Interview With Charles Lemonides Founder Of ValueWorks Talks Valuation Process, Shorting, Risk Management And More

Today is a very special episode, I am here with Charles Lemonides, he is the Founder of ValueWorks, he founded ValueWorks back in 2001. He began his career with Gruntal & Co, in their Research Department. He then joined Sterling Advisors an investment advisory unit of Gruntal & Co. He has a bachelor’s in history from Vassar College and pursued graduate studies in economics from New York University. He received his CFA Designation in 1989. In today’s episode we discuss his investing philosophy and what he looks for in equities. I want to welcome Charles to the show and I want to welcome all our listeners to a very special episode.

Full audio podcast is available for all readers and the full 7,000 plus word transcript is available for premium subscribers – enjoy!

Q4 hedge fund letters, conference, scoops etc

Raul Panganiban Interviews Charles Lemonides

Transcript

Welcome to ValuTalk with Raul.

Alright, so I just wanted to welcome our listeners to a very special episode.  I have Charles Lemonides, Portfolio Manager and Principal at ValueWorks.  Charles, welcome to the show.

Thank you very much for having me.

Alright.  Yeah, if you can just tell me what led you to finance and investing?

I’ve always loved the idea of trying to earn investors a return and make money in the capital markets.  And value investing has sort of been my entry into that because it makes sense to me as a process.

And can you tell me why you were attracted to value investing?

It gives you great downside protection when things go wrong.  There are a lot of investment styles and strategies that work.  And I don’t think value investing is better or worse than other styles or strategies.  I think it suits my skillset pretty well.  And that’s especially because it’s surely empirically based more than emotionally based, and that works for me.  And because the biggest challenge for investors I think is not when things are going well, but when you have hiccups in the portfolio at moments in time.  And the nice thing about a value approach is that when things go wrong you can revisit your math and reassess where you are at that moment in time.  And if your fundamental case is still intact you can weather the storm and come out the other side.  And that’s what really ultimately makes it for me a stronger investment discipline than a growth discipline or a momentum discipline or any other sort of technical discipline that’s out there.

And I know on your site it says [inaudible], if you can explain that, but I like what you put, like you guys are like value does work.

Well, to us value simply means that you start by caring about the price you pay for a security.  It’s not buying lousy businesses at discounted prices, and it’s not buying those bottom half of the valuation continuum, it’s caring about the price you pay to buy something when you’re buying it.  That you try to go out and understand what these assets are worth right now and what price you’re really paying to get at them.  And then when you can get a dollar’s worth of good assets for 50 cents, that’s the nub of an investment thesis to us.  And I think there are other really solid investment strategies that make sense and are equally as good but they’re just different.

Right.  Can you give me like an example of what you’re looking at right now?

Well, I’ll give you a contrast between value and growth and that is that a growth investor starts by trying to find the best possible asset and not care as much about what price they’re paying.  If you want to buy the crown jewels you are rarely going to get them cheap, and that doesn’t mean it’s a bad strategy, it’s just a different approach.  Our approach works for us because it’s one of two big schools of thought that are both logically based, solidly, you know, it’s a solid logical foundation for it and we have the skillset to implement it.

And can you tell me more about the valuation process and how you guys assess the quality of the companies as well?

Sure. So, you know, one of the nice ways that I like to answer the valuation process is going back to my very first investment which was quite some time ago.  But I tripped across a bond that was backed by an airplane.  And the airplane seemed to be worth $30 million and the bond had $20 million of [inaudible] amount outstanding and it was trading at a discount.  So in that investment we were getting control of an airplane worth $30 million and we were paying arguably $15 million for that control.  Our last investment that we made, or one of the last investments was Goldman Sachs.  Goldman Sachs is a financial company that should get value based upon multiple to book value.  Financial companies get valued on multiples to book value because ultimately, tangible book value is what allows them to earn a rate of return.  And when you can buy a quality financial company at a discount to book it will tend to work out for you over time.  And so when we look at Goldman Sachs, when we ask what their business is worth it’s going to be a premium to book value.  And book value of Goldman is something over $200 a share and the stock is under $200 a share and book value will grow because they’ll earn a return on equity.  And historically that return on equity has been between 12 and 15%, there’s no reason to believe it’s going to be any lower any time soon.  So you should earn a rate of return on that investment of between 20 and 35% over the next year or two years as book value grows and the premium to book value comes back into the stock.