Legendary value investor Lewis Sanders surprised Wall Street by going straight back into business for himself just nine months after his abrupt retirement as CEO of AllianceBernstein in December 2008, a year that was more challenging for that firm than many of its peers.
Even more surprising is the judicious manner in which Sanders is applying his value investing philosophy, which depends on anxiety-causing weaknesses in stocks, to a largely recovered stock market. In March, Sanders spoke with II Contributing Senior Writer Michael Shari. Here are excerpts from the interview:
Institutional Investor: Why did you set up your own firm at the age of 63?
Sanders: I am looking for a cerebral setting, a place where you can pursue significant research projects that you think really matter in depth. That’s it. And nothing more.
Are you looking for vindication?
I don’t think I need any vindication. I have a 40 year record that is among the best in the industry.
What’s your take on value investing?
I am a veteran of that particular domain. It really defined my career for some 40 years. I see value as continuing to be a highly efficacious way to form portfolios. Value is, as you know, behavioral. It is essentially a derivative of anxiety generated by issues of the day, whether they be macroeconomic, specific to an industry or to a company.
We’re talking about behavioral psychology here.
We are indeed.
How do you find an opportunity in someone else’s anxiety?
Think of it this way: You own a group of stocks, and you notice that one of them is falling in price. You do some investigation to find out why. You discover that this is a company that faces some serious challenges. And you talk to people, and you keep reinforcing that idea.
By the time you finish that exercise, you are feeling pretty uncomfortable, especially if you have a decent portion of your wealth exposed to that challenged investment. You are feeling insecure. You are unhappy. You go to sleep each night and say you are worried about this.
Now isn’t it a valid use of your wealth to say, “I don’t really care if it recovers, I don’t want this anymore, I want to feel better?” The value investor is compensated to take on the stress of ownership that the seller can no longer endure.
When was the last value opportunity?
It just passed in late 2008 and early 2009.
Are investors still anxious?
People are still anxious. But way less than they were. The opportunities that are left are mostly in stocks, and they’re OK but they are not superior. What is attractive to a value investor today are companies that are big, stable very profitable and have low leverage. Those characteristics are not prized at the moment because they used to be prized during the trauma [of 2008-2009]. If you were going to play for recovery, the last thing you were going to do is buy McDonald’s because the market has come up so far. The category of companies that used to be prized for their stability are now shunned for it. It’s not that anyone thinks there is anything particularly wrong with them. They just don’t think there is anything right with them. They sell at 11, 12 or 13 times earnings. The stock market is already 15-20 percent richer than that.
When was the last time you found large, stable companies attractive?
The last time that happened in grand scale was in 1980-81. There had been an oil shock in 1979. The inflation rate was 8 or 9 percent and galloping away. Commodity prices were soaring. Gold went to $800. Everybody was clamoring for real assets. The cheapest stock on market was Kellogg Co. It was, ‘Who wants corn flakes, I want gold.’ If your company wasn’t thought of as some kind of inflation hedge, you were cheap.
How do you invest in a stock market that has recovered?
Typically, a value investor would be hired to focus on equities exclusively. And in settings where the heat is really hot, it could well be that the opportunity is better in a company’s bonds than in its stock -- or vice versa -- and perhaps even assets that trade completely independently of the company in question, like commercial mortgage-backed securities. So wouldn’t it be better to design an investment service, a value service, that looks at them all, and has authority to invest in any one of them, or any combination of them, that appears to offer the best opportunity?
How can you cover all asset classes at such a small firm?
There are standing armies of analysts out there that are accessible to us at Barclays Capital or Credit Suisse or Bernstein Research. We don’t need customized research reports. We use their research as a foundation. We use our staff to take the next step. In value, the next step is deciding if the issue that is creating the anxiety is transitory or permanent. That is all we need to do. We don’t need a lot of people to do that if you are extremely focused.
Michael Shari is a freelance journalist in New York, where he covers finance and politics. He can be reached through his website, http://www.michaelshari.org . In addition to writing for Institutional Investor, he writes a weekly column called Fund Focus for AOL DailyFinance at http://www.dailyfinance.com/writers/michael-shari/ . He also writes periodically for Barron’s, the Financial Times and Risk Professional. Previously, he wrote for Time and BusinessWeek in Southeast Asia, where he won a string of journalism awards and citations for his coverage of Indonesia from the Overseas Press Club, the Society of Professional Journalists, the Online News Association, Johns Hopkins University and others.
