Charles Brandes and Canada go a long way back. The famous money manager’s first client was a Canadian who wintered in California, near Mr. Brandes’s headquarters in San Diego.
Back then, Mr. Brandes was not a billionaire investor with his name on a fund company that runs $30-billion (U.S.) in assets, jetting into Toronto for meetings and to speak at a high-profile dinner.
He was just getting started in the business of running money, and his first client was a Vancouver lumberman who spent time south of the border.
Since then, Mr. Brandes has spent a lot of time in Canada. He has run mutual funds for Canadian clients under the AGF banner, and now under his own at Brandes Investment Partners. He also has institutional clients in this country. He finds an affinity between the Canadian mindset and the patience required to be a value investor.
The lumberman may have established the ties to Canada, but it was another early client of Mr. Brandes that really set him up for success. Early on, he decided he would base his stock-picking style on the tenets of value investing fountainhead Ben Graham.
Back in 1971, Mr. Graham had an apartment in La Jolla, a seaside town near San Diego. The young Mr. Brandes was his broker. Mr. Graham made one trade in his account with Mr. Brandes. It was a purchase of National Presto Industries, one of the stocks that was a case study in Mr. Graham’s famous book The Intelligent Investor. The short-term profit for Mr. Brandes couldn’t have been much. But the long-term effect was huge. Mr. Brandes began visiting Mr. Graham’s apartment to learn from him.
Forty years later, most of the things that Mr. Brandes says over our lunch of halibut at the Chase, a trendy favourite of the financial crowd in downtown Toronto, come back to those same core principles that Mr. Graham stressed, and which he wrote about in The Intelligent Investor. Buy cheap. Have a margin of safety. Ignore the herd.
Our lunch is not many days after the blockbuster initial public offering of Alibaba Group. Mr. Brandes is bemused.
“As value people, we wouldn’t be interested at all,” he says. “We don’t want to forecast how fast they are going to grow to justify the price. To justify the price, they have to grow a whole lot, and I’ve never attempted to do that, to forecast that type of thing. Some people I guess can do it but I haven’t found a whole lot that can do it and do it really well.”
Instead, at the moment, Mr. Brandes is finding value in Russia. That Russia? Vladimir Putin’s Russia? Even with all that political risk and currency risk and … everything risk?
Yes, indeed. Mr. Brandes is a firm believer that people need to look around the world for opportunities, and at the moment emerging markets are cheap. That’s a key part of the speech he is in Toronto to deliver at the high-profile annual forecasting dinner put on by the Chartered Financial Analyst Society of Toronto. He is set to speak along with strategists from Pimco and BlackRock – the kind of league Mr. Brandes plays in.
As far as emerging markets go, nothing is cheaper than Russia.
“Some of the major Russian companies are very large, very substantial companies from the standpoint of their financing and their businesses, and they are unbelievably cheap. So, in our emerging markets we will have a limited exposure. At two to four times earnings, no matter what happens, we think we have a pretty good risk-reward ratio.”
Mr. Brandes is clearly not afraid of buying things that others would struggle with. He bought oil producer BP PLC after the Deepwater Horizon spill that spewed oil into the Gulf of Mexico. Remember Union Carbide, which had the tragic chemical spill in Bhopal, India? “Where they killed a lot of people,” Mr. Brandes says. “I bought that, by the way.” And he made money.
Mr. Brandes seems comfortable with being offside with public opinion, believing it’s a strategy that’s key to following Mr. Graham.
“You can be different and be right both at the same time. But only right over the long term. You might not be right over the short period of time when you are different than everybody else is thinking.”
He bought Microsoft at around $20 after the rest of the market decided the maker of Windows was a has-been. Mr. Brandes believed that the company’s software was far more entrenched and desktop computers more enduring than people were giving the company credit for. The stock now trades near $50.
He then stops to think about stocks he bought, betting that they would rebound, and which did not. After a pause, he comes up with an example.
“The newspaper business,” he says. “Once they [newspaper stocks] really came down in price, we decided these are value stocks, we will buy them. It didn’t work out.”
That stings. I chuckle ruefully and say I wish he’d been right. He laughs.
He wasn’t the only value investor who blew that call. Prem Watsa of Fairfax Financial Holdings, Canada’s most famous value buyer, did the same. Mr. Brandes knows Mr. Watsa well, and considers him a friend.
That said, he said that he doesn’t like to discuss his ideas too much with other value investors.
“It’s a small community, but I try to avoid being influenced by their thinking. If you look at value guys’ portfolios, [like] Prem Watsa’s and look at ours, or some of the other value guys’ portfolios, they can be quite different. So I would rather not try to copy the other value guys. If you are copying someone you don’t really have the really strong conviction of what you are doing.”
It took conviction to stick with the value beliefs over the many years of the past couple of decades, when growth was a more popular strategy. As value fell out of favour, Mr. Brandes’s firm lost assets. At one point, it managed more than $100-billion.
Mr. Brandes professes not to care about the decline in assets.
“Absolutely not. The only thing we really concentrate on is doing the right thing for clients over the long term even if it hurts the firm in the short term. Which it can and it will.”
He says that when value is not working “we are even more enthusiastic because we know it’s going to change. We have to go through those cycles and we understand it.”
And he sees signs that value is back. His funds outperformed benchmarks last year. “[In] 2008 and 2009 the cycle for value was the worst I’ve ever seen in my 40-year career. But it did change. And it has changed dramatically now. It just took longer.”
These days he believes that too many investors, especially institutions such as pension funds, are not putting enough into equities. Instead they are focused on so-called “alternatives,” such as hedge funds, that try to reduce volatility even if it means lower rates of return.
“I think that is a consideration of much too short-term type of thinking for these big institutional funds, these retirement funds that should be thinking very long term, but they are under this pressure of 2008 and 2009 that we can’t have that downside any more,” he says.
“It’s kind of what is bothering me today. It might be starting to change, but I’m still seeing clients giving up on equities, and equities is where the long-term rates of return come from, better than anywhere else.”
At 71, Mr. Brandes is far from giving up. He still travels a lot. Brandes has offices in Europe and Asia, and clients all about the globe.
“We invest around the world. [Travelling] is something that has to be done,” he says, even if the actual business of airports and hotels can all be “annoying.”
His low-key blue suit, subdued Jimmy Stewart-ish manner and simple lunch of fish and a glass of water give no hint of his higher-flying side. For example, he is a well-known lover of Ferraris. In the documents from a divorce in 2011, 10 were listed among his possessions.
He has the money. Those same filings said his income at the time was $16-million a month.
Some of it, he gives away. But he doesn’t want to talk about that.
“I have some friends around San Diego that do do that, [who] want to put their name all over everything and that sort of thing,” he says, adding that “philosophically” he does not agree.
When he is back home in suburban San Diego, he plays tennis, which he took up at 50. “For 21 years I have been trying to improve my tennis, but I have given up the idea of maybe becoming a professional.”
He also plays soccer, which he took up after his kids wanted to play and needed coaches. So the rich investor went to the library and read a few books so he could coach them. “Then I really got into it.” These days he plays pickup games with a group of friends.
He is also finishing writing a book that will be published shortly, called On Value. He already has one out, called Value Investing Today.
While those are fun pursuits for off-hours, he has no plans to stop working to spend all his time driving fast cars or chasing balls around.
“I’m not going to do that. It’s too much fun. I’m never going to quit.”