The Search For Exceptional Returns

Pope Brar is a money manager based on the West coast who has spent a considerable amount of time analyzing the success as well as the failure of some of the greatest investors. He has carefully examined the records of such legendary investors as Warren Buffett , Seth Klarman and others to see what they have done to achieve such success over such a long time in the equity market. Mr. Brar had worked as an analyst and investment bankers and using the knowledge gained from his research he opened his own fund last year after first seeding it with his own capital for five years to make sure he could achieve the superior results he desired. When asked about his investing approach he said “One of the best ways to achieve elite returns over a long period is to purchase businesses that are selling for less than half of intrinsic value. Buffett invested in two major categories. Plan A is always to buy the Coke and Moody's of the world at 50% off. If you buy these types of businesses at that discount and it takes 2-3 years to trade at intrinsic value, you'll do very well. Intrinsic value will be much higher in 2 to 3 years. So 50 cents may be worth $1.30 or $1.40. This is always Plan A. But plan A is virtually impossible to execute across the entire portfolio because they are so very ,very rare. When plan A fails, go to plan B. Plan B is to buy at half off, regardless of business quality (as long as you're pretty sure intrinsic value is very unlikely to decline.)” As he says Plan A is difficult to achieve because it can usually only be found when we have a full on market meltdown like 2002 or 2008 that creates extraordinary values. However as asset based deep value investors we can combine the concept of steep discounts from intrinsic value as well as a discount tot asset value to find some potentially outstanding opportunities. For intrinsic value we can use the Graham number which uses a theory developed by Graham to determines the intrinsic value using both earnings and asset values. Reverse engineering Grahams theory we can establish that the Book value multiplied by 22.5 and multiplying that product buy the earnings per share we have a rough estimate of a firms ongoing intrinsic value(note that this is not Mr. Brars methodology but a quick an dirty way for us to get an approximate fair value for the company). It is then a simple matter to screen for stocks trading at half of this value and also trade at a discount to asset value (again note that these are not Mr. Brar's picks but the results of a stock screener using his theories and approach). One thing that shows in the screen immediately is that both Brookfield Office Properties (BPO) and Brookfield Property Partners trade below book value and healthy discounts to intrinsic value. The two REITs are probably going to combine under a takeover offer made by BPY for BPO. It is a share for share offer so with BPO trading at a discount BPY investors can back into what will be a world class portfolio of commercial real estate including huge chunks of downtown Manhattan . Bond insurer MBIA (MBI) also shows up as a potentially severely undervalued stock. The company has spent the past several years cleaning up the mess it made during the mortgage meltdown and arguing with Banks, most notably Bank of America (BAC) as to who owed who what for the massive losses that were incurred. The company has a lot house cleaning to do so it can get back to its core municipal bond insurance business but if they are successful the potential upside for current levels is nothing short of spectacular. The stock trades at about 70% of book value and one third of the company's Graham number. Harvest National Resources (HNR) is also on the list. The comonay has reached an agreement to sell its interest in an oil and gas partnership in Venezuela and is attempting to sell its interests in Gabon in Indonesia. If all the transactions are concluded successfully the stock would have an asset value of more than double the current stock price with most of that in cash. There are obstacles when dealing in nations with less than friendly governments nut insiders seem confident and deal will get done as officers and directors have been pretty big buyers of the stock in the last three months. The stock currently trades at about 40% of book value and one third of its Graham number so the shares are definitely cheap. Combining intrinsic value and book value to find stocks with the potential for huge gains makes a lot sense. Although you can certainly use other methods I have found the Graham number to be a decent representation of intrinsic value and is usually within 10% or so of the values I get using more sophisticated valuation models.