Thomas Gayner gets a kick out of telling the story. It was 1983. He had just graduated from the University of Virginia with a plan to return home to Salem, New Jersey, to run an accounting business with his father, Jack. But Jack died suddenly, and instead of heading north, Tom wound up at Davenport & Co., a Richmond stock brokerage. He hadn’t been there long when he read an article about an investor from Omaha who was such an inspiration that Gayner wanted to share his excitement with his boss. “Hey, Joe,” Gayner said, “have you heard of this guy, Warren Buf-fay?” “It’s Buffett, you idiot,” Joe replied, and tossed Gayner out of his office.

A couple of months ago, crypto billionaire Sam Bankman-Fried was peering out from the cover of Fortune magazine above the words “The Next Warren Buffett?” Now he’s at the center of a spectacular financial collapse, with a net worth estimated by the Bloomberg Billionaires Index at zero when I checked last.

Less spectacularly — and much less disastrously for those who entrusted their money to him — venture capitalist and “SPAC king” Chamath Palihapitiya announced in September that he was closing his biggest special purpose acquisition company and one other and returning $1.6 billion to investors, 20 months after describing in a Bloomberg interview how he envisioned himself taking over the Berkshire Hathaway chairman’s “mantle” with a “Berkshire-like instrument that is all things, you know, not to sound egotistical, but all things Chamath, all things Social Capital.” Guo Guangchang, who said in 2014 that he aimed to build his Shanghai-based conglomerate Fosun International Ltd. into a “Buffett-style investment company,” is in the midst of an apparent fire sale as he seeks to raise money for debt payments. Finally — and this admittedly may be stretching it, given that my sources are some guy’s LinkedIn post and an article at Yahoo! Finance Canada — tech investor Cathie Wood earned some “next Warren Buffett” praise in 2021, and her ARK Innovation fund is down 65% over the past year.

Chalk up four more victims of what’s been called the “next Warren Buffett” curse — perhaps the most prominent since the fall from grace, if not from billionaire status, of Eddie Lampert Jr., who was featured on the cover of Businessweek in 2004 (before it was Bloomberg Businessweek) accompanied by the same “The Next Warren Buffett?” cover line as Bankman-Fried.

As someone with a bit of chastening experience with the genre (I referred to soon-to-flame-out CMGi as “the Berkshire Hathaway of Net investing” in the pages of Fortune in 1999), this got me wondering. Why would any journalist still use such language to describe an investor, knowing how quickly it could turn into an embarrassment? And why would any investor court such comparisons?

Part of the answer, of course, is that journalists can be shortsighted, and professional investors can be egomaniacs. But after digging through several decades of next-Warren-Buffett media references, I also learned that such comparisons don’t have to be a curse. Those who were compared to the Oracle of Omaha because their investing approaches resembled his often did just fine. None became the next Warren Buffett — he’s still running Berkshire Hathaway at age 92, after all — but they didn’t crash and burn, either.

By Buffett’s approach, I mainly just mean the patient value investing that he learned from money manager and Columbia Business School adjunct professor Benjamin Graham. Buffett frequently touted the success of other Graham disciples and even anointed one of them as a successor when he decided to wind down his investment partnership in 1969.

That sort of makes William Ruane the first “next Warren Buffett,” although I don’t think he was ever called that. Ruane, five years Buffett’s senior, started the Sequoia Fund in 1970 at Buffett’s urging, and $10,000 invested in the mutual fund at its inception was worth almost $1.9 million when he died in 2005, three-and-a-half times what an equivalent investment in the Standard & Poor’s 500 Index would have generated. In the meantime, of course, Buffett had transformed one of his partnership’s holdings, textile manufacturer Berkshire Hathaway, into an investment vehicle that multiplied $10,000 in 1970 into about $20 million at the end of 2005. Also, Sequoia’s performance has slightly trailed the S&P 500 since 2005, in part of because of a misplaced wager in the 2010s on a company billed as an “early-stage Berkshire.” Ruane wasn’t the next Warren Buffett. But he wasn’t a bad bet.

The same goes for most of the dozen young investors profiled in an October 1989 Fortune article headlined “Are these the new Warren Buffetts?” — the earliest such piece I came across in a search of Google and several news databases. Value-oriented hedge fund manager Seth Klarman has probably had the most lasting success and earned the most comparisons to Buffett over the years, with Buffett himself reportedly saying that if he ever retired he would want Klarman to manage his money, but other familiar names in the article include short seller Jim Chanos, the late activist mutual fund manager Michael Price, television star Jim Cramer and none other than Lampert, who certainly lived up to expectations for the next decade and a half.

Leucadia National Corp. also held up perfectly well after being the subject of a July 1995 Forbes article headlined “Another Berkshire Hathaway?” At the time, the share price of the conglomerate run by Ian Cumming and Joseph Steinberg had risen more than 300-fold in 16 years. From 1995 through 2012, when Cumming and Steinberg handed over the reins to Richard Handler, whose Jefferies Group Leucadia had bought, the rise was nearly fivefold — which still beat the S&P 500 and was close to Berkshire’s performance. Along the way, in 2009, Leucadia entered into a commercial mortgage joint venture with Berkshire called Berkadia.

Several corporations or investors outside the US that have been compared to Berkshire and Buffett because they combine disparate cash-spewing businesses or make productive use of insurance float or both also don’t seem to have been destroyed by the curse, although they haven’t always been the greatest investments. In Canada, there’s Prem Watsa’s Fairfax Financial Holdings and Jim Pattison’s Pattison Group Inc.; in Europe, there’s the late Albert Frère’s Groupe Bruxelles Lambert and the Agnelli family’s Exor. “India’s Warren Buffett,” Rakesh Jhunjhunwala, died a multibillionaire this summer. The “Berkshire Hathaway of Australia,” Stonehouse Corp., recently landed an investment from Berkshire’s vice chairman, Charlie Munger. I’m surely missing a few.

Such investment vehicles can still run into trouble, of course. With Guo’s Fosun it seems to have come from ignoring Buffett’s warning to never borrow money to buy stocks. With Lampert, who drew the comparison to Buffett in 2004 because he seemed to be using retailer Kmart as the core of a new Berkshire-like investment entity, it was the decision to double down on struggling retailers and spend the next decade and half trying and failing to revive Sears. I think the jury is still out on hedge fund manager William Ackman, who was described as a “Baby Buffett” on the cover of Forbes in 2015 as he made the shift to a publicly traded entity, Pershing Square Holdings, that underperformed the market for its first few years but has actually done quite well lately.

The cases where you can be almost sure the “next Buffett” curse will hold are ones where the resemblance is obviously only superficial. I haven’t been able to find the 1995 Fortune article that reportedly labeled 30-year-old California money manager Christopher Bagdasarian the “next Warren Buffett,” but from the news reports that followed when he was charged with securities fraud in 1996 I gather that this was based only on the 29% average annual returns he reported, which turned out to be made up. CMGi (the CMG stood for College Marketing Group, and it had started out as a seller of mailing lists to educational and professional publishers) assembled a portfolio of money-losing internet companies that zoomed in market value during the dot-com boom of the late 1990s but was clearly very high risk. I was not the only one to compare it and its chief executive officer, David Wetherell, to Berkshire and Buffett, and I used the phrase “Berkshire Hathaway of Net investing” as easy-to-understand shorthand, not endorsement, but I remember cringing a little when I wrote the words and certainly wish I hadn’t. I’m sure Ackman wishes he hadn’t referred to pharmaceuticals maker Valeant as a “very early-stage Berkshire” in 2015 simply because it was so good at making acquisitions. Blowback over accounting practices and drug pricing soon sent the company’s stock price plummeting, dragging down the performance of both Ackman’s Pershing Square and the aforementioned Sequoia Fund.

Then there’s Bankman-Fried, for whom the Buffett parallel was that he’d been buying up failed competitors during crypto’s very difficult summer. From the Fortune cover-story Q&A:

A longtime crypto insider told me you’re going to come out of this looking like Warren Buffett — owning a lot, and everyone owing you a lot of favors. Do you think that’s overstating it?

I hope it’s not overstating it, though it might be.

It was overstating it! And it was thin evidence on which to compare SBF to WEB (Buffett’s middle name is Edward) to begin with. Which is why I don’t think Bankman-Fried’s fate is reason to fear that, say, Greg Abel — who according to the current Berkshire Hathaway succession plan truly is the next Warren Buffett — is cursed.

Tracy Britt Cool spent a decade working for Warren Buffett. She now wants to buy the kinds of companies that might have interested the famed investor 30 or 40 years ago.

Those are businesses typically run by founders or family owners that have solid performance and competitive “moats”—a favorite term of Mr. Buffett’s—yet aren’t big enough to draw Berkshire Hathaway Inc.’s attention today.

A longtime associate of Warren Buffett and Charlie Munger revealed a $245 million stake in Berkshire Hathaway this week. The purchase signals he has confidence in the investing duo, and sees value in their company’s shares.

Li Lu’s Himalaya Capital Management bought nearly 900,000 of Berkshire’s “B” shares last quarter, Securities and Exchange Commission filings show. Himalaya counted Berkshire as its third-most valuable holding out of seven on September 30, and the stock made up 11% of its $2.1 billion portfolio.

Li has a long history with Berkshire’s bosses. He decided to become a professional investor after listening to Buffett lecture at Columbia University in 1993. Munger, the conglomerate’s vice-chairman, dubbed him ”the Chinese Warren Buffett” in 2019, and noted Li was the only outsider he’s ever trusted to invest his money.

Moreover, Munger declared in 2010 that he fully expected Li to eventually take a leading position at Berkshire. Li also introduced Munger to BYD, the Chinese electric-vehicle company that has been one of Berkshire’s best investments in the past decade.

Notably, Himalaya sold 15% of its BYD shares for about $320 million in July. Li may have decided to take some profits and reinvest the bulk of them in Berkshire, given the size of his new stake.

Berkshire is a natural fit for Himalaya. Li’s fund counted Apple and Bank of America — the two biggest positions in Buffett’s roughly $300 billion stock portfolio — among its handful of holdings at the end of September.

Even so, this is the first time that Himalaya has listed Berkshire in its portfolio since it began filing quarterly updates with the SEC in early 2017. It’s unclear why Li decided to buy the stock after all this time, especially as it’s climbed 25% this year and trades close to a record high.

Himalaya didn’t immediately respond to a request for comment from Insider.

Buffett will likely welcome Li’s vote of confidence. The Berkshire chief was fiercely criticized for not deploying a chunk of his company’s vast cash reserves on cut-price stocks when the pandemic tanked the stock market in 2020.

The investor has struggled to find bargains since then, especially as many assets are flirting with record highs, and private equity firms and special-purpose acquisition companies (SPACs) continue to price him out of acquisitions.

Berkshire — which sold a net $2 billion of equities last quarter as it cut its pharma and financial bets — has resorted to accelerating share buybacks during the deal drought. In fact, the company is on track to repurchase a record $25 billion of its stock this year.

Li may be betting on Berkshire to continue spending its cash wisely, and wagering that Buffett will be ready to pounce during the next market downturn.

Every generation puts its own spin on tradition. Recipes are adapted. Wedding ceremonies evolve. Vacation-photo slide shows become Instagram stories. And the era of traditional value investing, pioneered by Benjamin Graham as the U.S. was emerging from the Great Depression, has quietly undergone a sea change that most investors have yet to notice.

Graham’s version of value has long been considered sacrosanct. His two seminal books, 1934’s Security Analysis and 1949’s The Intelligent Investor, laid the groundwork for a generation of contrarian investors who eschewed macroeconomic trends and market patterns, and instead focused on a company’s fundamentals, looking for cheap stocks that they would hold for an uncomfortably long time. Legends such as Irving Kahn, John Templeton, and Warren Buffett (who named his first son after Graham, his favorite professor) have made value investing synonymous with successful investing for decades.

But the world, and the markets, have changed. Many of the biggest names—Buffett, Jean-Marie Eveillard, Bill Miller, Mario Gabelli—are in their 70s or 80s (or, in Buffett’s case, 90). As value stocks emerge from a 15-year slump—during which the Russell 3000 Growth index returned, on average, 12.7% a year, trouncing the 8% of its Value counterpart—it’s natural to look to the next generation of value investors to see how they’re managing money.

Yet when Barron’s asked veteran investors about the next generation of classic value managers who are at least a decade or two from retirement age, there were some awkward pauses. Some sheepishly admitted they had no idea—perhaps a result of the willful ignorance of contrarians practiced at ignoring groupthink. Others worried that the brutal stretch of value’s underperformance, compounded by the popularity of passive investing, may have left a talent vacuum. After a little prodding, some would reveal names they’re keeping an eye on, but few would say so on the record.

Value investing is about looking at things differently, and recognizing quality amid detritus. So, Barron’s took a similar approach when looking for some of today’s best minds in value investing. We chose seven to highlight as part of this article, and will introduce you to others in the near future. Their names and styles may be a surprise—these aren’t your father’s value managers.

Today’s managers have had to adapt to very different economic and market dynamics than those of their predecessors, and have their own definition of value. The purists should relax: Value has always existed on a continuum. Buffett himself broke with Graham’s hyperfocus on low-valuation stocks—those cheap based on metrics like price-to-book or price/earnings. Early in his career, Buffett favored these “cigar butts,” companies so beaten-down that they traded below the value of the company’s assets. But over time, he decided that buying a “wonderful company at a fair price” was better than buying a “fair company at a wonderful price.”

Buffett, of course, has spawned another generation of acolytes and value adherents, and many have continued to build on his pivot. Quality remains a focus—shorthand for strong management, strong financials, and a strong competitive advantage. But this generation focuses more on the durability of a company’s strength, especially its competitive advantage in the face of intense disruption, and that often means an even greater focus on a company’s management and culture.

Knowing how to value growth and assess qualities like competitive positioning is much more central to success as a value investor today, says Bruce Greenwald, who has taught generations of value investors at Columbia Business School and is a senior advisor to First Eagle Investment Management’s Global Value Team. The classic mandate of finding good companies trading below their intrinsic value is difficult today: The free flow of information, ease of screening for metrics like low price/earnings, and the rapid pace of change all increase the chances that a cheap stock is a value trap and not a hidden gem. “The fact that deep-value stocks have been sources of more risk than return impacts this cohort I’m in,” says Samantha McLemore, who works with Bill Miller at Miller Value Partners and runs her own firm, Patient Capital Management.

Today’s value managers are as patient and disciplined as past generations, but they are more flexible in how they think about value. Many are focused on “compounders”—companies with strong, but often moderate, growth that can continue for years. Compounders have the financial strength and real earnings often lacking in highflying growth companies, and their management is investing with an eye toward slow and steady growth, not a big boom 10 years out if a singular innovation comes to fruition.

The modern investor, Greenwald says, includes industry specialists and activists, investors willing to work with management to create long-term value, and who won’t make a quick exit. There’s also a small crew of traditional value investors exceptionally savvy at analyzing the replacement value of assets. And then there are those adept at valuing the growth of franchise businesses, which make up a much larger share of the stock market’s value than in the past.

“The next generation is not as recognizable for people with a standard view of what a value investor is,” says John Heins, editor-in-chief of newsletter Value Investor Insight. “They are more eclectic, focused more on special situations. Some have the head of a growth investor and the heart of a value investor.” Among the better-known members of this cohort are Li Lu, who heads Asia-focused Himalaya Capital and manages some of Charlie Munger’s money; activist Paul Hilal at Mantle Ridge; and Matthew McLennan, who oversees $89 billion at First Eagle.

Barron’s identified seven other managers as part of this next generation of value; some more traditional, others less so, and all with impressive track records that demonstrate an ability to spot value.

 Pierre Py, co-founder, Phaeacian Partners

Pierre Py, co-founder of Phaeacian Partners, is an unapologetic value investor. When he left First Pacific Advisors and launched his own firm last year, he ignored those who suggested that he drop the word value from the name of the two funds, Phaeacian Global Value (ticker: PPGVX) and Phaeacian Accent International Value (PPIVX), he has been co-managing for a decade.

The 44-year-old’s approach to value has been influenced by the veterans he has worked with: building on the process he learned from Oakmark International’s David Herro; adopting the obsession with downside risks from FPA veterans Bob Rodriguez and Steve Romick; a wariness of leverage from Artisan Partners ’ David Samra and Dan O’Keefe; and a preference for high-quality growth stocks from Select Equity’s Chad Clark.

In keeping with the mythical Greek people that the firm is named after—Phaeacians were world travelers who helped Odysseus return home—Py and his team scour the globe for quality businesses selling at big discounts, ideally 30%.

Py purposely built a team with backgrounds and interests beyond finance, such as art and architecture. “It’s about ‘culture’ in Jean Paul Sartre’s meaning—having the means, knowledge, and experience to understand the world around us, and where it is going,” he says.

Corporate culture is also important in the companies he invests in. Much like Buffett, Py believes the biggest risk to a business is bad leaders. Watching his father, “a quintessential example of an operational manager,” gave him a view of good management at an early age. Py and his team travel extensively, building local networks and identifying executives who have transformed their businesses. “Steve Romick always talked about emotional intelligence: A business is a group of people, and understanding how they interact is very important to determining the success of management,” Py says.

Py likes good companies that have an improving corporate culture after a run of poor management. Years of keeping tabs on executives with strong records has helped lately. When Giles Schnepp, previously chief executive of Legrand, and “one of the best managers in France,” joined the board of Danone (BN.France), Py spotted a possible turnaround in the making. Indeed, Danone just named Antonie de Saint Affrique, an executive Py praises for his record at chocolatier Barry Callebaut, as CEO. “Ultimately, good businesses won’t be run by underperforming management teams forever,” he adds.

That’s also the case at Swedish telecom-equipment maker Ericsson (ERIC) after a trio of insiders, led by CEO Börje Ekholm, took the helm and improved its cost structure and refocused its once-sprawling research-and-development investments. That enabled the company to update its products and gain market share in fast-growing areas like 5G. “The quality and strength of the new and improved Ericsson is still misunderstood,” says Py.

Py is choosy and, in the $414 million Accent International, prefers to hold cash if he doesn’t find cheap enough stocks, unlike some of his peers. The fund had 13% in cash at the end of the first quarter, higher than late last year but nowhere near the 46% in early 2020, when the team’s research into the outbreak in Wuhan, China, led them to decide that some businesses were simply unownable. That cash was quickly deployed when markets fell last year, and another pullback could provide the same opportunity. The fund has averaged an annual return of 13.5% over the past five years, beating 99% of its peers, according to Morningstar.

Investors are ignoring risks—inflation in particular—Py says, which makes today’s high valuations and big borrowing all the more troubling. “How many trillions of dollars have been created out of thin air? It’s mind-boggling, almost incomprehensible, what the implications may be.” Even more reason to focus on management quality, he says.

 Mark Cooper, co-founder and chief investment officer, MAC Alpha Capital Management

Mark Cooper, who co-founded MAC Alpha Capital Management in January 2020, is a fixture in the traditional value investing community, and isn’t shy about his value bona fides.

Cooper has been teaching the next generation of investors at Columbia Business School in his Applied Value Investing course for 17 years. He began teaching alongside his former professor, Greenwald, and now often invites friends and mentors, such as Berkshire Hathaway investment officer Todd Combs, Eagle Capital Partners’ Meryl Witmer, and Eveillard, who retired from First Eagle, to be guest speakers.

 The hedge fund manager runs an international small-cap equity strategy and a global long-short strategy at his new firm, building on lessons gleaned from the investors he has met in a career that has taken him across asset classes, managing money at Omega Advisors, Pimco, and First Eagle, where he co-managed an institutional international small-cap value strategy for five years.

“There’s a very limited number of genuine value investors. When value is fashionable, there are many, but once it’s unfashionable, they disappear,” says Eveillard, who invests with Cooper. Eveillard cites Cooper’s willingness to hunt in overlooked markets abroad, and his patience and knowledge that value will have its dry spells.

Cooper, 52, leans more toward Buffett in his preference for good businesses at fair prices than the cheap stocks associated with Graham. He looks further afield, concentrating on off-the-radar, small companies that he often follows for years before investing in, and draws on his deep network of foreign executives and investors to identify local trends and standout managements. That led him to companies like Pilot Corp. (7846.Japan), a little-followed Japanese pen maker that just began releasing its financials in English, so few U.S. investors knew it has generated free cash flow for 20 straight years. Business for its higher-end pens dried up during the pandemic as schools and offices closed, and its stock is down 50% from its three-year high, but Cooper sees revenue bottoming and a gradual improvement in the business.

The strategies typically own 70 stocks across 25 countries. Cooper also shorts stocks to boost returns; targets are money-losing companies without much of a competitive edge and aggressive accounting, and those often run by managers more concerned about short-term sales growth than profitability.

Though stock-picking excites his students the most, Cooper stresses that it’s not sufficient. The enthusiastic stockpicker also spends a lot of time on portfolio construction and risk management, with an emphasis on capital preservation and smooth returns. While many value managers focus on company fundamentals to the exclusion of anything else, Cooper says the recipe for “monster performance” is the trifecta of a cheap business seeing internal improvements that also gets a boost from the macroeconomic cycle or secular changes. “You can’t be an ostrich and say you only dig under the sand for ideas,” he says.

Cooper also uses big data and his background in currencies, fixed income, and commodities to find stocks that can act as “free hedges” to one another—putting together a stock tied to an economic reopening, for example, with another that would hold up better if there are more lockdowns—or companies that react differently to a weaker dollar.

Low interest rates and the magnitude of government stimulus could eventually mean a weaker dollar, and make Cooper more defensive. “The faith in modern monetary theory scares me to death because nothing like it has ever worked in human history,” he says.

Add in the frenzy around cryptocurrencies and the high levels of leverage at hedge funds, and Cooper is relying even less on leverage—and hunting away from even other value investors. Europe is popular among value managers, for instance, but Cooper says valuations aren’t that cheap and quality isn’t that high.

Instead, he is finding better opportunities in the United Kingdom and Japan, often amid industrials, a sector where competitive advantages can last longer than in consumer or technology businesses. Senior (SNR.UK), a British industrial supplier to aerospace and defense companies whose shares fell almost 75% last year as the pandemic disrupted commercial air travel, is the type of business that Cooper gravitates toward. Run by good operators he has followed for decades, the company should see an improving outlook as its investments in the supply chain for the next generation of aircraft pay off and air travel recovers, he says. There’s also a potential macroeconomic boost: currency appreciation.

 Samantha McLemore, founder, Patient Capital Management

Samantha McLemore has spent her entire career working alongside noted value investor Bill Miller, first at Legg Mason and now at Miller Value Partners. While her approach to value bears many similarities to her famous co-manager, the past two decades have left their own mark on the 41-year-old.

Growing up in Vermont in a family where money was tight, trying to get the most for it was second nature. McLemore is also comfortable being the odd person out, attending a Southern college as a Northerner and making her way in a male-dominated industry. Both offered a good setup for value investing.

“Samantha has exactly the characteristics Warren Buffett said he would look for in an investor—independent thinking, emotional stability, and a keen understanding of both human and institutional behavior,” Miller tells Barron’s. “She is patient, long-term oriented, and she doesn’t let the market’s behavior corrupt her thinking and decision making.”

McLemore launched her own investment firm, Patient Capital Management, last year, and still co-manages the $2.7 billion Miller Opportunity Trust (LGOAX), which has returned an average annual 23% over the past five years, beating 99% of peers. Miller Opportunity owns Amazon.com (AMZN) and Uber Technologies (UBER) and can invest up to 15% in Bitcoin—which may raise traditionalists’ eyebrows, much the way Miller’s early investments in tech stocks did in the 1990s.

McLemore notes that Buffett has long viewed growth as an input into the value equation. And like Buffett, McLemore is willing to pay closer to fair value for a company if she is confident in its long-term prospects. That’s just as attractive as a really cheap company with huge potential gains, but also has more risk, she says. This is different from her partner and mentor: Though Miller has made most of his money by being extremely early in some companies, notably Amazon, he has long loved high-reward, high-risk, deep-value stocks. “When I launched the Patient Capital strategy, I bought Google, and I couldn’t convince Bill to put it in the Opportunity fund,” McLemore says. “It didn’t have enough juice or upside to make it exciting for him, but I thought its long-term compounding potential was attractive.”

Buffett stressed the importance of investing in what you know; McLemore says it’s equally important to expand that “circle of competence” and think more broadly about how the world is changing. That leads her to growthier companies like Farfetch (FTCH), which provides a marketplace for luxury goods. It has strong management, an underappreciated Amazon-like technology-services business, and the potential to increase revenue sustainably at a double-digit pace while improving margins.

If this sounds too growth-y to be value, McLemore says, it’s important to remember her lens is valuations. “Unlike Cathie [Wood, of ARK Invest], who has strong views of innovation in the next five years,” McLemore says, “I’m more comfortable with businesses whose economics I can assess and analyze through a range of outcomes to see what is the downside and how much I can lose.”

Perhaps one of McLemore’s most controversial investments is Bitcoin, especially after its volatility this year. Though initially more skeptical than Bitcoin bull Miller, McLemore added it to her Patient Capital portfolio last year as interest among financial institutions and investors grew and it became viewed more widely as digital gold. Signals from the Federal Reserve that it may be patient with inflationary pressures made it an attractive inflation hedge, with the potential to be more.

The money manager always expected Bitcoin to be volatile, as the recent plunge demonstrated. But neither Tesla’s decision not to accept Bitcoin because of Elon Musk’s concerns about the energy needed to mine it nor China’s expanded cryptocurrency ban derails the investment case for it as digital gold, says McLemore, who views the recent selloff as a buying opportunity. Bitcoin, she adds, is less energy-intensive than mining gold, and China is pushing its own digital currency. The authoritarian country’s pushback against Bitcoin, which can’t be controlled, isn’t surprising.

Valuing Bitcoin requires some mental flexibility. “If you are thinking of it as digital gold, you can look at the capitalization of gold—about $12 trillion. Bitcoin is closer to $735 billion. That’s not a precise estimate, but a proxy for the potential upside if it proceeds along that path.”

One source of concern for the contrarian: A value panel at a conference this year all pitched compounders. “That makes me nervous,” she says, adding that perhaps deeper value opportunities could emerge if no one is looking for them. “That’s why I like the flexibility.”

 Clare Hart, managing director, J.P. Morgan Asset Management

Clare Hart, lead manager of the $45 billion JPMorgan Equity Income fund (OIEIX), started her career as a public accountant. She didn’t like making people so nervous that they cried or avoided her, and feeling like she was always on a financial archaeological dig didn’t suit her.

After hearing that equity research analysts did similar number-crunching but cast it into the future, Hart joined Salomon Smith Barney as an associate working on small-cap real estate investment trusts before joining a value team at Fleming Asset Management, which eventually became part of J.P. Morgan.

Hart, 50, has managed JPMorgan Equity Income—described by Morningstar as “the best in breed”—since 2004. Over the past 15 years, the fund has returned an average annual 9.2%, beating 88% of its large value peers.

Hart isn’t the type of value investor whose approach has been shaped by Graham or Buffett. “Everyone handed me those books, and I spent years going to [Buffett’s] annual meetings. He was fascinating as a human being, and I read bits and pieces of the books. But it was more that it was interesting, like how you might read a book of quotes from Churchill or Kant.”

Deep value stocks don’t appeal to Hart; she favors “quality” businesses that may be pricier but could look cheap in hindsight as their earnings consistently meet or surpass expectations. “Value, for me, is about when, not if,” says Hart. “I look at some value stocks, and there are a lot of ifs—if this doesn’t happen, X won’t go bankrupt. If rates stay low, they can delever and be OK. I try to find the ‘whens’ in the market.”

Instead of using discounted cash flow models popular among traditional value investors, Hart favors free cash-flow yield, which requires fewer long-term assumptions that neither the company nor the analyst can make. Still, Hart, a pragmatist, is quick to sell when assumptions begin to fall apart. “Just because it’s in your portfolio doesn’t mean you have to retrofit your investment thesis. If you’re wrong, you’re wrong.”

The fund is meant to act as a ballast in portfolios, with Hart especially attuned to what can go wrong—something that carries over at home when she starts thinking about valve turnoffs as gardeners work on her yard. “My husband asks me why I always go to the worst-case scenario,” she says.

Despite comparisons often made between now and the late-1990s bubble, Hart’s worst-case radar isn’t flashing red. “Companies then didn’t have the earnings and cash flow that today’s growth stars do,” she says. “It’s different in a healthy way for the overall market.”

As the economy recovers, new habits cemented during the pandemic—such as online shopping—will continue, benefiting the likes of VF Corp (VFC), Best Buy (BBY), and Gap (GPS). Capital One Financial (COF) stands to benefit from increased consumer spending but also from stimulus helping individuals and small businesses pay down debt, and improving credit quality.

Growing up in Brooklyn, N.Y., Hart wasn’t wealthy, and one of her persistent worries is about the part of the population that’s struggling. “At some point, the question is how [income inequality] connects to the market—whether through higher taxes or new requirements on companies to reduce income inequality through things like training,” she says, adding that there could also be opportunities. “Managed-care stocks, for example, could help with expanded healthcare coverage.”

 

Henry Ellenbogen and Anouk Dey, Durable Capital Partners

Henry Ellenbogen and Anouk Dey of Durable Capital Partners aren’t your typical value investors. But their approach embodies the type of flexibility, willingness to embrace disruption, and long-term view that Tano Santos, director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, says is the future of value investing.

After an early career working in politics, Ellenbogen joined T. Rowe Price in 2001 as an analyst covering internet, media, and telecom companies. He got a close-up view of how disruption can erode the durability of business models. In 2010, he took over the T. Rowe Price New Horizons fund, building a record as a star stockpicker and becoming among the first mutual fund managers to invest in private companies like Twitter and Grubhub. At Durable, the hedge fund he founded in 2019, Ellenbogen, 48, builds on that background, investing in smaller public and private companies that have the potential to become much bigger—in other words, compounders.

After an injury ended her competitive ski-racing career, Dey, 35, moved to the Middle East to work with refugees and eventually wrote a paper for a think tank about Twitter’s role in the Arab Spring, which led to meeting Ellenbogen. In 2012, Dey joined T. Rowe Price as an analyst, focusing on small-cap growth stocks. She took a compounders investing course at Columbia Business School, where she saw parallels to her international-relations background, looking for patterns from critical moments in history. She now co-teaches that class.

Durable, which has $11 billion in assets, defines compounders as companies that generate total returns of 20% annually, on average, over a decade. But the path is rarely linear; data show that compounders suffer a one-year stock decline of 60%, on average, in any given 10-year period. That’s why Dey says it’s crucial to have a time horizon of three years or more. The firm typically makes 10 new investments each year, with the hope that two or three of each draft class will become compounders over the next decade. While growth managers often favor companies with double-digit revenue growth, Ellenbogen says they’re satisfied with even 5% to 7%. The durability is the draw.

Management is key; the duo wants to see companies run by managers with an owner’s mind-set, fixated on making their core business better, and investing to extend their competitive moat. But Ellenbogen and Dey take it a step further, advising companies on how to infuse lessons the money managers have gleaned from other investments into their DNA early in companies’ life cycles. That could include, for example, helping private companies identify board members, advising them on processes or systems, or investing directly in the companies at crucial points. Don’t confuse them with activists, though: “If we don’t think someone is going to make good decisions such that we would have to advocate change, we would just sell,” says Ellenbogen.

During the pandemic, Durable made private investments in public equities, or PIPEs, into holdings like antibody supplier Abcam (ABCM) and Canadian real estate service company FirstService (FSV), which Ellenbogen describes as a “case study of excellent operating culture.” He notes the company’s portfolio of strong brands, treatment of front-line employees, and record of disciplined investments, with management moving quickly during the pandemic to bolster its commercial restoration business. That value-minded action is a draw: “If you can get assets or make investments when others aren’t, you get more advantage over time,” says Ellenbogen, who sees the company set up for years of strong growth.

 Laura Geritz, founder and CEO, Rondure Global Advisors

Listening to stories about her grandparents, who endured the Great Depression and Dust Bowl in Kansas, left an imprint on Laura Geritz. Her frugality and aversion to debt shows up in her personal life (she has been debt-free since age 30) as well as in her global portfolios (which eschew companies that are reliant on others for funding). She founded Rondure Global Advisors in 2016 after a decade of building an outstanding record as a globe-trotting investor, particularly among the emerging markets, at Wasatch Advisors.

The dangers of leverage were reinforced early in her career when she was pulled from her usual duties at a brokerage to help manage the flood of calls from retail investors on the day that Long Term Capital Management blew up and the market plummeted. “I can remember one story so acutely: It was a man who had a wife and two kids who had gotten a stock pick from a [friend] and had mortgaged his house and lost everything— and was $90,000 in debt,” says Geritz.

Geritz describes herself as a “quality contrarian” in the manner of Buffett’s current approach to value. Her team starts with 1,000 of the strongest companies in the world —the “Popeye-like” companies that have been eating their spinach to create strong franchises and bolster their competitive position, and are adept at turning net income into free cash flow. Among these companies, Geritz looks for those that can generate double-digit returns, even after stress-testing them for a host of scenarios.

A voracious learner, Geritz is as likely to pepper conversations with tidbits from a just-completed course on sustainability or one of the multiple books she has devoured that week, as she is a lesson from Graham. She takes an out-of-the-box approach to opportunities and risks.

And she sees risks piling up: Years of low interest rates have encouraged companies to borrow too much and caused other distortions. “If you had Enron come out of 1999-2000, what’s going to come out of this?” Geritz asks. “Global GDP is going to be high, but the quality is abysmal. It’s the combination of every single bubble we have ever seen. At some point, the Fed is going to lose control, and when that blows, the stuff that’s underowned will hold up better.”

Another risk: Competitive advantages are harder to maintain amid a rush of companies going public in emerging markets and as Chinese regulators knock internet powerhouses, which is one reason that Geritz, 49, has had a lighter allocation to China than peers for the life of her firm.

Geritz’s caution tends to pay off in downturns, but the $234 million Rondure New World’s (RNWOX) 7.5% average annual return over the past three years puts it in the middle of its peer group, and the $32 million Rondure Overseas fund’s (ROSOX) 8% average annual return trails the MSCI AC World index by 2.9 percentage points. Raising capital for cautious foreign funds during a raging U.S. bull market hasn’t been easy—though it’s easier to stay the course at her own firm. “I just tell clients the truth: It’s the most speculative of the speculative stuff [that’s] working now. I’m content to sit that out.”

Geritz lately favors “boring growth” companies like President Chain Store (2912.Taiwan), a Taiwanese convenience-store operator with strong governance and a juicy dividend that trades at nine times cash flow. While e-commerce companies get rewarded for gobbling up retail, Geritz says the reverse doesn’t hold; the convenience store hasn’t received credit for its investments in faster delivery and being an Uber Eats-like company.

Occasionally, Geritz spots a classic value stock, like low-cost Indonesian noodle company Indofood CBP Sukses Makmur (ICBP.Indonesia). “As wealth goes to the top of the pyramid everywhere in the world, the ‘rising middle class’ story itself has been a cigar butt,” says Geritz. Indofood, she says, has a strong operating record and could benefit from global stimulus and a commodities boom that may help Indonesia’s economy.

But the pace of markets means speed is increasingly important: “That’s the problem with value,” Geritz says: “If you’re not fast, you miss i

 

 

When Expedia boss Peter Kern dialled into an earnings call last May, hotels were closed, flights were grounded and the new chief executive of the world’s biggest travel agency had just asked Wall Street for $4bn in emergency financing. “I’m really excited about the opportunities ahead of us,” Kern said, before adding: “I’m not crazy.”

Bereft of revenue, Expedia urgently needed cash to cope with the economic impact of coronavirus. Yet most sources of liquidity were dry. Banks were in no position to lend quickly. Bond investors were in retreat. Even Warren Buffett, who had thrown multibillion-dollar lifelines to companies as mighty as Goldman Sachs and General Electric during the financial crisis a decade earlier, was licking his wounds from an enormous investment in US airlines whose collapsing shares he was now selling.

If Buffett’s Berkshire Hathaway in 2008 provided refuge to companies whose crisis-inflicted injuries did not quite condemn them to bailout or failure, then in 2020 that role most often fell to Apollo Global Management, the $455bn investment group.

Founded in 1990 as a buyout firm, Apollo announced two weeks ago that it is to merge with its insurance affiliate, Athene Holding, a move that may finally heal the running sore surrounding the relationship between the two companies. After a Financial Times investigation in 2018 two investors in Athene sued Apollo, claiming that the investment group had taken unfair advantage of its influence over the insurer, and the controversy has been a severe drag on the insurance group’s shares ever since.

The enlarged Apollo will be a financial powerhouse that bears comparison with Buffett’s twin insurance-investing empire. It follows an $88bn dealmaking spree in 2020 that had earned Apollo the reputation as Wall Street’s responder of last resort, helping keep the Hertz car rental chain running, United Airlines flying and Expedia’s recovery plan on track.

“No one has done what we are doing,” says Marc Rowan, who will soon take over as chief executive of the enlarged Apollo. “Yes, there are elements of Berkshire Hathaway . . . but we are doing something in our own way with our own strategy and with our own rationale.”

Athene’s explosive growth in recent years already makes it the principal source of funding for a sprawling investment empire. The insurance business, which Rowan created barely a decade ago, injects cash into Apollo’s vast lending business, which functions less like a Wall Street investment partnership than a diversified national bank.

Now Athene will become by far the biggest part of Apollo itself, underscoring how the firm Rowan co-founded with Leon Black and Joshua Harris has transformed itself from a scrappy buyout shop into a linchpin of the US financial system — one that is supplanting banks as a provider of financing for businesses and households across the US.

Yet the deal, which values the combined group at just under $30bn, is a risky move. Overnight Apollo will switch from a nimble asset manager to a lumbering insurance company, with more than $200bn in assets, on which it bears the losses if bets sour.

While that pleased some investors in Athene, who had been unhappy about the relationship between the two companies, others were left puzzled about why Apollo’s billionaire founders had decided to put so much more of their own wealth on the line.

“The merger is proof that for Apollo this [Athene] was never just a fee business,” Rowan told the Financial Times. “We were focused on the assets.”

Insuring the future

Rowan’s early exposure to investment and insurance was at Drexel Burnham Lambert in the 1980s. His title was associate, one of the lowest ranks in banking, but his colleagues gave him the unofficial status of “managing associate”, one former banker recalls, after noticing that he often provided answers when managing directors with decades of experience could not.

During stints at Drexel’s office in Beverly Hills, Rowan worked on high-octane financing deals, while across town in the Brentwood neighbourhood of Los Angeles, a less glamorous empire was taking shape. There an entrepreneur named Eli Broad was taking his quieter financial revolution to the suburbs. In time, it would become Rowan’s model.

Broad had gone into business as a builder in the 1950s, throwing up no-frills houses for young families seeking their first suburban foothold. Three decades on, he saw that baby boomers were entering a new life stage.  Broad’s company spun off its housebuilding unit, renamed itself SunAmerica and focused on selling retirement annuities. 

The corporate raiders backed by Drexel were all-or-nothing operators, trying to rake in staggering sums from big, high-stakes bets. By contrast, SunAmerica earned pennies on the dollar from what people in finance call “spread” — the result, in effect, of borrowing money at a lower interest rate than they can earn. Insurers typically plough the premiums they receive from customers into the credit markets, in effect lending out the money to companies and other borrowers. Over time, as the debts are repaid, the insurer sends policyholders their promised annuity payments. Typically, the margins are narrow and because payments to policyholders are fixed in advance, any shortfall can be catastrophic for the insurer.

But for a resourceful insurer — and one with a high enough earnings multiple — earning excess spread on a large book of policies can be lucrative. 

SunAmerica was extremely resourceful, ploughing some of its cash into junk bonds, car loans and other unconventional assets. One executive boasted that the company was earning nearly 3 percentage points more in interest than it was paying out to policyholders.

In 1990, Drexel collapsed, and junk bond prices plummeted. That spelt disaster for Executive Life, a Drexel client and SunAmerica rival that had been among the biggest buyers of junk bonds. As insurance regulators organised a fire sale of Executive Life’s portfolio, savvy investors saw an opportunity to make enormous profits by buying bonds that were still being paid off.

SunAmerica put in a bid, only to lose out to a Wall Street upstart named Apollo. It was a deal that would make the fortunes of Rowan and his co-founders, who raked in decent profits from borrowers that kept up on their payments, while taking over companies that went into default. The deal helped convince investors to back Apollo’s core investment funds, while the hardball tactics the company employed in its dealings with delinquent debtors made it one of the most feared distressed debt investors in America.

For Broad, the decade ended so well that the missed opportunity hardly mattered. Insurance group AIG bought his company for $18bn in stock in 1998, an astounding valuation that was equivalent to five times book value.

The birth of Athene

When Rowan spotted his next big opportunity in insurance, he would surpass even Broad’s ingenuity. In 2009, an Iowa-based insurer called American Equity Investment Life (AEL) was looking to hive off some of its annuity policies. Apollo bought them cheaply, and ploughed the corresponding assets into commercial mortgages that had collapsed in price during the financial crisis, but were nonetheless being paid off. Rowan had expanded the spread from both sides.

Like a wildcat driller who had struck oil, he raced to build structure around his new business model. Athene was its central support. Incorporated in Bermuda, advised by Apollo and initially owned by the firm’s clients, the insurance company made a permanent business out of what Rowan had originally conceived as a one-off trade in AEL.

Apollo and Athene hired a small army of industry veterans to scour insurance company balance sheets for more retirement annuities to buy on the cheap. Everywhere they looked, insurers were trying to rid themselves of annuity business that was dragging down their financial results. A decade on, Aviva, Voya and Prudential have all sold blocks of policies to Rowan’s team. “Athene has replaced Berkshire Hathaway as the buyer of last resort of insurance assets,” says one of its former executives.

By 2011 and with the economy in recovery, there were no longer any bargains in mortgage-backed securities. And with its biggest client being an insurance company, Apollo — which had specialised in leveraged buyouts, that carried huge risks but could generate billions of dollars in profit for the firm — needed to become a spread-generating machine.

Only a sliver of Athene’s balance sheet is unusual. About 95 per cent of the insurer’s assets are invested in corporate debt, mortgage-backed securities and cash. The insurance company carries little debt, and a lot of excess capital. But Rowan hopes he can deliver extra profits from “alternative” investments, which represent 4.5 per cent of Athene’s total assets, and are invested in Apollo’s “origination platforms”, essentially a collection of mini-banks.

In Maryland, there is MidCap, which specialises in secured lending to medium-sized businesses, many of them in the healthcare sector. In Ireland, there is Merx Aviation, which provides finance leases for aircraft. In New York, a team of Apollo executives works on its Buffett-style corporate rescues, which use Athene capital alongside money from other clients. Last year, the insurer paid at least $875m to buy part of Hertz, the bankrupt car rental company.

Such deals are complex, but potentially highly profitable. One travel industry deal last year involved parachuting in a team of Apollo executives to figure out whether the contemplated rescue financing would enable the stricken company to survive without revenue for two to three years. “The answer was ‘yes’,” according to an Apollo executive who was closely involved. “But you couldn’t tell that from the outside, if you didn’t work with management and consultants.”

Those capabilities exist mostly inside banks, which have long provided such rescue financing, and investment firms such as Apollo, which until recently did not. “I am excited about that,” Rowan said recently, “because there is excess spread.”

Investor scepticism

Yet the stock market has never displayed much excitement over Athene. Some of Apollo’s most loyal clients earned as much as four times their investment before the insurance group’s 2016 initial public offering, and Apollo itself did even better, having put up virtually no cash of its own for its double-digit stake in Athene which had increased to around 35 per cent by the time the merger was announced. But four years later, the share price is barely any higher.

While few expect an insurer to match the heady valuation that SunAmerica attained two decades ago, Athene’s share price performance has been noticeably dismal even as earnings per share have doubled since the IPO.

The problem stems in part from some investors’ perceptions of Apollo. Athene’s board is stuffed with Apollo loyalists, according to a shareholder lawsuit filed in 2019. The relationship has delivered hundreds of millions of dollars in asset management fees to Apollo, an amount the lawsuit called “exorbitant”, citing an FT investigation that reported Apollo’s own executives believed an independent asset manager would charge less. Apollo said the lawsuits were without merit and although the litigation subsequently stalled, it magnified unease over Apollo’s outsized influence over the insurer.

The price of that unease may run into billions of dollars. One industry executive estimates that, given its double-digit return on equity and matching earnings growth, Athene should trade at two times book value. Lately, it has traded below one. Apollo has suffered a double blow. Its senior executives own a large chunk of Athene’s underperforming shares, as does Apollo itself. But, because of an accounting quirk, the investment group’s accounts do not reflect its one-third share of Athene’s profits. 

With Athene now accounting for roughly one-third of Apollo’s asset base, a divorce was inconceivable. In 2019, Apollo ploughed an additional $1.6bn into the insurer while cutting its voting stake from 45 per cent — an effort, one insider says, to appease Athene shareholders who were spooked by the idea that Apollo might be using its influence to further its own interests rather than theirs. Ultimately, the stock price barely budged.

Rowan long ago concluded that the two companies should merge, according to people familiar with his thinking. And when he was chosen to replace Leon Black as chief executive in January, he acted swiftly.

Not everyone is convinced by the logic, and Apollo’s own shares have fallen slightly since the deal was announced. “I get why it is good for Athene but [am] not totally clear on why it is good for Apollo,” says a former executive in the firm’s credit business. As a private equity firm, Apollo earned enormous fees while tying up little capital of its own. Now the firm will be a capital-intensive insurance company, overseen by regulators watching for risks that could impair its hundreds of billions of dollars in assets.

“Owning more insurance on [the] balance sheet does bring a lower multiple,” wrote Glenn Schorr, an equity research analyst, in a note after the deal. “Apollo [is] being Apollo and embracing complexity to create value — it’s how they roll.”

As it strives to move past the controversy surrounding its founder Leon Black — and his links to the late paedophile Jeffrey Epstein — Apollo no longer conceives of itself as a buyout firm but as a vital part of America’s financial system.

Yet there is a tension in Rowan’s pitch. He is taking credit for creating a new kind of financial institution, while trying to persuade wary investors that it is one they can understand and eventually embrace. “I assure you that this merger is not an investment in the insurance business,” he said when announcing the merger. “Nor is it an attempt to build a conglomerate. We are building an asset manager.”

Billionaire investor Chamath Palihapitiya wants to build his Social Capital firm into a tech-focused successor to Warren Buffett’s $400 billion conglomerate.

“My ambition is to be our generation’s Berkshire Hathaway,” the Virgin Galactic chairman said in a recent Fortune interview.

Palihapitiya ultimately expects to take Social Capital public, he said, and doesn’t envision it as a venture-capital firm.

“It’ll be a Berkshire, a holding company that, instead of holding Gillette and Coca-Cola and McDonald’s, will hold technology businesses,” he told Fortune.

Buffett’s Berkshire owns dozens of businesses including Geico, Duracell, and See’s Candies, and holds billion-dollar stakes in public companies such as Apple, Bank of America, and Coca-Cola. It sold its stake in Gillette to Procter and Gamble in 2005, and cashed out its McDonald’s shares in 1998.

Palihapitiya’s investments to date include Slack, Box, and SurveyMonkey. He also partnered with billionaire Richard Branson to take Virgin Galactic public using a “blank-check” company last year, and has raised almost $1.1 billion for two further blank-check companies.

The investor revealed in the interview that he’s been making “highly structured, high-volume bets” on credit markets in recent weeks.

“There’s been a lot of asymmetry building because of what the Fed has been doing,” he said, referring to the central bank’s unprecedented interventions during the coronavirus pandemic, which include spending hundreds of billions of dollars on bonds, and buying corporate debt for the first time.

Palihapitiya isn’t the first tech executive to try to emulate what Buffett has done with Berkshire:

• Google bosses Larry Page, Sergey Brin, and Eric Schmidt had the idea for Alphabet — the holding company that sits above Google, YouTube, Waymo and other businesses — when they visited Buffett more than a decade ago.
• SoftBank CEO Masayoshi Son — whose Vision Fund has invested in the likes of Uber, WeWork, and TikTok-owned ByteDance — said in 2017: “Warren Buffett in the technology industry, that is what I would like to become.”

 

 

Jim Simons sat in a storefront office in a dreary Long Island strip mall. He was next to a women’s clothing boutique, two doors from a pizza joint and across from a tiny, one-story train station. His office had beige wallpaper, a single computer terminal, and spotty phone service.

It was early summer 1978, weeks after Mr. Simons ditched a distinguished mathematics career to try his hand trading currencies. Forty years old, with a slight paunch and long, graying hair, the former professor hungered for serious wealth. But this wry, chain-smoking teacher had never taken a finance class, didn’t know much about trading, and had no clue how to estimate earnings or predict the economy.