#46 – The Numbers Lady
/*! elementor - v3.22.0 - 24-06-2024 */.elementor-widget-text-editor.elementor-drop-cap-view-stacked .elementor-drop-cap{background-color:#69727d;color:#fff}.elementor-widget-text-editor.elementor-drop-cap-view-framed .elementor-drop-cap{color:#69727d;border:3px solid;background-color:transparent}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap{margin-top:8px}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap-letter{width:1em;height:1em}.elementor-widget-text-editor .elementor-drop-cap{float:left;text-align:center;line-height:1;font-size:50px}.elementor-widget-text-editor .elementor-drop-cap-letter{display:inline-block} Jennifer Wallace is the founder of Summit Street Capital Management, a value fund which invests in high quality companies when they are temporarily cheap.
SUMMARYJennifer Wallace is a value investor. She learned her trade from a series of luminaries, studying under Bruce Greenwald at Columbia, before going to work for famed value investor Bob Bruce (who used to hang out with Warren Buffett). Today she is the CIO of Summit Street Capital Management, and only invests in high quality companies with modest leverage when they are super cheap. This means she will often find stocks with issues that are hopefully temporary. But she has found a winning formula, having delivered a 7.8x return to investors since 2009. Around a quarter of her investee companies have been acquired. She explains why, her rationale for having a 25-30 stock equally weighted portfolio and why you should not befriend CEOs – if you want a friend, get a dog”.
Some takeawaysGetting into InvestingJennifer caught the value investing bug after doing a class with Bruce Greenwald at Columbia Business School. She acknowledges her luck in being hired to work for famed value investor Bob Bruce, the former CIO of Fireman’s Fund, when he was running money for the Bass family. Another podcast guest, Beth Lilly, also worked for Bruce who used to hang out with Warren Buffett. Jennifer recalls attending guest lectures by Buffett and by Seth Klarman and remembers knowing that she was in the company of greatness. She was a psychology major and investing was not in her sphere of interest, although she acknowledges that it has been useful in her investing career.
Our DiscussionThis conversation focused on value investing and on Jennifer’s investing philosophy which she has honed over the years. She has developed an aprpoach which is the right way for her.
We didn’t get into the S&P500 and the dangers of a market cap weighted passive index when valuations are at extremes, a subject on which she has strong views, but you can guess what she thinks (and I agree). But we did spend time on her investment philosophy and her very strict criteria.
She won’t buy a stock unless it’s very cheap, is a high quality business, has sensible management and a strong balance sheet. Very cheap means a 10% cash flow yield, which is an unusually demanding level. Hence she is happy to hold cash which at times has reached 30% of the assets.
She likes to hold 25-30 stocks and she insists on equal weighted positions. She dismisses the argument for running your winners and sees this equally weighted portfolio as a guardrail – if you hold a stock for a long time, it’s easy to fall in love with it, especially if it has been good to you. Similarly, you can get too close to management and start to believe the spin. She sees the 3.3%-ish weighting as being an important protection against losing money by becoming too close to a company. Position sizing is one of these conundrums that nobody seems to have a good answer to. Jennifer’s approach was new to Steve and it was only when Jennifer explained her rationale that he understood the potential advantages.
Jennifer is driven by the numbers. She thinks that management meetings have become much less valuable. CEOs and heads of IR are much more sophisticated today and it’s rare that they are not great salesmen for their shares. She never met a CEO who didn’t think his stock was undervalued.
She likes to meet them nevertheless, but she pays closer attention to what they do than what they say. She looks at the numbers for that confirmation – are they good at allocating capital? Can they do good acquisitions, do they buy their shares back when they are cheap etc?
She is very wary of becoming friends with the management teams. She says “if you want a friend, get a dog”.
Her focus is strongly on cash flows – she buys stocks which generate cash and have low leverage. This puts time on her side. Interestingly, she pointe dout that a quarter of the stocks she has owned have ben taken over, often by private equity. That’s because they tend to be smaller, “bite-sized” was her expression and with strong cash flows and clean balance sheets, this is an ideal recipe for a financial buyer, especially if it’s a quality company with consistent cash generation.
About Jennifer WallaceJennifer Wallace is a founding partner and CIO of Summit Street Capital Management. She has over 23 years of investment experience. Prior to co-founding Summit Street, Jennifer worked with the Robert M. Bass investment groups where she was manager of Emerald Value Partners and co-manager of Alpine Capital. Before joining the Bass organization, Jennifer was a consultant with McKinsey & Company and an investment banker. Jennifer earned a BA from Columbia College and an MBA from the Columbia University Graduate School of Business. Jennifer serves on the Advisory Board of The Heilbrunn Center for Graham & Dodd Investing at the Columbia Business School and the Stewardship Committee of the Episcopal Church of the Heavenly Rest in New York.
Jennifer recommended several books – she thinks that many young people coming into the industry don’t understand market history. Accordingly here are her recommendations:
Only Yesterday: An Informal History of the 1920s (Harper Perennial Modern Classics by Frderick Lewis Allen
Buy on amazon Reminisces of a Stock Operator by Edwin Lefevre – a classic.
Buy on amazon Seth Klarman’s Margin of Safety – out of print and so rare that it’s even been stolen from the British Library. This one is for sale at $2450. and may have done better than his fund!
Buy on amazon ANd of course a value investing book, this time by Jennifer’s professor at Columbia, Bruce Greenwald. Value Investing :From Graham to Buffett and Beyond.
Buy on amazon HOW STEVE KNOWS THE GUESTSteve was introduced to Jenny in Omaha by Chris Bloomstran, a previous guest on the podcast who has become a friend. Chris said that Jenny was a must-have guest. The previous year, Chris introduced Steve to Guy Spier – who will be next?
Steve subsequently caught up with Jenny in New York, where she was presenting at the Value Investing Conference and they decided to record over Zoom, not Steve’s favourite choice, but the only option given both their travel schedules.
And they will meet in Omaha where Jenny will be the moderator at the dinner in aid of Columbia Business School. Other speakers will include former guests Mario Gabelli and Beth Lilly.
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