Robotti & Company Advisors Q2 2023 Letter
Robotti & Company is a New York deep-value boutique founded by Bob Robotti in 1983, specializing in left-for-dead cyclical industries — energy services, building products, shipping — with multi-year holding periods and occasional activist letters. It manages about $650m; Bob is regarded as one of the most steadfast Graham-tradition cyclical value hunters.
In plain words
This is the start of a letter from an investment firm celebrating 40 years. It says markets always go up and down, but each time feels different. The key lesson: ignore emotions and focus on price versus value. For regular investors, this means don't chase hot stocks when everyone is excited. Instead, buy when others panic—prices then often assume the worst. The firm shows its own 30-year track record: patient value investing beat the market. Worth reading because it reminds you that investing isn't about guessing the future, but about knowing what you're paying.
On the occasion of its 40th anniversary, Robotti & Company released its Q2 2023 client letter, with the core theme of adhering to value investing and long-term patience. The report emphasizes that despite major events such as the collapse of the Soviet Union, the internet bubble, and the global pand
Theme and Background
This chapter opens the 40th anniversary letter to clients of Robotti & Company, reviewing major historical events the firm has experienced since its founding in 1983 (the collapse of the Soviet Union, the dot-com bubble, 9/11, the global pandemic, etc.) and emphasizing that market cycles have always dominated the investment environment. The author uses this to introduce the core investment philosophy: in an emotion-driven market, adhering to value investing and long-term patience is key to navigating cycles.
Core Views
- Market cycles are eternal, but each time they reappear in a different form: Historical events do not repeat themselves exactly, but similar themes and challenges emerge with new nuances. Understanding the past helps in dealing with the future.
- The core of value investing is "valuation," not "emotion": The author believes that the greatest danger for investors is assuming "this time is different," and successful investing depends on "what you buy and how much you pay."
- Contrarian investing and margin of safety are sources of excess returns: Buying during market panic ("pricing when everything could go wrong") can yield good returns even if the company performs only modestly; conversely, speculative companies with high valuations and low profits can be disastrous if execution falters.
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Key Arguments and Data
- Long-term performance comparison: Since the launch of the Separately Managed Account strategy in 1993, the annualized net return has been 10.7%, outperforming the benchmark Russell 2500 Value's 8.8%. An initial $1 million investment is now worth nearly $21 million, while the benchmark would be worth only about $13 million.
- Compounding effect: Over 30 years of compounding, the excess return (2.9% annualized) results in a final value difference of approximately $8 million.
- Behavioral advantage: The author cites a 2014 client letter, emphasizing that "maintaining high conviction when the market increasingly disagrees with us" is a behavioral advantage, not stubbornness or blindness. Patience is an active decision, as important as buying or selling.
- Margin of safety: Quoting Benjamin Graham and Jean-Marie Eveillard, the report argues that "the future is uncertain," making the margin of safety more important than ever. When the market panics, companies are priced under the assumption that "everything will go wrong," offering an excellent entry point for investors who understand the most likely outcomes.
Market sentiment cycle chart illustrating the complete cycle of investor emotions from optimism, excitement, and euphoria through fear, despair, panic, and depression, followed by a gradual recovery
Companies/Assets Involved
- Robotti & Company: Used as a case study itself, demonstrating the performance and philosophy of a 40-year commitment to value investing.
- Russell 2500 Value: Used as a benchmark index for performance comparison (switched from the Russell 2000 Index on September 1, 2011).
- No specific individual stocks are mentioned, but the author implies that the current market contains a large number of speculative companies with "low or zero profits and high valuations" (such as stocks driving large-cap indices higher) and believes these companies face significant risks.
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Investment Implications
- Adhere to a valuation-driven approach: Investors should ignore market sentiment fluctuations and focus on the intrinsic value of businesses and the reasonableness of the price paid. Avoid being misled by the "this time is different" narrative.
- Leverage market panic: Seek opportunities in the "panic to depression" zone, where the margin of safety is greatest. Even if a company's short-term performance deteriorates, as long as its fundamentals have not collapsed, buying at a low price can yield asymmetric returns.
- Beware of high-valuation speculation: The current market's enthusiasm for low-profit, high-valuation companies may repeat historical mistakes. Investors should stay away from assets whose valuations depend on "perfect execution."
- Patience is an active strategy: Not trading is not the same as inaction. In the absence of clear opportunities, maintaining patience and waiting for the market to make mistakes is a more important investment decision.