Tag Archives: Investment Philosophy

A Great Individual Investor’s Investment Letter; A Reader’s Questions


A successful individual investor recaps 2013 (Must Read) David Collum_2013_year_in_review  

Note how few long-term decisions he made. Owning long-term bonds from 1980 to 1988, etc.  Buying precious metals in 2001 and STILL holding on through 2013–now that is long-term investing! 2013 was only his second losing year in several decades thanks to gold and silver being down 39% and 55% this year.


A Reader’s Question

I have a couple of valuation questions that I have been wrestling with recently.  I would love to hear your take.

First, do you ever use a PE ratio for valuation?  I have always used a EV to EBIT or something ratio whether pre-tax or after-tax.  (I have an idea of the multiples that interest me in both cases.)  Sometimes I come across something that has a low PE but not so low EV/EBIT.  I think this is when the company has financial leverage and is paying an interest rate substantially below the earnings yield.  If it’s a high quality business and the leverage does not harm the company is it sometimes better to use a PE?
John Chew: No, I would use EV (enterprise value which includes net debt) rather than “P” or market cap because debt is part of the price that you pay. Also, look at the terms and conditions of the debt. Note the quality as well as the quantity of the debt. Bank debt is more onerous than say company-issued bonds. 
Also, if you are normalizing earnings, and current earnings are depressed and may be for a while, do you account for this in the valuation, perhaps as a liability?  Or is this an effort to be overly precise?  This quote from Jean-Marie Eveillard in The Value Investors suggests that the former method is overly precise because the future is uncertain:
  “There is no point asking about a company’s earnings outlook because if we are investing for the long-term, then short-term earnings never affect our intrinsic value calculation. Asking management about long-term plans is also pointless to me because the world changes. No one can predict what will happen, and so what is important for us as analysts is to discover the underlying strengths and weaknesses of the business ourselves.”
John Chew: You do not count this as a liability when you normalize earnings.  You look back over a long enough history 12 to 15 years (including the 2008/09 credit crisis) to sense what normal earnings are.  Part of normalizing earning would be assessing the competitive advantage of the business or the uniqueness of the assets.  For example, you should be able to have confidence in the earnings power of the assets owned by Compass Minerals (rock salt positioned near the Great Lakes giving a cost advantage). 
Finally, I want to share a quote from Dylan Grice that I recently found and thought you may find interesting:
Dylan Grice in the July 17, 2012, Popular Delusions
The power of a discounted cashflow model is that it allows us to achieve a value which is objective. With a model based on discounted future cashflow we can arrive at intrinsic value.
But is this correct? Can cash flows be objectively valued? Suppose I’m a fund manager worried that if I underperform the market over a twelve-month period I’ll be out of a job. What value would I attach to a boring business with dependable and robust cash flows, and therefore represents an excellent place to allocate preserve and grow my client’s capital over time but which, nevertheless, is unlikely to ‘perform’ over the next twelve months? The likelihood is that I will value such cash flows less than an investor who considers himself the custodian of his family’s wealth, who attached great importance to the protection of existing wealth for future generations, values permanence highly, and is largely uninterested in the next twelve months.
In other words, an institutional fund manager might apply a ‘higher discount rate’ to those same expected cash flows than the investor of family wealth. They arrive at different answers to the same problem. The same cash flows are being valued subjectively and there is no such thing as an objective or ‘intrinsic value’ embedded in the asset, even though it has cash flows.
John Chew: Well, I agree that investors have different discount rates. You need to use one that fits your situation.  We are discussing human beings making decisions under uncertainty or human action.  All value is subjective. To learn more go to: http://mises.org/austecon/chap4.asp
Thanks for the questions and to all a Happy, Healthy and Prosperous New Year in 2014


Who Lost the Most Money? Concentrated Positions in Financials/Fairholme

The Biggest Loser?

Who (famous, public money managers) has lost the most money? http://www.cnbc.com/id/45696742?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

A reader asked about how concentrated a position(s) one should have http://wp.me/p1PgpH-dy. Be aware of your limitations. If you read the comments below of a value investor who has concentrated positions in some financial companies, you will gain a sense of the pressure but also the reasons for his positions.

An investor discusses Berkowitz and Fairholme on the yahoo message boards.


You will gain more insight into what it feels like to have a few large positions—not pleasant when mr. market disagrees with you.

Re: Is Berkowitz trying to lose it all? 3-Dec-11 11:17 am

Ignore the crowd, maybe the tide is finally turning and people are finally recognizing just how cheap the financial sector is. IMO I never thought I would be able to own as many companies as I own @ ridiculous prices @ one time again, but it is happening.When Mr. Market loses his mind he really losses it. They  believe anything that is thrown @ them just take a look @ JEF a great company that is being attacked by shorts and a NO name rating agency just because they saw opportunity to make a buck after MF Global collapse. It is reminiscent when a bunch of hedgies were attacking a fellow great investor Prem Watsa years back and it was nonsense. I strongly urge you guys to read the JEF shareholder letter I will share below. Jef is my top holding it is not the cheapest valuation wise in   my portfolio, but it is a great company @ a very cheap price so I pay a little more following in Munger’s footsteps.  I believe you will be reading in textbooks years from now how much money some brave investors made on some of these names in the financial sector, but are they really brave or just value investors. Back to Bruce Berkowitz (of Fairholme) look @ his small fund FAARX it outperformed significantly the last 5 days mainly due to MBI.  His fund was up 21% during that time. When you are concentrated in a few names you can make up the difference in NO time and I believe Bruce will be beating the market not only in FAAFX but also in FAIRX in the near future. Will not give a date in this environment but it is hard not seeing everyone wanting to own companies like AIG, BAC and C once they start seeing the earnings power, dividends and once they start buying the crap out of there stock. Most of his holdings are coiled springs in my mind and I own a bunch of them because I think they are too cheap. I urge all of you to go read everything Bruce talked about on his top holdings and ask   yourself has anything changed to make these names sells? I only see they got cheaper and stronger and we are @ the point where it is laughable.

 Re: Is Berkowitz trying to lose it all?3-Dec-11 11:17 am

I am having a rough year after starting the year up 20% on a big bet on agriculture but ever since it has been downhill mainly due to my jump into financials, but I feel so confident on valuations on the names I hold I strongly believe it is right around the corner that I will be reaching new highs in personal wealth.My performance this year has not been stellar and I feel a little embarrassed. A family member asked me how was I doing in the market on Thanksgiving day and I said not too good I am down -13%, but the stocks I  owned were so cheap it is hard not seeing great returns in the future. That was the end of the conversation when you are down you lose your reputation just like that!Nobody wants to hear what you say; it is like talking to the wall. All you have done in the past was forgotten. I must have gotten lucky. When I am up a few hundred % from now he will want to talk stocks and I will say something like I am not crazy about anything right now, but I own   this and this stock which are ok priced and he will be buying and most likely pouring his paychecks into them over a few years then the market will collapse and he will not want to listen to me again and take a fraction of the money he put in out. That is shockingly the truth for most people they could only invest in something that goes up, but that is not where you make your money. It is buying what nobody wants. Finally, I am still holding up strong but not in familiar territory losing to the S&P down -1.13 (made up 12% since thanksgiving) while the S&P is off -1.06.I am writing this post not for popularity just trying to defend Bruce and all those value investors that look like fools @ times   because the media and most shareholders do not understand the life of value investing. Bruce in my mind is still one of the best investors going that -29% return right now does not make think any different of him his thesis is still sound.

Bruce has always taken huge positions in his best ideas.

When FAIRX 1st launched, Berkshire was a massive position around 25% just like MBI is for FAAFX.  He is not doing anything new. In 2004 he held 20% positions in Berkshire and MCI, 2003 he was like 20-25% in LUK, he has always loaded up on his best ideas. A 75% weighing in one sector that might be new for Bruce, but that is where he made his name that is the sector he understands the best. If you don’t think Bruce can determine which names are more undervalued then you are right own the XLF.

I do the same thing I manage 2 accounts mine and for a family member I have 75% of the family members money in 3 names and I have 50%-60% of my money in 4 names and both accounts have less than 10 names. Like Bruce says, “If you can buy more of your best idea, why put (the money) into your 10th-best idea or your 20th-best idea? If we’re confident in what we do, then that’s the way we should do it.

The only reason not to is a fear of being wrong. The more positions you have, the more average you are.” Was Bruce getting a horrible deal when he was buying AIG in the 30 and 40s now that it sits in the low 20s? Was he getting a bad deal buying BAC in the 12-13 range now that it sits around 6? IMO hell NO, the market is just not agreeing with him right now!

Was I wrong for buying Imperial Medals @ 14 and then again 10, 7, 4, 3 and it went to .93 cents? Wrong maybe for a brief period of time but the market regained its composure again and it was hitting highs when last checked 26 (13*2) when adjusted for the split. I always bring up Imperial medals because I invested a lot of money in that name and it kept falling on very low volume and I kept plowing more money in and on some of my purchases I was down close to 100%, but I held strong because it was stupid cheap. My biggest fear was Imperial being taken out for a low ball price by Murray Edwards or Fairholme capital because they owned between them off memory 60% of the company, but I knew Bruce would not take a low ball offer, Edwards would not either and management held a 20% stake.  Also would not take a low ball offer either, so while it was on my mind I was strongly confident it would never happen @ anything near what it was trading for.

Back to Bruce, IMO it is right around the corner maybe 6 months or a year when everyone will be jumping on the financial band wagon and it is going to be fun to watch, I go to bed thinking what is going to happen to BAC once they are allowed to raise the dividend, and buyback shares and I come to the conclusion it is going to be pretty.

A Great Investor’s 2006 Lecture on Investment Philosophy and Process

Another lecture to MBAs in our continuing series from one great investor.