Light and Heat at the Ira Sohn Conference
“One cool judgment is worth a thousand hasty counsels. The thing to do is to supply light and not heat.”
– Woodrow T. Wilson.
“When you can’t make them see the light, make them feel the heat.”
– Ronald Reagan
I had the pleasure of attending the 18th Annual Sohn Investment Conference in New York on 8 May 2013. Sohn has been called the “Super Bowl of investor conferences” because it consistently attracts the brightest hedge fund luminaries, as well as some of their most moneyed followers (tickets run up to $100,000 a head). This was my first time attending Sohn. As I entered the regal Avery Fisher Hall at Lincoln Center, I felt a bit like Nick Carraway entering Jay Gatsby’s mansion: Fund managers in impeccably tailored suits exchanged pleasantries while meticulously coiffed waiters served gluten-free quinoa salad. As the conference started, feature presentations from Bill Ackman, Steve Eisman, Jim Chanos, and others were interspersed with videos from the Sohn Conference Foundation seeking funding for pediatric cancer research. There was even a short but entertaining magic show from Oz Pearlman.
As a professional investor, I was primarily interested in the investment presentations (although who can resist a good magic show), but I found the format problematic. When your talk is projected on a giant screen to an audience of a several thousand, spectacle trumps subtlety. This, I suppose, is a problem endemic to all investment conferences, so it might not be fair to blame the Sohn Foundation. In the end, it is up to us as investors to focus on the light and ignore the heat.
The most valuable presentation, in my opinion, was also the least loud and least well-covered by the press. Li Lu, one of the student leaders of the Tiananmen Square protest in China and now chairman of Himalaya Capital, spoke without the aid of slides about a large group of securities that is mispriced by a wide margin: South Korean preferred shares trade at a 25–88% discount to their common equity counterparts while offering substantially the same or better cash flows.
While Korean preferreds lack voting rights, they pay dividends equal to the common dividend plus a spread. They also receive preference in liquidation, so under any scenario, going concern or bankruptcy, they offer a superior cash flow stream. Korean preferreds were originally issued several decades ago when the government pressured chaebols to raise more equity and delever their capital structures. The chaebols wanted the extra equity capital, but they also wanted to retain control of their companies — hence the new non-voting shares.
Li pointed out that one of the reasons for the discount is that Korean preferreds are poorly understood and largely ignored by the sell side. Managements tend to exclude them from earnings-per-share (EPS) calculations in public filings and thus have little or no incentive to buy them back (and capture the discount) because it would not improve EPS. This situation is similar to the option compensation issue in the United States (before tech companies were forced to expense options granted to employees, they had little incentive to curb those grants because they did not affect net income). EPS calculation rules are changing since Korea adopted new accounting rules in 2011.
The new rules require that all outstanding shares, including preferreds, be counted in the EPS calculation. The large discount between common and preferred shares in Korea is a glaring market inefficiency and a black eye for the country’s financial regulators, who are eager to show improvements in corporate governance — long an Achilles’ heel of the Korean market. So, there is some pressure to rectify the mispricing.
I should note at this point that I am somewhat biased toward Li’s investment idea because Korean preferred shares constituted a large part of the Asian equity portfolio I managed for a New York hedge fund in my prior job. That is, I had done the work before and was in a position to recognize the presentation’s value. The reaction of the audience at large, however, was polite silence. One contemporaneous tweet read, “I have no idea what Li Lu is talking about.” Indeed.
The least valuable presentation — again in my humble opinion — was given by Jeff Gundlach, who manages $60 billion at DoubleLine. He spoke at length about how ill-advised the Fed’s monetary easing policies are. His presentation drew parallels between our time and the 1930s, with the implication that, just as the great crash of 1929 was followed by a decade of catastrophe, we are in for some bad stuff. The presentation featured bold visuals like FDR (the U.S. president during the Great Depression) drinking a beer and some dancing girls singing “happy times are here again,” as well as double-hand-waving from Gundlach and a few jokes. What it did not feature was any kind of actionable investment idea. In the last few minutes, Gundlach threw in that we should short Chipotle Mexican Grill (CMG) because he “hates the chart” and thinks that “‘gourmet burrito’ is an oxymoron.” This is not investment analysis. It is propaganda. We deserve better.
David Einhorn of Greenlight Capital gave the closing presentation of the event. Rather than comment on his investment idea, I would like to highlight the last few minutes of his presentation, during which he presented a statistical summary of the performance of all 31 ideas he had pitched at previous Sohn conferences. As it turns out, these ideas earned approximately 20% on average in the year following the initial pitch, with 13 of the 31 losing money. I applaud this kind of objective performance review and wish it were required disclosure for all Sohn speakers. A little accountability should focus the speakers’ presentations on those ideas they are most confident in, and just might serve as an antidote to some of the fireworks and pomp.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: iStockphoto/fandjiki