Portfolio managers find inspiration in many different places. Sometimes it’s philosophy, sometimes it’s academia and just occasionally it’s the work of alternative rock pioneers Tool.
While the link between a progressive metal band from Los Angeles and value investing may not be immediately clear, Abhay Deshpande, founder and chief investment officer of Centerstone Investors, is quick to make the connection.
‘Tool takes a view that I love to try to incorporate, which is that they only come out with an album every seven to eight years,’ he said. ‘They decide that they aren’t pushing anything out until its perfect, so they wait for quality and they don’t care about time.’
The band has only ever released four albums. The first was in 1993, and the most recent came out back in 2006. Another is apparently on the way, but no date has been set. Like most of the band’s fans, Deshpande is happy to wait, knowing the payoff will be worth it.
He takes the same approach to stock-picking, seeking out undervalued companies that may not offer an immediate upside, but which he believes will reward investors in time.
For example, while Amazon and Whole Foods stole the limelight in groceries in 2017, Deshpande was happy holding onto the less-heralded Royal Ahold Delhaize, which owns Stop & Shop and Hannaford.
‘The basic misconception by the stock market or investors is that Amazon, through its Whole Foods purchase, is going to do a lot of damage to traditional grocery retailing,’ he said.
‘In our view, there is little likelihood that Amazon can do much damage outside of maybe New York City and San Francisco.’
Deshpande added that on an average $100 basket of groceries, the grocery store margin is about $3. When that profit is realized in conjunction with extra delivery expenses such as fuel, an e-commerce provider such as Amazon would have to make almost 10 deliveries just to break even.
‘There are not many markets that Amazon can beat, and that is because the costs of last-mile delivery are exorbitant,’ he said.
Deshpande looks for price dislocations and fundamental misunderstandings such as this – which he calls the ‘Amazon threat bucket’ – to find stocks that he believes are undervalued by the wider market.
After a 15-year spell at First Eagle Investment Management – where he oversaw close to $100 billion in assets – Deshpande set out on his own in January 2015, starting up a new shop: Centerstone Investors.
The Centerstone Investors fund invests in all-cap equities, both domestic and international, and sits in the Citywire Mixed Assets – Flexible Portfolio category as it holds bonds too.
Beating the house
While Deshpande believes Amazon’s impact on grocery stores will be limited, he is only too aware of how business models can change with the march of technology.
He pointed to Kodak as one example of this trend, explaining that the company was not a value trap but instead had a business model that simply came unstuck due to competition from digital alternatives. It was the camera firm’s inability to recognize those threats that ultimately hurt investors.
This focus on business models is the reason why Deshpande is the value investor he is today. It even helped him get into the asset management business in the first place.
He grew up in a household where the stock market and investing were perceived as gambling and something that had more to do with luck than with any kind of repeatable process. It was not until he stumbled upon the principles of margin of safety and intrinsic value – made famous by the likes of Warren Buffett, Benjamin Graham and his old boss, Jean-Marie Eveillard – that he was able to frame investing in a different way.
‘It became less about gambling and more about a business where you could actually apply principles to it to reduce the odds of losing,’ Deshpande said.
‘Then you can apply the principles to take advantage of the market’s very emotional state over time.’