of capital – establish a new position, add to an existing position, stand pat/build cash, take profits, or exit a position entirely. The greatest impact on which course to take is that of valuation. With rising valuations over the past decade, nearly every decision has led to either standing pat and building cash (on average near 20 - 25% in our investment partner portfolios) by taking profits. These actions have placed us in an awkward position. Holding a large percentage of portfolio funds in cash is no way to outperform in bull markets. Yet, as a true value investor, I refuse to overpay and potentially open up our partners to permanently impaired capital.
For the past several years we’ve been in a rather inopportune position of having our feet stuck in the mud as other investors have raced by achieving outstanding returns. What makes this so painful is that our long term record - achieved through bull and bear markets - of significant outperformance has been cut dramatically. As an example, on June 30 2020 our average investment partner portfolio had achieved a three year cumulative return of 87% versus the S&P 500’s 31% return - a 56% difference. At Nintai, we were sitting up a little straighter and walking with a little extra swagger after we reported that quarter. But - like all those who suffer from hubris (small or large) - it only took 3 months to teach us that inviolable law of reversion to the mean. By September 30 2020 that 56% outperformance had dropped to a 26% differential. Of all of that hard work and gains achieved over three years, we lost over one-half in just over 90 days. Ouch!
Don’t get me wrong - we aren’t crying in our New England clam chowder here at Nintai Investments. We are doing what we’ve done for nearly 20 years - maintaining open and honest communication with our investment partners, redoubling research on our portfolio holdings, and being cognizant of our emotions during this dreadful period. Our long term performance continues to give us confidence in our process. In addition, we are blessed with partners who understand the power of patience and have faith in our methodology.
Value Investing: A Wide Range of Underperformance
Of course, Nintai isn’t the only investment house in this position. While we had a very rocky 2020, some famous value investors have underperformed dramatically over the length of the bull market. For instance, what would your initial thoughts be of an investment manager that had the following summary description? Would you feel comfortable giving your entire retirement assets to such a fund?
“On a three-year basis, the fund currently sits 1,514 out of 1,516 fund managers in the Equity - Global sector. He lost 53.2% over the period to the end of March 2020 (3 Years), while the average manager in the sector lost 1.3%.”
Yikes. That performance was chalked up by Francisco Paramés’ Cobas Asset Management. Many people will remember Francisco from his prior investment venture - Bestinver - where he was employed for 25 years (leaving in 2014) and posted a 16% annual return over that time. For longer term underperformance, one doesn’t have to rummage around very long in the value investor hall of fame. For instance, Bruce Berkowitz’s Fairholme Fund (FAIRX) - Morningstar’s Fund Manager of the Decade in 2009 – has underperformed the S&P 500 by -16.8% over the last three years, -10.3% over the last 5 years, and -8.5%over the last 10 years. During the decade assets under management decreased from $11B to $650M. David Winters - former guru manager at Franklin Mutual before founding the Wintergreen Fund - underperformed the S&P 500 by -10% over 3 years, -10.6% over 5 years, and -6.9% over 10 years before closing the fund in 2018 after seeing AUM drop from $950M in 2013 to $10M in 2018. Third Avenue Value Fund - Marty Whitman’s died-in-the-wool value vehicle - has really taken a beating. It has underperformed the S&P 500 by -14.2% over the last 3 years, -10.3% over the past 5 years, and -9.1% over the past 10 years. Assets under management have decreased from roughly $5B to $390M.
I didn’t write this to ridicule my fellow investor managers or hold them up as individuals who’ve lost their touch. Far from it. I give them credit for sticking to their process and moral compass. Rather, I wanted to point out that nearly every value investor has been pretty badly damaged by the last decade-long bull market. These three represent a cross section of styles, methodologies, and asset portfolio that differ dramatically. The one common theme is they all derived from the classic school of value investing. The second theme is they have all underperformed (some less than others).
Is Value Investing Obsolete?
As investors peruse the wreckage over the last decade within the value investment landscape, many people have begun to ask whether value investing has seen its day. It’s easy to see why that is being asked. As you look out across the investment universe, you can find a considerable amount of classic value investors with truly appalling 3, 5, 10, and even 15 year records. This underperformance has cut across nearly every category (small, mid-cap, large, and jumbo). For instance, the Russell 1000 GROWTH Index through June 30 2020 has achieved a 1 Year return of 23.3%, a 3 Year return of 19.0%, a 5 Year return of 15.9%, and a 10 Year return of 17.2%. (return data provided Vanguard). Compare this to the Russell 1000 VALUE Index 1 Year return of -8.8%, 3 Year return of 1.8%, 5 Year return of 4.6%, and a 10 Year return of 10.4%.
As value investors (and I include myself as one), one has to look real hard to see any positive message in returns like that. Over a decade, it becomes increasingly difficult to convince investors that value is simply “out of style” or “we’ve all seen this type of cycle before”. One only has to look at the bull market of the mid to late-1990s to see that growth outperformed for only roughly 5 to 6 years. As of 2020, we are looking at growth outperforming vale by roughly 12 years - nearly double the tech bubble cycle.
These types of returns have begun to really bite into traditional the value investor business model. For instance, data from Lipper showed U.S.-growth funds attracted $17.6 billion in April and May of this year, while value funds witnessed outflows worth -$16.9 billion. Numbers like that are nothing to sneeze at. Assets under management have dropped dramatically for many value gurus. Vanguard reports the average actively managed Value Large-Cap fund has lost 38%, the average value Mid-Cap fund has lost 42%, and the average value Small-Cap fund has lost a whopping 62%.
So is value investing obsolete? At Nintai, we feel very strongly the answer is no. As silly as it sounds to say consumers will no longer look to find groceries on sale, we think there will always be a role for value investors to sniff out value and make their investment partners handsome returns arbitraging the difference between price and value. That said, we think some things will need to change if value investment theory is to thrive in the future. Some traditional methodologies need to be discarded while existing/future trends need to be embraced.
Potential Changes in Value Investment Strategy
At Nintai, we think the 21st century will be a golden age for value investing. Having said that, we think the golden age will be powered by the adoption of new technologies and trends and the phasing out of certain methodologies or measures that may not be as effective as they were in the past.
Information is a commodity now
Back in the days (and I date myself here), value investors used to take the latest Value Line report and read about hundreds of companies analyzing essential data derived from the companies’ balance sheet, cash flows, and income statement. You paid good money, but there simply was no better source of data in one place. This was further enhanced by the adoption of Morningstar’s fund data (later increased to stock and individual bond data) and the Bloomberg terminal. Unfortunately, all of this data has been digitized and is now available on a single platform with the ability to utilize your own proprietary algorithm to search for investment opportunities - all at the push of a button. What once took considerable dollars and even more time can now be done in seconds. Hidden gems - even including Ben Grahams net-net opportunities are now as simple to find for your next door neighbor as they are for a senior analyst at JP Morgan.
Company disclosure is available at the touch of a button
Learning about a company - everything from management compensation to chief competitive offerings –- is possible right on the company’s website. An enormous amount of content such as investor presentations and conference slide shows - not to mention 10-Qs, 10-Ks along with other SEC filings - is at the fingertips of any potential investor. The days of finding inside information or having an inside source really isn’t even an issue anymore.
Investment strategy and theory is just as easy to find
Many older value investors first became cognizant of value investment theory and methodology by picking up the 8 pound hardcover version of Ben Graham/David Dodd’s classic “Security Analysis” and settling down to take copious notes and trying to match the authors’ thinking with Marty Whitman’s thoughts on calculating intrinsic value. That certainly isn’t necessary anymore. Today one can search Amazon’s business section to finds thousands of books discussing everything from modern investment theory to detailed arbitrage strategies. The ability to learn about investing - from the highest theory to the meanest methods - simply cannot compare to what it was like in the 1980s.
These trends have leveled the playing field for all investors – whether they be growth or value focused, individual or institutional in size - limiting the ability to have an inside track because of corporate, competitive, or marketplace information. This has had a tremendous impact on value investors where accurately calculating the difference between value and price is the essential tool in achieving outperformance.
But sometimes these trends aren’t just a detriment for value investors. For instance, while the digitization of data has leveled the field in terms of knowledge, it has also fed on the impatience of today’s investors. Rather than let all this new knowledge work for them, many investors use it to do short-term or - god help us - day trading in the markets. Here’s a few instances where new trends can be inverted to the advantage of the value investor.
Research can be far more robust
While digitization of data has made research available to anyone with an internet connection, most individual investors have a difficult time utilizing this new asset. Indeed, many investors have been lulled into simple algorithms/search tools like “Warren Buffet’s Stock Buys” and think they can buy stocks within the search results and voila(!) they are seemingly a partner at Berkshire Hathaway. To obtain value from this influx of data, individual investors need to roll up their sleeves, develop a set of investment goals/investment criteria, and then utilize search features to identify possible investment targets. While many think this is the end of the research, true value investors know this is just the beginning. Being able to screen useless data, applying good data to answer critical questions (such as “what are the three major components of the company’s moat and how are they supported by returns on capital?”) takes enormous effort.
Digitization means more actions at faster speeds
We are beginning to see that the explosion in the amount of data is also increasing the velocity in which the data is used. According to Vanguard the average ownership time of a portfolio holding has decreased from 5 years 3 months in 1965 to less than 3 days in 2019. In some cases (such as Nasdaq or commodities trading) the holding period is measured in hours or - heavens forbid - seconds. Value investors can use this form of hyperactive disorder to purchase shares of outstanding companies at fair prices and then let time (meaning years) do its compounding wonders. Since beginning Nintai Investments LLC, our average turnover has been less than 5% annually with 75% of our holdings in the portfolios since inception. If you find an outstanding company headed by outstanding capital allocators, why not let them do the heavy lifting?
Great businesses are lasting longer. Poor companies are not.
In the good old days of value investing, the idea was finding companies selling below their total net assets or operating under some impairment such as a bad business deal or bad news. One simply had to scoop up the shares at a discount, wait for the market to recognize its mistake, and sell the shares when they reached fair value. It’s not so easy anymore. At Nintai we find companies that take a hit - for whatever reason - have a tendency to stay down for quite a long time. A recent example of such an extended price depression (or as it is called - a “value trap”) is AK Steel Holding (AKS). After peaking at roughly $17.50 per share in January 2011, the stock has slowly and steadily dropped to $2.25 per share at the end of 2020. Every event which has toted to be “turning point” has not panned out - selling assets, rebound of oil prices, etc. - and simply provided patient investors with a 90% loss of their investment. With the amount of data publicly available these days, simply betting on a company selling at a discount to its assets and waiting for the markets to price in a market catalyst is a disaster. At Nintai we think one of the reasons why a company like AK Steel can be a value trap is that it is much harder to find mispricing through hidden or misunderstood assets. In the past, many capital intensive companies (like AK) could prove to be a profitable investment when a security analyst found mis-priced assets hidden on the balance sheet that eventually reached full valuation through an asset sale or divestiture. Such extensive information and data available these days makes it much harder to find such mis-pricing and simply find a value trap instead.
At Nintai, we don’t believe value investing is dead. We would argue it has evolved as changes in informatics, corporate disclosures, and business velocity have altered the investment landscape. We think investors with the emotional ability to be patient and not overpay, combined with the ability to utilize all the data and information available, will be rewarded in the long term. The ability to find stocks with low PE or PS ratios or trading at 40% of its net assets simply isn’t enough these days. Neither is using some algorithm based on a formula to find “cheap” stocks enough. The playing field has flattened which has created both an opportunity and a risk. The truly successful value investors in the future will understand this and utilize the changes over the past 25 years and use them to their advantage in the next 25 years.
As always, I look forward to your thoughts and comments.
DISCLOSURE: Nintai Investments – nor its investment partners – own any stocks mentioned in this article.
 I can remember sitting at Well Beach spending a week in the sun, watching the surf and reading 8 different Value Line reports all week. I could slice and dice all this data today in a matter of minutes – not weeks.
I recently had the pleasure speaking to an Ivy League school’s endowment board of directors about the future of value investing. The Board has been struggling with roughly a decade of relatively poor performance compared to the S&P 500. A couple of particular sticking points have been high turnover in the portfolio along with fees charged by the endowment’s fund managers. (I should note the directors have no one to blame but themselves since they sign the contracts). About mid-way through our time together, it became clear the investment structure, management organization, and decision processes had no alignment with their goals for the endowment’s assets. At this point I discussed Nintai’s use of an intellectual framework and process that provides it with the means to actualize the company’s investment tenets and rules.
At Nintai, we practice our own unique version of value investing that focuses on price, value, and quality. These three legs of our investment triangle are sometimes disputed to be growth-at-a-reasonable (GARP) and not true value investing. We discussed this all the way back in 2015 in an article entitled “Am I a Value Investor?”. Since we focus on not overpaying and look for a substantial discount to fair value when we purchase, we consider ourselves value investors. We break from more traditionalists by worrying less about certain ratios such as price to earnings or price to book, but this certainly doesn’t mean we think value has no role in investment selection.
As value investors (now that we’ve settled that!), we focus on three core tenets that drive our overall investment philosophy and strategy. These are the impact of quality on value investing, making a clear distinction between a quality company and a quality investment, and creating an investment process that works for you. These tenets overlay four rules that make value investing work over the long term. These include cutting down on turnover/reducing trading and fees, mastering human emotions during good and bad times, creating a work ethic that makes you a learning machine, and understanding the relationship between value and price is the basis for outperforming the general markets.
At Nintai, we think these seven tenets and rules have created an intellectual process that gives us an advantage over most of Wall Street. None of it is rocket science. None of it requires advanced mathematics. None of it even requires a master’s degree in business administration. In fact, we’ve found much advanced educational and professional training is detrimental to being a successful value investor and more suited to speculation and market timing. I recommended to the University Endowment’s Board they get back to basics and follow these time-tested philosophy’s and perhaps (of course past performance is no guarantee of future returns) they might see a reduction in fees, costs and turnover all while increasing long term performance.
Value Investing and Quality
Ever since Warren Buffett partnered with Charlie Munger, there has been a robust debate about the definition of value investing. One school comes from the more traditional models of Benjamin Graham – sometimes referred to as “cigar butt” investing - in which the investor looks to purchase a company where the current assets (cash, cash equivalents, inventory, etc.) exceed the total liabilities of the company. That’s a complex way to say the company has got more than it owes. This type of investment (called a “net/net” by Ben Graham) would be part of a basket of such stocks where one might make a handsome profit when the markets realized such pricing discrepancy. The other school of thought looks for outstanding companies trading at fair prices. This might be a company with high return on capital, solid long-term growth, and solid balance sheet trading at roughly seventy-five cents on the dollar. In the former, an investor purchases a company with little long term future but a hope the markets recognize the mispricing of assets. In the latter, an investor refuses to overpay for assets but looks for long term value generation to compound over the long term. It is critical that an investor know why it’s important to build a portfolio around quality investments and how you go about finding them.
Quality Investments versus Quality Companies
Finding a quality investment is distinct from finding a quality business. For instance you may find a business with outstanding characteristics such as high return on capital, but trading at a 60% premium to your estimated value. This would be a quality company that is likely to be a poor investment. Conversely you might find a rather pedestrian company trading at a 15% discount to your estimated value. This would be a non-quality company at a compelling price. Should you buy either? It is vital that investors know the difference between a quality company and a quality investment. More importantly, they must know the core requirements that make up a quality company and how an investor goes about finding them.
Defining Your Path
Much like Warren Buffett, my career as an investment manager has migrated from the short-term cigar butt investor to one looking for long-term capital compounders. My record as a short-term investor wasn’t great and I found it didn’t meet my natural predilection for positive, long-term growth stories. It was a great first lesson - to thine own self be true. Create and stick with an investment approach that reflects your inner self. In abandoning the cigar butt methodology, I wasn’t making any moral judgement about investors who took such an approach. One thing you will learn on Wall Street is that there are many, many ways to make (and lose!) money. It is vital an investor creates their own investment operation that can help them sleep well at night.
It is critical to understand these basic tenets sit on a foundation of rules that are as immutable as any of Einstein’s theories on relativity. Investors should bear in mind that these rules work like a gravitational force in eating away at performance. Each of them can lead long term value and quality investors far astray from their goals. Conversely, when applied rationally they can provide individuals (or organizations) with an advantage at no cost to the patient, focused investor.
Turnover and Trading
Turnover and trading are not characteristics of a long-term quality investor. You will often read an overview of an investment advisor’s investment case for purchasing a certain holding and then see it was traded out of the portfolio after just 6 months. It seems to me the adviser either knew too little about that holding or they let emotions get the best of them. How do I define trading? Buying and selling a holding within a 6 month to 1 year time period is a sign of a trading mentality. Turnover of 50% or more year (meaning the adviser buys or sells 50% of the entire portfolio in a 1 year period) are signs of an adviser’s proclivity to trade. It’s critical to remember that trading eats away at returns by expenses in brokerage fees, lost opportunity costs, and capital gains taxes.
During periods of bull markets to bear markets – and all the spaces in between - many investors let their emotions get the best of them. Whether it be fear or greed, emotions can override some of the common senses rules you think you have down pat. How many investors have seen a holding drop by 30% in one day and sold it as quickly as their brokerage account could make the trade? What happened to well thought out business cases based on intrinsic value? Or even following the simple rule of “buy low and sell high”? Emotions have a way of making a hash of our best laid plans. To be a long term value investor, you must find a way to manage your emotions.
Value investing is hard work. While it may sound like I’m advising investors to find their 15-20 quality companies, make their purchases, and then check out for the decade. Nothing could be further from the truth. The ability to ascertain quality from both external and internal views (meaning internal metrics and external perceptions) takes an enormous amount of time. The investor must read, research, calculate, and synthesize a great deal of data and knowledge. You don’t need an IQ of 160 or have an MBA from Harvard, but you do need to make a commitment to always be learning about your portfolio holdings themselves and the markets in which they operate.
Price and Value Always Matters
No matter how outstanding the quality of a company, it will be difficult to obtain long term outperformance if you don’t know the value of what you purchasing and how that correlates to its price. If you purchased a basket of internet-based companies in January 2000 you had to be a relatively patient investor to see any positive returns and even longer for outperformance. One of Murphy’s Laws is that everything looks cheap when you don’t know its value. Wall Street cares little what you think about a company’s quality, and even less about how much you paid for a share of said company. Successful value investors simply predict value versus price better than other investors. It’s really that simple.
These foundational rules - when applied properly - can provide long term value investors with a real leg up on Wall Street. For all the talk on financial networks, investing shows, and industry marketing, the vast majority of financial “experts” have little to no idea of how the markets or their clients’ portfolios will perform over the next 1 month, 3 months, 3 years, or even 30 years. Financial markets are made up of - most basically - human beings making decisions based on a blend of these rules.
A word of caution. These rules may seem easy to live by. In today’s markets, commercials make it sound convincing that with the right technology and management team investors can join a website, follow their recommendations, and retire at 45. It would seem to me that the lessons from the spring of 2000, the fall of 2007, and the spring of 2020 should enlighten most that investing is far more complex (though in some ways easier) than marketed, and demands steady effort over the long term. It is my belief the vast majority of underperformance can be attributed to violation of these rules.
In sum, at Nintai we use these tenets and rules as an intellectual framework to pose questions, conduct research, ascertain the qualitative nature of a potential investment, assign intrinsic value, and - finally - to make investment decisions to buy or sell. I should point out that following these rules in no way guarantees an investor will beat the S&P 500 every year for the next decade. We certainly haven’t at Nintai! Previous performance is no assurance of future returns. But I think a focus and applied approach to investing following these goals/rules can provide an investor with the possibility of preventing very painful losses and better long-term performance.
 Cigar butts received their name from the concept than an investor might take one last hit from such a stock and purchase a dollar’s share of assets for fifty cents. For a non-investing description, imagine finding a nearly completely smoked cigar on the sidewalk, but having enough to take one more pull on it - hence cigar
To Our Officers and Investors:
Enclosed you will find our report on the Q3 2020 performance of the Nintai Investments LLC Composite Portfolio managed by Nintai Investments LLC. Returns reflect performance since October 31 2017 when the company began operations.
Q3 2020 Returns
Last quarter we mentioned the economy and markets were marred by the constant increase in COVID infections and deaths. We stated that during Q2 we reached roughly 1,600,000 cases and 100,000 deaths - combined with high unemployment - which made deploying capital a risky venture (it’s always risky - the exception here is that uncertainty far outweighs risks). The situation in Q3 has not improved very much. By the end of Q3, total COVID cases in the US has grown to roughly 7,200,000 cases and 210,000 deaths. These numbers are simply dreadful. Until the country takes the pandemic seriously - mandatory mask wearing at all times, social distancing, limited group interactions, etc. - then the disease will continue to be a story of immense human tragedy and drag on the long term growth of the US economy. Unemployment has improved – dropping from a 24% unemployment rate to 8.4% by October 1. While coming down, that is still a shocking number which places an enormous strain on consumer spending (75% of total GDP), our social safety networks, and the service economy in general. Finally, the search for a COVID-19 vaccine is on-going, with a concern of the general public the FDA will rush approval and allow the launch of a product with an insufficient safety profile. As scientists and researchers continue to better understand the virus, it appears utilizing a herd-type immunity will be increasingly difficult to achieve. Overall, the team at Nintai finds it hard to create a risk/uncertainty model that protects to the downside while offering sufficient reward to the upside. Consequently you may see cash positions as a percent of total assets under management reach new highs.
Overall, Q3 2020 wasn’t a very successful period for our investment portfolios. We underperformed the S&P 500 by 4.97% with many holdings performing poorly. Our showing against our two other comparable indexes wasn’t as bad. We underperformed the Russell 2000 by roughly 0.87% and the MSCI ACWI ex-US by roughly 2.14%.
As we mentioned in our Q2 update, the reversion to the mean (to the downside in this case) can prove to be a taxing process. We are comfortable each portfolio holding remains financially solid, has a strong competitive position, and is led by a management team with a firm eye on investment return on capital. As you can see from our latest investment cases (mailed out last month), we remain confident that each holding should perform well over the long-term (past performance of course is no assurance of future returns). The valuation spreadsheets tell a different story. Many portfolio holdings have highly elevated valuations. In our update “When the Economy and the Markets Disagree”, I stated we are left with the quandary
of holding outstanding companies with inflated valuations. In principal, we’ve been holding onto these companies simply because we cannot replace them with any other company that we feel could compete (from a return and quality perspective) over the next decade or two. This has held us in good stead until this previous quarter. For now, we see no reason to change course and actively sell large positions out of the portfolio.
For the quarter, the Nintai Composite Portfolio generated a (+4.07%) return (including fees) versus (+8.93%) for the S&P 500, (+4.93%) for the Russell 2000, and a (+6.28%) for the MSCI ACWI ex-US Index. For the 1 Year period, the Nintai Composite Portfolio generated a (+24.11%) return (including fees) versus (+15.15%) for the S&P 500, (+0.39%) for the Russell 2000, and a (+3.16%) for the MSCI ACWI ex-US Index. Since inception (on an annualized basis), the Nintai Composite Portfolio has generated a (+17.18%) return versus the S&P 500’s (+6.91% including reinvested dividends), the Russell 2000’s (+0.83%), and the MSCI ACWI ex-US’ (+1.37%)return.
It goes without saying we are very pleased with long-term numbers, but disappointed with the quarterly returns. In last quarter’s report, we stated:
“….it should be pointed out that Nintai Investments LLC (and its predecessor Nintai Partners) typically gains its advantages in truly abysmal years. Our risk averse approach generally shines in moments of significant drawdowns in the markets.”
This certainly been the case in 2020. During Q1 (with the onset of the Corina virus pandemic), the S&P 500 achieved returns of (-0.04%) in January, (-8.23%) in February, and (-12.35%) in March. The Nintai Composite Portfolio achieved returns of (+0.68%) in January, (-6.12%) in February, and (-5.28%) in March. The portfolio outperformed the S&P 500 by a cumulative (-10.72%) to (-20.62%) respectively (or by 9.54%).
Q3 tells an entirely different story (or inverts the findings as I am fond of saying). The S&P 500 achieved returns of (+5.64%) in July, (+7.19%) in August, and (-3.80%) in September. The Nintai Composite Portfolio achieved returns of (+4.36%) in July, (+1.71%) in August, and (-1.81%) in September. The portfolio underperformed the S&P 500 by a cumulative (+4.06%) to (+9.03%) respectively (or by 4.97%).
Seen below are results for Q3 2020, year-to-date, one year, and since inception (annualized). Note we have removed the Index Blend 85% Stocks as the portfolio no longer tracks to the indexes percentages.
For individual portfolio members only
Winners and Losers
For individual portfolio members only
The current Abacus view as of September 2020 shows that the Nintai Composite Portfolio holdings are roughly 25% below in value to the S&P500 and projected to grow earnings at a 20% greater rate than the S&P500 over the next five years. Combining these two gives us an Abacus Comparative Value (ACV) of +45. The ACV is a simple tool which tells us how the portfolio stacks up against the S&P 500 from both a valuation and an estimated earnings growth stand point. The number shows a portfolio much cheaper in value with much greater profitability and a sharply higher projected growth. We like to see the ACV above 20, thereby giving the portfolio the best chance at outperforming the general markets.
I remain highly focused in my industry and sector weightings. I currently have holdings in only 4 of the S&P 500’s 11 categories – financial services, industrials, technology and healthcare.
The third quarter of 2020 was the first time the Nintai Investment’s individual investment portfolios truly had a miserable performance against their proxies. As I pointed out earlier, our holdings generally outperform in down markets. This quarter represented an explosion in market enthusiasm as investors feel we turned the corner on COVID. Even with the infection of the President we are seeing this isn’t necessarily correct. There also seems to be (and we hate this phrase) an irrational exuberance in relationship to the recovery from the COVID-based recession. Again, we are in a minority that feels we have a long way to go in getting all parts of the economy back to operating on all cylinders.
Last quarter we wrote there were three main issues we felt would drive longer term returns for the markets. We think these three themes are unchanged since we first wrote about them. We have added a fourth as the United States’ approach to dealing with the COVID-19 has been woefully inadequate and will continue to be so until we get a new administration with a more systemic - and systematic - approach.
1. Stock prices - relative to price over earnings, price over cash flow, and price over estimated earnings growth - seem quite high in historical terms. While interest rates remain at historical lows, Nintai believes this doesn’t offset the full risk of such high process.
2. With over 7.45M cases (averaging roughly 35,000 new cases every day) and 212,000 deaths (averaging roughly 400 new deaths per day), the United States’ economy and overall consumer purchasing power will be severely hampered and unable to reach full potential. Any projection in earnings, growth rates, or profitability will be very hard to support until the pandemic is under control.
3. Geopolitical risks have never been higher with the US domestic political scene extremely volatile, the global energy markets in disarray, and the growth in nationalist/populist actively seeking to break up decades-old alliances. The 2020 US Presidential election only adds to these risks.
4. China represents an entirely new competitor with significant strength generated by its recent economic power, as a significant holder of US debt, and its play for greater military strength in the Pacific.
We generally don’t allow trends like these to drive our investment decisions or capital allocation. That said, the constant evolution of both US and global political economics can have an impact on individual portfolio holdings’ strategy and operations. As always, we will keep a sharp eye out for any impairment on our holdings’ valuations and/or competitive moat.
We hate underperforming. Regardless of what events that are happening in the greater economy or geopolitical world, we have no excuse for our performance in Q3 2020. You have our word we will work diligently to better our results and get back to excelling over our indexes. That said, we recognize underperformance happens and we won’t be suddenly increasing portfolio turnover to 115% or leveraging our portfolio by 400%. Rather, we will focus on what we do best and focusing on improving our process where we can.
Helping individuals and organizations achieve their life goals, support their corporate giving, or meet their retirement needs is a remarkable honor and mark of great trust. Every day we look to continue earning that trust. Should you have any questions, please do not hesitate to contact me by phone or email.
My best wishes for a healthy and happy summer season.
Over the course of the past 12 - 24 months performance within the Nintai Investment individual investment accounts have performed quite well against the major indexes we like to measure our performance against – the S&P 500TR, the Russell 2000, and the MSCI ACWI ex-US. Over the course of that run I’ve tried to be clear to all of our investment partners they should not expect the double digit (and even triple digit) returns we’ve seen over this time (I am even required to tell each of them and you that past performance is no guarantee of future returns). The last three months have proven that to be a wise policy.
As you all know, I absolutely hate to underperform - even in the short term. The last 90 days has been extremely difficult with nearly every holding in our portfolios underperforming against the general markets. Reversion to the mean - to the downside - is not nearly as fun as the ride up. Whenever we have a stretch of underperformance here at Nintai, we do several things. First is get outdoors and get some exercise. This gets me away from the computer and reduces the risk of making a hasty decision that will likely only enhance the problem. The second is I think of a story about Lyndon Johnson and John F Kennedy. On election night of the 196o Presidential race there was a great deal of tension at the Kennedy headquarters as returns coming in showed the results were going to be very close (it was - Kennedy won the total popular vote of 64,329,141 by only 112,827 or 49.72% to 49.55%). In the middle of this chaotic night, many people remember Lyndon Johnson - the Democratic Vice Presidential candidate - calling John F. Kennedy - the Democratic Presidential Candidate - and saying to him “I heard you’re losing in Ohio but we’re winning in Pennsylvania.”
As an investment advisor (and investor), I’ve never been impressed with money managers who take the LBJ way when it comes to reporting results. Many of them seem to live by the ancient Chinese proverb that says “victory has a thousand fathers but defeat is an orphan”. There will be no lonely orphans running around the Nintai Investment’s offices. The last three months have been tough on our portfolios. Though still up over the long term, these poor returns have eaten up half of our total outperformance. No one is responsible for that except me. I apologize for that.
Being a value investor - particularly with other peoples’ money - is not easy. You are sometimes faced with very difficult choices. Occasionally share prices will dance right around purchase or sell prices but never send a clear signal. Sometimes company’s may take on debt yet remain an outstanding investment opportunity. These types of situations can challenge your investment strategy, your investment criteria, or both. Yet we get paid to make decisions (and that may mean doing nothing) in each of those scenarios.
The most difficult situation is when market currents flow in conflicting directions. During these times it seems like any investment decision is a “damned-if-you-do” or “damned-if-you-don’t” proposition. We are currently stuck in an unfortunate market situation where four underlying forces are at work.
These four currents have put us in somewhat of an investing bind. I thought I’d share some thoughts on each of these so my readers can better understand Nintai’s decision making process.
General Markets are Overvalued
Just recently (September 8, 2020), Stanley Druckenmiller (who I admire a great deal) stated the markets are in an “absolute raging mania”. Morningstar would disagree with their “Market Fair Value” calculator showing a price to fair value of 1.01 (or 1% above fair value). Who’s right? Darned if I know, but I certainly lean more towards Druckenmiller’s view than Morningstar. It would seem to me a move from a market average PE of 14.8 in 2010 to 28.7 in 2020 is - in general - excessive.
Individual Portfolio Positions are Overvalued
In November 2016 when we first started building out the Nintai Investment model portfolio, the average PE was 16.7. By September 2020 this has jumped to 25.9 with 7 out of 21 portfolio holdings having a PE of 40 or greater. In addition, the portfolio price-to-fair value has jumped from 0.91 (or 9% below fair value) to 1.07 (or 7% above fair value). We are in the very difficult position of holding a selection of outstanding companies with a many significantly overvalued. Do you hold on to these no matter what? Do you sell a portion? Do you sell the entire position with the hope to reinvest again after the price drops? There’s no easy answer to these questions. We’ve unfortunately chosen to sit tight and have lost some of the gains by not taking profits when we could. As Warren Buffett would say, we’ve been guilty of thumb sucking.
All Our Portfolio Companies are Long-Term Holdings
As I mentioned earlier, all our portfolio holdings are led by outstanding capital allocators, have significant competitive moats, and maintain outstanding financials. We look to hold companies like this for decades and let management do the heavy lifting. As most of our investment partners have seen, Nintai’s typical turnover (unless receiving new assets on a regular basis) is less than 5-10% annually. We hate to take profits for several reasons. First, we have to be cognizant of taxes for most of our partners’ portfolios. Second, we hate to dilute or lose any part of a holding in such an outstanding company. Last, we have no idea what the short term price moves will be. For every price drop that takes place after taking some profits, there is an instance where the stock jumps by 30% the day after our sale.
We are Terrible Market Timers
Which brings us to market timing. Even though many of our portfolio holdings are overvalued, we recognize that we have absolutely zero skill in timing the markets. We don’t believe many of our fellow investors have that skill either. We generally purchase shares of a company regardless of what the markets are doing. An example of this is a large pharmaceutical company. We are currently conducting in-depth research on the company and may purchase it into partner portfolios even though markets are flirting with new highs on a near daily basis. Our investment decisions are based on individual corporate valuations alone.
The last year has shown the benefits and costs of a long-term investment horizon combined with high quality investment holdings. The first nine months were dream-like with the average Nintai portfolio returning 30 - 35% versus the S&P 500’s 15.8%. The next three months saw a horrible reversion to the mean with the average Nintai portfolio returning 5 - 7% versus the S&P 500’s 11.7%. Rather than taking the LBJ route (“we in Ohio versus you in Pennsylvania”), we recognize I am responsible for both the first 9 months as well as the latter 3 months of the past year. I have assured our investors we will take a look at these returns to see what learnings can be found to prevent such underperformance in the future. I’ve learned over my career sometimes you can find ways to improve and sometimes you are simply the victim of reversion to the mean. Either way, we will work hard to better understand the nature of our returns and report back to our investors any steps taken to improve our process.
I hope everyone is staying safe, wearing your mask, and practicing social distancing. If you have any questions or comments, please feel to reach out.
In January 2015, I wrote about Abraham Wald and his research in World War II about bomber survivorship during raids over Germany. To quickly summarize Wald’s work, he was asked by senior leadership of the US Army Air Force to critique a study by an internal team analyzing bomber losses. Their study analyzed damage to bombers that made it back and found the following damage patterns.
Aircraft damage across aircraft: WWII study
The study ascertained damage was centered on the mid-fuselage, outer wing tips, and the rear stabilizers. Since the damage patterns were so pronounced, the Air Force team’s recommendation was to reinforce these areas.
Wald took one look at this and told the team their work was deeply flawed. By studying the planes that came back the researchers were seeing where the planes could withstand damage. The more interesting facts should be about the planes that didn't make it back. By analyzing where all the bullets holes and damage were (on the wing tips, mid-fuselage, and rear stabilizers) on the planes that made it back, he proposed strengthening the areas where there were no bullet holes (mid-wing and rear fuselage). Through his report thousands of bomber crew members were saved through the course of the war. Wald’s work is often used in survivorship bias studies - meaning we focus too much on survivors when we should be looking more closely at those that don’t make it.
In my article, I used Wald’s research as a prelude to looking at survivorship bias in mutual funds. Investors many times get hooked on - like air force leadership - the winners in mutual funds, rather than the losers (or those who “don’t make it home” in Wald’s words). In the article I discussed inverting and understanding how many mutual funds survived and beat the S&P 500 index over time. The data demonstrate the incredibly poor performance investment managers displayed for the years 2007 - 2011. I wrote:
“Roughly 9 out 10 funds underperformed before they were either merged away or simply closed. A loss that would have staggered Wald himself. It’s hard to imagine that trained professionals - with a wealth of technology, analytics, and treasure behind them - couldn't exceed the batting average of an AA baseball team third stringer. In fact it’s hard to imagine that throwing darts at a list of stocks and bonds couldn't have produced better results. For the investors who received such terrible returns from their investment managers, all they received was a letter quietly delivered to their mailbox informing them of the merger of their fund with an entirely new – and no doubt exciting and outperforming – investment opportunity.”
I thought it might useful to take a look to see if anything had changed in the last decade and whether the findings in “Mutual Fund Survivorship” still hold up. Morningstar recently published its latest Active/Passive Barometer report which can provide answers.
Every month, Morningstar takes a look at both performance and survivability of active versus passive funds by fund category (e.g. large value, large growth, mid growth, etc.). They also report performance by management fee organized by decile. In August’s report Morningstar discussed their latest findings.
Taking a deeper dive into the data shows that sometimes the findings aren’t as simple as they appear. For instance, why is it that nearly every growth fund decreased performance by nearly 15% from 2019 – 2020? Yes, we know growth went out of fashion, but why? Here are some other complexities investors should consider as they think about survivability and performance.
Survivability is a Complex Problem with a Hybrid Solution
Having a fund merged away or closed is rarely due to a single issue. Many times it’s a combination of events. These include high costs versus both indexes as well as funds within their category (e.g. small growth), underperformance against both the S&P and other funds in their category, and a dwindling asset base. The answer to meeting these issues isn’t always easy. One and three are inextricably linked. If the fund lowers fees, then it might not maintain a level of profitability necessary to keep the fund going. But growing the asset base might require this if fund finds itself in a war against index pricing. The issue of performance is far trickier. The very choice of active management means the odds of beating the index has decreased versus an index fund (part of that of course is fees. Back to where we began!). The ability to pick stocks or bonds more successfully than an index fund – long term – is a very rare accomplishment.
Survivability and Performance Isn’t Just About Active versus Passive
With the data as they are, it’s easy to say that passive beats active. But that’s not the case every time. In both survivability and performance passive generally beats performance. It’s important to remember that outperformance can vary dramatically by fund category (small cap, mid cap, etc.), methodology (growth, value, or blended), geography (domestic versus international), equity versus bond, or even by industry (real estate). It’s far too easy to simply write off a fund because it’s actively managed. It’s vital investors spend time reviewing short- and long-term performance, fees, and the fund’s strategy. Some funds might outperform the market by 30% for one year but underperform by 15% over a five year period.
As Usual, Fees Greatly Affect Survivability and Performance
One thing that hasn’t changed and continues to be one of the top issues affecting performance and survivability is fees. The funds with the highest fees (both passive and active) had a survivability rate of only 27% of those with the lowest management fees. Those management teams that are both actively managing and charging the highest fees survived only 16% of the time period versus 47% of the passively managed funds with the lowest fees. Bottom line? If you think your active management team has any chance of long term success, at least make sure they have the lowest fee structures. Bottom line? Jack Bogle 1 - High fee actively managed funds – 0.
Since I published “Mutual Fund Survivorship” five years ago, not much has changed. We know active management generally is more expensive than passive and has a lower rate of survival. We also know the funds with the lowest management fees have better performance and longer survival than those with the highest fees. Actively managed funds with the highest fees have a pretty poor chance of “making it home”. As an active manager with a record of longer-term outperformance (remember: past performance is no guarantee of future returns!) we feel extraordinarily lucky to have investment partners who fully support our methods and strategy. Our goal of course is to provide them with long-term outperformance while maintaining a reasonable risk/reward profile. So far - with a generous amount of luck and some skill - we’ve been blessedly successful in these efforts. If we stick to our investment strategy, don’t wander too far from our circle of competence/comfort, and charge a reasonable fee, we can provide a real service to our partners. So far we seem to be on the right course.
As always we look forward to hearing from our readers. Tom can be reached at email@example.com.
 “Morningstar’s Active/Passive Barometer”, August 2020, Ben Johnson CFA
“There is little evidence of thought as to whether the price of a security already reflects current and projected future news flow, or whether the opening up of the economy might be premature, a sign not of strength, but of impatience, lack of resolve, and poor judgment.”
- Seth Klarman
Over the last three months, it seems the markets have been setting record highs on a regular basis. This despite the fact the Covid-19 pandemic continues ravaging huge swaths of our country averaging nearly 1,000 deaths per day. Large segments of the economy still face enormous job losses and the inability to open for business. Unemployment still hovers near 10% (nearing 14% several months ago) after reaching a record 2.3% just over 9 months ago. The killing of George Floyd led to a truly nation-wide outbreak of protests against injustice, police brutality, and race relations in general. All of this is - of course - taking place during a year of one the most consequential presidential elections in the past 50 years.
The stock market has always presented itself as a forward-looking mechanism. When trading began underneath the buttonwood tree on Wall Street in the 18th century, the first steps in creating an organized market became a reality. That market - which eventually became the New York Stock Exchange – would go on to provide hundreds of millions of dollars and eventually billions of capital to build the most powerful economy in the world. There have been times the Exchange has been in perfect alignment with the economy and others when there has been an almost total disconnect between the two. For instance from the 1973-1974 trough until roughly 1982, the markets had little correlation to what was to become the booming Reagan economy. By most value standards (and 20/20 hindsight), the markets traded at a large discount to the coming expansion and end of stagflation. By the mid- to late-1990s this had mostly inverted with stocks getting far ahead of the economy leading to what was to become the 1999-2000 technology bubble and subsequent crash.
In the last twenty years we have seen the markets go back and forth like this, making a hash of the efficient market school of thought. The question is how can an investor know when the markets are disconnected (in either an undervalued or overvalued manner) from the economy. The two tools I find most helpful are the simplest. One was created by Warren Buffett and the other by John “Jack” Bogle.
The Buffett Method
Warren Buffett is known for his folksy wisdom, but certainly his calculation in finding out if the markets are under- or overvalued according the US economy is remarkably simple and efficient. His model is based on several factors.
Corporate Profits Track GDP Long Term: First, over the long-term, corporate profitability must remain relatively closely correlated to the long-term growth of the US economy as measured by the Gross Domestic Product (GDP). That is to say that corporate profits cannot grow at 12% over the long-term if the GDP grows at 6% over the same time period.
Interest Rates are Equities’ Gravity: Second, interest rates serve as a gravitational pull for equity investments. If interest rates increase then equities must invariably decrease in value. The converse is true. If interest rates decrease then equities should rise. Many believe this has been the case since the 2007 - 2009 market crash. The US Federal Funds rate has been near zero percent and many countries are even moving into negative rates. These individuals (including this writer) thinks this has created an artificial floor pushing up stock prices.
Short Term Divergences Happen: Readers should note that the previous two factors reflect long term trends. In the short term, sometimes equity prices can drift remarkably far away from their normal correlation with the GDP. Think of the credit market bubble of 2005 - 2007. Real estate prices – along with their associated derivatives – became so extravagant it simply wasn’t possible for the trend to continue. Obviously they couldn’t in the long term and we saw the inevitable correction.
The beauty of Buffett’s model was he created a formula with two variables that can give investors a snapshot on the price/value relationship between equities and the GDP. The formula simply adds up the total market cap of all publicly traded equities and divides it by the Gross Domestic Product. The formula as of August 2020 was such:
Total Market Index ($34.7 T USD)
_______________________________ = 1.79
Gross Domestic Product ($19.4 T USD)
In this formula, 0.50 - 0.74 signifies the markets are significantly undervalued in relationship to the GDP, 0.75 - 0.89 the markets are undervalued, 0.90 - 1.10 the markets are fairly valued, 1.11 - 1.29 the markets are overvalued, >1.30 the markets are significantly overvalued. As you can see, the Buffett Method estimates the markets - at this time - are at nose bleed levels. According to this method, the markets have reached levels we haven’t seen since 1929 and 1999. Utilizing these numbers, the Buffett method projects a -2.9% annual return over the next decade. Not a particularly uplifting analysis.
The Bogle Method
John “Jack” Bogle was the founder of the modern index fund and also Vanguard, the index fund behemoth. His model was an attempt to predict what stock returns would look like out over the next decade. Bogle’s method had three factors that made up his calculation.
The Dividend Rate: According to Morningstar and the Hartford funds, since 1970 roughly 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends. Let’s use an example of Person A and Person B starting to invest in 1970 with $10,000. Person A keep the dividends while Person B reinvests all dividends. The difference? By 2019 Person A has a total of $350,144 in their account. Person B has $1,626,370 in their account. Now that’s an example of the power of dividends and reinvestment. Hence dividends make up the first factor in Bogle’s formula.
The Projected Earnings Growth Rate: This variable is a little tricky because the smallest change can make a huge difference in your end results. But historically earnings growth has been roughly 5%. That includes some of the best years in the United States’ economic history. So let’s reduce that to a far more conservative 3% (you can of course make it whatever you want, but keep in mind for the formula to be helpful your estimates should be realistic.
Change in P/E Ratio:
The first two numbers used in Bogle’s formula are what he called the “investment components” of your total investment return. The third factor is not based on the investment, but rather on the investor. Bogle wants to know what an investor is willing to pay for a dollar’s worth of earnings. This is calculated by using the change in the P/E ratio. For instance, if an investor looks to purchase an investment and Stock A trades at a P/E of 9 and Stock B trades at a P/E of 22, then the investor is paying $9 for $1 in earnings in Stock A and $22 for $1 in earnings in Stock B. Thus stock B is trading at a significantly higher premium than Stock A. What Bogle does is he applies this to the entire market – meaning what was the P/E ratio at the beginning of the period and what would you reasonably expect it to be at the end. Here’s how the formula looked for the 2000s.
Dividend (1.2%) + Earnings Growth (0.8%) + Change in P/E (-3.2%) = -1.2%
Let’s apply this formula to see what we think might be equity returns over the next 10 years.
S&P500 Dividend Rate + Earnings Growth (Est) + Change in P/E (Est)
1.8% (July 2020) 2.4% -7.5% = - 3.3%
The dividend rate is a set number published monthly by Standard & Poors. There’s no fudging that number. Earnings growth is an estimate based on historical data. After a 10 year bull market - then a sudden crash caused by COVID-19 - we think earnings growth will be considerably muted over the next decade. Finally, stocks are trading at a 29.2 P/E ratio. This has only been exceeded three times - twice during the late 90’s tech bubble and once during the 2007-2009 credit crisis. Stocks weren’t even this expensive before the 1929 crash. Consequently, we thing the P/E ratio will have to drop dramatically to justify just 2.4% earnings growth. The Bogle Method lines up with the Buffett method pretty closely by projecting a -3.3% return over the next decade versus the -2.9% return projected by the Buffett method.
When an Unstoppable Force Meets an Immovable Object
So what happens when the estimated return formulas (driven by economic data) are completely at odds with market returns? For instance, in the second quarter of 2020 – due to the COVID pandemic – the US GDP shrank by 33%. This was the largest decrease since the Great Depression. Conversely, the S&P 500 generated a 19.1% return for the same quarter (it added another 5.5% in July 2020).
On one hand, we have an extremely volatile economy still fighting a raging pandemic. On the other is markets that seem to reach new highs on a daily or weekly basis. What is an investor to make of this? Do you invest or stay on the sidelines? We think a value investor must approach the problem with several rules in mind.
Whether Bull or Bear, Think Defensively
In times like this, when the market seems entirely disconnected from the economy, an investor (whether individual or professional) must maintain the fundamental concept that defines a great value investor - always, always protect to the downside. It can’t be said enough – recovering from a 40% drop requires a 67% gain. A 50% loss requires a 100% gain. More importantly, there is no coming back when you sell a paper loss and it becomes a real loss.
Nintai Investments average portfolio has done quite well against the market indexes over the year-to-date as well as 1 year and 3 years. Our outperformance has a great amount to do with our returns in Q4 2018 (-2.78% for Nintai Investment portfolios versus -14.33% for S&P 500TR) and Q1 2020 (-12.25% for Nintai Investment portfolios versus -21.08% for S&P 500TR). By keeping an eye out for the downside, we have found returns will do fine over the long-term.
Use All Tools Available to Us Now
Fifty years ago, very few investors (individual or professional) had ever heard of behavioral finance. There has been an explosion in the last decade in our understanding about how the human mind thinks about investing, making and losing money, decision making during stressful times, etc. Almost none of it leads us to be better investors. In fact, the field of behavioral finance is largely about avoiding emotional responses and biases in our decision making. Spending a small amount of time understanding the topic and building steps into your investment decision making process can pay large dividends over the long term.
Contrarian Thinking is Even Rarer Today
In 2009 index funds made up roughly 25% of all mutual fund assets. That’s now nearly 50% according to Morningstar. This growth of indexing has taken the art form of stock selection out of the hands of personal and professional investors and simply allowing computers and algorithms to make stock selections. At Nintai Investments, this has created an increasingly large gap between stocks that meet the needs of index funds and those that fall through the cracks. We think – over the long term – it’s never been (other than the 30’s and 40s of the last century) a better time to be an active manager in the value investment field. As jumbo cap companies take up an increasing amount of investment dollars (simply because they must be owned in most index funds), we find there are many small cap gems that are passed over and are diamonds in the rough ready to b scooped up. At Nintai, we strongly believe our performance reflects this type of thinking and success.
At the time of writing this article (August 2020), the S&P 500 was on the verge of setting a new high on a near weekly basis. At the same time, roughly 175,000 Americans have died of the corona virus, there has been roughly 5.7 million cases nationwide, and roughly 1,000 additional patients die per day. In the race for a cure, citizens seem to be blissfully ignorant of how long it takes to develop a vaccine, how effective that vaccine will be, and whether we will be looking at a second wave of infections combined with the standard influenza later this fall and winter. In July, the unemployment rate declined by 0.9 percentage point to 10.2 percent, and the number of unemployed persons fell by 1.4 million to 16.3 million. Despite declines over the past 3 months, these measures are up by 6.7 percentage points and 10.6 million - respectively - since February. Huge swaths of the US economy - retail, restaurants, airlines, etc. - continue to face ominous reports that many of their brethren are simply not coming back (In New York City, it is estimated nearly one out of every three restaurants will not reopen their doors).
With all of this going on, it’s hard to get your arms around the enormous gains made in the markets. Are investors simply ignorant, dumb or simply wildly optimistic? It’s hard to know because every bubble or pricey market is unique. There are so many variables it’s hard to build a model that takes everything into account. All that said, we try to keep our thinking straightforward and simple as possible. At Nintai, we think risks far outweigh rewards - this includes earnings growth, interest rates, debt levels, and general economic trends such as our politico-economic relations with China and the EU. We will continue to do what we do best by locating the highest quality companies that have been overlooked by the indexing world and trading at cheap prices relative to our estimated intrinsic value. We will also look for companies with rock solid financials with characteristics such as no debt, high free cash flow margins, and outstanding return on capital. Finally, we will continue to hold lots of dry powder until opportunities come along. We will work hard to avoid any unforced errors and not be rattled by bad news. In the final analysis, when markets are seemingly out of touch with the economy, its best to review your current holdings, work hard on your watch list and be patient. Anything else would be doing yourself and your investors a grave disservice.
“By then I knew one thing for certain: the Detroit-based auto industry was a debt- enfeebled house of cards that had been a Wall Street playpen of deal making and LBOs for years…it needed nothing so much as a cold bath of free market house cleaning, along with a drastic rollback of the preposterous $100,000 per year cost of UAW jobs.”
- David Stockman
I’ve been involved in some way in the capitalistic system of the United States since I was 9 years old and delivered 112 newspapers on a route which I biked 6 days a week and collected exactly $21.60 in wages and somewhere between $20 - $30 in tips each week. It was a great experience in learning the core concepts of capitalism - seeing the conflict between management and labor (I couldn’t see why we weren’t paid more on Saturdays as the newspapers weighed exactly 1.8 times more than the other 5 days and it took twice as long to deliver that day’s papers), the importance of customer service and quality (delivering on time and in the location requested by customers meant better tips), and the power of a duopoly (there were only two newspapers in our town - the Concord Monitor and the Manchester Union Leader). My parents didn’t earn a lot of money in those days and sometimes borrowed from my tip jar to help pay the bills. They then scrupulously payed back the exact amount borrowed. I also learned that when Polonius said “neither a borrower or lender be” what he really meant was if you need to be one - be a lender.
Over time, my understanding of the capitalistic system became richer, deeper, and more profound as I helped found a small private-equity firm after earning my undergraduate degree and partnering with two friends who had both money and political connections. By the time I started Nintai Partners I had a pretty good understanding of the nature of competition, profit & loss, the power and danger of leverage, and the strength associated with free cash flow. As I transferred this knowledge from being the CEO of a boutique consulting firm to starting Nintai Investments LLC (a small registered investment advisory firm), I felt I had a very broad – and yet focused – knowledge on the type of company that I believe makes a powerful long-term investment prospect. I operated in this capitalistic system making
enough profits to help live a life filled with adventure, experience, and more than enough benefits to live quite happily.
My trip down memory lane isn’t the first sign of me losing my mind (at least I don’t think so!). Rather, I bring all this up as I’ve been giving a lot of thought of where my industry - which has been so good to me and so many others - is headed and what changes have taken place over the past 20 - 25 years. As I’ve moved full time into a role as a CEO of an investment advisory firm as well as chief investment officer, I’ve given a lot of thought about my experiences and what they taught me for being a quality investment manager.
In my article last week (“Quality in Investing – Part 2”, August 1 2020. It can be found here.), I ended my discussion about finding quality not just in your portfolio holding but also in your financial advisor. Since my first day as an investment manager I’ve held one tenet as the bedrock of my business values - I have a fiduciary responsibility to my investment partners. This simply means that my actions must take into account my clients first, and Nintai Investments’ needs second. Fiduciary responsibility can be a flexible concept. Some see how much (0.75% or 2%) you charge your clients while others see how (% of assets or 2/20) you charge them as the litmus test for fiduciary responsibility. Others see quality management as investing your own money as you do your clients’ (or as Warren Buffett said, “eating your own cooking” as Nintai does). There are many, many ways to achieve what appears to be a fair and equitable model. At Nintai, we think there are a set of core values that make up good fiduciary guidance and policy. I thought I’d share these with you today.
One of the questions you have to ask from the onset of opening your doors - and going forward until you close those doors - is the amount you will charge your investment partners for your services. The industry’s view on this has changed dramatically since the onset of “Bogles Folly” - Vanguard’s first index fund. Passive indexing means just that - there is no active component to managing client funds. An index fund simply follows its respective index (the S&P 500 TR, the Russell 2000, etc.) and rebalances once a year. The fees to manage such a fund are miniscule - in today’s world sometimes being less than 0.1% of AUM. It’s really only since around 2000 and the great “Tech Bubble” that saw fees began their dramatic descent. For instance, from 1979 - 1999 the average weighted expense ratio (with sales loads) increased from 1.50% to 1.52%. Since 2000, index funds have hammered the active fund management industry. The average annual management fee for actively managed funds from 2000 – 2019 has dropped 1.52% to 0.74%. Actively managed fund fees have been cut in half in the last 20 years. Overall, you’d think this would be a great trend for those invested in actively managed funds. But not so fast! During the period from 2000 - 2019, the total amount of revenues paid by investors (front end, back end, 12b-1, management fees, etc.) to mutual funds skyrocketed from roughly $45B in 2000 to nearly $107B in 2019. So much for cutting costs in half! In his classic book “The Battle for the Soul of Capitalism”, Jack Bogle writes that during 1997 – 2002 alone, the total revenues paid by investors to investment banking and brokerage firms exceeded $1 trillion, and payments to mutual funds exceeded $275 billion.
The arithmetic is simple in calculation and staggering in its impact. Let’s assume an investor starts out by investing $1M in a vanilla mutual fund that earns 6% annually. Let’s also assume a very helpful family member pays the small 0.1% management fee as an incentive to save. That $1M – with no fees – over 25 years would earn $330,000. Added to your initial $100,000 investment you’d have $430,000. Let assume life went another direction and no generous relative showed up and you invested your $100,000 in a fund that charged 2% (that’s not unreasonable for an active managed fund when you include all-in costs such as trading, differences in bid-ask, etc.). Paying those fees you’d earn $170,000. Added to your initial $100,000 investment you’d end up with $270,000. That’s quite a difference from $430,000. A 40% difference actually. So a 2% difference in fees can eat up 40% of your returns. That’s a lot of vacations, anniversary gifts, or heavens forbid medical care if you need it. Where are the customers’ yachts indeed? Where does all this money come from and where does it go? It’s pretty simple. Customers pay the fees and mutual fund executives and fund managers see the profits. As many of us know, paying all these fees doesn’t assure quality or outperformance. Amazingly, even after all these costs the vast majority of managers underperform a simple index fund. In investment management, you rarely get what you pay for when it comes to long-term returns.
At Nintai Investments, we charge 0.75% of all assets under management. We have an internal policy that should an individual’s personal investment account underperform its proxy (generally the Russell 2000 or S&P 500TR), for two straight years we reduce our management fee to 0.50%. After three years of underperformance we reduce the fee to 0.25%. If longer, it’s likely the Board will suggest we look for a career outside investment management!
We’ve all seen the disclaimer (usually in a ridiculously small font) that “past results are no guarantee of future returns” or something of the like. It’s probably one of the most accurate statements you’ll read in all your interactions with Wall Street. Because it is true. As an investment manager myself I have no idea what my returns will be in 1 year, 3 years, or 5 years. I certainly hope they will outperform the greater markets. But in reality I have no idea. Being honest about that to both your investors and yourself must be a bedrock intellectual foundation throughout your investment career. Bad things happen to both parties when a manager loses sight of this. Scenarios from simple pig-headed investment strategies to Bernie Madoff debacles are the inevitable by-product of those who are convinced they know more - and that they will always outperform - the markets in general.
Another critical trait in the investment returns of the great investors is the recognition that if you can avoid the truly horrific downturns (particularly those that permanently impair capital) the upside will take care of itself. At Nintai Investments, we spend an extraordinary amount of time looking for companies that meet our quality criteria (see our two-part series “Quality in Investing” published earlier in July/August 2020) that help us avoid significant drawdowns. If we can find companies with fortress-like balance sheets, strong free cash flow, deep competitive moats and trading at reasonable prices, then we are comfortable (but it is not guaranteed!) that the company can generate adequate returns over the next 10 - 20 years.
Nintai’s clients have been fortunate in that we have - on average - had investment partner portfolios beat the S&P 500TR by roughly 16% since inception and the Russell 2000 (a closer proxy) by 24% since inception. As we are required to say (and understand all too clearly), past performance is no guarantee of future returns.
For decades, the practice of many money managers was to issue an annual letter (or God forbid a quarterly letter!) that briefly outlined fund performance (usually skimpy in numbers or so complicated they were impossible to understand, but no happy medium). The manager would then spend a vast amount of the report pontificating on where the economy was going, what tax laws were going to change, and finishing with some inexecrable use of industry jargon like “synthetic options triple witching”. Overall, it was a report useful mostly for starting a wood fire or when you run short of vital bathroom supplies.
At Nintai we take a different approach. We like to provide our investment partners with content we’d like to receive ourselves if we were in their shoes. This includes investment cases and valuation spreadsheets on each of our portfolio holdings, quarterly reports which explain – in plain terms – how their portfolios performed, what went right, and more importantly, what went wrong. We want our investment partners to feel just that – partners in making investment decisions. If an investment manager can’t describe why they own a holding, how much that holding is worth, or discuss the major characteristics of the holding (products, services, competition, markets, etc.) then they really aren’t managing anything, other than collecting their fees.
When individuals discuss ethics, they generally are referring to the investment managers personal ethics – do they have any sanctions or settlements in their past, have they stolen from their clients, etc. At Nintai, we believe that’s important. But equally important is the ethics of both the company and management outside the business. We believe strongly ethics means a positive and active engagement by management in their community, supporting people, organizations (even animals) in need, or helping those who simply need a hand up. It also means the company actively supports charitable giving. We live and work in a system - and country - that has provided us with enormous opportunity. Our corporate ethics requires us to help those who don’t have the same advantages or opportunities. So while we pledge to provide ethical management in our investment business, we also pledge to be ethical in our compensation to support staff, to our vendors who do the hundreds of things that make our business run, and to regulators who have provided us with voluntary guidance and assistance. Next time you think of the ethics of an investment manager, remember they don’t operate in a bubble, or only work with you. Make sure they provide a global view of doing the right thing. It makes all of us better workers, citizens, and human beings on an increasingly integrated planet.
I’ve given a lot of thought to the David Stockman quote at the beginning of this article. Here was a man who had everything in the world and yet as a senior partner at a private equity company participated in the very process he so aggrievedly writes about. He is right about nearly everything he discusses without understanding the irony that he helped create and engage in this very activity and helped design the system. His work at Blackstone – and later Heartland – is a record of all the characteristics one should avoid in an investment manager. The fee structure of Heartland Industrial Partners assured the winning hands were weighted heavily against the investor. His returns were abysmal leading to Steve Schwarzman (CEO of Blackstone) cutting him off from investment deals . His record was even worse at Heartland leading to a $340M loss in in its Collins & Aikman investment. His ethics certainly took a hit when federal prosecutors indicted Stockman and the SEC brought civil charges. Both were related to “a scheme to defraud Collins & Aikman's investors, banks and creditors by manipulating C&A's reported revenues and earnings.” In fairness, it should be noted the federal prosecutors dropped their charges in 2009.
When one is looking for quality in an investment manager, I feel strongly the individual should have traits more in alignment with Nintai’s than Mr. Stockman’s. Fees and returns should prove the manager has both the skills and emotions to be a successful long-term investor. Communications between the investor and manager should be clear and concise discussing returns and other issues in a manner where the investor comes away satisfied they know everything necessary to explain their portfolio. Finally, the manager and his/her organization should have a deeply ethical framework in their personal and professional actions and decision making. Finding such a manager might be difficult, but certainly possible. There are many outstanding investors and investment teams who meet these criteria. Choosing one will be one of the best investment decisions you will ever make.
 “The Great Deformation: The Corruption of Capitalism in America”, David Stockman, PublicAffairs, Perseus Books Group, 2013
 Securities and Exchange Commission, Division of Investment Management, “ Report on Mutual Fund Fees and Expenses”, December 2000
 “The Battle for the Soul of Capitalism”, John C. Bogle, Yale University Press, 2006, page 11
 A special thanks to Vanguard for the basis of this example.
Low quality investment opportunities are actually quite easy to stumble on. Having a company implode from over indebtedness, corporate fraud, or simple gross incompetence is remarkably common in today’s “go-go” easy money markets. Finding quality - outstanding management, pristine balance sheets, deep competitive moats, and high customer satisfaction - is actually quite difficult.
At Nintai Investments, we utilize roughly 16 measures that help us create a list of quality companies based financial, operational, strategic, market-based, and competitive characteristics. This leaves us with 41 of 3,671 (1.12%) total United States publicly traded companies, 305 of 17,602 (0.23%) total Asian publicly traded companies, and 88 of 8300 (0.49%) total European publicly traded companies. As one can see pretty quickly, the amount of companies that identify as quality is less than 1% world-wide.
Last week I reviewed what we defined as poor quality at Nintai Investments. One might think that high-quality companies simply feature the opposite traits of poor-quality companies, but that’s not entirely accurate. A quality company has characteristics unique to their category - in much the same way as poor-quality have their own. As Tolstoy wrote, “All happy families are alike; each unhappy family is unhappy in its own way”.
The kind of qualities we look for in at Nintai Investments fall into four key buckets. These include:
Excellence in Management: We look for management that have a vested interest in how the company performs (by purchasing shares in the open market, not stock option grants), provide a history of outstanding management candidates (similar to GE’s top 3 candidates for CEO - when one was chosen and the other two were considered outstanding managers in their own right and are expected to leave the company as CEO of another firm), deeply understand they work for both shareholders and their respective community, and finally achieve outstanding results in both operational measures (ROE, ROA) and strategic measures (ROIC, FCF margins). Most important than all of these, we look for management with a clear moral compass. This presents itself in forbidding financial transactions that profit management (such as renting a building they own directly or through corporate ownership), not using off-balance sheet gimmicks (such as special investment vehicles - SIVs), forbidding any type of family interactions with the business (such as placing family members on the Board), and the use of stock options as a transfer of wealth from corporate coffers to management’s pocket book. We feel strongly the fish rots from the head and it won’t be long before that rot works its way downwards.
Create Deep External Facing and Inward looking Moats: In both good times and bad, we look for managers who can create exceptional defensive moats that can keep competitors at bay as well as drive significant value for their customers creating a moat that keeps them from seeking out replacement products and services. Sometimes managers can spend blood and capital digging a defensive moat but they spend little time listening to their customers’ needs. This type of one-way thinking can create significant weaknesses in looking for new offensive opportunities in existing customers, markets, or adjacent markets. An inward looking moat means management has developed the means to make their products and services essential to their customers’ strategy and operations. This type of in-depth value - for lack of a better term “the tape worm approach” - demands a nearly constant improvement in quality, scope of offering, and new products/services on a daily basis. It’s hard to find management and corporate structures that have the drive to approach each work day as means to radically improve their value to their clients. A great example of this is Veeva’s constant evolution of products and services in the biotechnology industry. In the past 5 years the company has launched 116 new offerings and made over 1200 changes to existing offerings. That’s a launch or change nearly every 2 days.
Creates a Rock Solid Financial Castle: At Nintai Investments, we look for investment opportunities that can survive the most violent shock to its foundations. This can include a sudden elimination of access to any capital (the type of shock that overcame the financial markets in 2007 - 2009), a rapid increase/decrease in the Federal Reserves’ prime rate, or the LTCM failure demanding government intervention to stave off financial disaster. All of these led to some form of catastrophic market failure. We look for a company that is reliant upon no one or no institution for survival or financial bailout in a time of market crisis. This requires a balance sheet with little to no debt (or the ability to pay 100% of liabilities with 1 year of free cash flow), high free cash flow yield, and outstanding returns on capital, equity, and assets. This demands we focus on cash rather than earnings because we believe in Alfred Rappaports’s “profits are an opinion, cash is a fact”. We recognize its is very difficult to sniff out financial shenanigans if management is intent on cheating and the consequences be damned. But we think keeping a hawk eye on cash gives us the best chance to avoid partnering with an unethical management team.
A Singular Focus on Market Domination: We look for companies that seek to wholly dominate a market so large that the runway for growth is roughly 15 – 20 years. We want to know with some assurance the company will be in the same markets (or adjacent ones) dominating them with high market share, outstanding returns, and great gross and net margins for an extended period of time. Obviously it is difficult to find a company that operates in a monopoly or duopoly environment at a discount to our estimated intrinsic value, but it is possible in the micro to small-cap markets. Examples of this include iRadimed (IRMD), Computer Modelling Group (CMDXF), and Veeva (VEEV). Finding these hidden gems – which requires an awful lot of research and industry knowledge - can successfully drive investment returns for decades. We’ve often stated that two companies - Factset Research (FDS) and Manhattan Associates (MANH) - drove nearly 80% of the Nintai Partner’s internal investment fund’s outperformance. We still believe a combination of these gems with some larger companies that meet our criteria can provide outperformance with less risk.
A Final Note
I would be remiss to say that successful investing isn’t about just quality companies. We firmly believe your financial investment advisors core intellectual (and emotional) models matter equally. These models should include acting on facts rather than emotions (in both bull and bear markets), always being intellectually open to new ideas, new industries, and new companies, being humble about your success and even more humble about failures, and reveling in diagnosing and discussing investment screw-ups. I’ve found over the years the latter is one of the greatest distinctions between Nintai and our competitors. While we have the same animal spirits as others in this field and are driven by our competition, we actually enjoy writing about our mistakes. Perhaps enjoy is too strong a word (after all we hate losing our investment partners’ hard earned capital), but we find discussing these occasional debacles helps ground our egos and forces us to better understand what happened, why it happened, and how to prevent it from happening again. So while quality investments drive returns, an investment manager should have qualities of excellence as well.
We look forward to hearing your thoughts and comments.
DISCLOSURE: Nintai Investments LLC has positions in iRadimed, Computer Modelling Group, Veeva, and Manhattan Associates in either or both business investment accounts or individual investment partner accounts.
During the dog days of summer, we usually move everything outside, work on the deck, and suck up the summer sun. We take the down time to evaluate roughly one-half to two-thirds of our portfolio holdings. This includes taking apart the business case, looking at the competitive markets, diving into new products and services, and completing a truly deep dive on the company financials. We do this for two reasons – one is we want be assured each and every portfolio holding can still be considered very high quality. Second, we want to look back at our projections (strategic, operational, and financial) and be assured our assumptions are valid, valuations have not decreased (hopefully increased!), and the share price has not gotten too far ahead of our estimated intrinsic value.
For some of our investment partners, these revised investment cases and valuation spreadsheets are like Christmas in July and August. For others, they go the pile to read after a relaxing summer vacation. We’re fine with either. We simply want our partners to have as much knowledge as we would like if we were in their shoes.
I thought I’d break this in to two separate articles. The first part is reviewing what we would consider obstacles in defining quality for a possible investment. This isn’t a complete list. It isn’t even a full description of each item on this list. But I wanted to make it as simple as possible for investors to understand why poor quality can impair your returns. The second part is describing what we consider quality at Nintai Investments. Some readers will say “Oh God. I’ve heard all this before”. If you are a long term reader of my writing then you probably have. As Aristotle said “We are what we repeatedly do. Excellence, then, is not an act, but a habit”. Nintai Investments (and its predecessor Nintai Partners) would have achieved very little as a company or an investment manager if we didn’t constantly hammer away on the concept of value. Looking through my last 100 articles, the second most common word was “quality” – coming up a total of 232 times. (“Value” was the number one word cited 431 times).
In some ways it’s much easier to identify what’s NOT quality than defining what IS quality. Some attributes that make up a non-quality company are the following.
Excess Goodwill: In almost any acquisition, the agreement between acquiree and acquirer involves a certain amount of negotiating that leads to overpayment. At Nintai Investments we recognize that’s part of the animal spirits that make up the capitalistic system. Having said that, I can remember a management team that completed $23.6B in acquisitions from 1998-2002. Over the period of 2003 – 2006 the company wrote off $23.2B of those acquisitions (a whopping 99%!). Management claimed this was a victimless crime – acquisitions were made nearly entirely in stock so who was harmed? Let me just say that when management can’t see the damage from the the evaporation of over 65% of total assets on the balance sheet, then they certainly don’t represent quality in our books.
Excessive Stock-Based Compensation: A cousin of the goodwill excess, is the gross overuse of stock-based compensation. Again, many claim this is a victimless crime until the payments are expensed under the cash flow statements. This snaps many heads around. For many companies, this type of executive compensation is simply a transfer of wealth as the company announces billions in stock buybacks while simply seeing those very stocks slide out the side door as enormous pay packages for executives. When you see a company announce a $500M stock buy back and total shares outstanding either remain flat (or worse increases) then it’s a good chance this is not an excellent company.
WACC Exceeds ROIC: Don’t get hung up on the acronyms in this section. This simply means the company’s return on capital is less than its cost of capital. Let’s use a simple example to highlight this problem. Imagine you see that steak is on sale by 8% this week at the supermarket. Excited at the thought of eating steak all week, you whip out your credit card and purchase $100 worth of beautiful Delmonicos. You smile at the 8% in savings. Yet consider the other end of the transaction. The rate you pay your credit card is 24%. So while you’ve saved that 8%, the cost of that return is 24%. The formula is simple: 8% - 24% = -16%. Your return on invested capital has been far exceeded by your weighted average cost of capital. This type of disastrous financial model is sometimes explained away by the famous (or infamous) line – “don’t worry we’ll make it up on volume”. Any company that shares similarities to this example is certainly not a quality company.
Customer Churn/Turnover is in the Double Digits: A company that relies on constant turnover and finding new customers is highly likely to be a low-margin business with no moat. Some businesses are notorious for churn which further drives down margins. Take for example wireless phone companies. You constantly hear of dissatisfied customers, switching from Sprint, to Verizon Wireless, to US Cellular, to AT&T Wireless. It’s a never-ending movement seeking the Shangra-La of coverage with constant rebate offers, and fine print that can only be found on the seventh level of Hell.
The Company’s Product Is A Nice-to-Have: The road to personal wealth is littered with the wreck of thousands of businesses that were the “new hot thing” until they weren’t. You’ve probable owned one of these in either your personal or professional lives. These are products or services you swear you can’t survive without until the next recession hits and you have to choose between keeping the lights on or having that $59/month answering service. The one that provides an $8/hour operator with the most gorgeous Scots accent and gives your company that “international” flavor. Pretty cool when you are rolling in dough, but the first to go in tough times. The company’s price falls 85% before filing for bankruptcy late Friday night when it’s impossible to save even the smallest part of your investment.
Capital is Essential to Business Operations: The first trading under the buttonwood tree on Wall Street was designed to meet the needs that all capital markets provide – creating access to capital. Well run markets and companies will dip their toes (hell…even their entire lower waist) to obtain capital to increase production, complete an acquisition, or extend operations overseas. This financing can be in either debt or equity in structure. The trouble begins when debt (or issuance of equity) becomes necessary simply to keep the doors open. When a holding maxes out its credit line or raises $2B in convertible debt to “explore strategic solutions”, this certainly isn’t a quality company.
There are many ways to make money on Wall Street. Since its first trades in the 18th century, the New York Stock Exchange has seen hundreds – if not thousands – of techniques used to make money in the buying and selling of equities. Since then we’ve had an explosion in the number of exchanges along with the types of things to trade ranging from corn futures to collaterized mortgage securities. At Nintai Investments, we’ve tried to keep our investment model simple and limited in its adoption of risk. We don’t trade derivatives in any way, shape or form, we don’t short, we don’t trade debt, and we avoid anything but the highest quality in companies. This article has briefly discussed what is not quality. The next article will discuss the qualities we look for in an investment - and more importantly – why its critical to our long term success as investment managers. Please feel free to send in any comments or questions and we will try to reply as soon as possible. We hope everyone finds a way to stay cool.
Mr. Macpherson is the Chief Investment Officer and Managing Director of Nintai Investments LLC.