Michael Price is a lesser-known investor, with a unique approach to investing. He got his start in 1975 at Mutual Shares and went on to produce a market-beating track record.
Max Heine started a small fund company in 1949. He set up a single no-load fund called Mutual Shares to invest money for friends and family. But it wasn’t your typical mutual fund. Heine had a unique approach to racking up big returns for his investors. He went anywhere he could find value.
Under Heine’s tutelage, Price learned how to find dollars for fifty cents. He’s followed Heine’s playbook ever since.
Their philosophy begins and ends with the preservation of capital. It’s accomplished through strict discipline to portfolio construction. A portion of the portfolio is always invested in assets that move independently of the market because it helps to reduce drawdowns.
It’s not for everyone either. Price’s strategy requires a particular set of skills and a strong stomach because it often takes him places, like bankruptcies, that few investors want to go.
Over the years, Price has shared more about his and Max Heine’s investment approach.
On His Investment Philosophy.
My mission isn’t to make money in bull markets. My mission is to preserve capital.
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The goal is to make good returns with less risk. Risk is not the same as volatility. It’s very hard to measure risk. It’s very simple to measure return. You can’t model it.
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When most people look at the day’s stock tables, what do they turn to first?… I look at the day’s biggest decliners. I love to read about losses.
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Max taught me that if you really wanted to find value, you had to do original work, digging through stuff no one else wanted to look at.
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You have to do your homework and kick the tires. It’s not the answers that make you good in this business, it’s the questions you ask. If you ask the right questions you will always find out more than the next guy.
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Never, never pay attention to what the market is doing.
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One of the things you do is watch smart people. This is a business where, especially in our game of bankruptcy and cheap stocks, there are certain people out there who control companies with large amounts of money. These are smart people and you want to be buying what they are buying. You never want to be selling what they’re buying.
On Mistakes
You know, we make mistakes. Some go from 12 to 10 and we sell them. Some go from 20 to nothing. In a 10-year period, you are going to have one or two that go from 20 to nothing. If you have more, it is bad.
On Portfolio Construction.
We do three things. We do cheap stocks based on asset value… We do deals… And we do bankruptcies.
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What we did way back when the fund was small…is divide the portfolio into components. Cash is between 5% and 25% always. Well, cash doesn’t move with the market. Bankruptcies don’t really move with the market, they move with the progress of the case. Arbitrage deals, announced tenders, mergers, buybacks, and liquidations, trade as a function of the deal’s progress. So if you add up our cash, the bankruptcies and arbitrage and liquidation deals, and some other unusual securities we sometimes carry, it generally will be 40% of the fund. The other 60% will be made up of what I call POCS, Plain Old Common Stocks, and those are value stocks and most are trading if not below book, at least below intrinsic value, so they should go down less than the market. So, if 40% of your portfolio is not really related to the market, you can get a beta of .6 or a real low standard deviation.
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Our turnover is in the mid-70s, but it is skewed by the arbitrage deals. A lot of our stocks get taken over.
On Distressed Debt
What we try to do is separate out and only work on the good businesses. There are really good businesses out there with junk bonds. I don’t want bad businesses… But then we want to buy them at prices where we can’t lose any money.
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We work on all the big bankruptcies, from different perspectives. In some cases, we just own the bonds. In other cases, we own bank loans. In still other cases, we’ve bought out lots of the banks and are looking to take over significant interests in the companies. We want to buy thins without a lot of downside. I don’t worry too much about the upside. But those situations are still hard to find.
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We want to buy the senior most securities so we get protected because we’re senior. As we learn more about the case, we’ll go down, if the returns are there, to the more junior securities. We try to be one of the biggest investors in the company so we can control the case, but not so large that we are on the committee and prevented from trading. We try to bring the company out with the best and cleanest balance sheet it can get.
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The bankruptcy process has evolved today to where there is more competition and you have to get smarter about how you invest your money. Just buying the bonds isn’t good enough. In the last five or ten years, we have come up with some pretty creative ways to put money in companies to create new securities… Rights offerings and cash infusions are ways. We go to a company that needs money.
On Special Situations
One of the things I do is look at every merger announcement. What a merger tells you is what businessmen are willing to pay for a business. I think it’s the best indication of value… The first question I ask is why? The second question is: does it make sense? These are the simple basic things you do and we continue to do when there are merger announcements.
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We perform well because some of our stocks have these catalysts. You asked why do we spend our time going around to shake some cages? It’s because a lot of times you can buy good values. But until there’s a catalyst, the value is not going to get realized.
Sources:
Investment Gurus
Mr. Price Is on the Line
Price Conscious
Price’s Favorites
Related Reading:
Wise Words from Seth Klarman
Wise Words from Lou Simpson
