Michael Price Lecture, A Discussion on Value Investing, at Fordham Law School -12/9/2015

First met Mario Gabelli while working on International Mining, which held seven stocks, in
1977/78. Fresno, Tantalum Corporation of America, Molycorp (almost bankrupt today), etc.
controlled by Lou Arthur. Someone comes by and takes the big spreadsheet of my desk - it was
Mario (Price and Gabelli tell this story in the book Investment Gurus by Peter Tanous on pages
35 and 77). Mario recently sent me a copy of his report on International Mining in 1977/1978.
We have been like ice dancers finding value in the market over the years.
Value investing is simple. Works over time. Problem is people call themselves value investors
and they aren't. Value investors don't short stocks. Speculators short stocks. Value investors will
engage in arbitrage and will have short positions that way, but value investors do not short.
Value investors typically don't buy levered companies. Hedge funds have incentives to purchase
levered assets.
I'm on endowment committees that invest in funds. People will claim to be value investors and
when I ask what their top three positions are they say Google or Apple. I will ask how many
shares are outstanding and these money managers won't know. Layne Christensen (points to
Mario) - he'd know how many shares they have - 19.8M. (GAMCO has a stake).
The worlds a simple place. Wall Street invents things and makes it complicated. They have to
create things to buy. Wall Street is in the business of generating fees. Our job as value investors
is to pick through the paper Wall Street creates, bonds or stocks, and find those that are too
cheap. They get 7% on underwriting fees, 3% on M&A.
Look at MLP blowups. REITs are next. Not easy to sort out things. Have to wait for Wall Street
to present deals below intrinsic value. Wall Street won't do research on certain things. Want to
go where the Street isn't looking. We look to bad earnings, dividend omissions - not record
earnings and dividend raises.
The MLP crash is a great value vs. Wall Street example. Low interest rates attract yield pigs.
What happens to a security in low interest rate environment? Wall Street bids them well above
intrinsic value because of the yield. Retail investors bid them up. They invent funds to invest in
these assets. How many billions are created? MLPs now down 40%. Oil and gas gets a toll to
transport oil and gas. Kinder Morgan cut the dividend like 80%. What happens to the stocks
when they cut the dividend from 8% to 2%? They sell. Questions about debt to service, etc., so
debt trades down. Without yield pigs propping prices up they may now be interesting.
On REITs: Real estate is illiquid. With large amounts of buildings it could take years to sell the
assets. You may have vacancies, and the REIT's ability to service the dividend erodes. Then you
may be able to buy below intrinsic net asset value.
We wait for litigation, bankruptcies. Things like that. Intrinsic value is not the present value of
future cash flows. It's what a rational businessman would pay for the entire business. We want to
pay 30% less than that - that's margin of safety.

We have three jobs everyday:

1. Work on what we own. Analysts show intrinsic value - Sum of the parts minus debt and all
liabilities. We can drill down on what it's worth. We look at what people we respect do. Icahn
bought more Cheniere (LNG), we looked at it. Too much debt for us.
2. React to news. Hospira - went from $50 to $28 because the FDA shut a plant down. Lost $9B
of value. We did the research, found it may cost $1-$1.5B to rebuild plant. Then they sell to
Pfizer at $90. We consult lawyers, read releases. When it went to $28 the growth guys were
selling. We knew it wouldn't grow for the next two years.
Now MLP guys are going to value investors. Always had problems with MLPs - they're capital
intensive businesses. How are you going to raise capital for capex? Now have to sell stock below
NAV. Sometimes they'll have rights offerings - we love rights offerings. Forced to sell stock to
pay debts, sometimes asset sales; but asset sales can only last so long.
Rights offerings stocks high, then there's some uncertainty on the financing that drives the
stock down. They announce the offering and the stock opens higher now that the financial risk is
gone.
3. Come up with new ideas - but there's no time for that after the first two (jokingly).
So many events - makes it fun. Dow Chemical announced today - they did one thing right, hired
the right guy. That's what's fun.
When we wake up - ask where can I find value? Not what Wall Street is selling. We want
meetings no one attends. John Templeton would invest in South Korea because no one would
invest. European companies said we were the first American analysts they met. They had
conservative accounting that led to a ton of hidden assets. We had a ball for 4-5 years.
Oil and gas, metals and mining, and commodities are all very interesting today. Were on the
verge of a slew of energy bankruptcies. 100s of bonds trading for 25-35. Most of the time
companies go bankrupt because of too much debt. Sometimes fraud, etc., but mostly because of
debt. Cheniere, Chesapeake the debt is really equity and the equity is a call.
Have $10B of assets, $8B of debt with $2.5B of cash flow with oil at $80 now only have $1B
or $800M of cash flow to service $8B of debt you cant service it.
California Resources - $6/7B of debt, they have to do something. Cant even give away
California energy assets theyre the most restrictive in terms of environmentalists. Wall Street
sells senior unsecured bonds - $6B of it to people who gobbled it up, now at $0.40. Maybe worth
$5B, but with the debt at $3.2B, its interesting.
Value investors buy distressed to create value. Debts tricky, but can be the way to play to
create new company asset values.

In the 70s when I was starting out, it was railroad bonds. (I missed the Company he started
talking about) You had $10M of bonds trading at a nickel. Backed by warehouses, railroads
you could melt down and sell, rail cars figured it was worth par plus the accrued interest.
Can trace senior unsecured back to Milken.
Q&A:
Q: Valuation is an art and science two investors could vary on what they think intrinsic value
is. Can you share thoughts on your valuation process?
A: If we ask the right questions, go to original sources of information (not inside information)
whatever you can dream up you can figure out what a Company is worth. Saying a 12 P/E
stock will go to 15 P/E isnt value. Is the cash off-shore? Then its worth $0.70-80 cents on the
dollar. People take Apple at 100%. I dont. Youll have to repatriate that cash. Maybe you get a
tax holiday. Is the PPE properly depreciated? Brand names? Could be worth a lot, could be
worthless. Goodwill is zero. Max Heine always put it at zero. Liabilities are 100 cents on the
dollar. Look for pension, legal, environmental, etc. Do the work. Dig.
Q: Chipotle (CMG) a buy?
A: Too expensive. I dont know. Ruths Chris had too much debt; read they were selling
buildings. We bought into the rights offering. PE fund that owned them couldnt buy since that
specific fund was fully invested. We bought the rights. We bought at $2.50, opened up at $5,
now at $17. Restaurant stocks usually not value unless theres real estate. Unlikely to go there
(meaning CMG).
Q: What about Yahoo?
A: Visteon (VC) was a domestic auto parts company that we owned. (I missed some comments
here, didnt capture his point with the Visteon example). Hard to kick the tires in China
Chinese dont have the governance we do. Dont have the same culture. I dont trust Alibaba
do I need to be there? Even if you try to arb you wont get back what you could use to cover
your short. VMware was the same thing. You get the tracking stock. You dont need to go there.
Dont know how to value Yahoos core business. You see Yahoo all over CNBC, the papers
its all worthless (the news, not the Company).
Q: Views on activists?
A: MLPs have GPs, you are the LP. Should be MVLP Very limited partner. You have no
rights. Thats why MLPs could get cheaper. Activists helpful for the system yes, some do just
want to get their name out there and raise money for their funds, but mostly helpful.
Q: Thougts on Kinder Morgan?

A: Cutting the dividend helps service the debt. Theyre trying to address the $42B of debt. This
country doesnt run without Kinder Morgan. Its worth more than $42B. They have very
valuable assets.
Q: Achilles heel?
A: You have to know asset values. Have to know your personality. Emotion is a negative. You
have to be cold.
Q: How do you deal with selling early?
A: We sell early all of the time. We often sit on a lot of cash. We sell at intrinsic value. Well be
wrong. Dont want to be wrong more than 10-20% of the time. Weve owned stocks five times.
National Presto (NPK) owned in 1975, own today. Whats the NAV of National Presto?
Terrible to say, we buy when theres one war going on, sell at two.
Q (from Mario Gabelli): Where would you go if you were starting out today? Sell-side, buyside? Mutual fund, hedge fund, private equity?
A: Buy side is better than the sell-side. Any of those. Want to be trained by ethical, smart people.
Theres one guy out there, quite successful, trained by Boesky and (missed the second guy).
Thats his resume.
All these guys evolve mutual fund guys go to hedge funds to get paid. A lot of people
slumming along in mutual fund life like Mario (said this jokingly).
Q: Position sizing?
A: In mutual fund world, the max was 5%. Had 100, Mario must have 300, its too much. Today
have 80, still too much. The top ten/twenty really matter. Have 1% positions, build them as they
get cheaper or you have more conviction. Theyll go to 3%. Were a distressed kind of place.
Q: Why do you have an aversion to derivatives?
A: Theyre expensive. Hedge might work one or two quarters out of 36. The 36 is really
expensive. Cash is my hedge. As a value stock picker, its a cost.
Q: Alcoa split what do you do before the split?
A: We tend to fish in the small/mid-cap world. Alcoa splits in 2 announcing shouldnt change
the value. The plan comes in 3 months. Take Ks and Qs, look at margins, revenue, expenses,
etc. We do the pro formas. S-1 comes out in six months with the plan. Now have two
management groups that get options - how are we going to price those options? They have an
incentive to drive down the stock when-issued in order to get a low option strike price. Theyll
price options, and well need to know when we need to buy/sell once the stock is trading whenissued.