Robert Hagstrom of Legg Mason

http://www.valuepodcast.com/155#t=0:22.400

Books:

  • The Nascar Way
  • Warren Buffet Portfolio
  • ¬†Latticework

 

Investment Mandate:

  • follow the cash flow
  • the cash flow with the highest return on capital is better
  • apply sound valuation methodology to growth companies
  • not averse to applying value investment valuation methodology to new innovative, rapid growth companies; i.e. cloud computing
  • these companies are characterized by more uncertainty but they can be purchased with margin-of-safety
  • the upside is very high but you need to balance the portfolio to account for the uncertainty
  • the valuation model should be based on the following:
    • what is today’s cash flow
    • how sustainable is it
    • what is the growth potential
    • how strong is the probability of increased cash-flow
  • the greater the risk in the business, the greater the margin-of-safety
  • risk must be accounted for in future cash flow projections

 

Investment Mindset:

  • be flexible and open minded
  • markets are people driven systems; this is the key driver behind volatility, so remain calm

 

Valuation Models and Markets:

  • the description of Amazon for example: a direct distributor
  • this business model product triple digit returns on “incremental” or invested capital
  • IBM has morphed into a service business from hardware based
  • the cloud will be big
  • take time to think about global markets; any business that doesn’t have global exposure, will be struggle to grow.
  • U.S. domestic growth is static, however U.S. export growth is growing
  • be aggressive in market sell-offs to re-calibrate the portfolio
  • the market does not efficiently price growth
    • it does not price in sustained growth beyond 5 to 8 years
    • but the caveat is that only few companies can achieve this
  • how long is the growth runway and how is this reflected in the price

 

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