Jamie Dimon the CEO of JP Morgan Chase came out with his shareholder letter today. I always enjoy reading it as Dimon is honest, insightful, and outspoken. He touches on a variety of subjects but I found most interesting his belief in buying his stock, and his rationale for doing so which I completely agree with.
“Our tangible book value per share is a good, very conservative measure of shareholder value. If your assets and liabilities are properly valued, if your accounting is appropriately conservative, if you have real earnings without taking excessive risk and if you have strong franchises with defensible margins, tangible book value should be a very conservative measure of value.”
While JP Morgan trades right around tangible book value, other large banks with similar accounting and business models such as Citigroup, and Bank of America can be bought at significant discounts. I think Dimon’s perspective is the right one and will be proven so over time as bank stocks rise in price.
Dimon also correctly understands that the most attractive way to bring value to shareholders is through buying back stocks at discounts to “intrinsic value” and if possible tangible book value.
“So buying back stock is a great option – you can do that math yourself. Haircut our earnings numbers that analysts project and forecast buying back, say $10 billion a year for three years at tangible book value. With these assumptions, after four years, not only would earnings per share be 20% higher than they otherwise would have been, but tangible book value per share would be 15% higher than it otherwise would have been. If you like our businesses, buying back stock at tangible book value is a very good deal. So you can assume that we are a buyer in size around tangible book value. Unfortunately, we we were restricted from buying back more stock when it was cheap – below tangible book value – and we did not get permission to buy back stock until it was selling at $45 a share.”
Jamie Dimon is spelling out exactly what we at T&T Capital Management have been preaching. Buy the great banking and insurance franchises at discounts to tangible book value. When these companies are able to return cash to shareholders the stocks will likely appreciate quickly, or will have already appreciated. C, BAC, MS, AGO, AIG, MET all offer wonderful examples that you are not too late for.
The problem for a money manager is that often clients are very sensitive to volatility. For instance the Fairholme Fund ran by Bruce Berkowitz lost almost half their money after one bad year following this exact same concentrated approach. Those investors have missed out on Berkowitz’s top 1% performance thus far this year. Because of how we use options to get in at cheaper prices we have been able to shield some of that volatility at TTCM but we still are above average in that regard. We are fine with that however because it is our firm belief that volatility does not equal risk. We define risk as a permanent loss of capital. If as an investor you can have this same belief I’m very confident that over time you are likely to do quite well. Below is the link to the shareholder letter.