Interview With Francis Chou

[dyow]

I keep hearing about this guy but what are his historical returns?

 

http://lmgtfy.com/?q=Chou+funds+returns

 

incredible, internet wizard

 

Just curious what dyow means?

 

Do Your Own Work

I know what it means. I just find it ironic it was so hard to put 3 words into Google. It was easier to ask someone else the question and await an answer. Not doing your own work.

 

I was busy looking at a stock, an ugly one, hence the delay in replying.

 

For shhughes1116 and augustabound,

 

I will post my thesis for at least one of two stocks.  I have two ideas that are each worth about 75% to 150% more than current price with near term catalysts (i have researched these stocks for very closely, months worth of full time research each, i over do it i know). I know i can make money for other board members. 

 

But i won't post until either of you post a thesis and help other members.  I don't think it is fair that i put that much work into researching while others on the forum add no value.

 

You implied i don't do my own work, which in turn implies you guys do your own work............let's go thesis for thesis. and we can let the board members decide who actually does work.

 

 

[investmd]

Have been a believer in the Chou philosophy and admired his candid nature, thoughtful analysis and ability to go against the grain. However, 10 year returns on all his funds have been less than 5% annualized. Whilst value investing is a long term game, 10 years is a fair time period to analyze a money manager. Are there any structural reasons to think that the next 10 years will be drastically different? I wish Francis Chou would explain what he has learned over the past decade and how he plans to avoid the same type of mistakes. Is there a fundamental flaw in his philosophy? Or does he believe decision making tree was appropriate and would do the same thing again?

 

His explanations for investing in SHLD, Valeant, RFP, Blackberry all seem insightful but 10 years later the result isn't there....

[Cigarbutt]

investmd,

I like your way of asking more questions than providing answers.

We should continue perhaps bottom fishing looking for value but the question you ask: "Are there any structural reasons to think that the next 10 years will be drastically different?" really haunts me. Obviously, there is a lot of noise. Always the case. To separate the wheat from the chaff is the challenge.

I would appreciate also hearing Mr. Chou on these questions.

[CorpRaider]

In fairness, I would note that the last decade is one of the few in the history of (at least us returns) the stock market where value underperformed.  Not sure what his benchmark should be but portfolio visualizer shows a (.16) cagr over the period from 01/01/2007 - 02/28/2017 for international developed ex-us value stocks.

[ourkid8]

why don't you email his office?  ([email protected], [email protected])  I have emailed him in the past and he has called me back to discuss. 

 

investmd,

I like your way of asking more questions than providing answers.

We should continue perhaps bottom fishing looking for value but the question you ask: "Are there any structural reasons to think that the next 10 years will be drastically different?" really haunts me. Obviously, there is a lot of noise. Always the case. To separate the wheat from the chaff is the challenge.

I would appreciate also hearing Mr. Chou on these questions.

[valcont]

I keep hearing about this guy but what are his historical returns?

 

http://lmgtfy.com/?q=Chou+funds+returns

 

incredible, internet wizard

 

Just curious what dyow means?

 

Do Your Own Work

I know what it means. I just find it ironic it was so hard to put 3 words into Google. It was easier to ask someone else the question and await an answer. Not doing your own work.

 

I was busy looking at a stock, an ugly one, hence the delay in replying.

 

For shhughes1116 and augustabound,

 

I will post my thesis for at least one of two stocks.  I have two ideas that are each worth about 75% to 150% more than current price with near term catalysts (i have researched these stocks for very closely, months worth of full time research each, i over do it i know). I know i can make money for other board members. 

 

But i won't post until either of you post a thesis and help other members.  I don't think it is fair that i put that much work into researching while others on the forum add no value.

 

You implied i don't do my own work, which in turn implies you guys do your own work............let's go thesis for thesis. and we can let the board members decide who actually does work.

 

Come on guys, bring it on.I'll be the referee. I had posted one idea this year that would have been a multibagger had you shorted it. So no pressure.

[investmd]

I have emailed him and got variable responses in the past. He did not respond to this question a couple of months ago, but I did ask him to consider discussing in his annual letter.

 

 

 

why don't you email his office?  ([email protected], [email protected])  I have emailed him in the past and he has called me back to discuss. 

 

investmd,

I like your way of asking more questions than providing answers.

We should continue perhaps bottom fishing looking for value but the question you ask: "Are there any structural reasons to think that the next 10 years will be drastically different?" really haunts me. Obviously, there is a lot of noise. Always the case. To separate the wheat from the chaff is the challenge.

I would appreciate also hearing Mr. Chou on these questions.

[educatedidiot]

Francis' Q1 13F is out now.  Looks like he bought Endo and Teva: http://www.rocketfinancial.com/Holdings.aspx?fID=8456

[investmd]

Has the opinion on Chou changed over the past 5 years? His 10 yr returns while not great (4%-Chou Associates, 5% Chou Asia & negative 0.5% Chou Europe) may be acceptable, if the philosophy is still sound. However, Chou has not given any insight as to why mistakes were made that lead to large losses, what he has learned and why it may be different going forward. The 2016 annual letter is disappointing when he explains results by saying one bad year can ruin your 5 or 10 year result. That doesn't cut it. There will always be negative years. However, over time they should be averaged out by great years.

Chou put in $80-90 million - approx 20% of assets of Chou Associates in Valeant Pharmaceuticals. The investment is down 60-70%. In the future, would he put >20% of the fund into a similar investment? An explanation as to why or if he would do the same in the future with a different company or has learnt something to prevent massive losses would be fair. Admitting that 10 years is a fair time to judge an investor would be honest.

I've just re-read each of his annual letters for the past 20 years. He is bright, has insight and good thought process. He definitely has the ability to pick stocks that have potential to be multi-baggers. However, has he been able to learn how to avoid value traps and large losses (Valeant, Sears, Radio Shack...) that have held back results? Is he a smarter investor today than 15 years ago and will that translate into improved outcomes?

[Parsad]

Has the opinion on Chou changed over the past 5 years? His 10 yr returns while not great (4%-Chou Associates, 5% Chou Asia & negative 0.5% Chou Europe) may be acceptable, if the philosophy is still sound. However, Chou has not given any insight as to why mistakes were made that lead to large losses, what he has learned and why it may be different going forward. The 2016 annual letter is disappointing when he explains results by saying one bad year can ruin your 5 or 10 year result. That doesn't cut it. There will always be negative years. However, over time they should be averaged out by great years.

Chou put in $80-90 million - approx 20% of assets of Chou Associates in Valeant Pharmaceuticals. The investment is down 60-70%. In the future, would he put >20% of the fund into a similar investment? An explanation as to why or if he would do the same in the future with a different company or has learnt something to prevent massive losses would be fair. Admitting that 10 years is a fair time to judge an investor would be honest.

I've just re-read each of his annual letters for the past 20 years. He is bright, has insight and good thought process. He definitely has the ability to pick stocks that have potential to be multi-baggers. However, has he been able to learn how to avoid value traps and large losses (Valeant, Sears, Radio Shack...) that have held back results? Is he a smarter investor today than 15 years ago and will that translate into improved outcomes?

 

Fairfax is nearly at the same price today, as it was 18 years ago when I first bought a share in Berkshire.  It was at 5 times book then and it is at 1.25 times book today.  I would say that investing in Fairfax only once in 1998/1999 was probably a bad idea at that valuation.  But imagine what your portfolio looks like if you bought a little Fairfax every year over those 18 years.  What type of investment results do you get then, when compared to simply buying a stock and holding it?

 

I'm not trying to defend Francis or any other manager that has struggled over the last decade.  What I'm trying to point out is that even very good, intelligent investors can underperform for long-periods of time.  It could be due to mistakes, concentration in specific mistakes, distortions in valuations, influence of monetary or fiscal policies, black swan events or changes in circumstances that affect the original thesis. 

 

What I will defend is that there are a handful of managers I know that are ethically beyond reproach...I consider them friends and mentors...Prem Watsa, Francis Chou, Tim McElvaine, Mohnish Pabrai, Jeff Stacey, Allan Mecham, etc...I would be comfortable with my family investing with any of them.  And yes, many of them have struggled on and off over the last decade versus one of the largest corrections and then one of the hottest bull markets, including underperforming their respective indices.  But I suspect that if investors averaged their investments into their funds over the same period, the results look markedly different...just like I hope more of our partners average into our fund over time, or into PDH shares...just like I do! 

 

Cheers!

[Jurgis]

Sanjeev,

 

With all respect "averaging into" argument does not hold water for two reasons at least.

 

First, a fund is not a company. You cannot "value" a fund and buy when it's "cheap" and sell when it's "expensive". Yeah, you could try to do some kind of valuation on its holdings, but that's just second guessing the manager and I am sure you don't want anyone doing that to any managers you listed.

 

Second, if you average without valuation (e.g. just from outside cash flows), then you should be compare to averaging into indexes. And the underperformance remains the same if not worse.

 

Edit: In general, it is painful when highly ethical managers underperform. It is a decision for individual investor whether to stick with them or not. Best luck.

[Parsad]

Sanjeev,

 

With all respect "averaging into" argument does not hold water for two reasons at least.

 

First, a fund is not a company. You cannot "value" a fund and buy when it's "cheap" and sell when it's "expensive". Yeah, you could try to do some kind of valuation on its holdings, but that's just second guessing the manager and I am sure you don't want anyone doing that to any managers you listed.

 

Second, if you average without valuation (e.g. just from outside cash flows), then you should be compare to averaging into indexes. And the underperformance remains the same if not worse.

 

Edit: In general, it is painful when highly ethical managers underperform. It is a decision for individual investor whether to stick with them or not. Best luck.

 

My point wasn't simply averaging in, but that the best managers can and will have periods (sometimes long periods) of underperformance.  From 1971 to 1975, over a 5-year period, the brilliant Charlie Munger underperformed the market:

 

http://awealthofcommonsense.com/2014/09/charlies-munger-becoming-better-investor/

 

If Charlie Munger can underperform for 5 years, would it not make sense that merely very good investors might underperform for periods longer than 5 years?

 

If you had stayed with Munger from beginning to end, you would have done extremely well, even with that poor 5-year period.  For most investors, it's difficult to stay with a manager during challenging periods.

 

Indirect has been a Pabrai Funds client from shortly after the 1st year.  He has stuck with Mohnish through good and bad times, and thus has finished ahead of the index.  He was also smart enough to buy when Mohnish was down and add to his account...thus he is miles ahead of the index, even though Mohnish is modestly ahead of the index over the life of PIF2.  Cheers!

[investmd]

Sanjeev,

 

With all respect "averaging into" argument does not hold water for two reasons at least.

 

First, a fund is not a company. You cannot "value" a fund and buy when it's "cheap" and sell when it's "expensive". Yeah, you could try to do some kind of valuation on its holdings, but that's just second guessing the manager and I am sure you don't want anyone doing that to any managers you listed.

 

Second, if you average without valuation (e.g. just from outside cash flows), then you should be compare to averaging into indexes. And the underperformance remains the same if not worse.

 

Edit: In general, it is painful when highly ethical managers underperform. It is a decision for individual investor whether to stick with them or not. Best luck.

 

My point wasn't simply averaging in, but that the best managers can and will have periods (sometimes long periods) of underperformance.  From 1971 to 1975, over a 5-year period, the brilliant Charlie Munger underperformed the market:

 

http://awealthofcommonsense.com/2014/09/charlies-munger-becoming-better-investor/

 

If Charlie Munger can underperform for 5 years, would it not make sense that merely very good investors might underperform for periods longer than 5 years?

 

If you had stayed with Munger from beginning to end, you would have done extremely well, even with that poor 5-year period.  For most investors, it's difficult to stay with a manager during challenging periods.

 

Indirect has been a Pabrai Funds client from shortly after the 1st year.  He has stuck with Mohnish through good and bad times, and thus has finished ahead of the index.  He was also smart enough to buy when Mohnish was down and add to his account...thus he is miles ahead of the index, even though Mohnish is modestly ahead of the index over the life of PIF2.  Cheers!

 

Agree that if one checked results of quarterly investments in Chou Assoc vs. index, the index would still win out. Few thoughts:

1) 5 yr results can definitely be poor -as shown above in your example - but 10 years is a reasonable time to assess an active money manager as 10 years allows for a combination of some boom and bust periods. Especially since we are not talking about absolute results but results relative to an index.

2)Re: the example of investing in Pabrai funds when it was down: One difference btw Pabrai Funds and Chou is that Pabrai has been open about mistakes, what he has learned from them and taken steps to prevent them from recurring, i.e.: the CheckList, explaining how he missed the leveraging and debt in HorseHold Holdings...While I'm sure that Chou is a smarter investor today than 10 years ago, he hasn't been open about what he has learned and what steps he has taken to avoid "value traps". He writes extensively about "margin of safety", but given the end result of VRX, SHLD, RFP, RadioShack and others, was the "margin of safety" adequate. He hasn't told us how he might avoid these type of situations in the future.

3)When we talk about passive vs. active management, there has to be a way of objectively assessing the active money manager beyond, nice guy, honest, smart etc...

[Ballinvarosig Investors]

I had never seen this interview with Chou before, it's three months old, but still interesting.

 

https://robinrspeziale.com/2017/03/02/my-interview-with-francis-chou/

[investmd]

I had never seen this interview with Chou before, it's three months old, but still interesting.

 

https://robinrspeziale.com/2017/03/02/my-interview-with-francis-chou/

 

Thanks for sharing.

I see that Chou thinks that stocks are going nowhere: "...there is hardly anything to buy...I think if you break even over the next five years, you will have some of the best numbers five years down the road".

[educatedidiot]

Francis Chou's Q2 13-F is out.  Somewhat more activity this quarter.  He bought Davita, Spirit Airlines, Resolute Forest Products calls, and Allegiant Travel.  Sold out of Sandridge.

http://www.rocketfinancial.com/Holdings.aspx?id=8456&fC=1

[investmd]

1)What do people think is the motivation behind Francis Chou purchasing Stonetrust Insurance company from personal $s ?

 

a)Is purpose to deploy personal wealth and make more $s for self, family, or charity?

b)Is there a view towards incorporating Stonetrust into Chou Funds or vice versa? perhaps as a way to improve results for the Chou Funds?

 

2) Is it reasonable for an investment manager to deploy such a significant amount of $s (?$70M +) in a purchase other than his own fund? Does the alignment of interests hold?

 

Am asking these questions as a longtime Chou investor (>10 yrs), with significant portion of portfolio in Chou Funds who is considering the pros and cons of staying in the Fund.

 

Thank you for sharing your opinions,

 

 

[Parsad]

I can answer these for you based on my understanding behind the purchase.

 

1)What do people think is the motivation behind Francis Chou purchasing Stonetrust Insurance company from personal $s ?

 

For many years, he has been looking for a personal vehicle...Stonetrust provided that opportunity.

 

a)Is purpose to deploy personal wealth and make more $s for self, family, or charity?

 

Yes to all.  Remember, Francis was the one who understood Buffett's use of float and told Prem about it many, many years ago before Fairfax.  He thinks that he can grow capital utilizing float and Stonetrust is his chosen vehicle to finally do that.

 

b)Is there a view towards incorporating Stonetrust into Chou Funds or vice versa? perhaps as a way to improve results for the Chou Funds?

 

No.  There is risk in his management of Stonetrust and he's not interested in exposing investors to that risk of losing their capital.  It will not be offered to the general public.  The Chou Funds will fluctuate in value, but over time, he will always make money for them.  The likelihood of Chou Fund investors losing capital over the long-term is low.  He cannot provide the same protection in Stonetrust.

 

2) Is it reasonable for an investment manager to deploy such a significant amount of $s (?$70M +) in a purchase other than his own fund? Does the alignment of interests hold?

 

Most of his wealth is still tied up in the Chou Funds, so it isn't like his interests aren't aligned with Chou Fund investors.  It would be no different than if he owned a $70M apartment or commercial property outside of the Chou Funds. 

 

Am asking these questions as a longtime Chou investor (>10 yrs), with significant portion of portfolio in Chou Funds who is considering the pros and cons of staying in the Fund.

 

His investment in Stonetrust should have zero influence on your decision to stay a Chou Funds investor. 

 

Cheers!

 

 

[Guest]

Sanj (or anyone) do you guys know how much he has in Chou funds in total?

[alwaysinvert]

If I had a penny for every time I heard some version of "this distraction for the capital allocator is not really a distraction for the capital allocator".

[bizaro86]

The record of high profile managers who seek permanent capital after they get it isn't very inspiring. Buffett is the counter example, but more recent examples (Einhorn, Lampert) don't look so good.

 

Personally, if he isn't 100% client focused after a very long stretch of underperformance, I would be pretty inclined to pull my money.

 

YMMV.

[Guest]

Chou Opportunity over the past 5 years as an average negative return of .15%

 

S&P 500 has averaged 13.89%.

 

Even the MSCI ACWI ex US has averaged 4.85%

 

Keep in mind that a big piece of CHOEX is in US stocks too.

 

He has performed worse than Longleaf even.

 

 

[Parsad]

Sanj (or anyone) do you guys know how much he has in Chou funds in total?

 

Let's just say it's more than Stonetrust.  Cheers!

[investmd]

I can answer these for you based on my understanding behind the purchase.

 

 

2) Is it reasonable for an investment manager to deploy such a significant amount of $s (?$70M +) in a purchase other than his own fund? Does the alignment of interests hold?

 

Most of his wealth is still tied up in the Chou Funds, so it isn't like his interests aren't aligned with Chou Fund investors.  It would be no different than if he owned a $70M apartment or commercial property outside of the Chou Funds. 

 

Am asking these questions as a longtime Chou investor (>10 yrs), with significant portion of portfolio in Chou Funds who is considering the pros and cons of staying in the Fund.

 

His investment in Stonetrust should have zero influence on your decision to stay a Chou Funds investor. 

 

Cheers!

 

Sanjeev, I'm trying to understand your thought process here. It seems you are saying that it would be ok for you as someone who runs an investment fund to have 25% or 40% of your net worth held in an investment vehicle outside of the fund you run for investors? ...am I missing something important here?

[Guest]

invest, still wondering if you should sell out? At least with the funds up north the performance hasn't been quite as terrible!