The Investor's Consigliere

Daniel Och Interview, in the Financial Times

Read it here.  Danny Och rarely speaks in public--unless you count going public as a form of speaking in public.

Prem Watsa Profile

In Toronto Life Magazine.  It's difficult to tell if Watsa ever sat down with the writer for an interview.

Howard Marks Memo, March 2009

Read it here.  He writes about fixing the financial system, macro, politics, etc., but his main point, in underlined boldface, is:

The only things we have to fall back on at this juncture are intrinsic value, company survival, and our own staying power as investors. 

When Good Investors Say Bad Things

Anthony Bolton, a legendary mutual fund manager in Britain, tries to call a bottom:

Fidelity's Anthony Bolton, the nearest thing this country has to a Warren Buffett, told the National Association of Pension Funds on Wednesday that stock markets were "at or near lows", echoing a call he made at the turn of the year.

And again here:

One investor confident that equities have seen the worst is Anthony Bolton, president of investments at Fidelity International.

In a video interview with the FT this week, Mr Bolton called a bottom in stocks and the start of a new bull market. Mr Bolton made the same call late last year, before a renewed sell-off.

He says sentiment, valuations and the historical analysis of past bear markets, shows they reached an extreme last November and again last week.

"My strong message [for investors] is don't give up now, you're giving up, you know, really at the last fence," says Mr Bolton.

"I'm not saying there isn't going to be any more negative news," he adds, but says the news should be much better by the second quarter.

Robert Rodriguez Sabbatical

I was surprised to read that well-known value investor Robert Rodriguez will take a one-year sabbatical from FPA.  I saw him speak at a panel at the CIMA Conference and he seemed pretty fired up--tears of a clown I guess.

As I think about it, sabbaticals have a distinguished history among money managers.  Sometimes they are early retirements that end up being downgraded to sabbaticals, Michael Corleone-style.  Michael Steinhardt took a sabbatical.  My old boss did too, sort of.  One of the Chandler brothers--I forget which one--took some time off to go to Italy and study Italian.  George Soros "retired" but that didn't last long. 

Outright quitting can also be an honorable course for professional investors (I hope my high school wrestling coach isn't reading this).  When the gap between how you'd like to manage your own money and how you're forced to manage outside money grows too large, a professional money manager, especially one who is already rich, should quit rather than make compromises that come at the expense of long-term investment success.  Mark Sellers did this recently, as did Michael Steinhardt and Julian Robertson, and Warren Buffett in the late 60s.  All of them could have chosen a successor, or sold their management companies, but they chose instead to simply close the doors.

 

Jeremy Grantham Article: "Reinvesting When Terrified"

Read it here. 

Berkshire Hathaway Letter to Shareholders

is here!  Raise your hand if you sat there clicking "reload current page" until the 2008 letter showed up. I'll have a longer commentary later, but here are some initial thoughts:

1)  Your consigliere is on record saying that value investors who venture into macroeconomics do so at their peril.  I was afraid, I'll confess, that Buffett would do just that in his letter.  But he didn't.

2)  Buffett is well-known for preaching against diversification, but states that one of goals is for Berkshire to maintain "dozens of sources of earnings and cash" and that another is to find "new and VARIED streams of earnings."  In fact, Berkshire is probably the most diversified company in the world.

3)  Kremlinology alert--I'm about to read too much into Buffett's wording:  On page 4 Buffett very precisely writes that the three large PIPE deals he made were "In our insurance portfolios."  Meaning they were funded in large part by cheap/free float.  So a 10% coupon on one of these deals is less than the return on equity to a Berkshire shareholder from doing the deal. 

4)  Berkshire's large equity put portfolio can be understood as partly a bet on future inflation, as they were written on indices that reflect nominal currency values.  There is a chart on page 206 of Barton Bigg's Wealth, War and Wisdom that I'm too stupid to know how to reproduce.   It shows that from 1932 through mid-1957, a period that included both the Great Depression and World War II, the Italian stock market enjoyed near-uninterrupted growth.  But it's a nominal index--in real terms the market fell.  But if you'd written a long-term put on that index on similar terms as the ones Buffett made, you would not have had to pay anything.  Of course Buffett must also navigate inflation when trying to invest the premium he's received on those puts.

5)  Berkshire Hathaway the stock declined 32% in 2008.  Berkshire Hathaway the company declined only 9.6%, as measured by book value.  Keep in mind that the company is now largely in the business at "borrowing" money from policyholder at very low/free/negative rates in order to invest in regulated utilities.  Those two parts of the business did very well.

More later. 

Gold vs. Value Investing: The Devil's Advocate vs. David Einhorn

I continue to be intrigued by David Einhorn's recent disclosure that his Greenlight Capital funds are now significantly long gold and gold miners.  Read his 2008 letter to investors for his reasoning.  I don't disagree with any of it.

But Einhorn is a value investor, one of the best-known and most successful of our day.  His skill is in finding and buying undervalued companies (and shorting overvalued ones).  His bet on gold is not in that vein (no pun intended), but is rather a macro bet, a bet on the state of the world in the future.  It's not a particularly cheap one either.   

When I (very timidly) asked Einhorn about his gold bet at the CIMA conference, he stated that it, like all other investments, should be evaluated in terms of its opportunity cost.  It seems to be, however, that Einhorn's opportunity cost of holding gold is not the return on cash or treasuries, but rather the expected return from doing what Einhorn does best: value investing. 

Consider the following mini-case study.  History doesn't repeat itself but it does rhyme:  the 1973-1974 bear market in stocks coincided with a bull market in gold.  President Nixon moved off the gold standard and inaugurated the era of paper money, Vietnam-era "guns and butter" spending led to increased inflation, the Yom Kippur war highlighted the vulnerability of the west to commodity shocks, Watergate threatened everyone's faith in government, etc.  Gold traded up from its old fixed price of $35 an ounce in the late 1960s to about $150 in late 1974.  Stocks of course plummeted, even those held by the great value investors of the time.  I don't remember it but others do.  It was pretty bad.

What happened then?  The rest of the 1970s were outstanding for gold, although you had to wait until the latter part of the decade to start making money.  It performed amazingly well, hitting a high of $850/ounce on January 21, 1980 (I read somewhere that Jacqueline Kennedy Onassis bought gold during this period and made a fortune, on the advice of her companion Maurice Tempelsman.  If the story is true, he belongs in the Hall of Fame of Investors' Consiglieri.  But that's for another post).  If you bought gold at $150 in late 1974 and managed to sell at the top, you more than quintupled your money, a compound annual return of over 41%.  The gold bugs, in short, were absolutely right.

But not so fast.  How did the top value investors of the day, the David Einhorns of yesteryear, perform in the footrace againt gold from 1975-1979?  As far as I know, none of them made any significant bet on gold at this time--they were just doing good old fashioned value investing.  Here is the record, taken from the Berkshire Hathaway annual report and Warren Buffett's famous essay "The Superinvestors of Graham-and-Doddsville":

Berkshire Hathaway          34%      (book value growth)
Walter Schloss                  43%
Tweedy, Browne                32%
Sequoia                              36%
J.P. Guerin                         51%

Yes I'm cherry-picking the data here, but on balance I'm giving gold a head start by assuming you sold it at the $850 top, which occurred only briefly.  If you only managed to sell at $675, the average price during January 1980, your five-year return went down to 35%. 

My conclusion is that old-fashioned value investing, as practiced by its best practitioners, was remarkably competitive with gold during one of the latter's greatest bull markets. 

  

Robert Rodriguez Wall Street Journal Profile

An interesting article about Robert Rodriguez of the FPA Capital mutual fund, one of the best mutual fund value investors.  Going into 2008 his asset allocation stance was extremely bearish--he held so much cash in his fund that investors got mad at him.  However, on the stockpicking side he had heavy exposure to energy exploration companies, at prices which to me were only justified if one were a macro bull.  The net result of this kind of cognitive dissonance was that the fund declined only slighly less than the S&P in 2008.

Annoyingly, the article makes no attempt to estimate how much of the fund's 2008 losses were on positions initiated after the crisis started, as Rodriguez, eschewing trying to call the bottom and willing to accept short-term pain, deployed some of his large cash pile into what he thought were newly-undervalued ideas. 

If I were a manager selector evaluating Rodriguez, or an investor considering whether to redeem after a poor 2008, those are the two things I would focus on: a) why was he bullish on energy at 2007 prices, and b) how much of his 2008 losses came late in the year on new positions.

Wall Street Journal Profile of Bruce Berkowitz of the Fairholme Fund

Read it here.