Value-oriented Equity Investment Ideas for Sophisticated Investors

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Investing in the Tradition of Graham, Buffett, Klarman

Year IX, Volume XII

December 2016

When asked how he became so

successful, Buffett answered:

“We read hundreds and hundreds

of annual reports every year.”

Top Ideas In This Report

Alliance Data Systems (NYSE: ADS) …………………….. 56

HCA Holdings (NYSE: HCA) …………………….. 96

The Rubicon Project (NYSE: RUBI) ……………………108

Also Inside

Editorial Commentary ………………. 3

van Biema: Concentrated Investing .. 9

Ordway: Industry Structure ……….. 14

Gioja: Chess and Investing ………. 132

Surowiec: Investing in Cyclicals …. 133

Crangle: Paramés Autobiography . 147

Giancola: Investing in Canada ….. 148

Highlighted Events — Join Us!

Best Ideas 2017 January 10-11, 2017, fully online bestideasconference.com

Asian Investing Summit 2017 April 4-5, 2017, fully online valueconferences.com

The Zurich Project 2017 INVITATION ONLY June 6-8, 2017, Zurich zurichworkshop.com

Wide-Moat Investing Summit 2017 June 27-28, 2017, fully online valueconferences.com

European Investing Summit 2017 October 4-5, 2016, fully online valueconferences.com

THE SUPER- INVESTOR ISSUE

► Highlights of Recent Superinvestor Activity

► Superinvestor Portfolio Analysis: The Signal Value 100™

► 20 Companies Profiled by The Manual of Ideas Research Team

► Proprietary Selection of Three Candidates for Investment

► Exclusives: Michael van Biema, Phil Ordway, Glenn Surowiec,

Reno Giancola, Carlo Gioja, Ezra Crangle

► 10 Essential Screens for Value Investors

Superinvestor holdings analyzed in this issue include

Akamai Technologies (AKAM), Alliance Data Systems (ADS),

Chesapeake Energy (CHK), Chipotle (CMG), Cognizant Technology (CTSH),

Computer Sciences Corp. (CSC), Dave & Buster’s (PLAY), Digirad (DRAD),

Eastman Chemical (EMN), Fiesta Restaurant Group (FRGI), Gerdau (GGB),

HCA (HCA), PBF Energy (PBF), Perrigo (PRGO), Rubicon Project (RUBI),

Sears Holdings (SHLD), Southwest Airlines (LUV), SunOpta (STKL),

Wabtec Corp. (WAB), and Willis Towers Watson (WLTW).

New Exclusive Content in the MOI Members Area (log in at www.manualofideas.com

or email support@manualofideas.com)

Michael van Biema on Concentrated Investing

Phil Ordway on Understanding Industry Structure

PREMIUM: Chris Crawford on Contrarian Investment Principles

Register for Best Ideas 2017, the fully online investment event hosted by ValueConferences and The Manual of Ideas.

Visit BestIdeasConference.com

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Inside:

Book Review:

The Paramés Autobiography

By Ezra Crangle

With compliments of The Manual of Ideas

Value-oriented Equity Investment Ideas for Sophisticated Investors

© 2008-2016 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com December 2016 – Page 147 of 150

Book Review: The Paramés Autobiography By EZRA CRANGLE

Earlier this year, the media began to speculate about the future of superinvestor Francisco García Paramés (“Paco”), former manager of Bestinver. Would he join his former team at azValor? Would he start up a new firm? In the meanwhile, Roger Domingo, editor of the publishing house Deusto, said that Paco will publish his autobiography: Invirtiendo a Largo

Plazo (Investing for the Long-Term).

It was September and the non-compete clause of Paramés was over. The uncertainty about his future continued. During the presentation of his book in October, Paco announced that he was not going to azValor and that he would start his own firm: Cobas Asset Management, which will launch in early 2017.

In Invirtiendo a Largo Plazo, Paramés explains his career as an investor. It is curious that Paco began his career as a self-taught value investor when he read a book review of One Up On Wall Street in Businessweek. Since that moment, he started following the principles of Benjamin Graham. While he did not look for quality in the companies in which he invested, Álvaro Guzmán, a former colleague at Bestinver and now co-founder of azValor, convinced him to search for quality.

When Paco was a recent graduate, he had the opportunity to work in companies such as Salomon Brothers and McKinsey, but he decided to go with Bestinver because it was a small firm backed by family-owned Grupo Acciona.

It was the perfect job for him because he did not have to respond to short-term demands by his employer. Paco knew how to take advantage of this, and in his free time, he started learning from value investors like Lynch, Graham, Buffett, and Greenblatt. As Paramés writes in his book, “I confirmed that I had found the right kind of job work for the essential traits of my personality: analytical ability and patience.”

As an example, Paco tells how they were left intact during the dotcom bubble and the financial crisis of 2008. In the first event, they invested in bonds only to calm their clients. In the second, they avoided investing in the financial sector.

In addition, Paco tells an anecdote of when he sent a letter to Warren Buffett, which Buffett answered. Unfortunately, Paco did not respond to Warren again, and that’s where the relationship ended.

Another important part of the book is dedicated to the Austrian School of Economics, in connection with which the book

publisher states, “Paco’s book is more a tribute to the Austrian School than to the investment world.”

The Spaniard superinvestor has successfully applied in his investment style the knowledge he has gained on this economic school of thought, especially the Austrian Theory of the Business Cycle. In a chapter, Paco summarizes the beginnings of this school — important figures like Mises or Hayek, and criticism of the Keynesian economics, which most governments around the globe apply.

“Investing is trying to predict the behavior of consumers, business people, workers, politicians and everyone around us.

If we understand what influences move them and what can be expected from them, we will have traveled a great part of the way. Economics and investment are intimately related, and that’s because they are not just disciplines that deal with numbers, which hardly need them, but because in both cases the essential thing is to understand the man who acts. That understanding is what ultimate economists and good investors aspire to.”

The book also includes advice for those who want to start investing: start now. According to Paco, they can do it in two ways. Either someone gives them an opportunity in a job

related to analysis or management (a very scarce opportunity); or they start in a self-taught way by spending free time learning how to invest correctly.

“The amount invested is irrelevant; The decisive thing is to organize a good process that satisfies ourselves, and if possible, that works. How are we going to convince someone to give us a chance if we do not believe in it?”

Regarding his investment style, Paco prefers not to participate in boards of directors and loves family businesses. One of them is BMW. “Who better than the family to keep an eye on managers that are taking care of the long-term interests of shareholders. Obviously, we must also ensure that there is no nepotism, with unskilled relatives involved excessively in management.”

***

“Invirtiendo a Largo Plazo” is a great book for investors who

wish to go beyond “The Value Investors”, a book in which

Ronald W. Chan dedicates a chapter to Paco, the so-called

Self-Taught Value Spaniard. An English language translation

of Paco’s book is expected to be published by Wiley in 2017.

“Paramés tells an anecdote of when he sent

a letter to Warren Buffett, which Buffett

answered. Unfortunately, Paco did not respond to

Warren again, and that’s where the relationship

ended.” —EZRA CRANGLE

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