- May 10, 2011
The Search for the Opportunity to Add Value
Going global is about capturing quality companies at a low price through a really big advantage
The animating idea at the core of Graham's (and Buffett's) methods is the search for value—a quest for unrecognized value caused by seemingly endless market inefficiencies. On a daily basis, the classic value investor estimates the economic value of companies, mostly by screening stocks, reading annual reports, and calculating intrinsic value. Accessing the deals, acquiring the assets, and managing the assets are key steps but not the major focus (you buy the shares and put them in your portfolio). A prototypical value investment would be Warren Buffett's purchase of Coca-Cola. He recognized the mispriced value, purchased the shares on the public market, and put them in his portfolio.
Value point is the search for the opportunity to add value. Finding unrecognized value is actually not the primary challenge in most global markets today. These are rapidly developing markets with limited and often inaccurate information—and they are overwhelmingly inefficient. The value point investor's problems are accessing inaccessible investments, eliminating the larger uncertainties, and strengthening the weak and often impractical claims to the enterprise.
A prototypical value point investment is Prince Waleed's launch of two Four Seasons hotels in Egypt. He partnered with the Four Seasons and made private bids for both prime land and existing hotels in Cairo and Sharm El-Sheikh. The offer added so much value beyond just capital that the local owners and government officials were willing to sell a minority share at a good price. His added value (the Four Seasons brand and management contract) made an inaccessible deal accessible. Furthermore, his long-term control of the hotel management contract enabled him to comfortably become a minority shareholder of an illiquid private asset in a country with limited rule of law. Per Graham, it was a value-based surgical investment. The risk was minimized by a large margin of safety, and the returns were effectively secured at the time of the investment.
In both examples, we see that the investors identified a quality company, acquired it at a cheap price, and secured a margin of safety. The key to value point is knowing what constitutes a quality company in a developing economy or cross-border situation and how to solve the "going global" problems mentioned. I have found that a surgical addition of value at the time of investment is the most effective approach. It both increases access and expands the margin of safety to compensate for the increased uncertainty and instability of these environments.