CT Fitzpatrick manages the Vulcan Value Equity Fund, one of our highest conviction US funds. The fund’s investment process focuses on finding high quality companies with stable and growing values, and which are trading at a discount to their true value. The fund has performed well since inception, despite a difficult post-financial crisis environment for value managers. Below CT shares his thoughts on his investment career so far.
CT: I was a weird kid. I was reading the Wall Street Journal when I was 14 years old. My father was my mentor. He was an entrepreneur and I was just curious about what he was doing. It became an intellectual curiosity. My dad was a value investor but he didn’t know it. He didn’t call himself a value investor. He did a lot of things in real estate and he would try to buy properties at a discount to replacement value. He’d be looking for things that had fat cap rates, things like that.
Since I knew I wanted to go into business, I did not have the patience to pursue liberal arts, so I went straight into corporate finance at the University of Alabama. I majored in finance and minored in English. As my coursework evolved and I had exposure to more things, I discovered that I was passionate about investing.
While I was in school in the early 1980s, coursework emphasized efficient markets, CAPM, and all those things. Conceptually, a lot of it made sense but some of it didn’t. It was counter to how my dad actually did things in the real world. I started challenging my professors and I got pushback. It just didn’t feel right. Of course you want to do well on the test, but then do you really agree with it?
I read Graham and Dodd’s Security Analysis just to try to understand, “Okay, what’s the other side of this?” It really appealed to me and struck a chord. By the time I graduated, I wanted to be a value investor. It was the mid-80s and Wall Street was booming. I had an opportunity to get into investment banking in New York which later enabled me to get into what I really wanted to do, becoming a value manager.
CT: John Templeton. He was a great investor and also, importantly, a great human being who was spiritually grounded. We have incorporated many of his investment principles into our investment process and his values into the culture of our firm.
CT: We have access to so much more data than we did when I first started in the business. As a result, our research productivity has increased dramatically. Several years ago we began experimenting with artificial intelligence which has produced very promising results. These investments are further increasing the research productivity of our analysts.
A number of technology companies have developed sustainable business models and now qualify for investment for us, and a number of companies that used to qualify for investment no longer do because they have been disrupted by changing technology. We are hyper focused on disruptive threats to the businesses that we own.
CT: The importance of value stability. It is not enough to find discounted securities. We have to have the discipline to limit ourselves to companies with stable values so that we can enjoy a sustainable margin of safety over our long-term time horizon.
CT: During the financial crisis, we owned The DirecTV Group. It was a much better business in those days prior to the onslaught of streaming and cord cutting. During the teeth of the financial crisis, it was trading at roughly 40 cents on the dollar according to our estimate of its intrinsic worth. Liberty Media owned roughly 50% of the company and issued a tracking stock called Liberty Entertainment which held DirecTV, cash and some other entertainment assets, including STARZ!. DirecTV was by far and away the largest part of Liberty Entertainment’s value.
There were concerns about Liberty Media, the parent’s debt load, but those concerns had no bearing on Liberty Entertainment or DirecTV. At one point we could buy DirecTV at 20 cents on the dollar through Liberty Entertainment. We sold our stake in DirectTV at 40 cents on the dollar to fund the purchase of Liberty Entertainment at 20 cents on the dollar. In 2009, Liberty Entertainment rose over 100%, and it was still deeply discounted. We held our investment in DirecTV through Liberty Entertainment and then directly for a number of years. Its value compounded significantly and its price to value gap closed during our holding period. It was an excellent investment for us.
CT: While we see some publicly traded companies with inflated values, it is much more isolated than it was during the dotcom bubble. Where we do see excess is in the private markets, especially venture capital – the so-called unicorns.
As investors in publicly traded equities, we find it comforting that WeWork’s value fell from $47bn to $8bn when they faced the more demanding scrutiny of the public markets when they attempted their failed IPO.
CT: We are not catalyst investors. We can say, however, with a lot of confidence that the longer value underperforms the more violent the correction will be when value comes back into favor. We have lived through long periods of value underperforming in the past. I remember the cover of a prominent financial magazine published in late 1999 asking “is value dead?”. In early 2000, the dotcom bubble burst, and value outperformed growth and the major indices by a substantial margin for a number of years.
CT: Many. We travel around the world meeting with the management teams of the companies we own and visiting our clients. We gain a lot of perspective about conditions, concerns and trends in large cities like London. London, by the way, is my favorite large city. However, financial centers like London and New York, etc. are noisy and the investment communities tend to descend into groupthink. We find it very useful to live in a mid-sized city where our industry is a relatively small part of the overall local economy. We gain additional perspective from living outside of the noise. We can be quiet, thoughtful, and compare different perspectives when we are making investment decisions.
Birmingham is beautiful. A mountain range runs right through the middle of the city. It is a foodie town. We have a number of James Beard nominated chefs and restaurants, one of which won the most outstanding restaurant in the U.S. for 2018. We have excellent public schools in the greater Birmingham area, and we are in close proximity to beautiful lakes, more mountains, and some of the prettiest white sand beaches you will ever see. Finally, the rent is a little more reasonable than London.
CT: It’s not enough to be a talented investor. It is very important to learn how to be a good manager and an effective leader. You cannot do it all by yourself. You have to build a strong team that you can rely on and create a culture that reinforces your values. And you have to have sound values, or you have no foundation.
CT: The best book I have ever read about investing has nothing to do with investing. It is called Awareness by Anthony de Mello. I highly recommend reading the book. If it doesn’t help you become a better investor, it will help you become a healthier and happier person.
Awareness by Anthony de Mello. See above.
The Intelligent Investor by Benjamin Graham. It articulates the concept of a margin of safety better than anything else I have read and is easier to absorb than Security Analysis.
Security Analysis by Benjamin Graham and David L. Dodd. It is more technical and detailed than the Intelligent Investor, but it conveys the same concepts and provides a base of knowledge that every value investor should have.
I prefer reading Warren Buffett’s letters in chronological order through 2012 as opposed to books about Warren Buffett. The reason that I stop in 2012 is that Berkshire Hathaway has gradually morphed into more of a private equity firm as it has grown so large. Berkshire Hathaway’s earlier letters were more focused on publicly traded securities.
CT: My wife and I celebrated our 30th anniversary last year. I love spending time with her and our family. We spend a lot of time outdoors. The only thing that I am good at besides investing is fly fishing.
 Capitalisation rate – used in real estate investing to indicate the expected rate of return
 Capital Asset Pricing Model – a model used to describe the relationship between systematic risk and an asset’s expected return