The Best Value Investor You've Never Heard of
Learning from Norbert Lou of Punch Card Management
Reminder: these are show notes that should be read in conjunction with the podcast. Do not expect these notes to be a polished research report. Enjoy the episode and listen wherever you get your podcasts!
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Show Notes
*Ryan’s notes he made for this week’s podcast
Early life: Lou went to an average high school in Connecticut but was always a great student. Lou was the son of Taiwanese and Chinese immigrants. His parents always emphasized academics and his mother always (an accountant) told him how much more challenging school was in Taiwan, which kept him motivated despite being top of his class.
After graduating high school, he was accepted into Cornell. He really didn’t have much interest in finance at all, he was studying agricultural and biological engineering. His father had been an engineer but left to become a stockbroker, and tried to get Norbert interested by showing him some technical analysis stuff, but he didn’t really latch onto it. He did however come across Peter Lynch’s “One Up On Wall Street” which really made it click for him.
He instantly registered for a number of finance and accounting courses and continued reading all about it. His mom gave him $60,000 which was apparently almost all of her retirement money to manage (wow, I don’t think I would ever do this as a parent, but goes to show how bright he really was). That summer he landed an internship with JP Morgan. After graduating college top of his engineering class, he looked for analyst roles. He chose to take one at a smaller company called Brown Brothers Harriman where he worked for 2 years.
Here’s what one of the partners at the firm said about him:
He was always extremely reliable, and very effective in terms of just getting stuff done, but very calm. You could talk to him at 9 or 10 o’clock at night and say ‘we need to get this done’ and when you arrived in the morning it was there. In my opinion, he was the go-to analyst. If you had a tough project, you wanted Norbert on the team.
After being an analyst there, he joined Elliott Management. They earned great returns for investors during that time, but he came away saying that it didn’t suit his nature to be buying and selling constantly and just being generally so active. While he was at Elliott he was still managing his and his mother’s money.
Then, he came across NVR.
How did he find NVR? What was his thesis?
While he was at Brown Brothers, he came across a small homebuilder due to a big buyback announcement. He saw the announcement for up to $100M in buybacks and the company had a market cap of $275M at the time. So he started digging in and realized that he really liked what he saw.
NVR was a homebuilder. However, unlike traditional homebuilders which would acquire large plots of land and hold it on their balance sheet while they developed homes on it, NVR would instead purchase an "option" on the land. This meant that NVR would usually pay 5%-7% of the land value upfront and then could exercise the right to pay the remainder once the lot was finished. This model kept the inventory off of NVR's balance sheet, which helped the company during market downturns.
Additionally, he found that they were the largest homebuilder in their market. So there were actually some local economies of scale. Could get better deals from 3rd party contractors and materials costs were lower when bought in bulk. He thought this was a good recipe for success. And the stock traded at like 7x earnings. So he started buying it in 1997 at around $23 per share.
The rationale for buying at the time was fairly simple:
You could see that volumes were increasing, prices were going up, and cash flow would be higher in the next 12 months
Here’s an excerpt from an interview he did:
Running through every element of his thesis, he concluded that NVR, with its combination of low risk and high potential growth, was the best stock he had found in three years of managing his mother’s portfolio. NVR had little debt, was a low-cost provider of a basic necessity, and had been around for decades—and yet was growing rapidly. Despite these advantages, and the company’s willingness to buy back its stock, NVR traded at only seven times that year’s after-tax earnings.
Since it was the best thing he could find, he made it 35% of his mother’s portfolio. Within a year of buying, the stock had doubled. But it wasn’t because of multiple expansion. In fact, it continued to trade at the single-digit P/E for a while despite growing so quickly.
His largest positions had tended to perform the best and accounted for most of the overall return.
The other positions, for all the effort of looking and analyzing and buying and selling just right, didn’t amount to much in comparison
What was his investing style?
After about 5 years of investing his mother’s nest egg, he looked back at his performance and what had worked. Here’s what he found:
By buying a great stock and just hanging on, I ended up seeing how that could work out better than a lot of strategies,” he said. “That really had an impact later on how I viewed the ideal investment.
Ironically, he first looked at NVR because of the buyback announcement, but later on, he said
You actually want the companies that have such bountiful reinvestment opportunities that they don’t buy back any shares
In other words, they are generating such good returns on the money they invest into their business that it makes less sense to buy back stock. Not to mention, in a case like Homebuilder, there’s really endless room to apply their strategy.
How did he get discovered?
He continued managing his own money and his mother’s portfolio throughout his time at Elliott Management. While he was at Elliott he attended a Berkshire meeting and in one of the pamphlets, there was an ad for Value Investors Club.
VIC was started in 1999 by Joel Greenblatt and John Petry. Greenblatt and Petry had successfully been running Gotham Capital Management for a while and were well-known in the industry. Value Investors Club is a forum where you have to apply with an investment write-up to get in. Lou decided to apply with NVR since it’s one of the businesses he knows best and he thought it was still a good opportunity at the time, despite being up 6x since he first bought.
The application was accepted and he won the bi-weekly competition for best pitch. He quickly followed that pitch up with a microcap asset management firm that ended up being a successful net-net and a third stock called NII Holdings. All handily outperformed the market. In fact, NVR was a 15-bagger within like 4 years of the write-up.
"To this day, I hand out the first 3 write-ups he wrote on the Value Investors Club to my students at Columbia, to show them what a brilliant, concise, straightforward and clear investment thesis looks like." - Joel Greenblatt
How did Punch Card Management get started? What were his returns like?
Greenblatt and Petry took notice and invited him out to New York to meet with them. They encouraged him to start a fund of his own and said they would handle the back end. He mentioned that he was wary of running a fund because he didn’t want to worry about his short-term performance which really is pretty inevitable when managing a fund structure. So he set up very stringent LP agreements. Gotham thought they were fine and in 2004, they got started.
Petry, Greenblatt, and Gotham Capital were partners. And Lou was the only analyst. He did all the research himself. He says:
I didn’t want to remove myself from the critical details of an investment by installing a layer of analysts.” I think that actually makes a ton of sense.
Lou does not publicly report his own performance. However, prior to starting the fund, he looked back at his own performance and calculated that he compounded his and his mother’s own personal money at 38.5% annually from 1994 to 2003. From 2004 to 2011 (from when he launched the fund to when he did his one public interview), he generated 14.5% annual returns net of fees. That was at a time when the S&P 500 did just 2.2% annually.
What were some of the investments he made while running the fund?
While he was running the fund he made a few interesting investments. He continued holding NVR for a while but ended up selling out of all of it just before the GFC at ~$900/share.
But he also owned a company called Quinsa that brewed a beer called Quilmes, which was super popular in Argentina, and a couple other Latin American markets. He bought it at $17 per share in 2005 and wrote it up on VIC, but he said he wished he hadn’t written it up because he was still accumulating shares and it affected the price.
Quinsa was a family-run business, but it was going to be acquired by InBev, and there was a unique buyout clause here where it would get acquired for more at a later date depending on how much it was earning. So he had the sense that the family was going to quickly start pushing prices up, which is exactly what happened. He eventually got paid $82.50 for his shares in 2007.
He also made some investments that didn’t work out. He bought ZipRealty and ended up selling it relatively shortly after when he realized his thesis wasn’t proving out and he bought Abercrombie & Fitch which got destroyed due to competition. He said one of his biggest errors was not paying up for Morningstar when he knew it had latent pricing power.
And he ended up buying Moody’s after the GFC, once again because he thought it had latent pricing power.
What does Norbert Lou own today? Go through each position:
Berkshire: Lou fell into owning Berkshire thanks to his investment in BNSF in 2009. He really liked businesses that he thought had pricing power and so he was attracted to BNSF following the GFC. However, as we do know, BNSF was acquired by Berkshire in late 2009/early 2010. And through the acquisition, shareholders were given the option as to whether or not they wanted to take stock in Berkshire or cash. Lou thought Berkshire was actually pretty cheap, so he took the Berkshire shares. He’s held them ever since, and Berkshire’s total return is north of 400% since that time. 54% of his portfolio.
Ally: According to Finchat.io, which tracks when super investors like Norbert Lou bought a position, Punch Card first bought Ally Financial in Q1 2020. I think this fits exactly what he looks for and it makes sense to me. It’s cheap, has a structural advantage, and generates solid ROEs. 25% of his portfolio.
Winnebago: He first started buying Winnebago in 2019. But in 2020 he bought up more than 5% of the stock and wrote a letter to the board. Little change came off his letter, so he sold down his stake but still owns a decent chunk. 17% of his portfolio.
Smith & Wesson: Just 3% of the portfolio. I'm not exactly sure what he likes here. Obviously, he isn’t confident enough to make it a core position. But maybe there’s some latent pricing power, a little hard to tell. This is his most recent position that he’s bought (Q2 2022).
Discussion Question: Is this a strategy worth replicating?