The Ideas Report For Serious Investors

An exclusive interview with Professor Max Otte, one of the leading proponents of value investing in Europe's academic finance establishment, was published in a recent issue of Portfolio Manager's Review. The interview with Max Otte, Professor of Corporate Finance at the Fachhochschule Worms in Germany, sheds light on the peculiarities of investing in Europe and provides worthwhile advice for value-oriented investors. Excerpts:

The Manual of Ideas: You teach Bruce Greenwald´s Columbia University seminar on value investing in Europe. Are there examples of value investing theory that have to be “adjusted” in the context of investing in European stock markets? More specifically, are there any accounting or other pitfalls non-European investors should especially look out for?

Professor Max Otte: Europe simply is “more messy and complicated” — if you don’t have a truly global player, you really have to go country by country. That’s ten times the market research you do for a U.S. company. This is a reason why many U.S. investors don’t look here too much, which in my view is a big mistake. The legal system is as reliable as in the U.S. (fewer liability suits), and the business culture is generally one of more trust than in the U.S. The firms are generally more global than U.S. firms, which often tend to be run with a U.S.-centric approach.

As IAS/IFRS are taking hold, accounting is becoming very similar. However, in the German-speaking countries (Germany/Austria/Switzerland), we had the conservative principle of the lower value (cost or market) in financial account. This often understated income and assets and created hidden reserves. Some companies that do not need to fulfill the requirements of the major stock exchanges still cling to the old national standards, which I think were much superior in providing reliable minimum figures and stabilizing the economy. Again, those figures were not always “true and fair,” but much less subject to manipulation than, for example, GAAP.

Warren Buffett doesn’t like the idea that he has to disclose holdings over three percent in a public company in Germany once he starts buying.

MOI: Are there any countries in Europe that you find especially appealing? Perhaps individual sector or company opportunities that have arisen from local macroeconomic dislocation? Are there any European countries you find particularly unappealing?

Professor Otte: First, Europe as a whole is a rather tremendous place and as attractive as many emerging markets. Multiples are down and often lower than in the U.S., and revenue margins in European companies are generally lower than in the U.S. So many European companies have more fat to carry them through the crisis and can work on their margins.

Since I’m an active investor myself and my time is limited, I stick to what I know. I have a rather small universe of stocks. Over 80 percent of my holdings are in Europe right now, just 10 percent in the U.S., and the rest in Asia and gold.

My favorites are still German, Austrian and Swiss family-controlled “hidden champions” — often world market leaders in niche markets, often with very sound balance sheets, excellent growth prospects and long-term oriented management. Currently, you can buy many of these stocks at valuations as if they would never grow again. I presented three [ideas] at the Value Investing Seminar in Molfetta in 2007 – CTS Eventim, United Internet, and AWD – and investors who bought them below my recommended price would have broken even by the summer of 2009 despite the crisis. More of them: Grenke Leasing, Fielmann, Celesio, Takkt. Among large players, Nestlé looks very good, as do the pharmaceuticals.

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