intro to value investing

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A presentation on value investing given by portfolio manager Cale Smith at the New Jersey Institute of Technology on March 8, 2010.

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Page 1: Intro To Value Investing
Page 2: Intro To Value Investing

Our Lawyer Says Hi! This presentation is for educational and informational purposes only. Nothing contained here should be construed by anyone as an invitation or solicitation to buy or sell any security. This presentation does not contain personalized legal, tax, investment, or financial advice. Viewers should consult with a qualified adviser to obtain advice suited to their personal circumstances.

The performance discussed here is highly unusual and cannot be sustained. Because the portfolios contains a limited number of companies, their returns will be more volatile than a portfolio investing in a higher number of stocks. Tarpon Folio inception date 11/20/2008. Gecko Folio inception date 1/26/09. Returns are through the dates as indicated in the presentation. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss. The performance data is “net of all fees” reflecting the deduction of advisory fees, brokerage commissions and any other client paid expenses and includes the reinvestment of capital gains. The publication of this performance data is in no way a solicitation or offer to sell securities.

Page 3: Intro To Value Investing

•  Value investing •  Two funds: Tarpon

& Gecko •  Fiduciary oath •  Eat our own cooking

Page 4: Intro To Value Investing

Mutual Funds

A good idea gone wrong.

???

Page 5: Intro To Value Investing

Spoke Funds

All in it together.

Page 6: Intro To Value Investing

Why Islamorada?

Page 7: Intro To Value Investing

Yes!

Page 8: Intro To Value Investing

No!

Page 9: Intro To Value Investing

Reason #1,432…

Page 10: Intro To Value Investing

Once in a Decade

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+91% Tarpon Folio

+70% Gecko Folio

Page 12: Intro To Value Investing

Gecko Folio ‘09 A high-yield fund for income investors.

Page 13: Intro To Value Investing

Tarpon Folio ‘09 A long-term growth fund.

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Biggest 1st Year Gainers

98% 107%

126%

144%

105%

154% 153%

81%

194%

67%

0%

40%

80%

120%

160%

200%

ACL BLKB CCOI DISCA GOOG IGT JBT KMX PZN TGT

Page 15: Intro To Value Investing
Page 16: Intro To Value Investing

Why Stocks?

Source: Jeremy Siegel, “Stocks for the Long Run.” June 2002, McGraw-Hill.

Page 17: Intro To Value Investing

Why Fees Matter

Average Mutual Fund Fees? 1.73%

Sources: Karceski, Livingston, O'Neal, "Mutual Fund Brokerage Commissions," January 2004. Shoven, Dickson and Sialm, "Tax Externalities of Equity Mutual Funds," April 2008.

Page 18: Intro To Value Investing

Taxes and Trading

Sources: Tweedy Browne, Morningstar

Average Mutual Fund Turnover? 89%

Page 19: Intro To Value Investing
Page 20: Intro To Value Investing

Three Approaches Long Term

Fundamental (Value)

Gaps

1. 2. 3. Short Term

Fundamental Technical

Changes Momentum Price/Vol Charting

Efficient Market

Asset Allocation

Page 21: Intro To Value Investing

Value Investing “We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price."

Net worth $50B

Page 22: Intro To Value Investing

Valuing A Business “The critical investment factor is determining the intrinsic value of a business and paying a fair or

bargain price.”

- Warren Buffett

Page 23: Intro To Value Investing

Circle of Competence “If we have a strength, it is in

recognizing when we are operating well within our circle of

competence and when we are approaching the perimeter.”

- Warren Buffett

Page 24: Intro To Value Investing

Moats Low Cost Producer Switching Costs

Economies of Scale Intangibles Regulatory

IP Network Effects

Page 25: Intro To Value Investing

Mr. Market Stock prices are quotes from an

emotionally unstable business partner.

Use or ignore them as you see fit.

Page 26: Intro To Value Investing

Margin of Safety

“Confronted with a like challenge to distill the secret of sound investment into three words, we

venture the motto, MARGIN OF SAFETY.”

- Ben Graham

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Concentrated Ideas

“Wide diversification is only required when investors do not understand what

they are doing.”

- Warren Buffett

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Neutral Tandem (TNDM) Warning: May not be in your circle of

competence!

Currently one of the biggest values in Tarpon and…

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A Distinguished Alum

“Mr. Wren joined us in February 2006 and has served as our President, Chief Executive Officer and Director since that time….holds a B.S. degree in Electrical Engineering from

the New Jersey Institute of Technology and an M.S. in Management from Stanford University, which he attended as a Sloan Fellow.”

CEO Rian J. Wren:

Page 31: Intro To Value Investing

Is This Rational?

*Would your car’s value change so much?*

Page 32: Intro To Value Investing

Worthy of a Look?

Moat?

Cheap?

Margin of Safety?

Inside my

circle!

Page 33: Intro To Value Investing

At a high level… “Provides tandem interconnection services to competitive carriers”

Solve two problems: 1 – No direct connect 2 – Neutral solution

Ignoring new potentially large business

Page 34: Intro To Value Investing

Key Point About Risks Risks unequivocally exist in TNDM…

…but important to distinguish between Volatility in stock price and business risk…

…and my point is that none are large or imminent enough to explain why shares are so cheap.

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Simple DCF

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Sign of Competitive Advantage

Q: Is this a great business?

Network Effect

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TNDM Adjusted P/E Average long-term P/E = 15

Neutral Tandem P/E: 13 Market Cap = $530M

TTM Earnings = $41M $161M in cash (no debt) or $4.75 per share

Cash-adjusted P/E is 9

Earnings Yield of 11% is Too Cheap

Data as of 2.17.10

Page 38: Intro To Value Investing

TNDM is 7.5% of Tarpon

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Bottom Line “You need to worry about where the

company and the stock will be in three to five years. If you can buy something today

with little chance of permanent impairment and a high likelihood that you'll

double your money over the next five years, you should go ahead and do it.”

- Seth Klarman

Page 40: Intro To Value Investing

Start Early!

Source: Traders.com

Page 41: Intro To Value Investing

Contact Info www.islainvest.com

[email protected]

Twitter: @CaleintheKeys Blog: www.caleinthekeys

FB: www.facebook.com/IslandInvesting

(305) 522-1333 (cell)