Mr. Rosenwald is Co-Chair of the Management Committee and Senior Portfolio Manager of Asian Equities at Dalton Investments. Dalton is a disciplined, value-oriented, global investment management firm committed to capital preservation and long-term growth. Mr. Rosenwald is a recognized authority in Pacific Rim investing with more than 30 years of investment experience. He holds an MBA from New York University and an AB from Vassar College. He is also an Adjunct Professor of Finance at New York University’s Stern School of Business.
Conducted by Bryce Webster, MBA Class of 2015
When did you first become interested in investing? What was your first investment?
James Rosenwald (JR): I first became interested in investing when I was 12 years old. I would discuss investments with my grandfather who was a securities analyst at Nikko Securities. While on vacations we would discuss the balance sheets of corporations and how accounting differed in Japan and the US. I was instructed on how to reconstruct income statements using a first generation calculator and a 12 column accounting pad.
My first investments were made in 1970 in Kirin Beer and Bank of Tokyo. Kirin was the first export beer from Japan and was growing at high double digit rates due to increases in beer consumption in Japan as consumer demand expanded. The Bank of Tokyo at that time had a monopoly on conducting foreign exchange, which provided them with significant fee based revenues on top of their high quality lending business. These investments performed brilliantly in the 1970’s and were held for seven years. I sold them to buy my first car and travel to Europe.
If you had to describe value investing in a few words, what would you say? How important is investing with a margin of safety?
JR: Each value investor seems to have their own philosophy and way of interpreting Ben Graham’s basic principles. At Dalton we emphasize three components which represent value investing: the first critical component is the quality of the business and its defensible competitive position in the marketplace. We rarely if ever buy cigar butts in order to get the last few puffs! We especially like growing businesses that have pricing power. Second, we must see a clear alignment of interest between the enterprises’ management and shareholders. We tend to refer to state owned enterprises as “zombie” companies as the management has absolutely no alignment of interest with the shareholders. We avoid zombies while being drawn to family and entrepreneur led companies. Finally, we must have a clear margin of safety to invest in a company. We define a margin of safety as something trading at 50 percent of its private market value. We look at companies the same way a private equity shop would, but we get to buy at a discount!
It is sometimes said that value investors either “get it” right away, or never do. Do you agree with this notion?
JR: I believe that certain people gravitate to value investing because its simplicity and elegance resonates immediately. With this said, I have tried to make money trading currencies and options with mixed results, while value investing has provided long term results and great satisfaction. I put a premium on sleeping well at night so for me value investing fits this need and desire to a “T”.
Can you talk a bit about your experience as an outside advisor to George Soros from 1992-1997?
JR: I became an outside Fund Manager for Soros Fund Management’s Quantum Emerging Market Fund in 1992 and to the Quota Fund a few years later. The expectations at Soros were extremely short term and it was clear from the outset that you made money for the fund within six months or you were fired! My timing was lucky as the Korean market was just opening to foreign investors after having declined dramatically after the heights reached during the Korean Summer Olympics of 1988. I am eternally grateful to George Soros for giving me the opportunity to earn my first seven figure performance fee! I retired from Soros and sold my interest in Rosenwald, Roditi & Co Ltd in May 2007, just as the Asian crisis was rolling through Thailand and Malaysia, on its way to Indonesia, Korea, Hong Kong, China and Japan. In life it is better to be lucky than smart!
How did you get interested in investing in Asia? Were Korean life companies your initial segue into Asia?
JR: I was interested in Asia due to my grandfather’s advice and counsel. After visiting Japan in 1962 with the New York Society of Security Analysts he decided to invest the vast majority of his accumulated assets in Japan. He felt that Japan, being a non-nuclear country, would sit out the Cold War and supply both sides. I found Asia fascinating and still feel that the region will grow faster than North America or Europe in coming decades!
How important is it to have a structured investment process? Do you have a checklist of things to review for each new opportunity at Dalton? How did you first develop your process?
JR: Everyone on the Dalton team is a generalist. We look at each company with the same three criteria – is the company a great business with pricing power and a moat? Are the managers interests aligned with our clients? And third, does the current price provide a margin of safety for investors? These three criteria are the foundation of each analyst’s research!
What is your typical framework for valuation?
JR: We use private equity valuation models to generate our target prices for each security purchased. Each valuation model is specific to the industry, although many companies can be valued using traditional models available to all – like Professor Damadoran’s models!
How do you think about portfolio construction at Dalton? What percentage of time is spent reviewing existing holdings vs. sourcing/analyzing new ideas?
JR: Most of our analyst time is spent searching for new ideas. But we also spend a reasonable amount of time reviewing existing holdings. The portfolio is created from the bottom up, and we don’t construct portfolios using anything other than bottom up research. Amazingly we end up with a very diversified portfolio of securities!
Peter Lynch said that you should “go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.” Warren Buffet said that “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” How important is evaluating company management to your investment decisions?
JR: While we tend to agree with Mr. Buffett and Mr. Lynch about the general effectiveness of management, we focus solely on management’s alignment of interest with shareholders. We feel that there is so much room for monkey business in running companies, but that management teams who own more shares than we do tend to focus on the success of the business rather than stealing from the company! This is just as or more important than evaluating the quality of the management team which remains highly subjective.
What’s the best investment you ever made? Can you describe how difficult/easy it was to pull the trigger?
JR: The best investments ever made, other than marrying my wife and paying for our children’s education, have been (1) in Korea as foreigners were allowed to invest in 1992, (2) Russian equities when there was blood in the streets before the Russian Presidential election of 1996, (3) California multifamily real estate in the mid 1990’s, (4) dist
ressed debt and equities during the Asian crisis in 1997, (5) Chinese residential real estate during the SARs epidemic of 2003, (6) Berlin real estate in 2005, and (7) most recently, in RMBS beginning in the summer of 2008. Each of these investments was the “best” as I learned about various asset classes, geographies and cultures in the process. Each was a home run in its own right!
How about one that you wish you could have back?
JR: My worst investment ever was in the shares of Shokoh Fund, a Japanese small business lender. I really was fascinated by the CEO and his Samurai entrepreneurial spirit. At one point he was on the Forbes list of wealthiest in the world. His son went to NYU Stern and he was a generous contributor to the school’s endowment. His company was carried out by the Global Financial Crisis and my investment became worthless!
We’ve read that you periodically ask yourself what the best opportunities are. What are some good opportunities today?
JR: I am currently at a loss for good ideas as I am concerned that the Fed is holding up the value of assets globally by keeping interest rates at incredibly low levels. This feels like a good time to add shorts to our portfolio and keep the net exposure low. If shorting is not your fancy then holding a large amount of cash in your portfolio, like my partner Gifford Combs or like Seth Klarman, seems prudent!
What advice do you have for current students looking to become value investors?
JR: Students who are interested in value investing should certainly take Richard Levich’s class and participate in the Michael Price Student Investment Fund! Seeing as I guarantee students their money back for taking my Global Value Investing Course in the fall and my guest lecturers are some of the best investors in the industry, I would suggest that they also consider attending my course as an audit or for credit!
Thanks for sharing your thoughts – anything else to add?
JR: Anyone who has fun buying objects at a discount is a value investor. Translating that enjoyment to various global asset classes is what makes this profession so interesting. I can’t think of anything I would rather be doing as the exploration for bargains is a continuous challenge, much like a treasure hunt or solving a complex puzzle!
Wonderful insights Mr. Rosenwald. Thank you for your time!