Blue Tower Asset Management | Concentrated value investing

Applying Advanced Analytics to Classic Value Investing

While value investing as a discipline was born from Graham and Dodd's seminal 1934 work, Security Analysis, many strategies have come to be represented under the value umbrella over time.   It has evolved from Graham's balance sheet based investments to also include the relative value investments of great companies at a fair price that Warren Buffett has engaged in through his 60+ year career.  Later, value investing evolved to also include investors in financial derivatives such as those profiled by Michael Lewis in The Big Short who purchased credit default swaps prior to the 2008 financial crisis and profited tremendously.  The constant theme through all these strategies has been the belief that investing is based upon determining the true value of investments through fundamental analysis. While sentiment may determine prices in the short-term, prices will eventually converge to their intrinsic value.

Financial markets are currently in a period of rapid transition.  Financial databases and market data feeds with broad  access have begun to spread and enable increasingly quantitative strategies.  Passive investing with set formulaic allocations of assets and purely quantitative (no human discretion) mutual funds are proliferating.  More than 40% of assets invested in US Equities are in passive strategies as of Jan 2014.  In 2004, that figure was at less than 10% (Source: Morningstar 2014 Fund Flows Reports). Are humans in danger of being replaced by computer algorithms?

At Blue Tower, we believe that humans and computers are complements not competitors.  In 2013, there were 5,008 publicly traded companies which submitted a total of 655,846 filings to the SEC.  Some of these filings were thousands of pages long.  Our computer algorithms scour these filings as well as curated financial databases to detect important details such as improvements in operating margins or financial ratios over time, companies buying back stock, senior executives buying their company's stock in their personal accounts, companies becoming less capital intensive, or simply the business being cheap in consideration of its balance sheet or cash flow generation.  Based on a mix of these factors, we detect the most compelling companies which are then vetted by an analyst using classic methods of value investing due diligence.  Often times, these companies have good reasons for being cheap and a purely quantitative strategy would be walking into a trap by making an investment. Blue Tower looks for companies that are good businesses which are able to grow and operate with a high return on invested capital, that have "economic moats" which preserve the quality of the business into the future, and have good management that makes capital allocation decisions aligned with investors.