More Funds Find Security in Cash

"There are only two hedges to protect you in any market environment: knowledge and cash," Mr. Berkowitz of Fairholme says. "It makes no sense to me to be fully invested."

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Strong conviction in your investments, infrequent trading and a highly concentrated portfolio are the keys. Mr. Rodriguez, for instance, has enjoyed a tailwind from large positions in energy-sector highfliers such as Ensco International and Patterson-UTI Energy. About 45% of assets were in the fund's top 10 holdings at the end of March; energy stocks alone accounted for 40% of the total portfolio.

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Fairholme is even more focused, with about 70% of assets in its 10 largest investments at the end of February, including an 18% position in Berkshire Hathaway, 15% in Canadian Natural Resources, 9% in Sears Holdings and 7% in Dish Network.

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"We don't market time, but we don't invest just for the sake of investing," Mr. Berkowitz says. "We invest when we can find a security that has a significant margin of safety and an expectation of a double-digit total return. If we can't find it, we don't do it."

Morningstar Interview with Bill Miller

Short (but good) interview with Bill Miller: HERE

First Eagle Funds Conference Call - May 6, 2008

Jean-Marie Eveillard:

Now, let me move to an update to the current investment scene as we see it. I think investing is a matter of trying to balance what I would call circumstances and prices. In terms of circumstances, we have been, for a while, in a financial crisis, probably the worst since the end of World War II, which is a polite way of saying that it’s the worst since the Great Depression. This financial crisis is, to a large extent, I believe, a result, a consequence of the previous 25-year credit boom that was briefly interrupted in 1990. That credit boom, because it went on so long, in the last few years of the boom, the acrobatics by financial types, not us mind you, were extraordinary. Then the credit cycle turned in August of last year, with the sub prime housing crisis, and it has been painful ever since.

Now, I’m sure, of course, that the crisis will find its resolution; all crises do eventually. The key question, I believe, is, “How long and how painful the transition will be towards the resolution of the crisis.”

We are just beginning to see the economic consequences of the crisis. In other words, the economic slow down. We also have to worry, I believe, about the unintended consequences of the very unusual steps taken by the Federal Reserve to prevent the crisis from degenerating. Among those unintended consequences, of course, is the status of the dollar as the world’s reserve currency and the possibility that domestic inflation will accelerate.

Now it’s true that we’ve had, depending upon how one counts, six or seven financial crises over the past 20 years. And it seems to me that most investors take the attitude that in the past six or seven crises, it was all right to start buying equities in the middle of the crisis because those six or seven crises were handled by Mr. Greenspan, the former Chairman of the Federal Reserve. In each instance, he flooded the system with liquidity and after a few uncomfortable months, the crisis was over.

I would not bet the farm on a repeat of that scenario. It may happen that the crisis is over quickly, but again, I wouldn’t bet on it.

If I move to prices, the American equity market is off about 10 or 12% from its high last October. The high came at the end of a five-year bull market between 2002 and 2007.

In Europe, equity prices are also off 10 to 15% from their highs of last year. In Japan, the market is off much more than that. Not to mention China, where up until recently, the market was off about 50% from its high. But then China, and to a lesser extent, India, had been involved in major bubbles.

So what I’m saying about global prices is, hey, stock markets are off from their highs, but at least in the U.S. and in Europe, the decline is, so far, quite moderate. Nevertheless, as equity markets come down, as they did since last October, a few opportunities, to our mind, appeared here and there. We’ve been net buyers since the beginning of 2008, but I must say we may not be looking in the right places for all I know, but we have not come up with a great many opportunities yet.

There is nothing wrong with waiting. As Warren Buffett has said, “One has got to wait for the fat pitch.”

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Book (mentioned by Eveillard): The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust And What To Do About It By Louis Lowenstein

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Lowenstein Paper: Journey Into the Whirlwind: Graham-and-Doddsville Revisited

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Five value-oriented mutual fund managers that might be worth looking into:

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First Eagle Funds

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FPA Funds

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Longleaf Partners Funds

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Fairholme Funds

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Wintergreen Fund

The best fund manager of our time

Robert Rodriguez has accomplished the unheard-of-feat: driving staggering returns in both a stock and a bond fund for more than two decades.
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Fresh out of college in 1971, Rodriguez jumped into the hot growth stocks of the day. "I thought if you couldn't compound money at 20% to 25% a year, you were basically incompetent," he recalls.
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Then came the bear market of 1973-74. His favorite stock, a recreational-vehicle company called Executive Industries, started dropping from his initial purchase price of $22 a share. He bought more all the way down to $8, when he ran out of money. (His average cost per share was in the low teens.) The stock hit bottom at 88¢. The memory still haunts Rodriguez, who explains with a bitter laugh: "When somebody says to me today, 'This stock can't go any lower,' I say, 'Au contraire!' "
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The lesson didn't stop there. "I learned that if you make a mistake and you don't tear it apart to see what you did wrong, you're going to repeat it in the future. I learned that fear is a terrible thing to have." He adds, "The best way to minimize your fear is to have a solid understanding of the companies you invest in."
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Searching for answers in the library at the University of Southern California, where he was studying for his M.B.A., Rodriguez discovered Benjamin Graham and David Dodd's Security Analysis. Graham and Dodd helped him realize that chasing hot stocks was no way to pile up cold cash; instead, Rodriguez began to look past the fluctuating prices of stocks to determine the enduring value of the underlying businesses.

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He realized that Executive Industries, trading at less than $1 a share, had $2 a share in cash and $3.50 a share in real estate - plus an ongoing business that should bounce back once the recession ended. Instead of selling, he held on for dear life and eventually got out for around $22 a share, turning a nice profit on a stock that Wall Street had left for dead.
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"I realized then," he recalls, "that if I can survive the downturn I can live to participate in the upturn." According to Rodriguez, a true contrarian has to feel comfortable being lonely. And that, he says, means you can shrug off three unpleasant questions. The first is "Don't you know that...?" The next is "You're buying what?" And the third is "Are you nuts?"

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Related Previous Posts:

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Crossing the Rubicon - Bob Rodriguez, FPA

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Credit Crisis - Robert Rodriguez, FPA Funds

Wesco 2008 Annual Meeting Notes

A big thanks to Peter Boodell.

The only duty of corporate executive is to widen the moat. We must make it wider. Every day is to widen the moat. We gave you a competitive advantage, and you must leave us the moat. There are times when it is too tough. But duty should be to widen the moat. I can see instance after instance where that isn’t what people do in business. One must keep their eye on ball of widening the moat, to be a steward of the competitive advantage that came to you. A General in England said, ‘Get you the sons your fathers got, and God will save the Queen.’ At Hewlett Packard, your responsibility is to train and deliver a subordinate who can succeed you. It is not all that complicated – all that mumbo jumbo. We make bricks in Texas which use the same process as in Mesopotamia. You need just a few bits of ethos, and particularly engineering ethos. Think through the system, and get a margin of safety.


Q13: Scott from LA. With portfolio of $2m, vs. that of Berkshire, how would your mandate be different? Small vs mid, us vs intl, etc?

If I was managing smaller money I’d be looking in smaller places, I’d look for mispricing. But I don’t want to change places with you. [laughter]


Q21: Matt from NYC. How does Berkshire thru its subsidiaries manage an annual budgeting process?

We don’t have one. Obsessing over budgets creates bad incentives. Just eliminate unnecessary costs. Budget committees tend to do just the opposite.


Q24: Ashok from LA. Checklist?

I don’t have a simple checklist. You have to work at it a long long time. I still do dumb things after years of hard work. The more big ideas you have the easier. We exclude a whole lot of things because they are in the too tough pile. If you exclude, you do better. Then you must have field where rationality will be rewarded. Some of political ideas – it is very hard to know how they will work out over next few centuries. We are not trying to involve ourselves. We look for things that can be done. But I have no little short list. People who sell strong abs on TV at night might have one. I have no rule for a strong brain.


Q29: I’m curious, you are student of history. Does today remind you of any time in past, and why?

I punched premium channel in hotel in Tokyo, and out came exercise in pornography. I would argue Soddom and Gomorah is still around. I think Athens of Pericles is still around today. Our bullies are similar to past eras.


Q40: CA. Average investor should invest in index funds.

All intelligent investing is value investing. Calling something a value fund doesn’t absolve it. You can call yourself a ballet dancer if you dance like me, but it is not a good thing. I wouldn’t recommend people broadly invest with any value fund. I would avoid funds that have 100% turnover per year. It is a ridiculous way for an ordinary index fund to behave. It is imperfect, but best outcome for most know-nothings, in order to avoid being misled by fools and liars.


Q45: What has changed since you first started investing?

I owe a great deal to Mr Buffett. It took a while to convince me. Warren and I together got very good at reinsurance transactions and portfolio transfers. We’ve learned together at it. Berkshire would have been a mess if it had ever stopped learning. Only reason we’ve been able to keep a shred of decency in our record is that we have been hell bent to keep learning.

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Book: Poor Charlie’s Almanack

David Einhorn and Bill Ackman on CNBC's Squawk Box

In order:

http://www.cnbc.com/id/15840232?video=735143155&play=1

http://www.cnbc.com/id/15840232?video=735143181&play=1

http://www.cnbc.com/id/15840232?video=735145186&play=1

http://www.cnbc.com/id/15840232?video=735151413&play=1

http://www.cnbc.com/id/15840232?video=735154434&play=1

http://www.cnbc.com/id/15840232?video=735160207&play=1

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Book: Fooling Some of the People All of the Time: A Long Short Story By David Einhorn

Value Investing Congress - Speaker Picks

All of the presented ideas are located on the Value Investing Congress Blog. Here's a couple of them:

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Sellers and Fasciani presented the case for Vulcan Materials (VMC, $66):

• Demand for aggregate materials (asphalt related) will grow as US infrastructure (bridges, roads, etc) are in need of repair.

• The aggregate industry suffers from the “Not in my back yard” syndrome, so new mines are not being opened quickly enough. Plus, it takes five years, an onerous amount of permits, and $100 million to open a new mine.

• With growing demand for aggregate material, and desperate needs for infrastructure improvements in the US, Vulcan is well positioned to be a beneficiary.

• Sellers and Fasciani believe the stock is worth at least $90.

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Mohnish Pabrai - Pabrai Funds

Pabrai began by reiterating the notion that we as investors or entrepreneurs should look for opportunities with low risk but high uncertainty. If your risk is low, losses will be not break you. Since Wall Street hates uncertainty, it tends to misinterpret certain situations and companies, over-punishing them in the process. This gives patient, diligent value investors a potential advantage.
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Pabrai’s favorite idea was Wellcare (WCG, $46.49), whose shares slid from 128 to 21 in a very short time frame, following a raid and seizure of documents and materials by 200 federal agents related to potential excess Medicare billings.

• Pabrai became interested when it was disclosed in a 13G filing that Fairholme Funds took a 16% stake in Wellcare, following the raid

• Believes that ultimate damage to the company from allegations/penalties will be minimal

• Wellcare has loads of cash, and a solid, growing business

• Currently trading around $46, Pabrai believes it may be worth in the $93-$108 range

McGraw-Hill Professional to Publish 75th Anniversary Edition of Graham and Dodd's Security Analysis

Benjamin Graham and David L. Dodd's Security Analysis, first published by McGraw-Hill nearly 75 years ago, forever changed the theory and practice of successful investing. Written in the midst of the Great Depression and in the wake of the 1929 stock market crash, the book convinced the nation that stocks were still worth buying and became a bible for generations of investors, the most famous being Warren Buffett. Its timeless advice is as relevant today as when it was first published.

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To commemorate the 75th anniversary of the book and to make Graham's work even more accessible to the current generation of investors, McGraw-Hill Professional announces that it will publish SECURITY ANALYSIS: THE 6th EDITION in October 2008. McGraw-Hill has assembled today's most prominent value investors. These practitioners are joined by top value investing academics and authors. They present new commentary that will refresh and update the 1940 edition, which is considered the definitive edition by many Graham aficionados including Buffett. This edition will also include a CD-ROM of the original text.

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Seth Klarman says: "This is a fabulous new edition of Security Analysis. We have retained the integrity of the original text but added new overviews, as well as commentary on each section. Experienced value investors and novices alike will have much to gain from this revised classic. While the world has changed in more ways than they could have imagined, so much of what Graham and Dodd taught is completely relevant today. Their insights still illuminate the way for modern day value investors. It is an honor and real privilege to collaborate on this edition of Security Analysis."

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James Grant states: "Ben Graham could write, and he could invest. He could write about investing. He produced an investing book, Security Analysis that promises to endure for as long as there are stocks and bonds. And he wrote that book while suffering the torments of the 1929-32 bear market. He is my hero."

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Bruce Greenwald says: "More than a half-century after it was written, the classic second edition remains one of the best textbooks for aspiring professional investors currently available. It is a privilege to help reintroduce it to a new generation."

2008 Berkshire Hathaway Annual Meeting Notes

For detailed notes on the whole meeting, go HERE.

Below are some of my notes. I just wrote down a few things I thought were interesting. Much of it has been said before by Mr. Buffett (WB) and Mr. Munger (CM), but good advice is always worth repeating. These are my notes and paraphrasing, not direct quotes from Warren and Charlie.


WB: There should only be 2 investment courses taught in school: (1) How to Value a Business, and (2) How to Think about Market Prices. Option pricing theory, etc. is all nonsense. [added to the etc. that is nonsense are things like Efficient Market Theory, Beta as a measure of risk, and the Capital Asset Pricing Model (CAPM)]

CM: If you have some extreme political ideology, you’re very likely to make some dumb charitable gifts.

WB: Don’t ever trade away reputation for money.

CM: While we don’t like inflation because it’s bad for our country and our civilization, we’ll probably make more money because of inflation.

WB: The most important factor in choosing a career is finding something you’re passionate about.
CM: But you’ll do better if you develop a passion in something you have an aptitude for.

In response to a question from a professor who is writing a book to help people who are introverted:
WB: The ability to communicate, both in writing and orally, is enormously important. It is great for people who have trouble with that [like he said he used to] to get into situations where they have to do it [get up and talk in front of a bunch of people, etc.], preferably with other people having trouble too, at first.
CM: It’s a real pleasure to have an educator come who is doing something simple and important instead of foolish and unimportant.

WB: [After mentioning that he shorted out the market generally while running his partnership] It is really unnecessary to short anything if you have some good long ideas.

CM: [After Buffett discussed the inefficiency in the Municipal Bond Market recently] The dislocation in Muni bonds was very brief and very extreme. You had to be ready to act fast.

CM: We prefer businesses that drown in cash. [Told a story about a friend with construction business whose profit at the end of the year was sitting in the yard] Berkshire prefers those businesses that can write a check at the end of the year.

CM: Because of human nature….we’ll have turmoil [in this world] for as far as you can see. [There will always be something.]

CM: The goal of investment is to find situations where it is safe to non-diversify. This is the opposite of what is taught in school.
WB: There may be situations where by only putting 20% or less of your net worth in an investment, you’ll miss the opportunity of a lifetime.

WB: WB read the annual report for PetroChina [without talking to management or anyone else] and thought it was worth about $100 billion. He then checked the price and it was trading for $35 billion. The basic business was easy for him to understand and there was a big margin of safety, so he bought. When oil was at about $70-75 he thought it was worth $275-300 billion which is where it was trading, so they sold.

WB: Most big food businesses are good businesses in that they earn good returns on tangible assets. You can feel good about branded products when they’re runaway leaders in their field. If you buy good branded products and don’t pay too much, you should do okay – but you won’t do exceptional because that fact is well known. A brand is a promise.

CM: A risk officer is often just a guy who makes you feel good while you do dumb things. Models and things that make you feel good and have confidence in an investment often just clobber up your head.

WB: There’s no reason to be exposed to ruin and disgrace for something that doesn’t matter that much.

There are a lot of things WB and CM can make quick decisions about because there are a whole lot of things they won’t allow themselves to take the time to think about.

CM: I would argue there’s an environmental reason for using coal. [Explained something along the lines of using those (coal) hydrocarbons so that we can save food producing hydrocarbons – oil, gas – for food production]. Most people don’t think that way, but I do.

WB: You can become, to an enormous degree, the person you want to be.

CM: Avoid being manipulated by vendors and lenders by using their own tricks. [Recommended Robert Cialdini’s book Influence, and his new book, Yes!.]

WB: Americans have an aversion to mass transit. I don’t think this view will change anytime soon.

CM: Agrees with Al Gore that we shouldn’t be burning hydrocarbons, but they have different reasons. “My brain works differently than Al Gore’s. You’ll have to decide which you prefer.”

CNBC - LIVE BLOG ARCHIVE: Warren Buffett News Conference

Asked about the partnership, Buffett says the two hit it off from the start, "rolling on the floor, laughing at their own jokes" and have "had a lot of fun ever since." They disagree sometimes, but they have never had an argument since 1959. Buffett says Charlie has taught him a lot about how to value a business and about human nature. Charlie has pushed him to buy into strong, solid businesses rather than be tempted by cheap "cigar butts."

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Munger says Buffett has influenced his life far more than he has influenced Buffett, especially since Buffett convinced him to give up his law practice. "We both like learning." Berkshire is an example of an "ever-learning machine." "The best thing a human being can do is to help another human being know more." They say they are blessed to know each other and to be able to work with such talented managers throughout Berkshire.