MCINTIRE INVESTMENT INSTITUTE
AT THE UNIVERSITY OF VIRGINIA
Training Session
Prepared by the MII Managers | January 25th, 2012
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McIntire Investment Institute
WHERE TO FIND THESE SLIDES
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McIntire Investment Institute
AGENDA
 Investment Overview
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Long vs. Short
MII’s Strategy
 Elements of an Effective Pitch
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Identifying an Opportunity
Developing Theses
Forming a Variant Perception
Conducting VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
LONG / SHORT
 Is a hedge fund more or less risky than an index fund?
 “Long” – strategy that makes money when price of
security rises
 “Short” – strategy that makes money when security goes
down
 “Our mandate is to find the 200 best companies in the world and
invest in them, and find the 200 worst companies in the world and
go short on them.” – Julian Robertson, Tiger Management
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McIntire Investment Institute
VALUE VS. PRICE
 The value of any security, company, or project is determined
by its cash inflows and outflows
 Value investing is “the strategy of investing in securities
trading at an appreciable discount from underlying value” –
Seth Klarman
Undervalued - Long
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Value
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Overvalued - Short
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Price
Value
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Price
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McIntire Investment Institute
EFFICIENT MARKET HYPOTHESIS
 Thesis championed by economist Burton
Malkiel
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All publicly available information is priced into
stocks
Implication: stock pickers cannot consistently
beat the market without inside information
 MII’s response:
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Certain stocks exhibit more efficiency than
others
We can win with better information and better
analysis than the market
McIntire Investment Institute
VARIANT PERCEPTION
 Variant Perception
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Your edge as compared to market expectations
Focus on ideas where spread between value and price is
large
 Informational/analytical asymmetry
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Informational: Knowing something that others don’t
through tenacious research
Analytical: Superior understanding
 How is it generated?
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Value-added Research (VAR)
Consensus
Hard / Uncomfortable
x
Contrarian
Easy / Comfortable
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McIntire Investment Institute
EXAMPLE OF AN INFORMATIONAL EDGE
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McIntire Investment Institute
1. IDENTIFYING AN OPPORTUNITY
“We believe that according the name ‘investors’ to institutions that trade
actively is like calling someone who repeatedly engages in one-night stands a
‘romantic.’” – Warren Buffett
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
TOP DOWN VS. BOTTOM UP
 Top down approach
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Start with a promising (dying) industry and find the best (worst)
company in that industry
Start with an interesting trend and identify the best company by
which to exploit the trend
 Bottom up approach
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Start with a particular company, then determine whether or not
its macro prospects are promising
 Whether it’s top down or bottom up, stick to companies
and industries that you can understand
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
BECOME AND ENGAGED READER
 Identify general trends
 Recognize and evaluate corporate strategies
 Short Flags
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Identifying an
opportunity
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Poor Management – Inconsistencies
Few barriers to entry
Bond Downgrade
Overly Optimistic Projections
Overreaction to positive news
Under reaction to bad news
Sudden change in accounting firm or methodology
Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
PERSONAL EXPERIENCE
 Products/services
you’ve experienced
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
 Fashions becoming
more/less fashionable
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
OTHER IDEA GENERATION SOURCES
 Google / Yahoo Stock Screener
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(http://screener.finance.yahoo.com/newscreener.html)
 Blogs
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Marketfolly.com
distressed-debt-investing.com
Seekingalpha.com
 13-F Filings
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Fund holdings
Available through EDGAR on SEC.gov
 Consider taking the contrarian view on the
investment ideas you find online
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
BLUE RIDGE CAPITAL 13-F
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
2: DEVELOPING THESIS POINTS
“We enjoy the process far more than the proceeds.” -- Warrant Buffett
Identifying an
opportunity
15
Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
DEVELOPING THESIS POINTS
 Skim Form 10-K to better understand the
company and Form 10-Q for a more recent
update
 Read latest earnings call transcripts
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Available on Seekingalpha.com, Bloomberg terminal,
and Morningstar.com
 For articles written on your company, visit
Business Source Complete database when you’re
on Grounds
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Identifying an
opportunity
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http://guides.lib.virginia.edu/commerce
Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
AVOIDING BIASES
PatternRecognition Biases
Confirmation
Anchoring
False Analogy
Loss Aversion
Identifying an
opportunity
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Stability Biases
Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Social Bias
Groupthink
Catalysts
Valuation
Delivery
McIntire Investment Institute
3: FORMING A VARIANT PERCEPTION
“Price is what you pay. Value is what you get.” – Warren Buffett
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
GAUGING MARKET VIEW
 So I’ve identified a growing company with a sustainable
competitive advantage. How do I know that every other
investor hasn’t already identified this opportunity?
 Blogs (Marketfolly, Distressed Debt Investing)
 Other Investors
 Equity Research
 Do you have an original thesis point or catalyst?
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
EQUITY RESEARCH
 There’s a right way and a wrong way to use equity
research
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Right way: to gauge the market by interpreting
analyst commentary and financial projections
Wrong way: many non-MII investors base their
investment decisions on sell-side analyst
recommendations
 Availability
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Identifying an
opportunity
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Limited research on Bloomberg terminal
Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
EQUITY RESEARCH ON BLOOMBERG
 From main Bloomberg screen, type in name of
company
 Type “BRC <Enter>”
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
SMALL CAP PREFERENCE
 Small Caps (defined roughly as market cap < $1Bn) often fly under the radar, creating
opportunities for analysts like you to exploit market inefficiencies
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
4. CONDUCTING VALUE-ADDED RESEARCH
“A public-opinion poll is no substitute for thought.” – Warren Buffett
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
VAR CASE STUDY: SUREBEAM CORPORATION
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
VAR CASE STUDY: SUREBEAM CORPORATION
 Analyst Joel Ramin (MII alum, former analyst at
Bridger) sought to determine whether the
irradiation impacted taste
 Visited the centers where SURE irradiated the beef
and drove to upstate NY and IL to check out the
stores where test marketing was going on
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Confirmed analysts reports that sales were strong
BUT, meat was being discounted by 20% using instore promotions
 Bridger added to short
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
VAR CASE STUDY: SUREBEAM CORPORATION
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
VAR CASE STUDY: SUREBEAM CORPORATION
 Anthrax scare in September 2001
 Almost overnight, SureBeam switched from
irradiating meat to irradiating mail
 USPS bought eight irradiating machines from
SureBeam with option to purchase more
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
VAR CASE STUDY: SUREBEAM CORPORATION
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
VAR CASE STUDY: SUREBEAM CORPORATION
 Would USPS buy machines for every postal distribution
center?
 Would Congress fund such a venture?
 Did the technology work?
 Joel called postal inspectors and Congressional aides to
ascertain the government’s commitment to such a plan
 Joel visited the company’s test facility in Iowa
 Discovered that a female employee had to sign a
disclaimer verifying that she wasn’t pregnant before
working near the machine
 Figured out that amount of radiation needed to kill
anthrax was substantial enough to fry mail packages
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
VAR CASE STUDY: SUREBEAM CORPORATION
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
5: RISK ANALYSIS
“Only when the tide goes out do you discover who’s been swimming
naked.” – Warren Buffett
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
RISK ANALYSIS
 Tell us how your investment recommendation could be wrong
 An analyst isn’t a salesperson. You don’t get a bonus if your
company winds up in the portfolio
 Yes, there are risks listed in the 10-K, but try to dig deeper
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
6. ANTICIPATING CATALYSTS
“I buy on the assumption that they could close the market the next day
and not reopen it for five years.” – Warren Buffett
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
ANTICIPATING CATALYSTS
 So it’s a good and undervalued company or a bad
and overvalued company. How do we get paid?
 New product, geography?
 Shorts are inherently risky
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Theoretically, we can lose an infinite amount of money
on them
We generally aim to hold shorts for less than two years
Thus, catalysts are an essential element to short pitches
 Examples in “Good News, Bad News” part of the
“Money and Investing” section of the WSJ
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
7. VALUATION ANALYSIS
“It’s far better to buy a wonderful company at a fair price than a fair
company at a wonderful price.” – Warren Buffett
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
P/E RATIO
 Provides rough indication of market’s
perception of a company’s growth and value
 Current market price/earnings per share
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Forward vs. Trailing Twelve Month
 Varies according to industry
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Technology?
Grocers?
 As a yardstick, 15.5x is the long-term average
P/E ratio
 Far from perfect – negative earnings?
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
COMPARABLE FIRM ANALYSIS
 Uses valuation of peers to derive an implied
value of the company you’re analyzing
SPG COMPARABLE FIRM ANALYSIS
Peers
P/E Ratio
P/B Ratio
Identifying an
opportunity
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Developing
Theses
P/S Ratio
VNO
GGP
SKT
FRT
AVERAGE
67.15
n/a
108.10
41.91
75.01
2.89
5.85
5.08
4.34
4.71
5.50
1.48
7.00
9.23
8.12
Implied SPG Price
Actual SPG Price
Premium (Discount)
$93.76
94.53
0.8%
$73.10
94.53
29.3%
$108.09
94.53
(12.5%)
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
8. DELIVERING THE GOODS
“Your premium brand had better be delivering something special, or it’s
not going to get the business.” – Warren Buffett
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
DELIVERING THE PRESENTATION/MEMO
 Practice before/submit rough draft to
manager mentor
 If you hold the stock in your personal
portfolio, please disclose this fact
 Have fun!
Identifying an
opportunity
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Developing
Theses
Forming Variant
Perception
Conduct VAR
Risks
Catalysts
Valuation
Delivery
McIntire Investment Institute
NOW THAT YOU’RE A STOCK PICKING EXPERT
 Application memos are due by 11:59 PM on Tuesday, January
29rd to miirecruitment@gmail.com.
 Please use the template provided in the membership email and
limit your memo to one page only – no exhibits or appendices.
 Your memo must be written on an individual publicly-traded
stock (either long or short) not currently held in MII's portfolio –
no ETFs, futures, commodities, etc.
 Please also be mindful of avoiding plagiarism when conducting
research, as your memo should represent your original analysis
and insights. Work individually – this is your idea.
 We do not expect VAR or in-depth financial analysis, but we do
value creative and well-articulated ideas (Apple and Facebook
do not count as creative ideas)
 This PowerPoint and other helpful resources are all available on
MII’s website at www.uvamii.com to assist you.
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McIntire Investment Institute