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In thinking more about this topic, it appears that on a diversified basis value investing can add from 1 to 4% annual in terms of returns. To get higher returns you need either to use leverage (margin, options or warrants), concentration or market timing. Using Bob's example, the FPA Capital fund is the diversified vehicle (but is also subject to client withdrawls). FPA Capital returned 15.2% over his experiment period, the S&P 500 10.6% (with dividend) and his top 5 fund 24%. So his value methodology added 4.6% and the concentration an additional 8.8%. If you look at the investors in the appendix of the Intelligent Investor you see the same trend the concentrators (Buffet, Munger, Guerin) outperform the diversifiers (WSJ and Tweedy Brown) by about 10% per year. I am wondering how have the value concentrators versus diversifiers done here. The 2 styles are for different types of individuals - the diversifiers (more conservative) and the concentrators (more aggressive). For example (I am a concentrator) and I have 10.5 year returns of about 37% annualized versus the S&P of 8% and the FPA Capital of 11%. What are other folks experiences? TIA. Packer

It is a good observation. Look who developed the EMH (folks with high IQs) and who are smart and think they know the right answer to everything. I would rather work with folks who aren't as smart but who work hard and have horse sense and know what they don't know (as skill that some high IQ folks have a hard time with). Packer

It has much more meat organized along type of value investment and strings ideas together. While in The Art of Value Investing you have to string many of the ideas yourself but they are straight from the horses mouth. Packer

[amazonsearch]Manual of Ideas[/amazonsearch] This has been one of the greatest books I have read in a while (at least since The Most Important Thing). It is a compilation of the approached of great value investors (including names for all you cloners out there) and dives into methodologies, strength, pitfalls, screening and questions to ask about investments of each types. It draws on the collective wisdom collected at the Manual of Ideas site so there is broad depth of knowledge. It even references this great site Sanjeev has built (see page 143). I have already found some interesting folks to follow along with a few new ideas. I can see returning to this volume periodically to refresh with the info therein. Packer

You are correct that a more typical bond fund (PIMCO Total Return) has only had modest declines (a few percentage) points versus LT Treasury Funds (like Wastach-Hoisington). PIMCO does have a lower yield of about 1.64% per year. Packer

Private pension funds are. This must be what Marks is talking about. The data implies that insurance company asset allocation is 39% to stocks. This appears strange as I have never seen a most insurance cos with more the 5 to 10% in equities. Packer

What about mutual fund flows over the past 10 years anbe especially since 2008? These are the ultimate institutions responding to lack of enthusiasm for stock. If flows had been upward for a long period of time I would agree but the opposite appears to be the case. What about institutional low allocations to stocks (per H. Marks comments)? I don't see the data supporting the case institutions are all in. Once these guys figure out alternative assets mean lower returns and higher fee they may re-discover stocks. Packer

You are correct about auto credit but cars have a much higher residual value because they are made better and last longer. In addition, the loan may be an incentive to purchase and if she got it from an OEM auto finance sub she probably had to get a co-signer. I am not saying go all in for stocks but buy what is cheap enough to meet your criteria and ignore the macro because sentiment is not euphoric. Sentiment is what drives the majority of the pricing of securities (that is why value investing works) and as long as it is negative/neutral if there is a decline there is not much air to come out of the ballon. As to cash and bond portfolios, this would have gotten killed this year. Most bond funds are down considerably. So the only way to play this is with a pure cash portfolio. The other question has there been a major decline with negative/neutral sentiment? None that I can find in history. Packer

There was a decline in 2000-2002 but it was really concentrated in tech/telecom. I remember buying BRK in 1999 at a price close to book and it recovering nicely in the decline. Many value investors did very well during that period as people rotated out of tech/telecom (which many rolled into in 1998/99) into other sectors such as financials. The 2008 decline was across just about all asset classes. I think we may decline but if we do it will be similar to the late 1970s/early 1980s (another era of low expectation). I think decline will not be as great as 2008/2000 because the two levers of increased asset prices are absent, namely high levels of leverage (debt in housing market and cheap capital via IPOs for tech/telecom stocks) and high levels of investor enthusiasm (negative fund flows for mutual funds since 2000 and especially since 2008). Using the 1970s analogy, the late 1960s was similar to the tech bubble and the subsequent nifty 50 was similar to the housing boom (no lose propositions). It took 6 to 7 years for sentiment to pick up again in 1982/83 and stock began to rise. These are some other historical data points to considered. I think I have seen quite a few great stock pickers ruin an otherwise excellent records by trying to become asset allocators and going into cash. Out of about a half a dozen I have only see one work and that is Prem and Fairfax. He hedged and did not go to cash so at least he retains the alpha to the market. See the following for a good discussion of confidence: http://news.morningstar.com/articlenet/SubmissionsArticle.aspx?submissionid=175276.xml Packer

I think the 2008 decline are once in a decade or even every 25 year decline. As Howard Marks has said if you built a portfolio to do well in 2008, you wouldn't have much of a portfolio (gold and treasuries). Holding cash in reserve is a good idea but the question I have is can you "time" that amount using any historical measures and end up with a larger portfolio in the end. I am assuming the portfolio we are talking about is money not needed for 10 to 20 years and given that you are not concerned about what the portfolio looks like until then and volatility will not cause to sell. Now cash as a sanity buffer is important if that is required. The other input is from a guy like Marks (who I view is more rational than either Shiller or Grantham who always appear to be crying wolf), he thinks we are in the early late innings based upon his combination of indicators. I think the one thing he has not seen is the reckless lending and euphoria of a typical bull market but has seen some bullish behavior based upon QE3. The real question is can we have a large decline when sentiment is negative or neutral at best. Based upon my reading of history the answer is no but it may be different this time. Packer

If you give me the name I can check to if BB lists its holders Packer

Would you buy less of a 50 or 30 cent dollar if Shiller PE was high? Would you buy more if it is low? I think the true signal is when you no longer find 50 cent dollars and only can find 79 and 80 cent dollars. The Shiller PE is interesting if you are buying the entire market (lets say S&P 500 Index Fund) but how many of us are doing that. I think that performing asset allocation is tempting using for example the Shiller PE but I have yet to see a study that it helps much more than an index fund. The only method I have seen demonstrated is buying 50 cent dollars. Maybe I am too simple minded but I would be interested to see if there have been any active asset allocation studies using the Schiller PE, GDP/Mkt Cap or any other indicator. Packer

I used to have a leverage mutual fund portfolio pre-2000 but then removed the leverage when we had kids. I had a good amount of leverage via LEAPs before 2008 but since then I am limited to a small amount in my non-IRA (about 10% in that account) and via some LEAPS (like COF, AIG and LNC). I don't have much in non-IRA accounts, so my leverage is limited in that sense. Packer

One question is what are we trying to do with this portfolio? If we are trying to see if the wisdom of the CoBF crowd is correct we may want to keep the portfolio small and concentrated in a few names (maybe weighted by votes). This will allow any signal to be separated from the noise. Which is the biggest issue in mutual fund performance measurement. Initially I am skeptical that such a system is going to work well because it is going to pick the favorite value stocks versus using some sort of value metric to measure the sentiment of the idea as reflected in the price. We will see. Packer

Uccmal, How much leverage have you carried or are you referring the leverage implicit in the warrants? If you do have leverage do you vary it with time or some other parameter. TIA. Packer

Tim's post mortem is below: http://mcelvaine.com/wp-content/uploads/2010/03/2010-Partner-conference-transcript-w-slides1.pdf A very good analysis of what caused to the shortfall. Packer

I think the metric us depends upon the type of firm. Financials P/BV, mature firms MktCap/FCF, growing firms EV/EBITDA. With this you can compare across firm types but between firm types you may need to estimate default value for each multiple. Packer

I am about 60% in my top 5. This leads to more volatility but also for me more focus. It forces me to make the decision about buying cheap stocks considering the downside risks. This leads to larger declines in down markets (50% in 2008) but hopefully higher returns across a cycle. The way I look at stocks is they have a quantum of value and the price may not reflect that quantum. So I want to weight my portfolio to maximize the price/value difference. If I diversify, I dilute that difference. In the extreme (most mutual funds), the dilution is so great it is very difficult to beat the market index. The more you know about the companies and their intrinsic values the less dilution you require to achieve an acceptable level of volatility. Packer

It will be interesting to see how this will turn out because the most popular value stock may already have some aspect of popularity factored into its price. Another idea is the value rank the stocks by a metric such as EV/EBITDA or MktCap/FCF or P/BV, chose the cheapest and value-weight the portfolio by how cheap they are. This will at least reduce the amount or popularity bias in the fund. Packer

I have seen this work in practice in some cases (Fairholme, the portfolios of Graham and Doddsville and my own portfolio over the past few years) and less so in others (Chou and McElvaine). In the less so cases I have not been able to isolate a cause. Although Tim has provided a pretty good post mortem on the largest shortfalls of his under performance (leveraged companies in flat or declining industries that could not pay there debt back). In each case though, they have beat the market it is just a matter of by how much. Packer

If you go to Yahoo Finance the Hyundai pfd is 005385.KS Packer

I am looking at the Hyundai preferreds as they appear to have a combination of quality and cheap price. I wasn't able to find anything about A-1 Pacific. Is it the same as Amore Pacific? TIA Packer.

Does anyone know of a broker that can buy/sell Korean securities as well as US and European securities? I looked at both IB and Fidelity and they don't appear to be able to Korean markets per their website. Packer

I find EBITDA helpful when used with other cash flow measures like price to FCF/owners earnings. It is also useful in situations where the firm is going through a one-time large capital expenditure period where FCF is negative and as a comparitive measure. Using it as the only measure is not right but in combination with other measures it can be useful. It is also helpful for international comparisons where depreciation rules are different and for calculating debt coverage and leverage ratios as this is what banks use for their covenants. In the case of real estate, FFO (a form of EBITDA) is commonly used to value property. If you use earnings you will be understating free cash flow because a good portion of the depreciation is not real. Packer

I have a tendency to use multiples as I think there are too many assumptions in classical DCF models to very helpful in finding undervalued securities. In addition multiples will get you 90% of the way there and the additional 10% takes alot of time for limited additional benefit. You can also focus on the issues that make a difference that cannot be modeled - investor psychology, security concentration, industry structure, moats/competitive advantage, other market (bond, option) signals, mgmts track record and incentives. I also do not do this full time so I try to maximize effort vs. time. See my AKA thread for valuation examples using comps. I do valuation as a business so I am familiar with the techniques and the uncertainty in the assumptions. Packer