About the Vancouver Value Investors’ Club A forum to: ◦ LEARN how to become a better investor. ◦ DISCOVER high-quality investment opportunities. ◦ SOCIALIZE with other Vancouver investors. The philosophy of the club is to apply reason and thoughtful analysis to the ideas presented. ◦ “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” ◦ “The most important quality for an investor is temperament, not intellect... You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” The focus is on viewing stocks as part-ownership in a business instead of pieces of paper to be casually traded. ◦ Finding and interpreting the intrinsic value of investments. ◦ Staying away from charting, market timing, excessive trading, rumors, speculative ideas, and IPO’s. Don’t be afraid to be inquisitive and ask TOUGH QUESTIONS! ◦ The goal is to discover the strengths and weaknesses of the ideas presented – and all ideas have positive and negative aspects, even the best ones. ◦ Don’t take criticism personally - in the end, only your own judgment counts! The quality of each meet-up depends upon your participation so don’t be afraid to share your passion for investing.

Patterns in Stock Charts? These charts are actually generated by a simulation of 1000 coin flips.

What do Value Investors Believe? They believe that stocks represent ownership of an actual business. They don’t mind if the stock market closes for 5 years. They are conscious of the limits of their knowledge and are the first to admit what they don’t know and act only within their circle of competence. They believe in buying stocks below their intrinsic value and having an appropriate margin of safety – they are bargain hunters. They have a ‘show me’ attitude and operate similar to detectives, looking at clues, analyzing data, having a realistic and cool-headed approach. They understand the power of compound interest and how the passage of time is one of the most important ingredients to creating wealth. They don’t mind investing against the crowd if the facts warrant a different conclusion. They believe that investing is a complex game with many unknowable variables, and that “noise” about the markets from the media is a distraction. They are slow to act, often experiencing long stretches of inactivity – they don’t feel under any obligation to swing at every pitch that they hear about. They are always comparing investment opportunities against the benchmark of existing investments or other opportunities available in the market – they prefer to add more to their top holding than their tenth-best holding.

How value investors think about the stock market. “Now if people look to the newspaper every day at the price of a stock to determine whether they made a good investment they're making a mistake. …They have to look to the business, the asset itself. If you own an apartment house you wouldn't get a quote on it every day. You'd just look at the rent, what your taxes and expenses were. And if they all came in-line with what you expected when you bought it you'd feel you'd made a satisfactory investment, and you'd never get a quote on it. So I don't look at quotes. Mostly, I can't tell you what Berkshire Hathaway is selling for today.” - Warren Buffet, NBC Interview Jan18, 2009.

Reading and Interpreting Business Information Value investors adopt a mental model of “good” corporate behaviour and filter all news and annual reports against these filters. Two of the more important filters are thrift and an owner mentality. The reasoning is simple: Frugal managements have the right ‘DNA’ for creating wealth for investors. Extravagant managements waste money. (E.g. John Thain of Merrill Lynch renovated his corporate office last year and bought a $1047 garbage can and $38,000 rug. He said, “It's clear to me, in today's world, that it was a mistake” and paid it back. In what ‘world’ would it be right?). Look for little signs that leaders have the wrong principles, they WILL spill over into the business over the long term. In annual reports, look for clichés, generalities, empty words, hubris, arrogance, unreasonable expenses, infomercials versus substance, only positives and no negatives, and earnings *before* little things like interest, taxes, and depreciation. “...Be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don't advance smoothly (except, of course, in the offering books of investment bankers). We are suspicious of those CEOs who regularly claim they do know the future—and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to "make the numbers" will at some point be tempted to make up the numbers." – Warren Buffett 2002 Chairman's Letter. Do Business with People you Can Trust’ by L.J. Rittenhouse which teaches how to discover good & bad companies by understanding the language used in annual reports and letter to shareholders.

Valuing a Business The value of a business is the total cash a business can generate over its lifetime discounted to the present (because $1 today is worth more than $1 tomorrow due to the long- term trend of inflation). There are many uncertainties – what is the lifetime, what is the rate of inflation, what is the growth or decrease in earnings? Because of these uncertainties, value investors use scenario analysis to layout multiple scenarios and a range of intrinsic values. Precision is not possible, reasonable guesses will do. If today’s price is still below all these estimates, the investment is said to have a good margin of safety and be undervalued. The more predictable the business and earnings, the more confidence you can have in long-term estimates of value. The more volatile and fast-changing the business (e.g. technology, unstable earnings, no earnings, etc..), the more difficult it is to value the business.

The Building Blocks of Valuation

Ways to make decisions under uncertainty 1. Panic – Emotional responses, usually due to fear, often resulting in loses where none would have occurred (e.g. selling or buying during steep market corrections) 2. Formulas – Using ‘old saws’, maxims, or other mechanical algorithms (e.g. screening for ratios, ‘no one ever went broke taking a profit’, ‘buy low, sell high’, etc..) 3. Experience – Comparing the current situation against what came before (e.g. using historical charts, looking at where you gained or lost in the past). Can be dangerous if it leads to formulaic behaviour and not thinking about differences in the future. 4. Logic – Analyzing each situation on its on merit and coming to a certain or ‘most probable’ conclusion (this is the best method).

Learning from top value investors: Video Case Studies Example: Alice Schroeder, Author of ‘The Snowball’, a biography of Warren Buffet describes in this clip how Buffet thinks about making an investment using the case study of a tabulated punch card business from the 1950’s. I have a collection of video clips from top value investors sharing their experience and advice. Is the group interested to view small bits of these videos during the meeting? – free with 45 day delay, member-based detailed analysis of undervalued stocks. Great resource.

Agenda for the next Meet-Up Looking for presenters who would like to do a brief minute presentation (or Q&A session) on a value investing topic of their interest. No experience necessary and friendly atmosphere. An opportunity to improve your investment skill and receive critical feedback. with the subject of the We’ll have the next meet-up as soon as we get three or four such ideas on the table.

Lessons from History… This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time. - The Great Slump of 1930 by John Maynard Keynes

Fairholme Fund Fairholme Funds run by Bruce Berkowitz. Website: Several interviews and transcripts with him available online.