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CUNDILL INVESTMENT CONFERENCE
PETER CUNDILL, SETH KLARMAN ET AL.
(continued from preceding page)
In 111 or 112 cases, you can pay less than nothing....
Cundill: In some ways, they're even better than the companies we were finding in 1975. And in other ways, they aren't as good. But one of the ways that they're better is that ... some of these Japanese companies have net cash - cash on hand - almost equal to their current market value.
They also have marketable share portfolios. And we've said, "Let's assume they sell their share portfolios and that they're taxed at 50%." And I'm not even sure that we should be tax effecting their portfolios to determine their margin of safety. But, anyway, we do.
Then, we net out the short-term and long-term debt. We don't include receivables and inventories ... or payables in the computation. We're not paying anything for them. And when we do that, we still find about 111 or 112 securities trading below net cash. So, in those cases, you're in effect paying a negative price for the business.
And they're making money and generating free cash, too....
Cundill: Also, all of the companies we're looking at are making money. In many cases, they have no debt. And in 80% or so of the cases, they're not spending their cash flow - their earnings before depreciation and taxes. So they're generating free cash. And that's because they're frozen in the headlights. They are doing nothing.
Since 1990, the Nikkei's gone from nearly 40,000 to not much more than 18,000. So roughly speaking, anyone invested in the Japanese market has had a compound loss of about 9% per year (disregarding dividends).
And I think that provides a pretty good explanation of why the Japanese are caught in the headlights today. Certainly, that describes corporate Japan right now. And I'd think that it describes individual Japan, too.
Anyway, I haven't seen bargains like those in Japan today - in terms of quality and quantity - since 1975 when America in some ways was caught in the headlights.
JUST ABOUT AS HIGH AS WE'VE EVER SEEN THEM.
It was layup time in the 1970s. Today, it's anything but....
Cundill: What about the U.S.? Well, we do a thing that we call "the see-saw of value". The basic idea came from a guy named Norman Weinger who at that time was with Oppenheimer. And aside from the net-nets back in the 1970s, he did something he called "the Magic Sixes". Those were companies trading at less than .6 times book, (less than 60% of book value), 6 times earnings and with dividend yields of 6% or more. And there were hundreds of them. It was layup time. We didn't know it was layup time, but it was.
When we run that screen today on 7,000 companies - industrial companies, incidentally, not banks - we find a grand total of five companies meeting those three criteria in the whole of the U.S. And one is Semi-Tech Global - which has been in there for a long time. [laughs]
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