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v Finding an Edge

v Field of Play
v Uncovering Value
v Research and Analysis
v Portfolio Management
v Learning Curve
v Of Sound Mind
v The Craft of Investing
Words of
Investing Wisdom
A Greatest Hits collection of investing insight from Value Investor Insight

TOPICS INCLUDE:

03 Finding an Edge 23 Portfolio Management


Efficient Markets Active Management
Concept of Time Buying and Selling
Concentrate or Diversify?
05 Field of Play Managing Risk
Circle of Competence Going to Cash
Does Size Matter? The Short Side
Sector Insight Activism
Going Abroad
33 Learning Curve
11 Uncovering Value
Where the Values Are 37 Of Sound Mind
Idea Generation
40 The Craft of Investing
15 Research and Analysis The Big Picture
The Research Process Investor as Manager
Analytical Rigor Finding Motivation
Management Education
Defining Value

EDITORS LETTER:
While we certainly believe there are investors tend to share as well. Weve They focus more on analyzing and under-
standing micro factors, such as a compa-
core principles upon which sound invest- identified an even dozen:
nys margins and future growth prospects,
ments are made, its equally clear that, and less on trying to predict the direction
like snowflakes, no two investing strate- They tend to buy whats out of favor of interest rates, commodity prices or the
gies are exactly alike. Equally talented rather than whats popular.
overall economy.
and accomplished investors can view the They focus on intrinsic company value They cast a wide net, seeking mispriced
same investment opportunity in precisely and buy only when there is a substantial
securities across industries and types and
margin of safety, rather than trying to
opposite ways. Thats a central reason we sizes of companies rather than accepting
guess where the herd will go next.
launched Value Investor Insight four artificial limitations on market capitaliza-
They understand and profit from rever- tion or other criteria.
years ago (and SuperInvestor Insight two sion to the mean rather than projecting
years ago), to help inform the ongoing They make their own decisions and are
the recent past indefinitely into the future.
willing to be held accountable for them,
development of our readers own unique They understand that beating the market not seeking safety in what everyone else is
investment strategies with the experience, requires a portfolio that looks different buying or decision-making by committee.
wisdom and ideas of a wide variety of from the market.
They admit their mistakes and seek con-
superior investors. They focus on absolute returns, rather stantly to learn from them.
The differences in strategy and style than outperforming a benchmark, and on
among value investors are many: Some avoiding permanent losses. Its in this spirit of continuous learning
invest primarily in small-cap stocks while They typically invest with a multi-year that we offer this collection of wisdom
others stick to large-caps; some invest time horizon rather than focusing on the from the pages of each of the 46 issues of
month or quarter ahead.
overseas while others stick to U.S. mar- Value Investor Insight, celebrating both
kets; some run concentrated portfolios
They pride themselves on in-depth and
the similarities and differences in how the
proprietary analysis in search of variant
while others are more diversified; some perceptions, rather than acting on tips or best investors apply their craft.
are activists while others never are; some relying on Wall Street analysts.
are long only while others actively short. They spend far more time reading things
The list goes on. like business publications and financial
At the same time, there are several reports than watching the ticker or televi- John Heins Whitney Tilson
fundamental characteristics that value sion shows about the market. Co-Editor-in-Chief Co-Editor-in-Chief

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 2


WORDS OF INVESTING WISDOM Finding an Edge

Finding an Edge
EFFICIENT MARKETS hasnt traded at such a low valuation for One way of dealing with information
five or ten years. But that doesnt matter, being more available is to stop playing the
So if the entire country became securities what matters is what will be. game and seek out securities or asset
analysts, memorized Benjamin Grahams Ric Dillon, 6.29.07 classes where theres less information or
Intelligent Investor and regularly attend- competition.
ed Warren Buffetts annual shareholder Seth Klarman, 9.30.08
meetings, most people would, neverthe- We always ask whether we ourselves
less, find themselves irresistibly drawn to have any competitive advantage in ana-
hot initial public offerings, momentum lyzing a particular company. Can we Wall Streets view is that if you dont
strategies and investment fads. People know the business better because no one make your projections, youre a bad per-
would still find it tempting to day-trade else seems to be paying attention? Is the son. Thats because they dont want to do
and perform technical analysis of stock markets view being distorted by some the hard work of making their own pro-
charts. A country of security analysts behavioral or structural bias that we jections to see if the companys projec-
would still overreact. In short, even the dont have? tions make sense.
best-trained investors would make the Brian Bares, 9.30.08 Richard Pzena, 2.22.05
same mistakes that investors have been
making forever, and for the same
immutable reason that they cannot The reason [GE traded at $55 in 2001] Wall Street sometimes gets confused
help it. was because Id estimate that 95% of the between risk and uncertainty, and you
Seth Klarman, 3.23.05 dollars invested in the U.S. stock market can profit handsomely from that confu-
were either indexed or closet indexed sion. The low-risk, high-uncertainty [sit-
people had to own it to keep up with the uation] gives us our most sought after
Human beings are subject to wild swings benchmark. If they thought it was over- coin-toss odds. Heads, I win; tails, I dont
in their levels of fear, risk tolerance and valued, their response would be to maybe lose much!
greed. That wont change. I base my buy only a 3% position rather than the Mohnish Pabrai, 6.29.07
whole approach on buying when others 4% weighting in the benchmark. Thats
are fearful and selling when others are the type of irrational behavior that can CONCEPT OF TIME
greedy. The reason Shakespeare is so rele- create inefficiency.
vant still today is that his plays were all Ric Dillon, 6.29.07 Its still true that the biggest players in the
about human nature, and human nature public markets particularly mutual
never changes. funds and hedge funds are not good at
Mark Sellers, 6.19.05 Investors overreact to the latest news, taking short-term pain for long-term
which has always been the case, but I gain. The moneys very quick to move if
think it's especially true today with the performance falls off over short periods
Humans have a strong desire to be part Internet. Information spreads so quickly of time. We dont worry about headline
of a group, says Legg Mason equity that decisions get made without particu- risk once we believe in an asset, were
strategist Michael Mauboussin in a 2004 larly deep knowledge about the compa- buying more on any dips because were
research paper that dissects how nies involved. People also overemphasize focused on the end game three or four
investors make decisions. That desire dramatic events, often without checking years out.
makes us susceptible to fads, fashions the facts. It's the classic, Are more peo- Jeffrey Ubben, 1.31.06
and idea contagions. ple killed each year by sharks or by being
VII, 9.28.05 trampled by pigs? type of situation the
dramatic event can get more play than it I like to talk about the long term with
deserves. These types of overreactions are management because thats how you real-
On the behavioral-finance side, one of what we're trying to take advantage of. ly determine if someone is going to create
many inefficiencies comes from people John Dorfman, 10.31.08 business value. Most stocks are reason-
anchoring on the past. People assume ably priced in the short term its the
something is cheap, say, just because it long term where youre most likely to put

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WORDS OF INVESTING WISDOM Finding an Edge

a different probability on something hap- ting better, that provides real opportunity occur within the discrete time period, are
pening than someone else does. for people who arent worried about that. discounted at a fairly remarkable rate.
Jeffrey Bronchick, 1.31.08 Those kinds of inefficiencies, if anything,
The human brain is incapable of concep- are more common than they were when
tualizing something vastly different from we started out 13 years ago.
what the situation is today. But the Ive read that the average holding period Murray Stahl, 11.21.07
biggest-money ideas are those where the on the New York Stock Exchange is nine
changes are far beyond what you can months, which I dont even consider
conceive today. The closer you can get to investing. Over such a short period of The most important change in my 40
conceiving those types of changes and time youre just betting on the overall years of investing has probably been in
the higher the probability they might direction of the market or on the next investors time horizons. Today the
happen, the more likely you are to find quarterly earnings. majority of investors Ben Graham
big winners. Aaron Edelheit, 1.31.08 would call them speculators are focused
Lisa Rapuano, 9.28.05 so closely on this week, this month and
this quarter. Stocks are bought and sold
Were catalyst-driven on both the short on penny deviations from short-term esti-
Lack of visibility on timing is one of the and long sides, so we generally look out mates, which is mind-boggling. Crazy as
best things you can have as an investor only one or two years for the thesis to it is, we cant complain it just creates
with a long time horizon. We love situa- play out. I was brought up in the business more opportunities for investors with
tions where its very difficult to model this to be skeptical of big, long-term discount- longer time horizons.
years earnings. ed cash flow models, so thats not an William Nasgovitz, 9.30.08
Ken Shubin Stein, 2.28.06 important part of how we invest.
Steven Tananbaum, 9.28.07
We have no problem buying things that
Time is our friend. Today theres so much take a long time to play out. Call me lazy,
money chasing quarterly performance or Most investment institutions define suc- but I don't want to worry about last
driven by program trading, index funds cess as having a good result in each and week's same-store sales or next week's
or ETFs. That leaves a real opportunity every discrete time period, so its quite oil price.
for fundamental investors like us who are logical that people in those institutions Jeffrey Schwarz, 5.30.08
looking out two to four years to find look to buy stocks that will do well from
inflections in businesses which arent cur- the current moment in time until, say, the
rently appreciated by the market. end of the year. As a result, favorable A[n] argument is made that there are just
Joe Wolf, 4.30.07 occurrences such as positive earnings too many question marks about the near
reports or value-realization events that future; wouldn't it be better to wait until
are highly probable, but not likely to things clear up a bit? You know the
Time arbitrage just means exploiting the prose: Maintain buying reserves until
fact that most investors institutional, current uncertainties are resolved, etc.
individual, mutual funds or hedge funds Before reaching for that crutch, face up
tend to have very short-term time hori- to two unpleasant facts: The future is
zons, have rapid turnover or are trying to never clear [and] you pay a very high
exploit very short-term anomalies in the price for a cheery consensus. Uncertainty
market. So the market looks extremely actually is the friend of the buyer of long-
efficient in the short run. In an environ- term values.
ment with massive short-term data over- Warren Buffett (quote from Forbes),
load and with people concerned about 4.30.07
minute-to-minute performance, the ineffi-
ciencies are likely to be looking out
beyond, say, 12 months. I have a ready answer when people ask
Bill Miller, 6.19.05 me why Im such a long-term investor,
which is because I failed miserably as a
short-term investor. Im not against mak-
Because enough people in the market If I knew how to get rich quick, ing money in the short term, I just dont
think theyll get fired for buying some- would I be sitting on a know how to do it.
thing that might be a year away from get- mountain-top all day? Thomas Gayner, 12.21.07

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WORDS OF INVESTING WISDOM Field of Play

Field of Play
CIRCLE OF COMPETENCE DOES SIZE MATTER? clearly established but can still be under
the radar. We also can get a lot more
Stepping outside your areas of compe- Our strategy from the beginning has been bang for the buck in companies that size
tence is often a seductive siren song, but to focus on areas where we believe we can from the initiatives we see adding value.
weve learned from experience not to lis- have some advantage, where there is a
ten anymore. Without the confidence that greater prevalence of irrationality and In my experience, its harder for a $30 bil-
comes from experience and the ability to higher likelihood of mispriced assets. For lion company to add $10 billion in value
recognize patterns, the risk is higher that us, thats not going to be investing in than it is for a $3 billion company to add
youll overpay or sell too soon in a panic. Microsoft or in some quantitative strate- $1 billion in value. Weve bought bigger
Shawn Kravetz, 12.30.05 gy against a room of Goldman Sachs companies in the past, but I cant say
Ph.D.s with Cray supercomputers. We weve been very good at it. Its just too
have to be guerrilla investors, lying in the hard to have an informational edge.
Over short periods of time, you can do weeds and picking off opportunities Robert Lietzow, 2.29.08
the wrong thing and make a lot of money among the obscure and mundane. That
and do the right thing and look like an usually means small, ignored companies
idiot. We try to stick to what we do well that no one else is talking about. We try to be cap-agnostic, but we do
and not get too caught up in what's James Vanasek, 4.30.08 want businesses that are easier to under-
working at any given moment. In the stand, and smaller to mid-size companies
long run, that sort of discipline will keep are generally easier to understand. They
you from blowing up. The core of our experience and success have fewer divisions and we can usually
Phillip Goldstein, 3.31.08 has been in companies with market caps get more of our questions answered.
from between $200 million to around $2 Steven Romick, 7.31.08
billion. Small-cap investing can be more
Most people say they want to stay within labor intensive due to the sheer number of
their circle of competence, and thats companies, but at the same time you can We want to maintain the discipline that
smart. But theres no reason to say more quickly know just about everything we will invest in a company, regardless of
Heres my circle of competence and, you need to know about a company to size, if it meets our criteria. Part of that is
guess what, its never getting any bigger make an investment judgment. I cant say because we learn from all the companies
because Im not going to learn anything that in looking at a company like AIG, we own. Part of that is because it keeps
new. Were trying to understand new for example. us fresh and engaged and not stuck in the
things if we can. Philip Tasho, 9.28.07 rut of looking at the same 100 companies
Bill Miller, 6.19.05 everyone else is. We also take the posi-
tion that a penny more in return for our
Our strategy works best with smaller-cap shareholders than we would have had
The article closes with a telling anecdote stocks. Multiples tend to contract further otherwise is a penny worth having. If
from a Wall Street banker recalling a din- when small companies mess up than smaller-cap companies can give us that,
ner with Buffett in Manhattan: He had when large ones do, so theres more room well buy them.
an exceptional ham-and-cheese sandwich. on the upside when a small company Clyde McGregor, 4.30.08
A few days later, we were going out again grows out of a turnaround. Id also argue
and he said, Let's go back to that restau- that its generally quicker and easier for a SECTOR INSIGHT
rant. I said, But we were just there and small company to be turned around,
he said, Precisely. Why take a risk with which improves your chances of invest- Our trifecta is to identify companies
another place? We know exactly what ment success. with increasing returns, growing cash
we're going to get. And that is what Kevin OBoyle, 11.21.07 flows and an ability to reinvest profitably,
Warren looks for in stocks too. He only which is what we see in natural resources
invests in companies where the odds are today. The phenomenon of 300 million
great that they will not disappoint. Our sweet spot tends to be in the $2-3 people moving to the middle class in
VII, 12.22.06 billion range, where the companies are China is going to have a dramatic impact

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WORDS OF INVESTING WISDOM Field of Play

on the commodity intensity of that econ- I believe the service companies are more investing more in trying to find new
omy and the world. I believe thats the attractive than producers in the current sources of oil and gas. On the industrial
investing story of this decade and beyond. environment. Whether oil is $40 per bar- side, companies are not making energy-
Andrew Pilara, 4.30.07 rel or $70 per barrel, Id argue its not saving investments that require $50-60
going to have that much impact on oil to pay off. If these investments on
demand for services. Many of the big oil both sides were being made, we believe
The physics make sense to us that this is companies have declining reserves and youd see tremendous oversupply
a resource thats being used up. Every will be desperate to add reserves. To do demand would fall sharply and supply
major field outside of Saudi Arabia is in that, theyve got to spend on finding and would go up significantly.
decline. Those people who talk about developing new production or getting Bill Nygren, 7.28.06
this endless supply of oil regenerating more production out of what they
and bubbling up from the center of the already have.
earth, where is it? We started working Robert Robotti, 8.25.06 I was surprised to read even smart people
through the alternatives: nuclear power, like [Princeton economist and New York
solar, wind, oil shale, coal-to-gas. I made Times columnist] Paul Krugman say oil
myself crazy one weekend trying to fig- couldn't be in a bubble because there was
ure out the potential for ethanol. All of no stockpiling. That to me showed a dis-
these have their own problems from tinct lack of understanding of what was
safety, to capacity constraints, to cost, to going on. Companies were, in effect,
lead times and its going to be hard for stockpiling quite aggressively by not
any of these to compete with oil even at extracting oil that was economically
todays prices. viable. That stockpiling in the ground, so
Bruce Berkowitz, 4.28.06 to speak, created a speculative bubble
that we expected to burst, set off by a
downturn in the economy.
Given energys commodity nature, its all James Montier, 10.31.08
about how [energy-company] manage-
ment allocates capital in a capital-inten-
sive business. Whats interesting is that I love the videogame business. Its a high-
the survivors in the worst times are the margin, high free-cash-flow business with
ones who are thriving now when times The lack of investment in developing remarkable installed-base growth. Theres
are good. It gets back again to managing energy resources was so profound for so a gigantic secular tailwind behind this
through tough times, which I find a fasci- long that we expect to see inelastic, high- business, which is unstoppable. Were in
nating process to study. er prices for a very long time, regardless the midst of a massive change in the
Philip Tasho, 9.28.07 of the fall in oil prices of late. world of media, broadly defined, and
John Burbank, 8.31.08 videogames will continue to take time
away from old media. People of the prop-
Were very constructive on natural- er investment age dont get it, so its
resources businesses over the next five to The entire energy sector appears to be unlikely for this change to be fully dis-
ten years. We look for situations where attractively priced right now, so our focus counted in share prices.
there is a steepening of cost curves and is on the stocks offering the best relative Lisa Rapuano, 9.28.05
the discrepancy between structurally value and those that may have other cat-
advantaged assets and the marginal pro- alysts than oil prices that will cause the
ducer is increasing over time. We see share prices to move. Educational systems are generally geared
those in any number of different com- Edward Maran, 10.31.08 to educate the elite, not the masses. But
modities markets today. Id argue that the the industrial economies of the past,
cost or otherwise advantaged natural- where you just needed a few highly edu-
resource company has a bigger and We still dont believe long-term, market- cated people while the vast majority of
longer-lived advantage versus its competi- clearing oil prices have moved to a level people were working on production lines
tion than in almost any other segment of substantially higher than $40. I know it or delivering stuff, are being turned on
the economy. sounds silly because thats barely half of their heads. Now nearly the entire popu-
MacKenzie Davis, 12.21.07 what prices are today. But if the oil com- lation needs training and education that
panies themselves believed the long-term goes past age 18. So theres no question
price was much above $40, they would be the sheer number of students is going to

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WORDS OF INVESTING WISDOM Field of Play

increase dramatically, and somebody has this global trend of consumers wanting to industry. Its very hard to get a govern-
to house them. Even if youre just aver- trade up in the quality and style of what ment contract, not because the govern-
age, youll be getting students through they buy. Through strong or weak ment doesnt entertain new entrants, but
your doors. If youre very good, and even- economies, we think that companies that because the rules of bidding require assets
tually people recognize that, thats only provide affordable luxury, who give the in place in order to bid. If you wanted to
going to make the demand for your edu- average person the chance to indulge in a compete with Boeing on the B-1 bomber,
cational services that much better. special treat, will be extremely well youd have to build an entire facility and
Guy Spier, 4.27.05 rewarded in years to come. hire all the necessary engineers and pro-
Shawn Kravetz, 12.30.05 duction people to assure the government
you could actually build a better B-1
Im convinced television programming is bomber all just to enter a bid that you
going to go over the Internet, an open sys- There is something inevitable to me about may never win. Thats a positive situation
tem thats the most efficient distribution positional goods. Once youve provid- for a company like Boeing.
network ever created. Everybody will be ed for your basic needs, you start to Murray Stahl, 11.21.07
selling broadband access as a commodity. march up the consumption curve and it is
In such a world, a cable or satellite com- often the more traditional brands that
pany packaging channels with some attract the consumer as he reaches a new Were focused on four sectors that have
choice but not much and charging you position in life. The more you prosper, the exhibited unvarying demand regardless of
40% off the top is insane. more narrow the universe of items economic activity and that have key fun-
through which you can express your damental strengths that help explain why
At the end of the day, the cable company prosperity. theyve been around for hundreds of
is the middleman. In a digital world, mid- Thomas Russo, 6.30.06 years. The inherent demand of people to
dlemen margins get crushed, because the smoke, drink and gamble and of nations
marginal cost of transmitting a bit of to arm themselves is clearly strong and
information is zero. If youre a middle- We believe the U.S. is already heavily long-lasting.
man with a closed architecture, youre in over-stored, so retail has become more of Charles Norton, 4.30.08
trouble. You might not feel it in 2006 or a zero-sum game one companys success
even 2008, but longer term youre is at the expense of another. We also
doomed. believe that after 15 years of spending I first got interested in technology stocks
James Chanos, 7.29.05 growth, the American consumer is truly after watching things like Micron
tapped out. Technology go from $20 to $40 to $20 to
Jean-Marie Eveillard, 5.30.08 $40 to $20 to $40. The cyclicality in
The secular trend in healthcare is cost- many of these businesses can be more reg-
containment. How do you slow the ular than is often believed, so its possible
growth in the total cost of healthcare as a We think its hard to play where it to buy on the down leg of a cycle because
percentage of GDP? The convergence of appears the class-action lawyers have a there will inevitably be an up leg.
secular trends in healthcare will not be permanent goal to destroy the industry,
positive for big pharmaceutical compa- such as in tobacco or handguns. Ive had Weve also had considerable success in
nies. It has been and will be positive for long discussions with friends of mine, for buying technology companies that have
companies like Aetna and United example, about Philip Morris [owned by great balance sheets. Companies like this
Healthcare. The cost structures of compa- parent company Altria]. I just cant imag- have the flexibility to invest in new initia-
nies that have earned excess returns for ine all the prohibition against smoking in tives, buy new technology and invest in
decades dont reflect a lot of competition. the U.S. in restaurants, bars, office research and development. Even if they
Thats where the danger is when the secu- buildings all the added taxes and all the arent profitable today, you have the
lar trends change because these compa- litigation risks arent going to be a prob- potential for a gold mine if the business
nies have a culture that doesnt know lem for the stock. Of course, my friends turns around.
how to compete but its also the oppor- have so far been right and Ive been John Buckingham, 8.31.07
tunity when someone comes in and wrong. These are just risks that weve
changes things. decided to avoid.
Bill Miller, 6.19.05 John Rogers, 11.30.05 We dont do a lot in technology.
Successful technologies change some-
thing, creating an efficiency or demand
Coach, which we originally bought in Another example [of a high barrier to that wasnt there before. But the very fact
2002, is the poster child of tapping into entry business] would be the defense that the change happens means that

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WORDS OF INVESTING WISDOM Field of Play

somebody else can come along and of gold would go up, providing a partial us to believe they can more than deal with
change it again. If, because of the threat offset to the hits wed take in our equity some ups and downs.
of technological obsolescence, Im uncer- portfolio. John Rogers, 11.30.05
tain about a companys cash flows sever- Jean-Marie Eveillard, 5.30.08
al years out, Ill put a big discount on
those cash flows and conclude theyre My law of money management profitabil-
not worth much. Because Wall Street I find it almost sickening what has been ity says that because of fee structures, the
tends to put a large value on the future done to the countrys balance sheet, rate of return a money manager gets on
cash flows of technology companies, we which is only going to get worse as the its capital is, by definition, better than the
rarely find one that we consider very government tries to spend its way out of rate of return the client gets on his capi-
attractive. our many and varied problems. In that tal. If you find stocks that are desirable,
Ed Wachenheim, 2.29.08 kind of environment, we believe gold as a youd be better off buying the money
storehouse of value will come to even manager holding those same stocks than
greater prominence. buying the stocks themselves.
Real estate is a natural for a value-invest- William Nasgovitz, 9.30.08 Murray Stahl, 11.21.07
ing firm like Third Avenue. Real estate
companies typically have identifiable GOING ABROAD
hard assets that are relatively easy to There's a saying that you should not con-
value based on a sum-of-the-parts analy- fuse a clear vision with a short distance. From day one we've had a significant por-
sis to arrive at a net asset value you can We're willing to own gold even though it tion of our assets invested outside the
compare with the current stock price. may not act as a hedge in the near future, United States it's currently about 30%
Michael Winer, 8.31.07 because we have a fairly clear vision of our gross exposure. This is probably
about what will happen to inflation too broad a generalization, but in our
three, four or five years out, and it's not view non-U.S. markets tend to be less effi-
Weve never been that fond of the hotel a pretty sight. cient than the U.S. market. In an ideal
business because the tenants move out Charles de Vaulx, 11.26.08 world, I'd like to be more selective in the
every night. That makes the business U.S. and take advantage of more oppor-
susceptible to economic swings in a way tunities outside the U.S.
that office buildings with long-term leas- I have always had an affinity for compa- Lee Ainslie, 12.22.06
es to credit-worthy tenants arent. We nies that actually make things. We favor
prefer to see more predictable streams of companies with transparent businesses
cash flow than lodging companies typi- that we can understand fairly quickly and With the tremendous run in international
cally have. those that have large and recurring main- stocks over the past three years, the valu-
Michael Winer, 8.31.07 tenance, repair and overhaul revenues ation gap has clearly closed. But, in gen-
from an installed base, such as elevator eral, you still see less long-term commit-
companies or aerospace-parts firms. ment to owning equities by investors out-
Gold kind of scares me because very Alexander Roepers, 2.28.07 side the U.S. When markets run into trou-
often the people involved with it seem to ble, youll see more wholesale selling of
be slightly insane. My other problem is I equities by non-U.S. institutional holders.
don't know how to value it. That said, I We dont like businesses that are com- There may be some historical precedent
can certainly see why gold could be con- pletely reliant on human capital that can to that, and we hope it continues.
sidered somewhat of an insurance policy, walk out the door. We have no rule Will Browne, 9.29.06
if not an investment in its own right. Any against it, but you generally wont find us
kind of systemic economic turmoil is investing in things like investment banks
likely to drive gold prices higher. or consulting firms. Over the next ten years its far more like-
James Montier, 10.31.08 Donnell Noone, 4.30.08 ly that the huge amount of capital owned
by the rest of the world will grow by
investing somewhere other than the U.S.,
We dont look at gold as a commodity, Weve invested for a long time in the whether its in infrastructure in China or
but as a form of insurance against what mutual-fund industry, for example, and the Middle East, or to develop consumer
Peter Bernstein calls extreme outcomes. clearly see it as within our circle of com- markets in places like India.
In most circumstances in which world- petence. Our experience with the long- John Burbank, 8.31.08
wide equity markets would go down term track records of companies like T.
and not just for a week or two the price Rowe Price or Franklin Resources leads

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WORDS OF INVESTING WISDOM Field of Play

One benefit of being a global investor is For the types of companies I generally We take into consideration what we call
in learning how a particular business invest in sophisticated global companies attitudes toward capitalism. For example,
should be valued which is often proper- like Diageo, Nestl, Pernod Ricard the there's a very low risk of being squeezed
ly done in the U.S. and applying that in information is generally accessible and out at an unfair price if you own 13% of
countries where the valuation is different. complete, so I dont require a greater mar- a company in the U.K., but that could
Charles de Vaulx, 11.26.08 gin of safety or lower multiples because happen in Switzerland, where the laws
theyre international. Also, partly because are less shareholder-friendly.
the field hasnt been as crowded, Ive had lvaro Guzman de Lzaro, 11.26.08
In general, we believe its prudent for as good, if not better, access to senior
long-term investors to have a significant management at non-U.S. companies.
and growing portion of their portfolios Thomas Russo, 6.30.06 In general, there arent many countries in
allocated to equities in foreign countries which we wouldnt invest. But if a coun-
that are growing faster than the U.S. and try is too economically or politically
whose currencies will likely appreciate Believe it or not, there are still countries troubled or the rule of law doesnt really
against ours. Weve primarily been invest- around the world where accounting stan- prevail, we pass. The main country in
ing in closed-end funds offering a double dards are conservative. In the Anglo- which we wont invest today is Russia.
discount trading at a discount to their Saxon world we're used to seeing over- Theres still too much risk for foreign (or
net asset values and in what we believe stated earnings, but in places like South even local) investors that youll think you
are growth economies undervalued by the Korea, Japan, Germany and Switzerland, own an asset and then Mr. Putin decides
capital markets. you can sometimes find earnings that are you dont.
David Nierenberg, 7.28.06 significantly understated. Jean-Marie Eveillard, 5.30.08
Charles de Lardemelle, 11.26.08

Id argue that literally every investor We haven't been traditional emerging


today has to be a global investor to Japan is particularly interesting right now. markets investors because we do not
understand whats going on certainly in While corporate governance is improving chase growth or glamour, but we like
markets like energy and commodities, but in the developed countries, Japan is prob- nothing better than to invest in emerging
also to take advantage of where we think ably still the furthest behind. Some of the markets on a contrarian basis. Strong
the best opportunities are going to be. best opportunities today, though, are in economic growth is never steady, so you
John Burbank, 8.31.08 companies that have a long way to go in can find nice opportunities to invest after
improving corporate governance. booms have gone temporarily bust.
Alexander Roepers, 2.28.07 Charles de Vaulx, 11.26.08
Another reason its important to be more
international in your outlook: if youre
not paying attention to what competitors Were not afraid of political risks, which Weve recently been very active in the
in emerging markets can do, youre likely we generally think are exaggerated. We Middle East, which we consider to be the
taking on risk with U.S.-company invest- invested in Thailand after the coup. Were new emerging-markets story today and
ments that you shouldnt. investing in Turkey in the face of political the third one-billion-plus population area
Robert Williamson, 8.31.08 uncertainty. Its not a big component of of the world that any global investor
what we do, but there are always small absolutely has to understand.
pockets of mispriced risk and political John Burbank, 8.31.08
One interesting aspect of whats going on uncertainty can create very nice bargains.
is the global nature of the credit explosion Oliver Kratz, 6.29.07
and now decline. Credit-fueled liquidity We think Europe is particularly attractive
pushed asset valuations up dramatically right now its probably ten years behind
across assets and in just about every part We like to operate under the illusion that the U.S. in terms of rationalizing corpo-
of the world. When I first started in the if we see something that is out-and-out rate structures and activism is becoming
business, trends didnt spread as quickly unacceptable being done, that theres a more accepted and will continue to pro-
or from market to market around the clear rule book and well-defined avenue mote change there.
world like they do today. Id imagine to complain about it. Its not clear thats Barry Rosenstein, 3.30.07
theres no going back on that front. yet the case in China.
Bob Wyckoff, 12.21.07 Will Browne, 9.29.06
We've found over the years that European
markets are much less efficient than those

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 9


WORDS OF INVESTING WISDOM Field of Play

in the U.S. Right now we have less than I once heard someone say that for every
5% of our portfolio in the U.S., and it's 2X kilometers you are away from where
really lower because our largest holding you are investing, you should divide the We keep heading more toward direct
that trades there operates in the U.K. quality of your assessment in half. We international investing, but worry that
Francisco Garca Params, 11.26.08 agree with that. were going to end up being the patsy. We
Francisco Garca Params, 11.26.08 looked at South Korea, but kept asking
ourselves what edge we really had there.
One of the keys to Warren Buffetts early How do we understand the culture, the
success was investing in high return on For better or worse, the Anglo-Saxon management?
capital consumer businesses that were rel- business model puts the interests of share- Bruce Berkowitz, 4.28.06
atively immature when he bought them holders first. We are less comfortable in
and that grew enormously along with the markets where loyalties are more divided.
U.S., the largest economy in the world. Jeffrey Schwarz, 5.30.08 The fundamentals of value investing
He owned companies like Gillette, Wells which to my mind are based on common
Fargo and Washington Post Co. over a sense still work, and work equally well
period in which consumer-products, My feeling is that its beyond my skill set to across borders. We look at stocks exactly
financial and media companies grew from try to buy local companies outside the U.S. the same way, whether in Hong Kong or
being a relatively small part of the S&P Some people will make a lot of money Japan or Paris. People always ask, But
500 to a very large part of it. Thats a nat- doing that, but not me. What I am doing is dont you want to invest like the locals,
ural evolution in any large, developing buying companies like GE and Citigroup understanding the local idiosyncrasies?
economy and we expect that dynamic to and Diageo, who already have tremendous and my answer is simply no. We never
create value in India for a long time. expertise and operations outside the U.S. buy stocks based on what we think other
John Burbank, 8.31.08 to take advantage of international growth investors are going to do.
and development opportunities. Jean-Marie Eveillard, 5.30.08
Thomas Gayner, 5.26.06

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Winter 2008 www.valueinvestorinsight.com Value Investor Insight 10


WORDS OF INVESTING WISDOM Uncovering Value

Uncovering Value
WHERE THE VALUES ARE Management changes can help a lot with tion between value and growth share-
timing. If a board of directors is serious holders causes them to fall out of focus.
When you've been around as long as I about restructuring, theyll often hire Mitch Julis, 3.31.06
have, you realize that value manifests someone from a best-in-class company to
itself in different ways at various times in make it happen. Those people arent
the market. cheap, which shows the board is serious, I look for companies that may be losing a
William Fries, 10.31.08 and the fact that the person is willing to bit of money, break-even or even a bit
come indicates they think they can add negative cash flow, but where two to
value. An executive from a first-class three years out you can get $1 worth of
We dont have a discernible edge deter- company taking over a laggard can mean earnings power for every $5 in stock
mining whether IBMs earnings are going an opportunity is ripe for the picking. price. Most investors worry about next
to beat the Street by a nickel. But there Philip Tasho, 9.28.07 quarter, not what will be in two to three
are a wide variety of situations in which years, so thats why these stocks can be so
there are dislocations like mergers, spin- cheap relative to the longer-term earnings
offs, short-term bad news, legal issues power. Companies eventually get priced
where we think we understand why there on earnings power, not current earnings.
might be a huge disconnect between sup- Matthew Feshbach, 5.22.05
ply and demand for a given security.
Jon Jacobson, 2.28.06
We focus first on good businesses, with
high returns on capital, barriers to entry
Its often when companies are in the midst and significant free cash flow generation
of change buying or selling divisions, over a cycle. If you're right about the
installing new management, reorganizing business, time should be your friend, so
or restructuring. Change brings uncer- catalysts are not important.
tainty, so many investors want to wait out Charles de Vaulx, 11.26.08
that uncertainty until the situation is eas-
ier to analyze. We think that uncertainty
is what creates opportunities. In general, the best thing for us is to find
Peter Langerman, 12.30.05 companies that have really stumbled, but
Just missing a product cycle is generally where you can look at their past and
fixable. So are problems that result from understand why they are going to earn
The hedge-fund industry grew up by a company outgrowing its infrastructure something much better in the future.
preying on the inefficiencies created by its a high-class problem to have, but Thats opposed to looking at a company
the mutual-fund mentality of only depart- can result in some real earnings trouble. like Amazon.com, for example, which
ing from a benchmark index weighting Botched acquisitions can also create inter- might be a great business, but where
with reluctance. Events that transform esting opportunities if we believe the understanding exactly what the model is
companies can complicate things when delayed cost savings or strategic benefits going to be in the future isnt easy. Its a
youre focused on, say, having an 8% will eventually increase earnings. lot easier to look at the prospects for a
weighting in industrials. Thats why these Kevin OBoyle, 11.21.07 railcar manufacturer, whose business has
types of companies can often be mis- been the same for decades.
priced. Theres also change going on and Steven Romick, 7.31.08
the market can be remarkably slow in Companies in severe financial stress tend
shifting its focus from how things have to be overlooked and underloved,
been to how they will be. because they have a risk or fundamental In my experience, stocks begin to fall out
Gary Claar, 3.30.07 profile that many equity investors are not of favor when companies miss Wall Street
comfortable with. We also like what we estimates and then really get hammered
call crossover equities, where a transi- when actual earnings decline. Thats

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 11


WORDS OF INVESTING WISDOM Uncovering Value

when prices can be least efficient, as the something is no longer a high-flier. All I reverses itself the true value of the compa-
market extrapolates short-term trends care about is the future potential relative ny is likely to come out.
too far into the future and also ignores to what I have to pay for it. James Vanasek, 4.30.08
companies that may still have a few dis- Alan Schram, 1.31.07
appointing quarters ahead.
Kevin OBoyle, 11.21.07 We often return to stocks that face a cycli-
[W]e basically spend our time trying to cal business downturn, but investors are
uncover the promising turnarounds, overreacting to the prospect of a tempo-
Dreman Value Management has research dullards and assorted investment misfits rary dip in earnings. When the Fed is rais-
that shows something like 40% of all in the markets underbrush that are large- ing rates, for example, investor reaction is
earnings announcements are surprises. ly neglected by the investment communi- usually negative out of all proportion to
Overreactions to those surprises happen ty. One of the key metrics we assign to economic reality. We bought banks,
all the time, which often creates great our companies is an analyst ratio, thrifts and mortgage companies in 1990,
buying opportunities. which is simply the number of analysts 1994 and 1999 as investors followed con-
John Dorfman, 10.31.08 who follow a company. The lower the ventional wisdom and sold them.
better as of the end of last year, about Wally Weitz, 8.29.05
65% of the companies in our portfolio
Most of the time were picking up the had virtually no analyst coverage.
pieces after a high-growth company hits Carlo Cannell, 3.31.06 An area we try to mine is busted IPOs.
the wall at 80 miles per hour, having Buying at the IPO often means youre
made at least one too many investments buying from smart sellers, but wed
to try to sustain an unsustainable growth Most companies expand during good much rather buy from dumb sellers
rate. Public markets can actually conspire times and wind up over-leveraged and which is more likely to happen after an
to screw companies up. When youre with too much capacity when the busi- IPO company disappoints in some way
growing fast, you get this big P/E and ness goes south. We like to see the oppo- and the people who bought in the initial
pretty soon you have the wrong investors site, companies today investing on the offering bail.
with ridiculous expectations. You try to cheap in additional capacity for when Steven Romick, 7.31.08
meet those ridiculous expectations and do things turn up.
things contrary to shareholder value. James Vanasek, 4.30.08
Jeffrey Ubben, 1.31.06 We like looking at multi-segment busi-
nesses where its a bit more complicated
My returns have actually been slightly to analyze all the parts and theres not an
If you look at technology-driven growth negatively correlated to the S&P 500. obvious answer to the question of what
industries over the past two centuries The reason is that most of my companies the entire company is worth. In this con-
steam engines, railroads, telephony, elec- have zero momentum, zero hype, arent text, we pay a lot of attention to private-
tric power, the Internet people become usually in cyclical businesses and have no market values and trying to understand
too excited about growth and overinvest analyst coverage. Why would they move how underperforming segments should
in it. When the bubbles burst, markets in step with the market? be valued.
overcorrect on the downside, even though Aaron Edelheit, 1.31.08 Peter Langerman, 12.30.05
the fundamental growth drivers may still
be as present as they were before. We love
to find jewels buried amid the rubble after Any time we see a headline saying com- Holding companies are particularly inter-
that kind of explosion occurs. modity X is trading at a 30-year low, esting now because for some odd reason
David Nierenberg, 7.28.06 well be sure to look closely at the indus- the discounts to the sum of the parts usu-
try for the company or companies still ally increase in bad markets, even as each
doing okay, which are most likely to lead part individually becomes more underval-
We are often looking for broken growth the way off the bottom. Conversely, if we ued. That provides two layers of under-
stories, when a once-great company is no see stories about commodity X trading at valuation.
longer considered to be great. The market a 30-year high much more likely today Francisco Garca Params, 11.26.08
tends to overreact in these cases, as well look at companies that are
growth and momentum investors move dependent on the commodity and have
on to the next new thing and the share- had input costs driven through the roof. First and foremost we want to invest in
holder base turns. Since I wasnt in the The more dependably cyclical the indus- businesses that have the fundamental
stock before, Im not disappointed if try is, as the commodity price trend ability to earn attractive returns. There

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 12


WORDS OF INVESTING WISDOM Uncovering Value

may be a core business that fits that idea, properly so, was that you could get net working capital current assets minus
model and management has tried to a free call on any new-business upside current liabilities. The approximate num-
expand beyond that and the strength of because the stocks were so cheap. This ber of companies selling at a discount to
the core business is being obscured. isnt happening any more in areas of net working capital today is zero.
Michael McConnell, 7.31.07 rapid technological change because the Murray Stahl, 11.21.07
cash flows evaporate faster than you ever
dreamed. IDEA GENERATION
Wall Streets focus on steady growth in James Chanos, 7.29.05
quarterly earnings is [ridiculous]. I want Theres no magic bullet to finding ideas
to go into companies where on a reliable the tools available are there for everyone
basis over a long period they keep Im looking for steady cash flows, rein- to use. Good ideas generally come from
increasing net asset value. Thats what we vested on owners behalf by honest and individual curiosity and then creativity
pay attention to. able management. Steady cash flows around what could be done with the busi-
Marty Whitman, 5.22.05 come from businesses that, for one reason ness. The real value we can add is having
or another, enjoy the perception of indis- conviction about what we think prospec-
pensability for their products. tive earnings power is and why.
In general, we're far more interested in Thomas Russo, 6.30.06 Michael McConnell, 7.31.07
cyclical companies that are well-capital-
ized, that don't lose money at the bottom
of the cycle and whose peaks and troughs Theres a clarity that comes with great
are both higher over time. ideas: You can explain why somethings a
Charles de Lardemelle, 11.26.08 great business, how and why its cheap,
why its cheap for temporary reasons and
how, on a normal basis, it should be trad-
We find opportunity in looking at the dif- ing at a much higher level. Youre never
ferent values ascribed to different asset sitting there on the 40th page of your
classes. If the debt markets would provide spreadsheet, as Buffett would say, agoniz-
100% financing of a companys total ing over whether you should buy or not.
market value, that usually means the Joel Greenblatt, 10.31.06
equity is undervalued.
Steven Tananbaum, 9.28.07
Another thing Peter Lynch did really well
was figure out how else to make money
One general thing well do is focus on on a good idea. Look down the industry
areas that are not being talked about. structure and figure out the other ways
Well look at each other and say, I If youre looking, as we are, for extraordi- that this particular information can gen-
havent heard anything about agricultur- nary returns from companies whose erate an edge. In our portfolio today, we
al-equipment manufacturers. I wonder stocks can go up 10x rather than 2x its identify a theme say consumer-driven
whats going on there? far more likely to happen because the com- health care and then we try to figure out
Donnell Noone, 4.30.08 panys earnings turn out to be so much bet- where all the opportunities are.
ter than anyone expected than because you Jeffrey Ubben, 1.31.06
found a temporary 50-cent dollar.
Music to my ears is when something is John Burbank, 8.31.08
considered dead money and people say, Say youre interested in copper. You may
It looks okay, but Ill come back to it start with the mining companies, then
later when this or that issue resolves In such a value-focused world, we need to move to refiners, then intermediate
itself. That to me shouts, Look here. be all the more contrarian in our views. It processors, then metal-bender manufac-
Jeffrey Schwarz, 5.30.08 also requires additional research focus on turers and on up the line. If one area of
unique, future-potential situations that the business looks lousy, you may want to
might traditionally have been called look at the companies that buy from
Historically, value investors have found growth ideas. This is just a practical those people. You may look at the com-
opportunity in declining businesses with response. As defined in classical Graham petitors or the alternatives to copper.
companies that could milk cash flow and and Dodd terms, a bargain-basement stock Thirty-five companies down the road,
make smart investments elsewhere. The has a market capitalization lower than its youre likely to be in a completely differ-

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 13


WORDS OF INVESTING WISDOM Uncovering Value

ent business and industry and youll come gy. One example: Applying well-under- Bloomberg lists on a monthly basis the
across something that looks interesting. stood U.S. investment ideas to markets highest-ranked and lowest-ranked stocks
James Vanasek, 4.30.08 outside the U.S. During the time when one- by sell-side analysts. I look at the lowest-
newspaper towns in the U.S. were another ranked for buying opportunities and the
version of Buffett's toll booth, there were a highest-ranked for selling opportunities.
Our best ideas tend to come from what I number of European newspapers that were Jon Jacobson, 2.28.06
call old research, new events. Thats dominant local monopolies which were
typically the good company youve stud- still trading at attractive multiples and I
ied carefully and would love to own at the was able to do very well with them. One fruitful screen over the years has
right price, that gets marked down after it Guy Spier, 4.27.05 been for what we call low-P/E outliers
trips or its industry goes out of favor. companies with the lowest 1% of trailing
Ricky Sandler, 8.25.06 P/Es in the market, but with debt that is
We use a lot of grapevine ideas, asking still less than equity. That causes us to
people what theyve finished buying that look at things most investors will not
It would be unusual for someone to call might be interesting. Why not look at look at, which is a good thing.
us with an idea that we dont already what other great investors have found? John Dorfman, 10.31.08
have some knowledge of. As a result, the Bruce Berkowitz, 4.28.06
vast majority of our ideas come from
thinking through the ramifications of We dont do traditional screens and are
industry developments or the recognition We learn a lot from other investors. I go actually looking for situations in which
of changes within a market. to idea dinners and regularly talk to a lot the publicly available information that a
Lee Ainslie, 12.22.06 of people I respect in the business. Im not computer can analyze is giving false sig-
afraid of ideas owned by other people, nals. For example, we bought auto-insur-
but you obviously need to do your own er Progressive [PGR] in 1999 when their
The majority of our investments are origi- work and make sure they fit what you do. earnings looked bad because they were
nally driven from the top down. Well Ricky Sandler, 8.25.06 spending heavily on a direct-to-consumer
identify an industry that has underper- strategy like Geicos. A computer would
formed for the past five or ten years that see that as a negative earnings trend
we believe is due for a cyclical regression Our best source of ideas is probably other resulting in a too-high multiple, but it
up to the mean. Then we systematically investors we highly respect. I dont have a doesnt know how to judge whether cer-
review the micro-caps in the industry, sort- problem sharing ideas and research we tain spending might generate big returns
ing them based on financial measures and get as much as we give and we obviously in the future.
subjective assessments of management to only buy things that make sense for us Boykin Curry, 3.31.08
identify the companies well bore into. after doing a lot of work.
David Nierenberg, 7.28.06 Robert Lietzow, 2.29.08
We do exactly one screen, which is to seg-
ment our potential opportunities by mar-
Time is a precious resource and if you I dont talk much to other fund managers, ket cap. Starting with a rank-order valua-
make it your task not to miss anything, but I do have a network of investigative tion screen is more likely to lead you into
you set yourself up for failure. There are reporters I know who call me from time to less-than-optimal businesses, which we
too many opportunities out there and, by time to discuss long or short ideas theyve cant afford to be in with such a concen-
definition, you will miss many of them. come across, which can be helpful. trated portfolio.
Thats why we narrow where we want to Francois Parenteau, 7.31.08 Brian Bares, 9.30.08
look first by the themes we consider most
compelling. Were not necessarily seeing
things others dont see, but we will have a We follow management teams we know Its hard to have unique insights in this
very different view on the magnitude of are good. We talk to operators we respect business, but they often just come from
the trend or the speed at which it happens. about what other companies or business- working on something that leads you to
Oliver Kratz, 6.29.07 es they think are doing interesting things. something else. I work with two analysts
We might look at something because its a and every once in a while well say,
product we use. Lets brainstorm about new ideas, but
Id say most of the ideas that have made Mario Cibelli, 6.30.06 I cant say weve ever come up with an
money for the portfolio have been the idea that way.
result of some form of reasoning by analo- Ed Wachenheim, 2.29.08

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 14


WORDS OF INVESTING WISDOM Research and Analysis

Research and Analysis


THE RESEARCH PROCESS One thing we try to do is find the Theres a virtuous cycle when people
guru. Getting to the truth can really be have to defend challenges to their ideas.
Before I even look at a financial state- accelerated by finding the handful of Any gaps in thinking or analysis become
ment, I try to find out as much as I can folks who truly understand a business or clear pretty quickly when smart people
about the history of the company, to industry. ask good, logical questions. You cant be
understand how it has arrived at its cur- Jeffrey Tannenbaum, 7.31.07 a good value investor without being an
rent predicament. (If were looking at it, independent thinker youre seeing val-
its usually a predicament.) Im trying to uations that the market is not appreciat-
find evidence of similar issues in the past Julian Robertson was always adamant ing. But its critical that you understand
and what happened, to help judge about seeking out the opposite point of why the market isnt seeing the value
whether current problems are control- view and then being completely honest you do. The back and forth that goes on
lable and rectifiable. with yourself in deciding whether your in the investment process helps you get
Murray Stahl, 11.21.07 analysis overrides that. Thats something at that.
we try to practice every day. Joel Greenblatt, 10.31.06
Robert Williamson, 8.31.08
One of the first questions we ask about a
possible investment is Why is it mis- We spend time early in our research
priced? If you dont have a reason, theres If weve spent time with a Wall Street ana- process speaking with competitors, the
a good chance it isnt really mispriced. lyst to understand why he or she disagrees one group with a vested interest in telling
Jeffrey Tannenbaum, 7.31.07 with our opinion on a company, that will us why our thesis is wrong. Id much
generally make us more confident when rather hear why our thesis might be
we ultimately make a buy decision. Its wrong at this point than for the market to
Peter Lynchs greatest influence, which not that were smart and analysts arent, tell us after we own the stock.
still pervades Fidelity, is that you pick up but usually that they operate with a much Boykin Curry, 3.31.08
the phone and call companies. At the end shorter time horizon.
of the day, if you havent spoken to a few Christopher Grisanti, 10.31.07
companies in existing positions or on Its very common to drown in the
new ideas, you go home a failure. details or be attracted to complexity,
Thats a good discipline you should but whats most important to me is
spend your day talking to operators, to know what three, four or five
not to Wall Street. major characteristics of the business
Jeffrey Ubben, 1.31.06 really matter. I see my job primarily
as asking the right questions and
focusing the analysis in order to
One lesson is how important it is to make a decision.
get out there are talk to people. If you Jean-Marie Eveillard, 5.30.08
spend all your time with your models
and spreadsheets, youre likely to
miss something important. You need We have a disciplined process, but it
to understand how the economics has to be open to serendipity often
work for the people who are making its the footnote in the trade journal
the actual decisions and when you where you see something interesting
come across something you didnt that eventually becomes an idea.
know that has broad application, it Shawn Kravetz, 12.30.05
can be very useful.
Clyde McGregor, 4.30.08
Our research process brings us
Looks like another case of
media overload sir. down to 50 or so companies about

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 15


WORDS OF INVESTING WISDOM Research and Analysis

which weve affirmatively answered the checklist to eliminate what could be a cat- "The long-term return on a stock
question, Would we want to own this astrophic error if they try to circumvent depends not on the actual growth of its
company? Its only then that we turn to it. Investors are well served by having earnings, but on the difference between
valuing each company. similar types of checklists and sticking its actual earnings growth and the
Brian Bares, 9.30.08 with them. growth that investors expected."
James Montier, 10.31.08 Something to consider every time you
buy a stock, especially if youre betting
One of my clients has only one on sweeping trends.
Bloomberg terminal in his office, sitting The best investors often employ checklists VII, 7.29.05
in the corner, and people get ridiculed for each idea, to ensure that no data-gath-
when they use it too often. His point is ering shortcuts are made. General impres-
that they don't need it their business is sions also should not be mistaken for We spend a lot of time trying to figure out
investing and they should work out the facts: As the saying goes, says Legg how competitors would attack the busi-
value before seeing if there's a sufficient Masons Michael Mauboussin, the plu- ness of the company were interested in.
margin of safety to invest at the current ral of anecdote is not evidence. The harder that is, the more interested we
price. If there isn't, the work hasn't been VII, 10.31.06 are. We try to avoid markets perceived to
wasted because there one day might be. be so attractive that capital could start
James Montier, 10.31.08 ANALYTICAL RIGOR pouring in at any time.
Mario Cibelli, 6.30.06
Everyone tends to see the same things,
Were constantly trying to triangulate and read the same newspapers and get the
confirm what we hear or see elsewhere. If same data feeds. The only way to arrive Im a big believer that a companys suc-
returns on invested capital tell us its a at a different answer from everybody cess is about execution and the hundreds
great business, we also want to hear from else is to organize the data in different of little things that one company does bet-
customers about why they value the com- ways, or bring to the analytic process ter than another. We want to understand
pany as a supplier and expect to continue things that are not typically present. that for the companies we invest in: is the
to do so. If the company expects to Bill Miller, 6.19.05 party line whats actually taking place in
increase market share, we want to hear the branches? In bad companies, theres
directly from competitors why they dont an enormous difference.
think that will happen. Taking short cuts One of the best lessons I learned early on Thomas Brown, 10.28.05
in due diligence, for whatever seemingly was to look at companies as companies
decent reason, is just a recipe for disaster first to understand what they want to
in our view. achieve and the likelihood they can There are characteristics that have been
Robert Williamson, 8.31.08 achieve it. People too often focus on proven over long periods to be associated
stocks first and think they can generate an with above-average rates of return: low
edge in how theyre looking at valuation. P/Es, discounts to book value, low
In studying the common traits of those In the end, static valuation is relatively debt/equity ratios, stocks with recent sig-
most successful at games of skill across efficient and it's what companies do that nificant price declines, companies with
disciplines researchers have found a drives their futures. patterns of insider buying and some-
clear tendency to focus more on process Oliver Kratz, 6.29.07 thing were paying a lot more attention to
than individual outcomes. Poker legend stocks with high dividend yields.
Amarillo Slim has described it this way: Will Browne, 9.29.06
The result of one particular game does- One of the biggest things we struggle
nt mean a damn thing, and thats why with in training people is driving home
one of my mantras has always been the fact that you cannot have an opinion True sources of sustainable competitive
Decisions, not results. Do the right thing about an investment unless you really advantage fall into four categories
enough times and the results will take understand what the consensus is and [according to The Little Book That
care of themselves in the long run. are then able to articulate why the con- Builds Wealth]: 1) Intangible assets, such
VII, 1.31.06 sensus is wrong. as brands, patents or regulatory licenses;
Jon Jacobson, 2.28.06 2) High customer switching costs; 3)
Network economics, in which the value
Pilots do the same thing thousands and of the product or service increases with
thousands of times in their lives, but they As Jeremy Siegel writes in his well- the number of users; and 4) Cost advan-
still go through the physical pre-flight researched The Future for Investors: tages, stemming from scale, location or

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 16


WORDS OF INVESTING WISDOM Research and Analysis

unique processes. Such attributes can pro- The most important thing I figured out enemy unless you see a clear catalyst for
vide the competitive barriers to entry and early on was the benefit when investing in value to be recognized.
pricing power that allow companies to turnarounds of focusing on companies Jeffrey Tannenbaum, 7.31.07
generate high returns on capital over long that operate in growing markets. If a
periods of time. company has market growth as a tail-
VII, 5.30.08 wind, its quite a bit easier for manage- Discounted cash flow to us is sort of like
ment to execute an operational turn- the Hubble telescope you turn it a frac-
around. tion of an inch and youre in a different
I think the number one variable in the Kevin OBoyle, 11.21.07 galaxy. There are just so many variables in
investing equation that Wall Street over- this kind of analysis thats not for us.
looks is margin leverage. Most investors Curtis Jensen, 5.22.05
focus on leverage from sales growth, I like to see multiple levers in an invest-
which is relatively easy to figure out and ment that will allow me to win. I think
everybody looks at that. But in the great your margin of safety is directly correlat- We rarely use discounted cash flow to cal-
organic growth stories, a lot of the share ed to the number of levers. It could be the culate target prices. We just don't think
price upside has come from these compa- ability to double sales over four or five it's worth the effort except for very stable
nies increasing operating and net margins years. It could be margin leverage. It businesses such as toll roads or utilities.
as they grow. Margin leverage tends to go could be leverage from undervalued Francisco Garca Params, 11.26.08
along with a company having an endur- assets that management can use to unlock
ing competitive moat. value. It could be a huge cash position
Arne Alsin, 11.30.05 that might be used to buy back stock, pay People often say they emphasize the qual-
a dividend or invest in growth. ity of management or the competitive
Arne Alsin, 11.30.05 moat of a company, but the problem with
Our favorite way to get paid is to find some of those generalizations is that com-
companies with below-normal margins for panies with those attributes are very often
reasons that are fixable and in their con- Many times companies find themselves in not attractively priced.
trol, and to which the market is not giving what the market considers predicaments Ric Dillon, 6.29.07
the benefit of the doubt. In those, you get because they have been far-sighted and
paid two ways if youre right, both the are spending on future opportunities. The MANAGEMENT EDUCATION
earnings and the multiple improve. good thing about that type of spending
Stephen Roseman, 9.29.06 from a shareholders standpoint is that if The power of self-interest in business and
the company is right, you benefit, and if it economics is, of course, well established.
turns out to be wrong, it stops spending It is not from the benevolence of the
Our experience shows theres a positive the money and you also benefit. butcher, the brewer, or the baker that we
correlation between improvements in a Murray Stahl, 11.21.07 expect our dinner, wrote Adam Smith in
companys return on invested capital and The Wealth of Nations, but from their
its stock performance. More than any- regard to their own interest.
thing, were looking for inflections in Stock prices go up for two primary rea- VII, 6.19.05
businesses where some sort of structural sons. The first is investors willingness to
change will drive returns on invested cap- pay a higher multiple for a companys
ital to be materially higher. earnings or cash flows. Thats what tra- There is no way to make a good deal with
Joe Wolf, 4.30.07 ditional value managers look for a bad person. Its the character of the peo-
undervalued securities that will be more ple you go into business with that will fun-
richly rewarded in the future. Were try- damentally determine your investment
An area on which we spend a lot of effort ing to find that as well, but were also returns and your ability to sleep well and
is to define how big the runway of oppor- looking for evidence of fundamental eat well in the meantime. If youre not
tunity is in the business. Were not look- turnarounds and the additional stock- comfortable with the people involved
ing for short-term or arbitrage opportuni- price upside that comes from higher because of their prior conduct and how
ties, but cases where we can see a reason- earnings expectations. theyve treated shareholders, youre proba-
able probability of a huge upside, which Ronald Mushock, 10.31.07 bly not going to be comfortable with your
were not paying for. investment results. I take it to heart and
Robert Jaffe, 12.22.06 use it as a screen for potential investments.
If something is cheap but the business Thomas Russo, 4.27.05
dynamics arent great, time can be your

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 17


WORDS OF INVESTING WISDOM Research and Analysis

We tend to be more about the jockey ence all of which we consider necessary ical to the thesis, knowing and believing
than the horse. Its important to under- to invest with conviction. in management is very important.
stand how people are going to behave Randall Abramson, 12.21.07 Alan Fournier, 2.28.07
under stress. You dont have to predict
the future if you know the company has
the assets and management to do well in Making judgments about management is Excellent management is usually critical
difficult times. I believe thats when the important to us and something I think to successful turnarounds. While man-
seeds for exceptional performance are value managers tend to underweight. You agement changes arent always neces-
planted. can analyze something statistically, but if sary, we often view management changes
Bruce Berkowitz, 4.28.06 you expect to own it for 10 years, man- positively. Youre much more likely to
agement is going to make thousands of get a frank, thorough appraisal of what
decisions you can't predict and may never has gone wrong and why, so youll prob-
Im at a stage in my career where Id say even know about, which collectively ably understand the situation better. My
human behavior is the most important make earnings compound at a rate more confidence also increases when a strong
determinant of a businesss long-term suc- or less than they would have otherwise. new manager has been attracted to a
cess. I dont care how smart an analyst Those things can add up over time to the given situation and is highly motivated
you are, you cant really know whats difference between a Staples and an to perform.
going on inside a business. We want to Office Depot. Kevin OBoyle, 11.21.07
invest not only in highly capable man- Boykin Curry, 3.31.08
agers, but also those with clear track
records of integrity and acting in share- We'd rather analyze the company, its
holders best interest. Ive found that [The importance of handicapping man- opportunities and issues, and how it has
when a manager puts his hands in share- agements skill] really depends on the type allocated capital in the past, without first
holders pockets once, hes much more of investment were making. If a compa- being fed the party line. When we do
likely to do so again. ny is under-earning against its industry or meet with management, it should be an
Charles Akre, 11.30.06 historical levels and the challenge is to get educated discussion between two knowl-
things back to normal, my perspective edgeable parties.
would be more like Rich Pzenas that if Charles de Lardemelle, 11.26.08
You cant overstate the importance of the current management cant figure it out,
CEO in judging an investment. My best someone else will. But in a situation
ideas, by far, have been in situations where the business is growing and man- [The ideal turnaround CEO] is a first-
where a new CEO takes over an under- agements ability to reinvest capital is crit- time CEO, between the ages of 48 and
managed franchise. If we only focused on
one thing, that would be it.
Kenneth Feinberg, 5.31.07

Julian [Robertson] was maniacal on the


importance of management: Have you
done your work on management? Yes,
sir. Where did the CFO go to college?
Umm, umm. I thought you did your
work? He wanted you to know every-
thing there was to know about the people
running the companies you invested in.
Lee Ainslie, 12.22.06

We dont ascribe to the view you should-


nt meet with management to avoid being
sold. A personal connection gives us a
better understanding of whats going on,
allows us to judge management more When I said none of us were infallible, I didnt mean you sir.
directly and even can give us some influ-

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 18


WORDS OF INVESTING WISDOM Research and Analysis

52. They have 25 to 30 years of experi- held their particular views on business
ence, but have never had a #1 spot. (and pretty much everything else) in very
Theyre seeking out a challenge, have I started my career doing criminal defense high regard. The problem was, the world
everything to prove and while theyve work and learned a lot from having my was changing. Money was no longer
surely done very well probably havent clients lie to me and having to see through falling from the sky from newly public
yet had the huge payday, which they that. Thats been invaluable in dealing dot-coms. Broadband Internet access
badly want. with corporate America. was developing rapidly. Traditional
Lloyd Khaner, 4.28.06 Edward Studzinski, 4.30.08 advertisers were demanding accountabil-
ity. And management whiffed, leaving
AOL woefully unprepared for the
For asset stories, we want at least to see Investors face a variety of risks, which we changes taking place.
competent management that wont mess can more or less address in how we con- VII, 5.22.05
up the value of the assets weve identified. duct our analysis and make our invest-
With cash-flow ideas, were depending on ment choices. But the risk that can really
future execution to deliver the cash flow set you back and is more difficult to Its fascinating how differently the same
that at the moment is just a number in control is if you have a management business can perform with two different
our model, so first-class management is that takes these great cash flows and leaders. We look first for intellectual
much more important. expropriates them more for their own honesty. It drives me crazy when you
Chistopher Grisanti, 10.31.07 benefit than for the benefit of the compa- meet with management and there are real
ny. That, I think, is the biggest risk public issues and they act like they arent there.
equity owners face. Also important is a contrarian bent, a
We sometimes buy companies with bad Thomas Russo, 4.27.05 confidence to go against the prevailing
management, if that fact is more than trend. You generally dont want people
accounted for in the price. At a cheap who are saying this is what we should do
enough price on a decent business, Im AOL was run at the peak of the Internet because this is what others are doing.
willing to ride out any problems until bubble by a coterie of relatively young You want people who are spending when
somebody, if not current management, managers who had, thanks to their others are not, and taking chips off the
figures out how to turn things around. efforts and in no small part to what table when everybody else is putting
Robert Olstein, 9.28.05 turned out to be a fantasy-land economy them on.
and stock market, become fabulously Jeffrey Ubben, 1.31.06
wealthy. As wealth is often a strong con-
The hardest thing is to find management tributor to self-esteem, its safe to say
that actually objectively behaves in share- this tight band of executives busy in We look for certain behavior patterns in
holders interest as opposed to their own their spare time acquiring yachts and management that are consistent with an
long-term interest. Its not what they say, fractional jet ownership and third homes efficient and prudent guardianship of our
its what they actually do. Take assets. If we visit a fan manu-
SPX Corp., the industrial com- facturer in Texas and the
pany that came out with this CEO meets us at the airport
elaborate description on how in his Lexus, spends five
they were focused on EVA hours with us and then takes
[Economic Value Added] us out to an expensive restau-
until they didnt hit their tar- rant and buys $300 bottles of
gets and then the board wine, that is suggestive of
changed the criteria and gave somebody who isnt as pru-
management their bonuses dent as we would like.
anyway, saying it wasnt their Carlo Cannell, 3.31.06
fault, the economy was bad,
why should they get penalized
for that? So youre looking The most important question
for managements and boards we ask management is what
that actually act in sharehold- they believe is the best and
ers interest, and there arent highest use of the cash their
many of them. company generates. We want
Bill Miller, 6.19.05 to make sure the answer is top

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 19


WORDS OF INVESTING WISDOM Research and Analysis

of mind and, of course, that we ultimate- great time to pay attention to manage- but it also reflects respect for the difficult
ly agree with it. ment pronouncements. If we read one job top managers have. As Fairholme
Christopher Grisanti, 10.31.07 more statement like this one from Royal Funds Bruce Berkowitz says of the best
Bank of Scotland CEO Tom McKillop, in CEOs: These are people who are great
announcing giant writedowns and the operators and managers, with excellent
You can usually pick out the empire need to raise $24 billion in new capital, people skills not qualities value
builders simply by asking how they allo- we're going to be ill: This is a difficult investors are generally known for.
cate capital they tend to have a hard time for the financial services industry, VII, 4.30.08
time zeroing in on a concrete answer. and it has presented us with specific chal-
Robert Williamson, 8.31.08 lenges. When times were good, we must DEFINING VALUE
have missed the memo saying, This is a
wonderful time in the financial services Heres how we think about valuation:
If I was stuck on a desert island and had industry, presenting opportunities to The S&P 500 companies sell at 15x next
to make a decision on management tal- make money hand over fist without pay- years earnings, 3x book value, 11x cash
ent, Id chose a summary of past returns ing much attention to credit standards or flow, 1.5x revenues, have an ROE of 17-
on capital over a cell phone to call people. what we really own. 18% and have anticipated trend earnings
Jeffrey Bronchick, 1.31.08 VII, 4.30.08 growth of 8%. Were looking for compa-
nies with equal or superior growth char-
acteristics that sell at discounts to the
The historical record on how they allo- Character today is best judged in the market valuation.
cate capital acquisitions, divestitures, proxy statement what do they pay Leon Cooperman, 11.30.06
buybacks, etc. is ultimately most impor- themselves and how? Is their financial
tant to shareholder value, but we also pay self-interest truly aligned with mine as a
attention to the level of management and shareholder? I have absolutely no prob- Were looking for a free-cash-flow
director share ownership and whether lem with the people running huge, com- coupon of 10% EBITDA minus real
theyre buying or selling. We mean real plicated, global businesses making a lot capital spending minus incremental
share ownership, not just options. Its of money. The big problem we have now working capital, divided by enterprise
rare to see excellent capital allocation is that youre seeing a lot of superstar value combined with a growth profile
without significant share ownership. compensation for only minor-league per- of 10%. We look three years out at what
Clyde McGregor, 4.30.08 formance. we think the balance sheet looks like,
Thomas Gayner, 5.26.06 what the cash flows look like and what
type of multiple we should expect out
One red flag is when management sits of that we want to see an annual 20%
down with us and right off asks, What We have nothing against successful exec- unlevered return.
do you think is wrong with our share utives making a lot of money some truly Jeffrey Ubben, 1.31.06
price? Any implicit or explicit focus on deserve every penny they get, and then
the share price rather than the business is some. The problem is when pay is utterly
a bad sign. disconnected from performance as is the If we're getting a 9-10% free-cash-flow
Edward Studzinski, 4.30.08 case with out-of-control severance pack- yield in an industry that we don't see
ages or when disclosure is lacking. In going away any time soon, and then can
such cases, shareholders should be both find other interesting lottery tickets pro-
How management communicates about vocal and aggressive in pushing for viding us with upside, that generally
mistakes is very important. No one is mis- change it is their money, after all, that's starts to get our attention.
take-free as investment managers, about being doled out. Jeffrey Schwarz, 5.30.08
40% of the stocks we buy end up under- VII, 12.30.05
performing the market and Id be con-
cerned about any company where share- Were looking to pay 10x free cash flow
holder communication doesnt include a While they wont always admit it, most or less, period. If you find those and you
candid assessment of mistakes. investors hold a special place in their cant figure out how to kill the business,
Bill Nygren, 7.28.06 hearts for successful and honest corporate you should be buying all day long. Weve
managers. Thats primarily driven by the always done very well when we can use
significant role strong management plays sixth-grade math on the back of a post-
In keeping with the dictum that tough in their investments increasing in value card to show how inexpensive something
times expose true character, now is a the surest way into an investors heart is relative to its free cash. Once we start

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 20


WORDS OF INVESTING WISDOM Research and Analysis

getting more sophisticated trying to equities over long periods of time has on companies trading at a 40% or greater
prove something rather than see if we can been around 10%. When you clean up discount to our private market value or
disprove it by killing the business we get the accounting, the real return on equity no more than 13x our estimate of next
into trouble. [ROE] of American business averages in years earnings. We have to have one or
Bruce Berkowitz, 4.28.06 the low teens. So our conclusion is that a the other to buy.
stocks return will approximate the com- John Rogers, 11.30.05
panys ROE over time, given a constant
Id consider our style more as GULP, valuation and absent distributions. So we
growth at unreasonably low prices. Why choose to swim in the pool of companies Once we understand the business and
pay a reasonable price for anything? If where the returns are a whole lot better where we think its going, well estimate
youre ever in Pennsylvania and see a than average, in the 20% range. the sustainable free cash flow the compa-
license plate that says 10XFCF, thats Charles Akre, 11.30.06 ny can generate net income, plus depre-
me. That comes from Bill Miller speaking ciation and amortization, minus mainte-
about how things trading at ten times nance capital spending. Depending on
free cash flow, if you understand the Were looking for businesses whose the growth potential, defensibility and
business, dont go down much. Our shares are trading at a 40% or more dis- profitability of the business, well put a
clients over the years have made a lot of count from our assessment of their pri- 10- 14x multiple on that free cash flow
money off that advice. vate market value. To avoid value traps, to arrive at a target price. At a minimum,
James Clarke, 10.31.06 we focus on companies that have forward we want to expect to make at least 50%
expected movement in that intrinsic value over the next two years.
per share from positive growth dynamics. Robert Lietzow, 2.29.08
We value companies based on our esti- Finally, were looking to invest in man-
mate of earnings per share, usually two agement teams that treat shareholders as
or three years out. I dont look six partners. As long as each of those ele- We define intrinsic value as what a
months to a year out because too many ments remains in place, our preferred knowledgeable investor or corporate
other people are doing that, and I dont holding period is forever. competitor would pay, in cash, for
look four or five years out because there Clyde McGregor, 4.30.08 100% of the company. From the ground
are too many uncertainties in looking out up we build that by making all the rele-
that far. Then its a question of putting a vant adjustments to the income state-
multiple on those projected earnings. The metrics we use to determine value are ment and balance sheet, then applying a
Over the past forty years the stock mar- pretty much what youd expect. We do multiple that reflects the quality of the
ket has sold, on average, at about 15x private-market-value analysis using dis- business to the resulting normalized
earnings, so I conclude that an average counted future cash flows and by looking earnings.
company is worth 15x earnings. Above- at breakup values. At the same time we Charles de Lardemelle, 11.26.08
average companies, of course, should be like stocks that are statistically cheap on a
worth more than 15x. traditional price/earnings basis. We focus
Ed Wachenheim, 2.29.08 Essentially, we forecast three
years out what we believe a com-
pany is going to earn and then,
In probably 90% of the cases we based on its expected return on
use 15x as our target multiple of capital, its capital growth and
normalized free cash flow. That prevailing interest rate levels, we
has been the average for American arrive at the multiple at which
stocks over the past 200 years and we believe the shares should
it results in a roughly 6.5% free- trade. Including any dividends,
cash-flow yield, which is quite we want to see a minimum 25%
reasonable if risk-free interest annualized return potential over
rates are 4-5%. three years.
Francisco Garca Params, Randall Abramson, 12.21.07
11.26.08

We dont have a problem with


I look at it this way: The aver- cyclicality. Wall Street still
I do my own thing.
age annual total return from looks for certainty in areas

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 21


WORDS OF INVESTING WISDOM Research and Analysis

that are uncertain. We feel good about We firmly believe no investment is so obviously think are important, but we
lumpiness. We just try to be cash coun- wonderful that it cant be ruined by a too- also believe that when constructing a
ters if you can buy something at 5x high entry price, so on our discount-to- portfolio you should have companies
free cash flow with a limited chance of cash-flow stocks we will not pay more with promise beyond just going from
permanent impairment, even if it earns than the market multiple on forward undervalued to fairly valued.
only half of what we originally thought, earnings. We want to avoid the tempta- William Fries, 10.31.08
thats okay. tion of making relative valuation bets
Bruce Berkowitz, 4.28.06 say, finding a software company attrac-
tive because its only 30x earnings when [A] good analyst is more adept at mak-
the group sells at 40x. ing judgments on growth. Thats their
Well estimate what we think earnings Christopher Grisanti, 10.31.07 job based on the business and the com-
can be four to five years out, apply the panys position in it, how fast is the com-
current multiple to those earnings, and pany going to grow? Its pretty hard to
then see what the price would be if dis- Our primary metric is to look at how our lose if youre right on the growth rates
counted back to today using a 20% annu- estimate of annual growth in free cash when the growth rates are high. In a
al rate. If the price today implies a dis- earnings compares to the current multi- 30x-earnings company growing 25%
count rate of more than 20% per year, ple. Our portfolio today is indicative of per year, youll be bailed out pretty
were interested. what we look for: on average, we expect quickly because in three years the earn-
Murray Stahl, 11.21.07 our companies to grow cash earnings by ings will double and the multiple on that
at least 15% per year, while the average will then only be 15x.
multiple of the companies in the portfolio Julian Robertson, 11.30.06
Were looking for a total annual return of is around 15x.
at least 25%, with position sizes adjusted Edward McAree, 8.31.08
for the degree of difficulty. For a given Borrowing from Warren Buffett, as we so
expected internal rate of return, the often do, we see growth and value as all
lower the outcomes expected volatility, Im probably more willing to pay up for part of the same equation to separate
the higher the position size. We create an quality than other value investors might them strikes us as kind of dumb. There
estimated risk-adjusted IRR for every- be. Some of my investor friends often tell should be fairly broad agreement that
thing and then allocate the portfolio me my ideas are too high-quality for what constitutes value is a companys
based on that. them. I would distinguish somewhat here discounted future cash flows, so the
Steven Tananbaum, 9.28.07 from paying up for growth Ill pay more growth in those cash flows is obviously
for a high-quality, slow-growing business. central to figuring that out.
I look for companies that will grow value, Ric Dillon, 6.29.07
In absolute terms, we generally want to not necessarily revenue, at above-average
see 50% upside potential over the next rates. On average, our typical investment
couple of years. And unless we see at is 30-35% cheaper than we think it ought We generally want to invest at a price
least 3x more potential upside than to be and we think its increasing value at where if our growth thesis is totally
downside from the current price, we 15-20% per year on top of that. wrong, we can still expect to earn at least
wont buy it. Ricky Sandler, 8.25.06 an 8% nominal cash-on-cash return.
Philip Tasho, 9.28.07 Thats roughly in line with what the over-
all market is likely to return, so we should
One of the big mistakes value investors match that even if none of the free
We look back as far as possible to inform can make is to be too enamored with options pay off.
what would be the worst-case levels of absolute cheapness. If you focus on statis-
revenues and margins, and then apply tical cheapness, youre often driven to On average over the past 19 years we've
what we think are trough multiples to the businesses serving shrinking markets or paid less than the market multiple for
resulting worst-case earnings. If the that have developed structural disadvan- the stocks weve bought, but the subse-
worst case is more than 20% below the tages that make it more likely theyre quent earnings-per-share growth on
existing share price we won't buy it, no going to lose market share. those stocks has been nearly double that
matter how much the discount is to our Bill Nygren, 7.28.06 of the S&P 500. We're trying to own
intrinsic value. things that look like value stocks when
Charles de Lardemelle, 11.26.08 we buy them, but which turn out to be
Many value investors are primarily growth stocks.
focused on price and valuation, which we Boykin Curry, 3.31.08

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 22


WORDS OF INVESTING WISDOM Portfolio Management

Portfolio Management
ACTIVE MANAGEMENT about buying the long-term compound- selves to buy more or get out. Not sur-
ing machines we want to buy, it doesnt prisingly, the analyst who originally rec-
The only way to add value as an active make much difference. ommended the stock is the last person to
manager is to be persistently different Christopher Davis, 5.31.07 want to sell it. We do something similar
than the index. We tell prospective clients on the upside: when a stock gets within
that if their main goal is to minimize stan- 10% of our estimate of fair value, a new
dard deviation around the index, save Its just very hard to trade in and out of analyst will review it and well make a
money and buy an index fund. positions successfully over the long- formal decision what to do with the
Jeffrey Bronchick, 1.31.08 term. Its only possible when you can position.
have unusually high confidence in the Jeffrey Bronchick, 1.31.08
precision of your intrinsic-value esti-
Classical buy-and-hold is really a dying mate. The most common reason we sell
concept. The notion that there are safe is when we find a better opportunity We have periodic devils-advocate reviews
companies like AT&T or IBM once that naturally takes us out of some high- of all our large holdings and a separate
were is a real miscalculation on the part er-valued stocks that might be most analyst is charged with presenting the
of people who can least afford it. Youre prone to a correction. negative case. Its more than a debate
more apt nowadays to come across the Brian Bares, 9.30.08 society, the devils advocate should gen-
blue-chip that has cracked . . . now those, uinely believe the negative argument is
we love. the right one. We obviously make plenty
Shawn Kravetz, 12.30.05 We dont have many rules, but when a of mistakes, but that discipline helps us
stock is down materially relative to its reduce the frequency and severity of
peer group we assign another analyst to them. In investing, thats half the battle.
We buy based on a multi-year horizon, formally review it and then force our- Edward Studzinski, 4.30.08
but have found that it typically
takes about 12 to 18 months
if were right for the market I remember calling on Phil
to recognize the value. If some- Carret, the legendary founder
thing you considered truly of the Pioneer funds, and I
cheap hasnt shown any signs asked him how he possibly
of working after 18 months, its could keep tabs on over 200
generally a good idea to make stocks in his portfolio. He
sure you have a new reason to paused and then said, Bill, I
keep it, because theres a good buy em right. Things like
chance your original thesis was that you dont forget buying
wrong. right with a long-term perspec-
James Clarke, 10.31.06 tive is much more than half the
battle.
William Nasgovitz, 9.30.08
Our turnover is typically in the
single digits. Its great when BUYING AND SELLING
something goes up 50% in a
year, but if you sell it youve We try to fight against state-
got transaction costs and taxes ments like this would be a
and then need to find an incre- great investment if it were
mentally better use for the 10% cheaper. Thats a wussy
money. Weve never been very conclusion because you cant
good at trimming and But I CAN be spontaneous . . . just give me be wrong: If it goes down,
adding but, if were right a couple of days. you can say you knew it was

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 23


WORDS OF INVESTING WISDOM Portfolio Management

too expensive. If it goes up, you can say basement ideas, I'll deploy some capital opportunity to even better understand the
you knew it was a great investment. But if as long as I have some capital left. It's not company and its business while getting to
you know its a great investment you a fool-proof or painless strategy Ben know management and whether were all
should buy it. Graham used a variant on it and nearly on the same page.
Christopher Davis, 5.31.07 got wiped out during the Great Jeffrey Ubben, 1.31.06
Depression but it's one that acknowl-
edges that we cannot know the future
I expect to hold investments for three to with any degree of certainty. Well probably take R&D positions in
five years, so the buy decision to me is James Montier, 10.31.08 stocks [before completely finishing our
clearly more important than the sell deci- research]. Action adds a sense of urgency
sion. More poor investment returns are to the work there are so many things to
made by paying too much for a stock look at in this business that things can fall
than by selling at the wrong time. through the cracks unless you force your-
Mark Sellers, 6.19.05 self to focus. Having capital on the books
does that.
Ricky Sandler, 8.25.06
Sir John Templeton had one of the best
methods for keeping emotion out of the
process. He used to do his calculations of We dont generally buy full positions on
intrinsic value when there wasn't a lot day one well buy a half position,
going on in the market. He'd then place a watch it trade, live through a quarter or
margin of safety on those intrinsic values two of earnings announcements and con-
and place buy orders with his broker at, ference calls, and then decide whether to
say, 40% below the current market price. buy more.
I'm sure a fair amount of those orders Vance Brown, 10.31.07
never got filled, but if there was an enor- Many value investors will buy the cheap
mous dislocation in the market or in an company when theres just a turnaround
individual stock, the order would fill. story attached to it, but we patiently I believe the biggest way you add value
Psychologically, that kind of pre-commit- wait for the fundamentals to improve as a value investor is how you behave in
ment is a very powerful tool to help us in first. The philosophy works because those down-25% situations. Sometimes
periods of emotional turmoil. If you look investors underreact to both positive and you should buy more, sometimes you
at something when it's just gone down negative changes in fundamentals. If we should get out, and sometimes you
40%, you're probably not going to want see all the ingredients of a sustainable should stay put. Ive never actually
to touch it because it just warned on earn- turnaround, well buy after one quarter looked, but we probably hold tight 40%
ings or something similar. of good earnings, allowing our clients to of the time, and split 50/50 between buy-
James Montier, 10.31.08 benefit from the slow rebuilding of con- ing more and getting out. Making the
fidence that will be reflected in the stock right decisions at these moments adds
price over time. more value, in my opinion, than the ini-
Im a value guy at heart, so would rather Kevin McCreesh, 10.31.07 tial buy decision.
buy early than late. The problem with Richard Pzena, 2.22.05
being late is that youre already paying
for the turnaround itself, so you have to Given the way we invest, we will fall into
count much more on the turnaround value traps from time to time. In general, My threshold for pain is high as long as I
resulting in sustained revenue and profit we try to constantly remind ourselves that believe Im still right. Historically, weve
growth. when an industry goes south, things often made a lot more money on the long side
Kevin OBoyle, 11.21.07 get worse than you expect and stay bad when what we thought we were buying
longer there's usually plenty of time to cheap went down another 30% before
find the bottom. finally going up we always buy more if
I have no idea where the bottom is. If I John Dorfman, 10.31.08 our thesis hasnt changed.
did I wouldn't be invested at all today Francois Parenteau, 7.31.08
and would then be fully invested when
the bottom came. The alternative for me We like to live with smaller investments in
is to say that each time the market drops a company for three to six months before I dont believe everything is either a buy
and throws up some of these bargain- making a full commitment. It gives us an or a sell some things are worth holding

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 24


WORDS OF INVESTING WISDOM Portfolio Management

to stay connected to the company and ing stops. That means if something hits just dont do anything. We try not to sell
learn more about it. Well also make the market multiple on the day it's trad- just because were angry. If you sell when
small investments for the same reason. ing at $61, we'll set a stop to sell, say, at youre angry, you can imagine everybody
Spencer Davidson, 6.30.08 $59. If the stock goes up to $63, we'll set else who sells that way reaches the point
the trailing stop at $61, and so on. of exasperation at exactly the same time.
Hopefully this allows us to better take Thats the kind of thing that creates at
There are no holds. Every day you're advantage of people's willingness to over- least a trading bottom. Better to sit on it
either willing to buy more at the current pay for our shares. for some time, and even if you still hate
price or, if you aren't, you should rede- John Dorfman, 10.31.08 what the companys doing, youre proba-
ploy the capital to something you believe bly going to get a better chance to get out.
does deserve incremental capital. David Einhorn, 3.23.05
Lee Ainslie, 12.22.06 We may be willing to hold until 110% of
appraised value if management, through
its strategic decisions or capital alloca- One lesson learned after enduring a few
I more often than not sell too soon. To tion, has a proven history of increasing too many round trips is to take more of
avoid that, Im trying to better distinguish intrinsic value beyond a natural rate. We an IRR [internal rate of return] focus on
between cases in which the rise in the actually talk more about management when to sell what is the return potential
share price is still primarily a function of when we're looking to sell than when from today, not Im holding this until it
improving business fundamentals and we're looking to buy. reaches my target price of $X. Well still
those where multiple expansion has Charles de Lardemelle, 11.26.08 ride things up and down, but its been
become most important. A rapidly less frequent since we starting thinking
increasing multiple often means too many more in terms of todays IRR. When we
people are starting to agree with me, If were right on the long-term trends, no longer believe something can make us
which makes me nervous. our bias is to stay with a trade for many 50% over the next two years, we start
Aaron Edelheit, 1.31.08 years to allow that to happen. We try to picking our spots to sell.
avoid getting itchy every time something Robert Lietzow, 2.29.08
hits a new high a stock that goes up a
Ive concluded that leaving money on the lot over time, by definition, is frequently
table is a built-in problem for value hitting new highs. One thing weve had to get better at over
investors. Our assumptions are generally John Burbank, 8.31.08 the years is sizing our positions to our
so conservative that companies will blow conviction level. That may sound obvi-
through our target prices when theyre ous, but the only bad year weve had was
really firing on all cylinders. At least thats When management really makes us angry, in 2003, when a lot of our best-perform-
how I rationalize it it stills hurts when we put the file in a drawer for a while and ing stocks went to historically high valua-
something Ive sold takes off. tions and we made the mistake
Alan Schram, 1.31.07 of not taking profits.
Robert Williamson, 8.31.08

To avoid selling too soon, weve


forced ourselves to look over If a company is doing well and
long periods at where margin continues to earn an attractive
and sentiment peaks have been return on capital, Im in no
in individual stocks, to really hurry to sell. We will sell when
vet how high something might events materially threaten that
reasonably go. return on capital, the discount
Philip Tasho, 9.28.07 rate implicit in the stock gets
too low because the valuation
has gone up, or if I just have a
We used to have a fairly rigid much better idea.
rule that as soon as something Murray Stahl, 11.21.07
went above the market multiple
we'd sell, but we thought we
too often were leaving money Weve been too quick at times to
on the table so we now use trail- Be careful! All you can tell me is be careful? sell high-quality businesses. The

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 25


WORDS OF INVESTING WISDOM Portfolio Management

mediocre ones you buy for 50 cents on the stocks move those were the most dan-
dollar, and when they get to 90 cents youd gerous parts of investing. For me, Id like
better start thinking about selling. But to capture more of the early part of the People would disagree with me on this,
businesses that have strong moats that can move and leave the latter part for some- but I dont think you can sell based pure-
be protected for a long time, in industries body else. ly on your valuation analysis. The stock
that are growing strongly, we make sure Robert Jaffe, 12.22.06 has to at least be at fair value, but I also
we give those businesses a chance to devel- look for the sentiment to be clearly posi-
op. Sometimes you should let your truly tive. If its still negative, I may hold on to
great businesses run a bit. We replace portfolio holdings later in it even beyond my fair value.
Zeke Ashton, 2.22.05 their earnings cycle and at the high end of Mark Sellers, 6.19.05
their valuation range with those that have
the opposite characteristics. Theres not
If value keeps building in the business, one absolute number against which all We have for selling what we call the IBD
that provides a cushion against round- ideas are compared. This is the value- test. When our companies start showing
tripping over time and were happy to be added of fundamental research using up on Investors Business Dailys hot top-
patient. We also think a slightly over- our judgment and experience to gauge 10 lists, thats generally the time for us to
priced stock in the hands of skilled man- where companies are in their valuation get out. When the momentum investors
agement can be used as a currency in and earnings cycles. bible brands one of our companies as a
making acquisitions and building a busi- Kevin McCreesh, 10.31.07 hot growth company, were usually ready
ness, so were not entirely averse to hold- to sell. Sometimes its early, but weve got-
ing something slightly overvalued. ten in early as well.
Amit Wadhwaney, 5.22.05 We are required as analysts to present David Nierenberg, 7.28.06
five, six or seven key reasons to own a
stock, and if any of those start to erode,
The argument that losers in your portfo- thats a warning sign that often leads us to Its when were truly negatively surprised
lio will outperform in the future doesnt sell. For example, we have tended in the that we typically exit a position. If were
generally hold up to close scrutiny. After past couple of years to overestimate the surprised, that usually means manage-
analyzing the trading records of 10,000 intrinsic-value growth in media compa- ment is also and that theres something
discount-brokerage accounts, Terrance nies. As we scale those estimates back more fundamentally wrong with the busi-
Odean, now of the University of taking away a primary reason for our ness than we thought.
California, Berkeley, concluded that owning them we should be selling. Steve Galbraith, 12.22.06
Investors who sell winners and hold los- Clyde McGregor, 4.30.08
ers because they expect the losers to out-
perform the winners in the future are, on When a stock reaches the midpoint of the
average, mistaken. We have three people in charge of the [valuation] ranking, from cheapest to
VII, 4.27.05 portfolio and we require unanimity on a most expensive, we sell automatically. As
stock in order to buy. Its majority rules a stock price goes up and becomes less
on selling. The fact is that its very hard cheap, well want to hold less and trim it
We do make a clear distinction when sell- to sell one of your ideas, especially when back as its going up, and were out when
ing between compounders and cigar- its working beautifully. it reaches the midpoint.
butt stocks. Once the cigar butts come Christopher Grisanti, 10.31.07
back, you know to get out because theyre I arrived at that discipline because other-
just going to go down again. With some- wise I would have no idea how to sell. It
thing like Johnson & Johnson, though, Sometimes tracking insider selling isnt so struck me that if you let your emotions
you make a judgment call when it hits helpful, but if you do see an insider dictate when to sell, you risk falling in
intrinsic value, based on your confidence aggressively selling when the stock is love with companies that have been doing
in its ability to compound returns and falling, run. Theres only one reason well and you ride them too long, and then
what your alternatives are. somebody does that, and its not because something goes wrong. For me, having
Christopher Browne, 9.29.06 theyre bullish on the stocks prospects. I something systematic that says this is
couldnt care less if youre paying for a cheap or this is fairly valued is really,
new swimming pool or your kids tuition really important.
[SAC Capitals] Steve Cohen thought it youre selling and think your stock is Richard Pzena, 2.22.05
was the silliest thing in the world to try overvalued, so why should I own it?
to capture the first and last part of a Aaron Edelheit, 1.31.08

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 26


WORDS OF INVESTING WISDOM Portfolio Management

Its a lot easier to know when to buy We believe in constructing the portfolio way we look at it, if we can find five new
something than when to sell it. In gener- so that we put our biggest amount of ideas to replace previous winners or mis-
al, when the upside/downside ratio from money in our highest-conviction idea, takes, thats an honest years work.
the current price gets to parity and we see and then we view the other ideas relative Jeffrey Bronchick, 1.31.08
no reason to change our targets, well to that. We find things that we think are
start selling. exceptional only occasionally. So if we
Philip Tasho, 9.28.07 find something that is really set up, where We just dont see the sense in putting
we think its mispriced, where we have a money in our 30th-best idea. We do pay
good understanding of why its mispriced, attention to end-market diversification,
Ive never understood why value investors where we think the mispricing is very within our companies and across the
who are very disciplined on the buy side large and the overall risk is very small, we portfolio. Our goal is to own businesses
become momentum investors when they take an outsized position to make sure we with uncorrelated enough end markets
sell, saying theyll wait for the market to give ourselves the chance to be well com- that we can continue growing the intrin-
tell them when its the right time to sell. It pensated for getting it right. sic value of the portfolio in any kind of
seems to me that if you think your portfo- David Einhorn, 3.23.05 market.
lio is being hurt by that last move from fair Brian Bares, 9.30.08
value to overvalued that that move is
greater than what youd get by going from What works for us is between 10 and 20
60% of fair value to 90% of fair value in positions. Owning more than 20 stocks, One reason focused investing works is
something else then shouldnt your strat- its too hard to follow the companies very that you box yourself into what I think
egy be to identify names that youve closely, and a big winner wont move the is a very positive corner. You force your-
missed that have run up to fair value and needle enough. Im uncomfortable with self into the position where you cant
buy them for the run to overvalued? the risk of owning fewer than 10, because afford to be wrong, so youd better do
Bill Nygren, 7.28.06 we live in a dynamic world and you do all your homework. My goal is to buy a
make mistakes. I dont want to make a stock at such an attractive price that
mistake in a 15% position. even if were wrong, we get more than
In general, were not in the business of Ed Wachenheim, 2.29.08 our bait back. Sometimes that comfort
holding securities that are fully priced. If comes from hard assets. Sometimes its
in our judgment the companys valuation the private-market value of the business.
is appropriate for its growth prospects, Because my style is so research-dominat- We also manage risk by going in when
we should be selling and buying things ed, I should run a very concentrated port- the company is already starting to do the
that are bargains. folio and force myself to wait which can right things. If youre in a concentrated,
Francois Parenteau, 7.31.08 go against human nature for only the illiquid situation, the last thing you need
fattest pitches. is to have to convince somebody to do
Aaron Edelheit, 1.31.08 something.
Value investors should completely exit a Matthew Feshbach, 5.22.05
security by the time it reaches full value;
owning overvalued securities is the realm We want each decision we make to have
of speculators. a meaningful impact on our results and to We think concentration is the key to big
Seth Klarman, 9.30.08 be rewarded when were right, so our performance, but we also have no desire
portfolio is concentrated in only 10-15 to have our year depend on one or two
CONCENTRATE OR DIVERSIFY? stocks. We believe that the more compa- things working out, so we have generally
nies you own, the more mediocre your kept our largest positions at 5-8% of total
If I didnt have partners, the concentra- results will be and the more exposed you capital and make sure those big positions
tion [65% of the portfolio in the top are to market risk. are not particularly speculative or highly
seven stocks] would be even higher. A Atticus Lowe, 4.30.07 levered.
company compounding capital at way Gary Claar, 3.30.07
above average rates, when I have great
confidence that will continue and the val- Our ideal is 25 roughly 4% positions,
uation is modest, I want to own a lot of though the reality varies around that. We You can understand why many succumb
that. The rationale is that simple. believe concentration is tied to outperfor- to the pressure to hug the index, so to
Charles Akre, 11.30.06 mance, but many institutional investors speak. But we believe if you go down the
dont have the stomach for our being road of trying to make sure youll never
much more concentrated than that. The do much worse than the index, youre

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 27


WORDS OF INVESTING WISDOM Portfolio Management

almost insuring that youll never do well ten in actual performance. So were just geographic breadth of where we invest, is
enough to justify your compensation as more comfortable being somewhat more not at all the case for us. I know the argu-
an active manager. diversified. ment that you should only own your best
Bill Nygren, 7.28.06 Zeke Ashton, 2.22.05 30 or 40 ideas, but Ive never proven over
time that I actually know in advance what
those are.
Early in my career I had 20% of my port- People tend to assume that the only form Jean-Marie Eveillard, 5.30.08
folio in Johnson & Johnson just before of active portfolio management is
Tylenol was laced with poison. My objec- through relatively concentrated portfo-
tive is to produce an above-average long- lios. We think there's an equally legiti- While weve generally avoided being hurt
term return, and I think I can do that mate form of active money management by underhanded executives, that risk is
without taking that kind of concentration in running a diversified portfolio that has always there and its far more pro-
risk. Things happen. nothing to do with the benchmark. Our nounced if youre running a concentrated
mandate is first and foremost the return global portfolio. A second reason were
If I really knew the best stock in my port- of capital, which has also so far resulted more diversified is because I believe a lot
folio Id put 100% of the portfolio in it, in above-market returns. With that man- of our alpha comes from being in the
but I dont. [Financial columnist] Dan date, we don't want a concentrated port- right sets of companies rather than the
Dorfman once asked me in an interview folio that bets the farm on a few stocks. right specific companies. If we get the
what the best and worst stocks were in This year has been an excellent reminder themes right, well do as well, with lower
my portfolio. I told him the worst stock of how valuable diversification can be as volatility, owning more names rather
was Converse, the shoe company, which a risk-management tool. than fewer.
he dutifully reported in his column. It got Charles de Vaulx, 11.26.08 Oliver Kratz, 6.29.07
taken over two days later, up 50%.
Robert Olstein, 9.28.05
We have fairly strict diversification rules Having a broadly diversified portfolio is
so that we dont get overexposed to any just a more prudent way to invest in
Diversification is a big part of our risk one sector or industry. We state those lim- small companies. The myriad of unex-
management. An important percentage of its in absolute terms, not relative to a pected things that can happen, which
Omegas total capital is our own money benchmark. Being slightly underweight might be short-term glitches for a bigger
and were just trying to do what we think financials when financials had grown to company, can take a small company
is intelligent in a highly uncertain world. such a large portion of the market a year down. We dont want to be overexposed
Our level of diversification reflects our ago wouldnt have served you very well. to that.
unwillingness to make giant bets or to Ric Dillon, 6.30.08 William Nasgovitz, 9.30.08
give up liquidity. We could liquidate our
portfolio in 48 hours.
Leon Cooperman, 11.30.06 We typically have 50 to 60 positions. Its Our flagship mutual fund today has 300
not more concentrated out of prudence stocks. Buying things when they meet the
and humility. Theres always a chance valuation characteristics that have
We want to have enough good ideas at well be wrong on any given idea. worked for us in the past is our selection
work that if were wrong or unlucky on Spencer Davidson, 6.30.08 methodology, period. Its not about pick-
one or two, we havent lost a significant ing the best 5%, 10% or 20% of those
amount of capital. Its not unusual for us I dont know which ones those are.
to make a good decision that has a bad Ive never had the confidence to make John Buckingham, 8.31.07
outcome this is a probabilistic business. precise distinctions about which of the
If youre really concentrated and have stocks we own will go up more than the MANAGING RISK
two bad outcomes out of ten perfectly others. Its hard enough at any one time
good decisions, 10% of your portfolio just to find 40 stocks that wont kill you It's not during up years that great invest-
can blow up. Ive heard the argument and another ten that will make you ment track records are made.
that if you have your top ten best invest- money. Charles de Vaulx, 11.26.08
ments, why would you want to dilute it Susan Byrne, 1.31.08
with your 11th best investment? But if I
had to order my top ten ideas by how Long periods of prosperity tend to breed
much I thought theyd go up, I guarantee The knock on diversified funds is that overconfidence on the part of investors,
you that wouldnt end up being the top theyre index-huggers, which given the which leads to a misassessment of risk.

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 28


WORDS OF INVESTING WISDOM Portfolio Management

During times of excesses, we concentrate looking for some huge transformation in million birthday parties for his third wife
on reducing risk by holding particularly a companys business. at company expense. Other investors like
strong companies. Christopher Grisanti, 10.31.07 the leverage that having debt gives you on
Ed Wachenheim, 2.29.08 the upside, but we generally try to look
down before we look up leverage does-
By focusing on stocks we know very well, nt look so great from that perspective.
One of the key ways we manage risk is with a high level of tangible downside James Clarke, 10.31.06
by buying securities for which there are protection, weve so far captured more
minimal expectations. If expectations than the market return in up markets and
are minimal or no one is paying atten- only 15% of the markets loss in down We do cap a given industrys exposure at
tion, short-term volatility can be muted. markets. For value investors, thats kind 25% of the portfolio, which is a check on
This is really just another way of saying of what its all about. the innate lack of humility we often have
its prudent to buy securities with value Atticus Lowe, 4.30.07 as investment managers. Owning five or
characteristics. six positions in an industry is a good,
Carlo Cannell, 6.30.08 strong bet, but also isnt betting the
house on how smart we are relative to
everyone else.
We think our way of investing lowers risk Jeffrey Bronchick, 1.31.08
dramatically. If you invest only in quality
businesses that generally arent exposed
to external shocks like union actions or Well have no more than 30% in any one
a lot of cyclicality that are growing 8- sector, which is meant to insure that we
10% per year and earning 10% current wont follow a very strong sector as it
returns, you dont ever really dig yourself grows in importance in an index.
any big holes. Kevin McCreesh, 10.31.07
Jeffrey Ubben, 1.31.06

Investing is often about knowing your


Weve found that the best way to deal strengths and we've learned that we're
with the fact that market sentiment can better at spotting profitable, unglam-
change so quickly is to try to own absurd- ourous, under-valued companies than we
ly cheap things. are at identifying traditional turnarounds
Stephen Roseman, 9.28.07 by which I mean money-losing compa-
nies we expect to get back into the black.
We like it when expectations are very As a result, we set a guideline for our-
In periods of rapid change in liquidity and low and we have a contrarian view on a selves that no more than 10% of the port-
economic conditions, the odds that were broader issue impacting the company. folio will be in companies with negative
simply wrong about our estimates of Low expectations help limit the down- trailing 12-month earnings.
companies near-term fundamentals are side and can result in prices that leave John Dorfman, 10.31.08
higher than average. As a result, were you paying nothing for the upside if
more focused today than ever on main- good things happen. As Joel Greenblatt,
taining flexibility through cash levels who is one of my oldest friends, always We dont benchmark at all. I dont care
and buying power and in sizing our bets says, If you don't lose money, most of if we own almost no financials and I
according to the medium- to lower-confi- the remaining alternatives are good dont care if we own an excess amount
dence environment were in. Were not ones! of energy. Well go where we think the
necessarily making fewer bets, but theyre Jeffrey Schwarz, 5.30.08 value is and let the weightings fall where
smaller in size. they may.
Larry Robbins, 12.21.07 Steven Romick, 7.31.08
To some extent, balance sheet risk is a
character issue for us. The CEO whose
Not to be flip, but all we count on in a company has a great balance sheet prob- We spend 12 months building a position,
number of our investments is just for ably isnt going to make the big, dumb are actively engaged with management
things to return to normal. Theres a lot acquisition that will kill the company. over the next 12 months and if it all
less risk in wanting that to happen than Hes probably not the guy throwing $2 works out, were exiting after another 12

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 29


WORDS OF INVESTING WISDOM Portfolio Management

months. The activist approach to roll up flow of ideas and analysis indeed, chills
our sleeves and work to improve share- free speech by making it so darn expen-
holder value is the best risk management Ben Graham always made the point that sive, writes David Einhorn. If posting
tool we have. even if you thought you had a portfolio of an analysis on a Web site or making a
Christopher Kiper, 7.31.07 very cheap stocks, if the market at the speech gets you an SEC investigation,
time was fully priced, you should have at why bother?
least 25% of your portfolio in something VII, 5.30.08
Ill sacrifice some upside in bull markets other than equities, such as cash or
to protect the downside in bear markets. bonds. To do otherwise would be to
That provides a valuable service to the delude yourself that your stocks, no mat- Short sellers play a valuable market role.
average investor who cant handle the ter how cheap they appeared to you, There are obviously cases in which peo-
level of volatility inherent in equity would be magically immune if the whole ple may try to start rumors more than
investing. It also allows me to spend less market was to correct. anything else, but thats as true on the
time talking to upset investors. Charles de Vaulx, 11.26.08 long side as on the short side. Markets
Steven Romick, 7.31.08 work better when both sides of the trade
are heard.
Many value investors have a very partic- Steven Tananbaum, 6.30.08
One of our strategies for maintaining ular view of when things are cheap and
rational thinking at all times is to attempt when theyre expensive and they should
to avoid the extreme stresses that lead to hold cash. They portray holding cash as a Without having a commitment to the
poor decision-making. We have often risk-reduction method. My view is thats short side, its difficult to be offensive
described our techniques for accomplish- just taking on a different risk. Youre bet- when you should be. The highest-return
ing this: willingness to hold cash in the ting there is going to be regular cyclicali- opportunities are available when markets
absence of compelling investment oppor- ty and things are going to get cheap again are in free fall, but if youre getting
tunity, a strong sell discipline, significant and youre going to be able to buy them. shelled, you may not have the emotional
hedging activity, and avoidance of But if they dont, youre screwed. Youll conviction to be aggressively opportunis-
recourse leverage, among others. end up like the guys that have been bear- tic and you may not even be able to do it,
Seth Klarman, 2.29.08 ish for 20 years and dont have any assets because of redemptions. Being able to be
any more. offensive when everybody else is defen-
GOING TO CASH Bill Miller, 6.19.05 sive, in and of itself, can yield excess
returns.
One big reason we like to hold cash is Ricky Sandler, 8.25.06
that my inherent nature is to feel some- By having a high cash balance, one is sug-
thing better to buy is always going to gesting that he has some wisdom or
come along and I want to have the cash knowledge about timing the market for We have consistently prepared for the
available to buy it. People assume they which he or she should be compensated. I worst, incurring significant hedging costs
can always sell something to buy some- have none of that. on an ongoing basis. While many of our
thing better, but I dont like potentially Carlo Cannell, 6.30.08 holdings did not truly require hedges in
selling into a lousy market when the liq- order to be attractive, and while many of
uidity isnt there. our hedges ultimately proved unnecessary
Steven Romick, 7.31.08 Our cash balance is purely a residual of because the anticipated risks failed to
whether or not were finding enough to materialize, our hedges were quite valu-
invest in. able as enablers, in that they gave us the
Every couple of years theres a crisis, in Jean-Marie Eveillard, 5.30.08 comfort and the confidence to, at times,
one industry or across markets. We think incur fairly concentrated positions that
its very important to have buying power THE SHORT SIDE have produced such excellent long-term,
going into something like that, which we risk-adjusted results.
always have either through holding cash Well-functioning markets depend on the Seth Klarman, 2.29.08
or having significant borrowing power. transparent flow of information, which
Without the ability to buy in the middle can be greatly hindered when critics are
of a crisis, youll suffer the volatility of it attacked not for the quality of their analy- We think shorting makes us better ana-
but wont be able to buy the cheap assets sis, but simply for being skeptics. The lysts. Charlie Munger says you really
that result from it. vilification of critics, be they short-sellers, understand a company when you can
Ken Shubin Stein, 2.28.06 journalists or regulators, chills the free articulate the negative scenario better

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 30


WORDS OF INVESTING WISDOM Portfolio Management

than the person on the other side of the years; 6) Risk of asset repossession at
trade. We also think that from a business creditors whim.
standpoint, if youve done all the work One thing we like to do on the short side
and conclude the negative scenario is is to see things start to break down before Having spent 15 years of my career
most likely to play out, it makes a lot of we get involved. Once something starts to doing nothing but short selling includ-
sense to be able to short. crack, there will still likely be plenty of ing periods of great prosperity and other
Ric Dillon, 6.29.07 disagreement reflected in the stock price periods of fast, painful losses I can
on whether or not the business is really argue with some authority that, as an
broken. So well typically miss the top, investment strategy, shorting suffers
We short because I think it is the most but the risk/reward can look even better from each one of these characteristics of
prudent way to manage a portfolio, from to us long after the break. a bad business.
a risk perspective, and because I believe Alan Fournier, 2.28.07 Joe Feshbach, 2.28.06
the key to successful long-term investing
is to never have losses. ACTIVISM
Carlo Cannell, 3.31.06 We wont short on valuation say,
because Google is trading at 20x next Poor management persists because share-
years cash flow when we think it should holders arent willing to do anything
An important way we try to minimize only trade at 15x. about it, which we think is an abdication
risk is by actively deploying short sales. Steven Tananbaum, 9.28.07 of responsible ownership and fiduciary
We dont do it primarily for that reason duty. The private-equity business is built
we do it to generate incremental prof- around taking over companies and doing
its but the outcome of shorting is that One challenge weve had in shorting is what shareholders should have gotten
in periods of declining market prices it with growing but grossly overvalued done, while they keep most of the money
does tend to preserve the gains or trump companies, in which the market can for themselves. The amazing thing is that
the losses we have on the long side of the delude itself for a long time. We gave up the same shareholders who do nothing to
book. on our short of solar energy company effect change at a poorly managed com-
Carlo Cannell, 6.30.08 First Solar [FSLR], for example, after pany before a private-equity firm comes
analysts started doing things like setting a in to take over line up to pay a stupid
price target and then backing into the multiple for the company when it comes
When you short, its important to have multiple at which they thought it should public again.
the right benchmark. People look back trade today. Jon Jacobson, 2.28.06
and say, I spent all this time and effort Randall Abramson, 12.21.07
on shorting and only broke even what a
waste of time. We compare how our If you think about where the corporate
shorts have done against the market. If We made a few more general mistakes system has fallen down in the United
weve broken even on our shorts over a when we started our own firm. One was States, its when the actual capital has
period where the market is up 7-8% per that we told ourselves that we should be gotten too far removed from the enter-
year, weve generated huge alpha that has hedging against macro concerns when prise, and the agency relationship
allowed us to be levered to our longs. I that wasnt really our expertise. Short between owners and management has
would call that a zero-cost hedge and a positions were never going to be a big gotten so broad and wide. Thats when
very valuable tool. part of our portfolio, but they took up an you have disconnects or conflicts of
Ricky Sandler, 6.30.08 inordinate amount of time and added an interest. Everything we do tries to shrink
inordinate amount of stress. the distance between the capital and the
James Clarke, 10.31.06 enterprise.
When there is a cyclone of wealth trans- Michael McConnell, 7.31.07
fer into an area, some of the participants
in the fledgling industry will be real com- How would you judge an investing strat-
panies whose products and services will egy that had the following fundamental Michael Price [CEO of Mutual Series
change the world. But there will also be economic characteristics: 1) Limited from 1988 to 1998] was at the forefront
dozens of other companies that are bogus potential returns, but unlimited potential of shareholder activism. His and our atti-
and run by unscrupulous promoters. losses; 2) Skyrocketing competition; 3) tude became that just selling if you
Thats the subset of the market were Tax inefficiency; 4) Aggregate net losses werent happy wasnt the right conclu-
attracted to on the short side. over its history; 5) The elimination of a sion. As the owners of the company,
Carlo Cannell, 6.30.08 significant source of income in recent shareholders really deserve full credit for

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 31


WORDS OF INVESTING WISDOM Portfolio Management

what companies are worth. So its not just follow through by buying the company cheap stocks where the businesses are
our right, its our obligation to do all we or going on the board to help fix it if run by morons and then force them to do
can to see that we get that credit. steps arent being taken to address their something different. Thats not a bad
Peter Langerman, 12.30.05 concerns. Youll need to be more than a strategy, but thats not how we tend to do
yeller and screamer whose biggest asset is things.
that you dont care what anybody thinks Wayne Cooperman, 3.30.07
A corporate board has three main respon- about you.
sibilities: set overall strategy, hire the right Jeffrey Ubben, 1.31.06
CEO, and put in place compensation sys- The fact is, when I feel I have to write a
tems that create alignment in the agency letter and make noise, that almost always
relationship with owners. If we do our Theres a certain trendiness to activism, means Ive made a mistake and the more
job right, we can bring courage to the driven by the fact that the opportunities productive use of my time is to sell and
first, hopefully some insight to the second for activism arent always there. In the move on.
and accountability to the third. 1980s you heard a lot about it, but then Thomas Gayner, 5.26.06
Michael McConnell, 7.31.07 as valuations changed in the 1990s you
didnt hear much about it at all. Now its
popular again, but weve always consid- I will say that I have in the past fallen
Much of the activism you see today is ered a willingness to be active as just into what I call time traps, where Ive
buy shares today and tomorrow throw a another weapon in our arsenal. spent too much time trying to resolve
hissy fit. The focus is on shortening time Barry Rosenstein, 3.30.07 problem investments. We will pick our
horizons by being your own catalyst. battles, but usually were better off help-
Thats a problem for me, because that ing our best investments maximize
style is transparent and could discredit all We like to invest with management that opportunities than trying to perform
activists. Activists are going to need the gets it and is doing what we think they brain surgery on dogs.
capital base, experience and credibility to should. Some investors want to buy David Nierenberg, 7.28.06

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Winter 2008 www.valueinvestorinsight.com Value Investor Insight 32


WORDS OF INVESTING WISDOM Learning Curve

Learning Curve
Becoming a better investor has always should be more of a business analyst than People suffer from an illusion of control,
struck me as a process of self-education a stock analyst, meaning that I had to bet- that even if things do go wrong, they'll
you read everything you can and learn ter understand how companies them- be able to sort them out. A lot of the
through trial and error. My finance selves created value. I moved more away modern risk-management techniques
degree, except for having to take some from classical stock metrics of P/E and created a totally false illusion of safety.
accounting courses, was worthless. book value to business metrics of return The idea that by quantifying risk using a
Aaron Edelheit, 1.31.08 on capital and cash flows. tool like VaR [Value at Risk] that you
Andrew Pilara, 4.30.07 could therefore control it is one of the
slightly more ridiculous things to have
Ive had the good fortune of being come along in years.
around smart investors my whole life, If one is wrong in judging a company to James Montier, 10.31.08
including my father. But Id have to say have a sustainable competitive advantage,
learning from what works and what the investment results can be disastrous.
doesnt is how you really become a better Jean-Marie Eveillard, 5.30.08 Back in the late 1990s we invested in a
investor. In the end, the market is the best few too many concept stocks earlier-
teacher. stage companies with developing tech-
Wayne Cooperman, 3.30.07

I generally find the best investors are very


open and have almost a child-like curios-
ity about how everything works. They
dont come to the table with preconceived
notions. Americans, in fact, are more like-
ly to have this kind of attitude than
Europeans or Asians. Its much harder to
learn new things when you think you
already know everything.
Oliver Kratz, 6.29.07

If you stop learning, the world rushes


right by you. It's very hard to do this by
merely hearing someone else talk. That's
why most teaching is vivid. For example,
when they trained soldiers for World
War II, they shot real bullets above
them, which really taught them to hug
the ground.
Charlie Munger, 7.31.07

Around 1982 it hit me that there were a


lot of lousy stocks in my portfolio and I
started wondering why. While it sounds
like an obvious conclusion now, the com-
mon denominator of the losers was that I didnt actually catch anything, but I do feel
they were in lousy businesses. I realized I I gained some valuable experience.

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 33


WORDS OF INVESTING WISDOM Learning Curve

nologies where the stories were com- them individually doesnt really bother that if that 1-in-100 event happens, you
pelling and indicated that there would be you, but then you wake up over two or dont blow up.
considerable future value. The problem three years and find that the core business Phillip Goldstein, 3.31.08
is that without a real underpinning of is now 40-50% of revenues instead of 80-
asset value or earnings, these types of 90% of revenues, the new businesses are
companies can run into big trouble when not doing so well and now the company We have become very leery, based on
the thesis doesnt pan out as quickly as has too much leverage. It can catch up to experience, of companies that need to
expected or new competition disrupts you slowly, but the cumulative effects can raise capital in order to survive and pros-
the story. be devastating. per. Its not a good thing to be vulnerable
Randall Abramson, 12.21.07 John Rogers, 11.30.05 to the whims of capital markets, which
can close rapidly and surprisingly.
Jeffrey Tannenbaum, 7.31.07
One mistake weve too often made is [Lessons from a money-losing investment
buying lagging companies that stay that in Sprint?] Id put this in the category of
way much longer than we expect, often what David Packard once said, that more At the peak of the Internet bubble I went
because we misread a macro trend. companies die of indigestion than starva- to an investor presentation by [check
Another thing weve learned from experi- tion. This was a company that had not manufacturer] Deluxe Corp., in which
ence is to get out when a restructuring done a big acquisition, so our mistake they described how the Internet was
companys balance sheet worsens rather was in taking the companys plan after going to flatter, not tarnish the check
than improves. the merger at face value. There were a lot business. Then the CEO launched into a
Philip Tasho, 9.28.07 of reasons, in retrospect, to imagine big discussion about how he was going to
theyd have a much more difficult time convert his core franchise to a new plat-
than they expected. form he called Internet gift sales, and that
Ive learned from experience to avoid Christopher Davis, 5.31.07 they were going to lose $50 million a year
acquisition-driven stories during the on it. I went away and didnt buy the
actual acquisition-growth phase big stock, disgusted with that idea. What I
problems always come of that. Ive also You have to be willing to double down learned from this, however, was that real-
recently concluded that if you find your- when you invest in the types of companies ly dumb ideas like this one actually have
self going back to the well with the same we invest in, where things often get worse a habit of meeting an early death. In fact,
idea a third time, youre not generating before they get better. But I dont want to it turned out to be such a dumb idea that
enough ideas and are likely to get killed. leave you with the impression that always it died quite quickly, leaving the business
Youre not as vigilant as you should be works. In the late 1990s I had about a to flourish under its core dynamics,
because you think you know it already. 12% portfolio position in Superior unburdened by ill-considered strategic
When I find myself doing that, I tell National, a big player in California work- moves. That was a big lesson.
myself Im just not working hard ers compensation insurance. I increased Thomas Russo, 4.27.05
enough. my position in a rights offering and it got
Jeffrey Ubben, 1.31.06 as high as 20% of my portfolio. When the
workers comp business in California fell A bubble is a logical impossibility, when
apart, the company turned out to be too people are investing on a premise that not
The biggest mistakes we ever made leveraged and the shares went from $22 only wont happen, it cant happen. The
involved a few investments in highly to zero. The lesson wasnt not to be tech bubble in 2000 wasnt because stock
acquisitive companies that had balance aggressive, but not to be overweighted in prices were high, it was because stock
sheet leverage. The big lesson is that anything thats so leveraged that it really prices incorporated the belief that many
when you mix financial risk, in the form has the risk of going to zero. companies in the same industry were all
of leverage, with operating risk, from Robert Robotti, 8.25.06 going to have 20% market shares and
having to integrate acquisitions, you high margins. That cant happen.
compound the overall risk dramatically. Murray Stahl, 11.21.07
Jeffrey Tannenbaum, 7.31.07 One of our biggest mistakes was ten years
ago going too heavily into emerging-mar-
ket closed-end funds, which were selling One final Internet-bubble lesson is obvi-
One mistake weve made more than wed at 25-30% discounts to net asset value. ous, but bears repeating: Make your own
like is sticking with great niche companies When the Russian debt crisis hit, the decisions. Crowds can be ugly when they
that get bored and start to make acquisi- NAVs got hammered. Its one of the first change directions.
tions around the periphery. Each one of lessons you learn: be diversified enough VII, 9.28.05

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 34


WORDS OF INVESTING WISDOM Learning Curve

poor-quality mortgages, but we failed to Ive been fooled many times by being too
recognize the vulnerability of some of our impressed by executives who are articu-
Its hard to get away from truisms and companies to the liquidity crisis that late and have done well in the past. Ive
clichs, but things that appear too good would occur as the market had its emper- learned to be humble about my own
to be true investments or otherwise or's-new-clothes moment. opinions and rely more on the opinions
usually are. The market exposes that Wally Weitz, 12.21.07 of people who arent biased and have
from time to time and were in the process known the management personally or
of that with respect to credit right now. professionally for a long time.
Thomas Gayner, 12.21.07 Weve looked carefully at why we so Ed Wachenheim, 2.29.08
often sell investments too early. People
tend to give you a pass on that, saying
Top executives from a Japanese property you invested in the safest part of the prof- The lesson for investors is clear. Pay
and casualty insurer weve owned for it cycle. But I have to say, people have attention to the signs of management
years were just in our office last month made a lot of money buying stocks from hubris: the overly grand pronounce-
explaining the extent of the CDO expo- me. Over an investment career, thats not ments, the unwillingness to communi-
sure in their investment portfolio, which a good thing. What I discovered is that cate, the lavish perks and pay packages,
was upsetting to us. We said, Didnt the the investments that have done much bet- the building of monuments. Ignore
fact that you were buying a triple-A ter than I expected after I sold are con- them at your peril.
rated product with a yield much in sistently those in superior businesses or VII, 5.22.05
excess of what you could get from with superior managements. Thats why
Procter & Gamble sound too good to be we now spend so much time analyzing
true? But that kind of thing happened managements prior actions and their Some of my biggest investment drub-
around the world. results in creating shareholder value. bings have come from not responding
Jean-Marie Eveillard, 5.30.08 Ken Shubin Stein, 2.28.06 quickly to inconsistencies in what man-
agement is saying over time or in differ-
ent forums. Changing stories are a huge
We were interested in red flag.
Fannie Mae a year ago but Robert Lietzow, 2.29.08
first wanted to understand
their credit risk better. We
spoke with the ratings We have at times underes-
agencies and asked them timated how quickly and
what would happen if deeply ineffective manage-
house prices fell. You ment can impact a compa-
mean a six- sigma event? nys operations. We typi-
they asked. No, I said, cally havent put a high
just if prices fell 5 or priority on site visits and
10%. They said, That's meeting with management,
six-sigma! Well, if house but we are starting to put
prices going back to where more emphasis on that
they had been just 12 today.
months earlier was consid- James Vanasek, 4.30.08
ered six-sigma by the rat-
ings agencies, I thought we
were in trouble. Ive seen far too many
Boykin Curry, 3.31.08 businesses investment
firms and others run
into the ground by
Whats most embarrassing impressive people who
and annoying to me is that start to think theyre
we foresaw credit prob- smarter than everyone
lems for the owners of else. Thats when big mis-
mortgage-backed securities takes get made. There are
Cmon, we wont get burned this time.
and CDOs backed by enough ways to screw up

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 35


WORDS OF INVESTING WISDOM Learning Curve

in this business without bringing it on If you never make a mistake, youre being
yourself because of ego. too conservative and missing profit
Barry Rosenstein, 3.30.07 Mistakes of judgment are the toughest to opportunities you shouldnt.
learn from, because each one is different. Ed Wachenheim, 2.29.08
There were a lot of ways to look at the
We shorted crude oil at $40 per barrel mistake of buying AT&T when Michael
and thankfully Karen [Finerman] got us Armstrong took over, for example, that Dont be paralyzed by the fear of making
to cover around $44. When prices detach would have prevented you from buying a mistake. Understand that the best
on the upside from fundamentals, the best IBM when Lou Gerstner came in. opportunities usually carry more per-
thing to do is to run screaming from the Christopher Davis, 5.31.07 ceived risks, and distinguish carefully
building. Theres no reason a ridiculous between the risks that matter most and
price cant go to 3x ridiculous. those you can live with. As long as I know
Jeffrey Schwarz, 5.30.08 When I worked for New York City, I met the risks Im taking and the stock prices
an old-time surveyor in my department are compensating me to take those risks,
who had gone broke betting on horses. I can live with that.
This is not at all to say valuation doesnt The first time he had gone to the race- Brian Gaines, 5.26.06
matter, but there have been times Ive been track he decided to bet on a horse named
right about the trend but didnt buy a Surveyor, and the worst possible thing
leader because it was 20% too expensive happened the horse won. This guy fig- Ive been doing this for more than 25
and that turned out to be a mistake. ured it was easy money and over the next years and have learned never to take
John Burbank, 8.31.08 20 years he proceeded to lose just about mistakes lightly. Whats most important
everything he had. for us, though, is to stay focused on the
Phillip Goldstein, 3.31.08 discipline of only investing in companies
When something spooks me, I should with the characteristics of leaders, lag-
more often take advantage of the liquidi- gards and innovators that weve seen
ty of the market to get out and finish the One lesson borne of experience is that the work as investments over a long period
work on whatever the new issues are. If best course in investing is often to do of time. That discipline keeps us ground-
you determine the problem is a big one, nothing. Thats a hard lesson to apply in ed, and helps us keep mistakes in per-
you can avoid a lot of pain. If you con- practice, given the propensity most of us spective. Otherwise, you can drive your-
clude the problem is only temporary, you have for tinkering. self crazy.
can typically get back in at a lower price. Edward Studzinski, 4.30.08 Philip Tasho, 9.28.07
David Eigen, 1.31.06

Is investing a creative process? Hard- We're quite open and honest about our
If you believe the market can at times be charging money managers resist defining mistakes, but we have to be very careful
inefficient, as I do, the logical conclusion what they do in terms usually reserved for not to take the experiences of the last
is to be wary of what it's telling you when artists. But if one defines a creative person year as justification for fundamentally
it says youre wrong. That can sometimes as does the American Heritage diction- changing how we analyze and select
mean I don't cut my losses when I should. ary as one who displays productive stocks. Our common belief is that this is
Jeffrey Schwarz, 5.30.08 originality, theres little doubt that suc- a very unique environment that we prob-
cessful investors fit the mold. ably won't see again for some time once
we get through it. It's important to keep
The single biggest thing people do wrong To be sure, creativity isnt possible without that in mind, or you may find yourself
is to believe there is a single right way to perseverance, effort and, of course, the changing how you do things at exactly
invest, like its handed down from God. right attitude. Edison went through more the wrong time.
Things trade at different values from their than 9,000 experiments in his quest to cre- Connor Browne, 10.31.08
true worth because human beings look at ate the incandescent light bulb. When
them in certain ways in certain circum- derided by colleagues for what they per-
stances. Those ways and circumstances ceived to be the foolish quest, he respond- The best advice is to learn from mistakes
can change, so the tools you use and your ed: I havent even failed once; 9,000 times and move on. If every shot you hit in
thought processes have to evolve. The Ive learned what doesnt work. golf was a hole-in-one, youd lose inter-
same thing doesnt work over and over VII, 10.28.05 est, Warren Buffett has said. You gotta
again the markets too smart for that. hit a few in the woods.
Lisa Rapuano, 9.28.05 VII, 4.27.05

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 36


WORDS OF INVESTING WISDOM Of Sound Mind

Of Sound Mind
For perfectly logical evolutionary rea- could take the form of formulaic adjust- Skepticism is the chastity of the intellect,
sons, the human brain constantly triggers ments based on asset-class exposure, and it is shameful to surrender it too soon
immediate physical and emotional industry exposure or position size. or to the first comer, wrote philosopher
responses to external events. While these VII, 9.28.07 George Santayana. Sound investment
may work beautifully for choosing a mate advice, indeed.
or avoiding danger, they can also form the VII, 9.29.06
basis for behavioral biases that get Mozart was an example of a life ruined
investors into trouble. by nuttiness. He was consumed with envy
VII, 10.31.07 and jealousy of other people who were Youre a product of your experience, so
treated better than he felt they deserved the fact that I came of age as an investor
and he was filled with self-pity. Nothing in the 1970s has basically made me scared
The risk among any group of investors is could be stupider. Envy, huge self-pity, of everything. Ive found that abject fear
that they only pay attention to what they extreme ideology, intense loyalty to a par- and sound analysis can be a very healthy
already agree with. Thats limiting in our ticular identity you've just taken your combination for an investor.
opinion, and dangerous. brain and started to pound on it with a Susan Byrne, 1.31.08
Michael Mauboussin, 8.31.07 hammer.
Charlie Munger, 7.31.07
We are big fans of fear, and in investing it
How can investors counteract the nega- is clearly better to be scared than sorry.
tive ramifications of being wired to chase Sadly, there's no twelve-step process for Seth Klarman, 2.28.07
the big score? Never make snap invest- eradicating envy from your life. The best
ment decisions, instead putting all poten- advice for investors is probably Sir John
tial investment ideas through a similar Templeton's admonition: It is impossible An early mentor of mine started out dur-
process checklist. Be wary of story to produce superior performance unless ing the Depression and used to always say
stocks and of situations that are reminis- you do something different from the we were in the rejection business that
cent of previous big investment successes, majority. On a more personal level, we'll were paid to be cynical and that a big
both of which can lead to costly analyti- leave the last word to Charlie Munger: part of success in investing is knowing
cal shortcuts. Focus on being an empiri- Learn how to ignore the examples from how to say no. He never dwelled on
cal skeptic rather than accepting that others when they are wrong, because few missed opportunities because something
earnings can grow 30% annually for ten skills are more worth having. else even the same thing later on
years or a given level of return on capital VII, 11.26.08 would always come along. Im a big
can persist, look at the distribution of believer in that approach.
outcomes from a large historical sample Spencer Davidson, 6.30.08
to see how reasonable such estimates are. When I started in research, I had one of
Finally, spend as much time defining what the worst character traits an investor can
the downside can be as the upside, and have I was a believer. I was too often
look to make highly asymmetrical bets. seduced by charismatic CEOs and by
VII, 7.31.08 concept stocks, where the product or
service made a lot of sense but there
turned out to be cost, competitive or
Our brains automatically anticipate that other reasons it would never succeed. I
rising stock prices will continue to rise and, learned the hard way to be a skeptic
if they do, the natural chemical dopamine about managements and my own
is released, resulting in a feeling of eupho- ability to forecast with precision well
ria. To counter this and other tests to into the future.
investor willpower, Benjamin Graham sug- Francois Parenteau, 7.31.08
gests the use of more mechanical methods
for portfolio rebalancing, which today

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 37


WORDS OF INVESTING WISDOM Of Sound Mind

The biggest payoffs go to those holding As Graham, Dodd and Buffett have all I think my background has helped me
the best cards. Getting into that position said, you should always remember that learn to think well conceptually.
requires patience, discipline and an you dont have to swing at every pitch. Investing is not just about numbers. It's
unnatural willingness to hoard your chips You can wait for opportunities that fit also about imagination and structure and
until the time is right. Thats not some- your criteria and if you dont find them, narrative and characters the types of
thing investors can turn on and off as the patiently wait. Deciding not to panic is things we liberal-arts majors should
situation warrants. Warren Buffett has still a decision. know something about.
spent an investing lifetime putting himself Seth Klarman, 9.30.08 John Burbank, 8.31.08
in positions in which the deck is stacked
in his favor. We should all strive for that
luxury. I always respected that [mentor] Jean- The biggest lesson from my father was
VII, 9.30.08 Marie Eveillard never showed emotions that investing was all about businesses
like anger, fear or panic and maybe and people. Hed talk about McDonalds
most importantly, greed. vs. Burger King or the rise of Nike or
In 1939, right after Hitler marched into Charles de Vaulx, 11.26.08 how Steve Jobs started Apple, all in a
Poland, John Templeton bought 100 way that was very interesting for a kid.
shares of every stock on the Big Board There was nothing about P/E ratios or
selling for less than $1. Within a few It is stressful to have pockets of underper- market caps things he figured we could
years he had quadrupled his money. He formance, but one truly remarkable thing learn later. He wanted us to understand
always said the time to buy was at the about our firm is how calm it is. People the essence of business and what made a
point of maximum pessimism and pain dont get too worked up whether out- business successful.
obviously something to keep in mind comes are particularly good or particular- Christopher Davis, 5.31.07
today. ly challenging. We try to keep plugging
John Dorfman, 10.31.08 away on the process and how the expect-
ed returns on the portfolios are improving I did a simulation of how often a top
as market prices correct. money manager earning 20% per year
In a world in which most investors appear Michael Mauboussin, 6.30.06 with a 15% standard deviation would
interested in figuring out how to make lose money over short time periods. A
money every second and chase the idea du 20% return would be about double the
jour, theres also something validating Investors shouldnt underestimate the markets long-term average return and a
about the message that its okay to do importance of keeping balance in their 15% standard deviation would be lower
nothing and wait for opportunities to lives. Sometimes going for a walk or meet- than historic market volatility. So this is
present themselves or to pay off. Thats ing a friend for lunch when the market is someone doing very well.
lonely and contrary a lot of the time, but down 200 points is a lot better then star-
reminding yourself that thats what it ing at the screen trying to figure out what But on any given day, this hypothetical
takes is quite helpful. to do. You dont have to do anything and manager would lose money almost half
Seth Klarman, 9.30.08 most of time you shouldnt. Im absolute- the time. Hed lose money in 35% of the
ly convinced that regularly clearing your months and, on average, one quarter per
mind helps you make better decisions. year. Once every ten years hed have a los-
You obviously have to get your analysis Aaron Edelheit, 1.31.08 ing year. I think its healthy for investors
right to be a great investor, but success to remember that even great long-term
also comes down to patience. We think of records are full of plenty of down months
ourselves as like a lion lying in wait. People who are in a good mood are more and quarters. Remembering that is hard
There are plenty of gazelle running inclined to try learning new skills, to see to do sometimes as time horizons in the
around, but we cant run after them all, things in a broader context, to think of industry have gotten so short.
so we wait for one to get within 125 feet creative solutions to problems, to work Bryan Jacoboski, 8.29.05
before we go. Not 150 feet or 200 feet, well with other people, and to persist
but no more than 125. Sometimes the instead of giving up. If you were writing a
market offers up those great kills and we recipe for how to make more money, Id always said that if a guy was long the
try our best to be ready and to take those are among the first ingredients you best 50 companies he knew and short the
advantage when they come along. would include. 50 worst, if that didnt work you were in
Francois Parenteau, 7.31.08 Jason Zweig, 10.31.07 the wrong business. But that strategy was
literally a recipe for bankruptcy from
1998 to 2000. I said when I closed down

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 38


WORDS OF INVESTING WISDOM Of Sound Mind

that it was a market I didnt understand, when everybodys yelling at you because they were taking money out. This is not
and I didnt. youre trailing the market. Its important nuclear physics, but its hard to stick to
Julian Robertson, 11.30.06 not to get carried away with yourself your guns when the crowds running over
when times are good, and to be able to you. We dont believe value investing is
admit your mistakes and move on when ever out of style it just doesnt work all
Its important to play to your strengths. theyre not so good. of the time.
As an investor, Im not a home-run hitter Jeffrey Bronchick, 1.31.08 Robert Olstein, 9.28.05
and cant think of a lot of securities on
which Ive made ten times my money. But
I also cant think of a lot of securities, Over a long career you learn a certain By controlling risk and limiting loss
post-1970, on which Ive lost a meaning- humility and are quicker to attribute suc- through extensive fundamental analysis,
ful amount of capital. Its not really much cess to luck rather than your own bril- strict discipline, and endless patience,
more complicated than that. liance. I think that makes you a better value investors can expect good results
Spencer Davidson, 6.30.08 investor, because youre less apt to make with limited downside. You may not get
the big mistake and youre probably rich quick, but you will keep what you
quicker to capitalize on good fortune have, and if the future of value investing
One reason our results have been relative- when it shines upon you. resembles its past, you are likely to get
ly strong is because our mistakes have Spencer Davidson, 6.30.08 rich slowly. As investment strategies go,
been in smaller positions and our success- this is the most that any reasonable
es in larger ones. I attribute a lot of that investor can hope for.
to our partnership: I tend to be a glass- The fundamental principles of value Seth Klarman, 9.30.08
half-full person, while Ed [Co-manager investing, if they make sense to you, can
Edward Studzinski] behaves more as if allow you to survive and prosper when
the glass is broken and empty. He helps everyone else is rudderless. We have a Traditional value investing strategies
restrain my more aggressive instincts and proven map with which to navigate. It have worked for years and everyones
his natural skepticism has been incredibly sounds kind of crazy, but in times of tur- known about them. They continue to
valuable. moil in the market, Ive felt a sort of work because its hard for people to do,
Clyde McGregor, 4.30.08 serenity in knowing that if Ive checked for two main reasons. First, the compa-
and re-checked my work, one plus one nies that show up on the screens can be
still equals two regardless of where a scary and not doing so well, so people
Value managers on their own can too stock trades right after I buy it. find them difficult to buy. Second, there
easily make big, dumb mistakes. Because Seth Klarman, 9.30.08 can be one-, two- or three-year periods
youre stubborn, youre apt to overlook when a strategy like this doesnt work.
the warning bell that should be ringing as Most people arent capable of sticking it
something is going down if you loved it This is a core message of Benjamin out through that.
at $10, isnt it that much more attractive Grahams: A stock price matters at any Joel Greenblatt, 11.30.05
at $5 or at $2? Having a partner to ring given time only in relation to the value of
that warning bell adds a lot of value. the company behind it. Staying focused
James Vanasek, 4.30.08 on value rather price during times of If you are a value investor, youre a long-
market turmoil is most likely to pay term investor. If you are a long-term
financial not to mention psychological investor, youre not trying to keep up
Theres no question confidence in ones dividends. with a benchmark on a short-term basis.
abilities is a prerequisite to successful VII, 9.28.07 To do that, you accept in advance that
investing. To commit your own and oth- every now and then you will lag behind,
ers hard-earned capital requires convic- which is another way of saying you will
tion, and conviction requires confidence. Changing an investment style to the latest suffer. Thats very hard to accept in
But as with fine scotch or pepperoni fad produces the same result as changing advance because, the truth is, human
pizza, too much of a good thing can cause lanes during rush-hour traffic jams: You nature shrinks from pain. Thats why
problems. increase the risk of an accident with little not so many people invest this way. But
VII, 5.22.05 chance of achieving better results. The if you believe as strongly as I do that
psychological pain of sticking to your value investing not only makes sense,
guns, though, is tough. I was up 35% in but that it works, theres really no credi-
This is the worlds best business when 1999 but had people telling me I didnt ble alternative.
youre doing well and somewhat less so have enough technology in my fund and Jean-Marie Eveillard, 5.30.08

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 39


WORDS OF INVESTING WISDOM The Craft of Investing

The Craft of Investing


THE BIG PICTURE leads to overinvestment, bubbles and then Particularly in the U.S., the market has
crashes. That thinking kept us out of tended to be long on stuff in peoples
Baupost Group's Seth Klarman, in his financial stocks over the past few years, basements and attics that they wont ever
most recent investor letter, described the because we believed there was a credit need and short on stuff that can have a
recent tenor of the market perfectly: The bubble in the U.S., Spain and elsewhere. broader impact on economic efficiency.
chaos is so extreme, the panic selling so Francisco Garca Params, 11.26.08 Consumer spending is two-thirds of the
urgent, that there is almost no possibility U.S. economy, but I dont know that that
that sellers are acting on superior infor- is a permanent state. Perhaps at the mar-
mation; indeed, in situation after situa- Today, wed argue the disinflationary gin well start to see people forgo a few
tion, it seems clear that investment funda- forces of the past 25 years are leveling extra boxes that will sit in their basement
mentals do not factor into their decision- and, if you look at any model of the cost in order to get the Van Wyck Expressway
making at all. of labor, the cost of capital, the cost of paved so they can get to JFK airport 20
VII, 11.26.08 energy and the cost of food, are probably minutes faster I know I certainly would.
starting to go the other way. Weve Jesse Stuart, 6.30.08
already had the best of times in terms of
Anything is possible, of course. Britney falling interest rates. U.S. tax policies for
Spears may get her act together. The investors are better than theyve ever An indication that the worst is over
Chicago Cubs' free-agent spending spree been, and one could imagine those would be when the respected wisdom
may lead to a World Series triumph this becoming less, rather than more, posi- says were in a bear market and its not
year. The next presidential race may be all tive. What this all means is that the rock- going to rally. Today I think people are
about issues, not personal attacks. But et fuel of a declining discount rate is either bullish because they believe the
our thinking tends to be more in line with probably behind us. I know this sounds worst of the financial crisis is over, or
Seth Klarman's, who in his most recent self serving, but that means the active theyre bearish but nervous about being
letter to Baupost Group investors states stock picker should have a relative bearish.
simply: Eras of quite low volatility and advantage over the next five years pas- Ricky Sandler, 6.30.08
general prosperity are often followed by sive index investing will no longer have
periods of disturbingly high volatility and the wind at his back. It also means that
economic woe. We think we'll position our return expectations over those next You could argue that for the past 10 or
our portfolios more with that in mind. five years should be lower. even 20 years, equities havent been
VII, 2.28.07 Andrew Pilara, 12.21.07 allowed to get cheap. When it appeared
the market was really going down in
1987, 1998, 2000 the government tend-
One of the economists who has heavily It seems much more likely that in the next ed to intervene to prop it up. In the past
influenced the way I think is Hyman five or ten years, the most successful fifteen months weve seen a complete
Minsky, who always said, Stability investors will be of the growth variety, breakdown of the private-equity model
begets instability. The very idea is that not of the value variety. Investors are since there is no available leverage and
the more stable things appear, the more going out of their way today to look for were starting to see stocks trade at what-
dangerous the ultimate outcome will be companies with certain cash flow charac- ever price. Theres a much higher proba-
because people start to assume everything teristics, returns on assets that are stable bility that fundamental value investors in
will be all right and end up doing stupid and that have objectively verifiable tangi- this type of period will be able to add
things. ble assets that could be liquidated at some value with specific stock selection.
James Montier, 10.31.08 point. If that's going to be the focus for Seth Klarman, 9.30.08
literally thousands of funds ... how could
you possibly have outstanding results by
We're avid followers of the Austrian- just doing the same thing? Virtually all studies show that about 60%
school economists, who have done an Murray Stahl, 11.21.07 of the return and volatility of the average
excellent job of explaining economic common stock is determined by the
cycles and how the expansion of credit movement in the aggregate stock market.

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 40


WORDS OF INVESTING WISDOM The Craft of Investing

So while were bottom-up stock pickers, One of my biggest jobs is to keep every- tage of them even if they dont fit exactly
we think its important to have a view of one focused. Dont stare at the red num- into your historical playbook.
the economy and the overall market to bers on the screen call companies, call Jeffrey Tannenbaum, 7.31.07
help us determine which industries and industry contacts to hear whats really
sectors to emphasize. going on, dig for new ideas and just look
Steven Einhorn, 11.30.06 to take advantage of the volatility. Great advice I once heard was to struc-
Markets like todays make it ever more ture your business so you respect your
obvious that volatility in stock prices can customers, because theyll bring out the
We just don't see what we're not looking enormously exceed actual changes in best in you and youll feel better about
for. We're governed by our recent expe- fundamentals. yourself.
riences and don't actually ponder the Jeffrey Bronchick, 1.31.08 Christopher Davis, 5.31.07
bigger picture very often. Just because
something hasn't happened in the past
12 months, or even five years, doesn't Well make mistakes, but it wont be Its important to hire people with diverse
mean it can't. because of lack of discipline or focus or experiences and viewpoints, which you
James Montier, 10.31.08 because of conflicts of interest. No equity dont necessarily get if you just hire
portfolio manager or analyst has any straight-A Harvard MBAs. Getting good
equity investments other than our funds grades and having courage are not the
Whenever Ben Graham was asked what and company stock. same thing. Being really smart and hav-
he thought would happen to the economy Ric Dillon, 6.29.07 ing good judgment are not the same
or to company Xs or Ys profits, he thing. People men or women should-
always used to deadpan, The future is nt be winnowed out so early in life.
uncertain. Thats precisely why theres a If I believed having 10 people rather than Susan Byrne, 1.31.08
need for a margin of safety in investing, 52 would allow us to be more successful,
which is more relevant today than ever. we'd quickly make that transition. But
Jean-Marie Eveillard, 5.30.08 with the specialization of the people we're Its important to realize that the brain
competing against today, I think it's very isnt programmed like a computer, and
INVESTOR AS MANAGER difficult to have a meaningful edge with- that every individual can approach prob-
out significant depth and expertise. We lems and issues in a unique way. Even at
It's wonderful to be trusted. Some think if should know more about every one of the my age, I try to remain flexible and open
we just had more compliance checks and companies in which we invest than any to new ideas and ways of approaching
process, virtue would be maximized. At other non-insider. things. That keeps me from being a frus-
Berkshire, we have subnormal process. Lee Ainslie, 12.22.06 trated pedagogue and also allows me to
We try to operate in a web of seamless get more from the individual strengths of
trust deserved trust and try to be care- the people who work for me.
ful whom we let in. Theres a real premium in this business on Spencer Davidson, 6.30.08
Charlie Munger, 7.31.07 innovation. That doesnt mean chasing
the latest fad, but it does mean recogniz-
ing new opportunities and taking advan- The art of what we do is in the interpre-
If one of our portfolio managers has one tation of data produced by our valuation
great year, it doesnt factor at all into model and deciding what to actually buy
how he or she is paid. That could just be and sell. Here you need to rely on experi-
a random event. I think its actually a ence, judgment and continuous learning.
stretch to say five years is long enough to Is that repeatable as the people change? If
be relevant, but I realize not everyone has you pick the right people, teach them well
the same time frames. Clients do have and give them the experience necessary to
finite patience, so I consider five years a act on their own, we think so.
decent compromise between what clients Ronald Mushock, 10.31.07
will give you and what we think is the
minimum necessary to have any statisti-
cal significance. I spent my career at one firm before set-
Ric Dillon, 6.29.07 ting out on my own and have always been
Dont bother me with facts. Tell interested in being long-term selfish, not
me what I want to hear. short-term selfish. Ive hired people for

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 41


WORDS OF INVESTING WISDOM The Craft of Investing

$50,000 a year, three years later paid advantage do I have in being one of the in business in terms of intellectual stimu-
them a multi-million-dollar bonus and thousands of people analyzing every move lation. Second, Im very competitive, but
then had them quit to make more money. Apple or Microsoft or Google makes? in the positive sense of trying to improve
Its Pay me, pay me, pay me if I do well, Aaron Edelheit, 1.31.08 and always measuring how well Im
and if I lose money, Ill see you later. I doing that. The third part making
cant bemoan the way things are, the sys- money is not required, but conveniently
tem has treated me very well. But people I love the intellectual challenge of invest- and pleasantly is a result of being good at
should recognize that its a vacuum in ing there are always new questions to the first two.
nature, not some God-given right, that try to answer. But its important to John Burbank, 8.31.08
has created the opportunity to make the remember that you don't actually have to
money that we do. answer all the questions you ask yourself.
Leon Cooperman, 11.30.06 Its like being able to take a test in school What I particularly enjoy is when you can
where you can answer any 10 questions help change the choices people have in
FINDING MOTIVATION of your choice on a 100-question test. their lives. I put my sister into shares of
You answer only those you know well Berkshire Hathaway at $200 per share
Theres a big difference between loving to and ignore those that are very difficult to and she still has them. Thats the coolest
win and hating to lose, which has a lot to answer. Thats what investing is all about. experience of all.
do with ones approach to risk. Someone Murray Stahl, 11.21.07 Charles Akre, 11.30.06
who loves to win is willing to take a lot of
risks because the euphoria of winning
outweighs the bad outcomes. If you hate Im a golfer, and one of the things I love One reason why investors eschew value
to lose, though, any bad outcome is not about it is that you can play the same investing is that it's a get-rich-slowly
acceptable. To be a great investor, I think course 20 days in a row and every day approach. Poring over numbers and dig-
you really have to hate to lose. will be different. It just rained, or its hot, ging for deeper insight into a company or
Jon Jacobson, 2.28.06 or the wind is blowing from a different industry isn't exactly the adrenaline rush
direction. You have to adjust all the time sought by the Mad Money crowd. To
for a lot of changing factors, which is also that, we'd suggest an alternative view of
You mean besides the incredibly attrac- true of investing. People who really love excitement: Compounding money at a
tive financial characteristics? I love learn- to invest wouldnt have it any other way. greater rate over time seems pretty darn
ing about businesses and the intellectual Robert Lietzow, 2.29.08 fun to us.
challenge of investing. Im also intensely VII, 11.30.06
competitive about generating great
returns. Thats not to say Im particularly First, I enjoy the process of trying to fig-
fond of those days when you feel like an ure out whats going on in the world and One great thing about investing is that,
idiot and your numbers make you look think investing is about as good as it gets unlike the pitcher who starts to lose his
like an idiot. But as a competitive person, fastball in his mid-30s, my fastball as an
I wouldnt have it any other way. investor should keep getting better. Im
Ricky Sandler, 8.25.06 one of those guys who says Thank God
its Monday, because this is as much my
hobby as it is how I make a living. If you
When I started in the business I was dont feel that way, you should probably
motivated by being a real competitor. I be doing something else.
love to win, and the idea of being in an Andrew Pilara, 4.30.07
industry where you keep score and know
where you stand every day was highly
appealing to me and, in the end, seemed Ill be 81 in September. Since Im not
inherently fair. qualified to be a tennis instructor, what
John Rogers, 11.30.05 else am I going to do with my time? I
enjoy being a perpetual student, and
working with good people. Ill probably
Trying to find hidden gems just fits my be here until I go non compos mentis. Ill
personality. I love the detective aspect of lose my marbles, then they have a right to
being an investor and uncovering things Im trying to achieve total harmony of get rid of me.
no one else seems to be seeing. What body, mind and cashflow. Marty Whitman, 5.22.05

Winter 2008 www.valueinvestorinsight.com Value Investor Insight 42


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