McIntire Investment Institute At the University of Virginia

1. McIntire Investment Institute At the University of Virginia Training Session Prepared by the MII Managers | January 25th, 2012

2. Where to Find These Slides

3. Agenda • Investment Overview • Long vs. Short • MII’s Strategy • Elements of an Effective Pitch • Identifying an Opportunity • Developing Theses • Forming a Variant Perception • Conducting VAR • Risks • Catalysts • Valuation • Delivery

4. Long / Short • Is a hedge fund more or less risky than an index fund? • “Long” – strategy that makes money when price of security rises • “Short” – strategy that makes money when security goes down • “Our mandate is to find the 200 best companies in the world and invest in them, and find the 200 worst companies in the world and go short on them.” – Julian Robertson, Tiger Management

5. Value vs. Price • The value of any security, company, or project is determined by its cash inflows and outflows • Value investing is “the strategy of investing in securities trading at an appreciable discount from underlying value” – Seth Klarman Undervalued - Long Overvalued - Short 30 30 Price 28 28 Value Value 26 26 24 24 Price 22 22 20 20 18 18

6. Efficient Market Hypothesis • Thesis championed by economist Burton Malkiel • All publicly available information is priced into stocks • Implication: stock pickers cannot consistently beat the market without inside information • MII’sresponse: • Certain stocks exhibit more efficiency than others • We can win with better information and better analysis than the market

7. Variant Perception • Variant Perception • Your edge as compared to market expectations • Focus on ideas where spread between value and price is large • Informational/analytical asymmetry • Informational: Knowing something that others don’t through tenacious research • Analytical: Superior understanding • How is it generated? • Value-added Research (VAR) x Hard / Uncomfortable Consensus Contrarian Easy / Comfortable

8. Example of an Informational Edge

9. 1. Identifying an Opportunity “We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’” – Warren Buffett

10. Top Down vs. Bottom Up • Top down approach • Start with a promising (dying) industry and find the best (worst) company in that industry • Start with an interesting trend and identify the best company by which to exploit the trend • Bottom up approach • Start with a particular company, then determine whether or not its macro prospects are promising • Whether it’s top down or bottom up, stick to companies and industries that you can understand

11. Become and Engaged Reader • Identify general trends • Recognize and evaluate corporate strategies • Short Flags • Poor Management – Inconsistencies • Few barriers to entry • Bond Downgrade • Overly Optimistic Projections • Overreaction to positive news • Under reaction to bad news • Sudden change in accounting firm or methodology

12. Personal Experience • Products/services you’ve experienced • Fashions becoming more/less fashionable

13. Other Idea Generation Sources • Google / Yahoo Stock Screener • (http://screener.finance.yahoo.com/newscreener.html) • Blogs • Marketfolly.com • distressed-debt-investing.com • Seekingalpha.com • 13-F Filings • Fund holdings • Available through EDGAR on SEC.gov • Consider taking the contrarian view on the investment ideas you find online

14. Blue Ridge Capital 13-F

15. 2: Developing Thesis Points “We enjoy the process far more than the proceeds.” -- Warrant Buffett

16. Developing Thesis Points • Skim Form 10-K to better understand the company and Form 10-Q for a more recent update • Read latest earnings call transcripts • Available on Seekingalpha.com, Bloomberg terminal, and Morningstar.com • For articles written on your company, visit Business Source Complete database when you’re on Grounds • http://guides.lib.virginia.edu/commerce

17. Avoiding Biases Pattern-Recognition Biases Stability Biases Social Bias Confirmation Anchoring Groupthink False Analogy Loss Aversion

18. 3: Forming a Variant Perception “Price is what you pay. Value is what you get.” – Warren Buffett

19. Gauging Market View • So I’ve identified a growing company with a sustainable competitive advantage. How do I know that every other investor hasn’t already identified this opportunity? • Blogs (Marketfolly, Distressed Debt Investing) • Other Investors • Equity Research • Do you have an original thesis point or catalyst?

20. Equity Research • There’s a right way and a wrong way to use equity research • Right way: to gauge the market by interpreting analyst commentary and financial projections • Wrong way: many non-MII investors base their investment decisions on sell-side analyst recommendations • Availability • Limited research on Bloomberg terminal

21. Equity Research on Bloomberg • From main Bloomberg screen, type in name of company • Type “BRC <Enter>”

22. Small Cap Preference • Small Caps (defined roughly as market cap < $1Bn) often fly under the radar, creating opportunities for analysts like you to exploit market inefficiencies

23. 4. Conducting Value-Added Research “A public-opinion poll is no substitute for thought.” – Warren Buffett

24. VAR Case Study: SureBeam Corporation

25. VAR Case Study: SureBeam Corporation • Analyst Joel Ramin (MII alum, former analyst at Bridger) sought to determine whether the irradiation impacted taste • Visited the centers where SURE irradiated the beef and drove to upstate NY and IL to check out the stores where test marketing was going on • Confirmed analysts reports that sales were strong • BUT, meat was being discounted by 20% using in-store promotions • Bridger added to short

26. VAR Case Study: SureBeam Corporation

27. VAR Case Study: SureBeam Corporation • Anthrax scare in September 2001 • Almost overnight, SureBeam switched from irradiating meat to irradiating mail • USPS bought eight irradiating machines from SureBeam with option to purchase more

28. VAR Case Study: SureBeam Corporation

29. VAR Case Study: SureBeam Corporation • Would USPS buy machines for every postal distribution center? • Would Congress fund such a venture? • Did the technology work? • Joel called postal inspectors and Congressional aides to ascertain the government’scommitment to such a plan • Joel visited the company’stest facility in Iowa • Discovered that a female employee had to sign a disclaimer verifying that she wasn’tpregnant before working near the machine • Figured out that amount of radiation needed to kill anthrax was substantial enough to fry mail packages

30. VAR Case Study: SureBeam Corporation

31. 5: Risk Analysis “Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffett

32. Risk Analysis • Tell us how your investment recommendation could be wrong • An analyst isn’ta salesperson. You don’t get a bonus if your company winds up in the portfolio • Yes, there are risks listed in the 10-K, but try to dig deeper

33. 6. Anticipating Catalysts “I buy on the assumption that they could close the market the next day and not reopen it for five years.”– Warren Buffett

34. Anticipating Catalysts • So it’sa good and undervalued company or a bad and overvalued company. How do we get paid? • New product, geography? • Shorts are inherently risky • Theoretically, we can lose an infinite amount of money on them • We generally aim to hold shorts for less than two years • Thus, catalysts are an essential element to short pitches • Examples in “Good News, Bad News” part of the “Money and Investing” section of the WSJ

35. 7. Valuation Analysis “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett

36. P/E Ratio • Provides rough indication of market’s perception of a company’s growth and value • Current market price/earnings per share • Forward vs. Trailing Twelve Month • Varies according to industry • Technology? • Grocers? • As a yardstick, 15.5x is the long-term average P/E ratio • Far from perfect – negative earnings?

37. Comparable Firm Analysis • Uses valuation of peers to derive an implied value of the company you’re analyzing

38. 8. Delivering the Goods “Your premium brand had better be delivering something special, or it’s not going to get the business.” – Warren Buffett

39. Delivering the Presentation/Memo • Practice before/submit rough draft to manager mentor • If you hold the stock in your personal portfolio, please disclose this fact • Have fun!

40. Now That You’rea Stock Picking Expert • Application memos are due by 11:59 PM on Tuesday, January 29rd to miirecruitment@gmail.com. • Pleaseuse the template provided in the membership email and limit your memo to one page only – no exhibits or appendices. • Your memo must be written on an individual publicly-traded stock(either long or short) not currently held in MII's portfolio – no ETFs, futures, commodities, etc. • Please also be mindful of avoiding plagiarism when conducting research, as your memo should represent your original analysis and insights. Work individually – this is your idea. • We do not expect VAR or in-depth financial analysis, but we do value creative and well-articulated ideas (Apple and Facebook do not count as creative ideas) • This PowerPoint and other helpful resources are all available on MII’s website at www.uvamii.com to assist you.