113 ciccio azzollini vis 2014

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11th Annual Value Investing Seminar

Ciccio Azzollini

July 2014

ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUEELEVENTH ANNUAL VALUE

Value Investing as a way of Thinking:

Simple, Different and Big

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Disclaimer

Cattolica Partecipazioni S.p.A. and I have been wrong several

times in the past on stocks/businesses we’ve invested in.

Please do your own independent research and due diligence.

We own stocks in the businesses we’re recommending, so we

are likely biased.

No commitments/plans to provide perspectives or updated

thoughts on the businesses being presented.

We own these investments as part of a portfolio of business.

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LEFT & RIGHT BRAIN FUNCTION

RIGHT BRAIN FUNCTION

HOLISTIC THOUGHT

INTUITION

CREATIVITY

ART & MUSIC

ANALYTIC THOUGHT

LOGIC

LANGUAGE

SCIENCE & MATH

LEFT BRAIN FUNCTION

Strategy to try to maintain rational thinking

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Understand our Brain and how it works


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Know our Mental Pitfalls

1.Overconfidence 2.Rear view mirror3.Social proof 4.Confirmation bias5.“Anchoring” on irrelevant data 6.Liking7.Halo effect8.Commitment and consistency bias 9.Conservatism 10.Excessive aversion to loss 11.Fear of uncertainty 12.Fear of making an incorrect decision and feeling fool (regret aversion) 13.Reluctance to admit mistakes 14.Hindsight bias15.Forgetting the powerful tendency of regression to the mean 16.And more and more…..

Common Mental Mistakes

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All this natural human tendency are part of us and influence our decision making process, especially in the auction driven market place where huge amount of emotions take part. Some of these mental pitfalls have antidotes and some don’t .



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Our Psychological Checklist

Antidotes to our mental pitfalls

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•Simplify problems • Find numerical support • Invert always invert:look at downside, look for disconfirming evidence, kill the idea• Multidisciplinary approach • Properly consider result from a combination of factors: loolapalooza effect • Think the market as the Pari Mutual System • Be skeptical, ask always why and do your home work• Keep a written investment diary; it’s a very effective method of learning from mistakes • Be flexible, focus on facts, when they change, change your mind• Pre-committment: wishing list or inventory idea • Use of autopsy: post mortem reverse engineering • Focus on process not outcome: what buying, what pricing, what sizing and what selling • Don’t model:THINK!! Be indipendent, do your judgement through your experience • Be patient: never understimate The value of doing nothing •Implement the checklist a simple one •You must know your limits, your circle of competence: distinguish what you know and what you don’t know. Be humble about what you don’t know

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Business

Management

PRICE: Market Implied Expectation Variant view Downside-Upside

• Why is it cheap?

The investment checklist mental framework

Our Investment Checklist

The checklist doesn’t tell you what you do, it’s not a formula but it helps you in: a) improve the probability of good outcome; b) improve efficiency; c) reduce the frequency and severity of mistake and trying to help us to maintain rational thinking in our decision making process.

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Potential compounding machine and potential opportunistic investment

Potential Opportunistic Investments

Potential Compounding

Machines

Why we share our investment ideas and our mistakes?

•It’s a useful exercise for us – It helps clarify our own thinking•We often get valuable feedback, if there’s information or analysis that would cause us to change our views we want to hear about it.

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Our investment ideas:


9ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUE INVESTING SEMINAR ELEVENTH ANNUAL VALUEELEVENTH ANNUAL VALUE

Billabong International (ASX:BBG)Our investment ideas:



Billabong International (ASX:BBG)

•Checklist failure issues:-Lifestyle change could change permanently the value of the business-Execution risk-Limited downside protection as tangible asset•Market implied expectation: Current price implies that management will be able to fix permanently the business at 4% net profit margin without growth.•Variant view: We think that on 3/5 years basis, due to strong competitive position of the co., great management and the financial strength the turnaround plan have an high probability of success. Billabong could be able to reach a pre tax margin close to the normalized level of the industry around 10%.

•Downside/upside ratio:Considering that “turnarounds seldom turn”, we have a worst case scenario, with a low probability, where we could incur in a permanent loss of capital of about 30%. Our intrinsic value range based on the assumptions mentioned above, could be between 0,9AUD$ / 1,5 AUD$ •Why it is cheap:Time arbitrage: markets have a short term view and are looking into a rear view mirror. There is a natural uncertainty with regards turnaround and market pay an high price for certainly and vice versa.Under followed.

Billabong is engaged in marketing, distributing, wholesaling, and retailing apparel, accessories and hard goods in the board sports sector primarily in Australia, North America, Europe, Japan, New Zealand, South Africa, and Brazil.

Last price 0, 48Mkt Cap 469 mln EV 469 mlnSales* 1.150 mln

* FY 13-14 E



Moncler SpA ( BIT:MONC)

•Checklist failure issues:-Extremely competition-No downside protection as tangible asset-Only one core product-Too high gross margin compare to the industry: reversion to the mean risk

•Market implied expectation: Current price implies a growth rate of about 8% in the next five years .

•Variant view: At current price Moncler is a bargain based on future growth potential and is fairly valued based on 2014’s free cash flow. In other words, we are buying the cash flows from the existing stores at a fair price and getting the future store development for free.

•Downside/upside ratio:We think there is a low probability of permanent loss of capital and the expected intrinsic value could be double of the last price. •Why it is cheap:Time arbitrageFree float is less than 40%

Moncler S.p.A. designs, produces, and distributes winter clothing and related accessories for men, women, and children under the Moncler brand name in Italy and internationally

Last price 11,6 €Mkt Cap 2.895 mln EV 3.062 mlnSales* 600 mlnP/E 30 X * Ltm sales 31/03/2014



Salvatore Ferragamo( BIT:SFER)

•Checklist failure issues:-No downside protection as tangible asset

•Market implied expectation: Current price implies a growth rate of about 8% in the next five years.

•Variant view: At current price Ferragamo is a bargain based on future growth potential and is fairly valued based on 2014’s free cash flow. In other words, we are buying the cash flows from the existing stores at a fair price and getting the future store development for free. The growth will be driven by new stores opening , comparable store sales growth and by margin expansion , now below the industry’s average. •Downside/upside ratio:We think there is a low probability of permanent loss of capital and the expected intrinsic value could be multiple of the recent price, in the range of about 40€ /50€

•Why it is cheap:Lower market expectation , is due probably to lower growth rate recorded in the last year data , compare to the previous years.Family owned company: Ferragamo family owns more than 70% of the company.

Last price 20,6 €Mkt Cap 3.480 mln EV 3.540 mlnSales* 1.275 mlnP/E 23 X * Ltm sales 31/03/2014

Salvatore Ferragamo S.p.A. is engaged in the creation, production, and sale of luxury goods for men and women worldwide

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The Value Trap

In the Business of Investing is not important how many times you are right or wrong, but it’s important how much money you make when you are right and how much money you lose when you are wrong.

• Don’t think that if something is statistically cheap it’s automatically a bargain.

• Beware of poor management, especially in the commodities business and leverage one.

• Beware of state owned company.• Beware on giving 100% of value to excess cash.

Bank Business

• Beware of Domino Effect and Regulatory Risk they could lead to massive dilution from Capital increase.

• Government bond are structural in bank business model; so when you invest in a bank you invest also in the balance sheet of the country.

FraudChinese Scam

• Too good to be true could be a nightmare even if the stocks is listed in USA market. Compare local Chinese Filings to the SEC. Beware of emerging market governance-integrity risk.

Our biggest mistakes:expensive lessons we have learned

Leverage on Leverage

• When you borrow money and you buy a leveraged company you are leveraged x2

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POTENTIAL COMPOUNDING MACHINES

Our investment ideas from last value investing seminar

POTENTIAL OPPORTUNISTIC INVESTMENTS


COMPANY TK PX AT 11/07/12 LAST PX P&l PANDORA CPSE:PNDORA 54 425,4 688%

POLTRONA FRAU BIT:PFG 1,498 2,96 98%FERRAGAMO BIT:SFER 14,8 21,72 47%PIQUADRO BIT:PQ 1,48 1,96 33%DELONGHI BIT:DLG 12,34 15,84 28%

TOD'S BIT:TOD 74 91,4 24%YOOX GROUP BIT:YOOX 19,73 19,71 0%

BRUNELLO CUCINELLI BIT:BC 20,58 16,75 -19%MULBERRY AIM:MUL 9,7 7,81 -19%

JAMBA JUICE NASDAQGM:JMBA 15,82 12,44 -21%PRADA SEHK:1913 71,15 55,3 -22%

AVERAGE 76%

COMPANY TK PX AT 11/07/12 LAST PX P&l INDESIT BIT:IND 3 10,95 265%

ESPRINET BIT:PRT 3,04 8 163%FIAT BIT:F 4,08 7,71 89%

MUTUI ON LINE BIT:MOL 2,86 4,98 74%PRYSMIAN BIT:PRY 12,3 17,1 39%

SAIPEM BIT:SPM 14,39 20,03 39%CIR SPA BIT:CIR 0,8975 1,129 26%

FIAT IND. BIT:CNHI 8,8 7,525 -14%

AVERAGE 85%

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Experience

Value Investing is most likely an “experience – based” business. As Howard Marks says: “Experience is what you get when you didn’t get what you wanted. Good times teach only bad lessons: that investing is easy, that you know its secrets and that you don’t need to worry about the risk. The most valuable lessons are learned in tough times”In that sense I’ve been “fortunate” to start my investment professional life in the worst 10 years of the last 70 years!!!!!The bursting of assets (both equity and real estate), Banking crisis, Sovereign debt crisis and potential Euro-currency crashes.The only one left is Inflation crisis!Our entire framework is build up from 10 years of self-taught experience and being a permanent student of B. Graham, W. Buffet, C. Munger, P.Fisher, H. Singleton and some of the most successful investors: J. Greenblatt, R. Pzena, S. Klarman, W. Tilson, M. Whitman, E. Lampert, G. Tongue, W. Ackman, T. Russo, M. Pabrai, P. Lynch, J. Robertson, J. Grant, J. Grantham, B. Berkowitz, D. Einhorn, H. Marks, L. Khaner, G. Spier, F. Parames, J. Montier, M. Shearn, C. Akre, Ruane & Cuniff and others: just thank you!!!Last but not least: thank you Papà !!!!

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“The best thing a human can do is to help another human being know more” Charlie Munger

113 ciccio azzollini vis 2014

Documents

rational thinkingknow

dont know6antidotes

investment ideas

incorrect decision

whatselling dont model

written investment diary

auction driven market

way of thinking