Eden’s Perspective

By | October 21, 2015

From time to time I’m being asked about my approach to investing or for my comment about an investment-related topic. At Eden, we already wrote about many such topics in our letters to investors and I thought it would be a good idea to collate these writings into one post so here goes:

Eden is a partnership

“We feel lucky to have found a significant number of like-minded new partners in the recent months. In order to “initiate” them we will quickly run through the principles upon which Eden Alpha is based. Eden Alpha is a partnership, and as the name implies, we are partners in the results—successes as well as losses. As managing partners, we would keep you well informed of our investment decisions and lessons we learn along the way.”

(2014 first half letter)

On benchmarking

“We benchmark Eden with the “S&P500 Total Return” index. This index contains the top 500 companies in the US market and it well reflects both the American and the global economy. The “S&P500 Total Return” index differs from the S&P500 index as it takes dividends into account. The “Total Return” index return will always be higher than the S&P500 return and it shows the returns that an investor could have achieved had he bought a passive index fund.”

(2013 first half letter)

On being contrarian

“As value investors, we love to see across-the-board sell-offs in the market; “experts” and doomsday prophets come up with pessimistic forecasts and the media fuels the fire. In such times we find many opportunities to buy businesses below their intrinsic value, sometimes significantly so. In such markets, sellers tend to ignore the underlying facts, let their emotions take over and sell a dollar for fifty cents. Our estimations of intrinsic value play a crucial role in detecting such opportunities and history teaches us that eventually, the price of businesses aligns with their intrinsic value. At Eden, our goal is to understand what the intrinsic value is and to buy businesses below our estimation of their intrinsic value.”

(2012 year end letter)

Is it a good time to buy stocks?

“In early 2013 many “experts” claimed that it is not the best time to invest, fearing that the market is “too expensive”, anticipating a “correction” of some sort. At Eden Alpha, we do not invest in the market but in a small number of companies that we carefully choose and that are much cheaper than the broad market is. 2013 is an example of a year that wasn’t worth missing out. Every year, and also every decade, a small number of days account for most of the performance. For instance, $100,000 invested in an S&P500 ETF in the beginning of 1997 would be worth $340,000 today, a profit of 240%. An investor who missed just the best 30 days during these sixteen years (1997-2013) would have taken a loss of 30% and would have ended up with $70,000. In the end of these sixteen years, the investor who did not try to time the market is five times richer than his fellow who missed these 30 days due to guesses and acting on gut-feeling about the direction of the market. The risks of being out of the game are huge compared to the risks of being in it. The only way to enjoy the good days is to always be invested and not try to dance in and out of the market.

Is now a good time to buy stocks? In our opinion, when one invests for the long-term—given our flexibility and investment methodology—the entry point does not make that much of a difference. We always invest in companies that are cheaper than the market, so the overall market does not bother us. When a bear market will come, we will take advantage of it and increase the intrinsic value of the portfolio by capitalizing on the opportunities that will be created during the panic, just as we have done in the past. We can do so only thanks to the long investment horizon of our partners and their ability to ignore short-term volatility.”

(2013 year end letter)

Diversification or “Diworsification”?

“Trying to answer the question above, we recently conducted an analysis of our performance over time. The conclusion did not surprise us at all, but may surprise some of you. We found out that in any time period, a portfolio that was composed only of our five biggest investments would have outperformed the partnership’s portfolio. Very few people got rich over their seventh best idea, so diversifying, to some extent, might actually become “diworsifying”. It makes sense to focus one’s efforts on a small number of investments and know these investments inside out. It is not surprising that 67% of Berkshire publicly traded equities portfolio is concentrated in four companies. Other highly regarded investors such as Bruce Berkowitz and Seth Klarman run portfolios that are even more concentrated than Berkshire’s.

As a result of our analysis and the evidence we found in our portfolio, we believe that running a concentrated portfolio will pay off handsomely. As of the time of this writing, we have 59% of our assets in our four best ideas.”

(2014 first half letter)

Hitting new records

“Newspapers’ headlines never say things like “The 10th of the Month has Arrived”, however, the newspapers like to write that the stock market hitting a new record. 119 years ago, in 1896, the measurement of the Dow Jones Index began. Since then, the world experienced dozens of economic crises, two World Wars, the Cold War, plagues, and so on. In the face of all that, the market broke new records in 49 of those 119 years. Over that time period there were 1,287 days in which the market surpassed its all-time-high record. This occasion has on average occurred more than 14 times a year—more frequently than the calendar hitting the 10th of the month. Breaking new records isn’t as rare an event as it may seem to the unsuspecting reader. Next time you read that markets hit a new high, you will know that this occasion is not at all that rare.

At Eden Alpha, we choose high quality companies that are traded below their conservatively estimated intrinsic value, so we are not bothered by markets hitting new records. When a bear market comes—and sooner or later it will—the prices lower and the opportunities that we will be presented with become better, whereby we will be there and take advantage of those opportunities for you, our partners. We can take this approach only thanks to the long investment horizon of our partners, their ability to ignore short-term volatility, and their willingness to even increase their investments at times when other market participants rush for the exits, leaving many bargains behind.”

(2014 year end letter)

Government bonds: a safe haven?

“Between April and the end of the first half, Israel’s government bonds had moved down in price, sometimes quite substantially. Take the long dated “0142” government bond for instance—that bond lost 17% in just two months. This bond is the yardstick according to which long-term mortgages are priced in Israel: the interest on a 30-year mortgage will always be higher than the yield of this bond.

This phenomenon happened in other places as well. Bonds of almost all developed countries have had a similar experience of declining prices and rising yields. It seems like the air started to come out of the bond markets and as usually happens in such cases, the way down will be much faster than the way up.

It may fly in the face of what many people think but government bonds are not always a conservative investment and stocks aren’t always risky. Risk can’t be determined merely by the type of investment vehicle. Think about it: would you prefer to invest in the bonds of Petrobras, a corruption-plagued company, which yield 4% a year, or buy the shares of Liberty Global, the biggest broadband and cable provider in Europe at a yield of 10% a year? In 2008, Brazil’s economy had taken a severe hit due to the recession while Liberty Global’s profits showed a double-digit increase. Of course, then, the latter deal is the favorable one even though it involves investing in stocks while the former proposition involves investing in government-backed bonds. The missing variable in order to make an informed decision is the price that an investor is required to pay. While a government-backed bond may sound like a safe and sound investment, when it comes at a minus 0.5% yield it becomes a much riskier proposition than investing in stocks. Warren Buffett put it best: bonds that used to offer risk-free return now offer return-free risk.

We believe that what we are witnessing now is a re-pricing of risks. It is our view that while maybe on the higher side, shares are reasonably priced but many government bonds are totally mispriced. An example for that could be seen earlier this year when the yield on Israeli-government bonds was lower than the yield on similar US bonds, an absurd situation given the much lower risk that is embedded in those US bonds.

The lesson therefore is clear: don’t just judge a book by its cover.”

(2015 first half letter)

 

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