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Chou Semi-Annual - Avoiding Value Trap


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Francis Chou's semi-annual letter is out http://choufunds.com/pdf/SEMI-AR%202017%20vF%20%28with%20cover%29.pdf

 

Review of holdings shows ability to analyze companies and buy them at deep value with numerous "winners" up > 3x (BRK, Nokia, Citi, JPM Warrants and Wells Fargo Warrants). However, the same thoughtful, erudite, value investing analytic pathway resulted in losses of >50% in Valeant & Resolute Forest Products, with Sears being down >80%!

 

End result is 10 yr returns of 4.3%/yr and 15yr returns of 6.6%.

 

Without a couple of the big losses, his fund would be hitting it out of the park. Is there something that Chou can (vs. will) do to avoid these huge losses? I see no evidence of change in "style" .

 

Finally I don't agree with his "math" that 10 & 15 year returns can be skewed by one bad year and that's just the way it is. He's mentioned this before and I'm surprised to see him bring it up again. One expects there to be some bad years and some very good years. However, over any period of time, it should average out. Ten years is a good period of time.

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I am a unit holder in his fund and it has been a terrible investment.  At least Francis acknowledges his mistakes in stock selections. 

 

In conclusion, we do not believe that we have entered a new paradigm; there is definite room for

improvement in stock selections but the principle of value investing is sound and, in time the

logic will prevail in the end.

 

 

Francis Chou's semi-annual letter is out http://choufunds.com/pdf/SEMI-AR%202017%20vF%20%28with%20cover%29.pdf

 

Review of holdings shows ability to analyze companies and buy them at deep value with numerous "winners" up > 3x (BRK, Nokia, Citi, JPM Warrants and Wells Fargo Warrants). However, the same thoughtful, erudite, value investing analytic pathway resulted in losses of >50% in Valeant & Resolute Forest Products, with Sears being down >80%!

 

End result is 10 yr returns of 4.3%/yr and 15yr returns of 6.6%.

 

Without a couple of the big losses, his fund would be hitting it out of the park. Is there something that Chou can (vs. will) do to avoid these huge losses? I see no evidence of change in "style" .

 

Finally I don't agree with his "math" that 10 & 15 year returns can be skewed by one bad year and that's just the way it is. He's mentioned this before and I'm surprised to see him bring it up again. One expects there to be some bad years and some very good years. However, over any period of time, it should average out. Ten years is a good period of time.

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Buying his Chou Opportunity fund was one of the worst investments I've made. After a terrible stretch, I decided to add more (contrarianism...doesn't always pay off). I still wonder about it. If you look at the history he went many, many, many years underperforming the market...until he didn't. I'm hoping he'll do it again. Can't say I'm buying anymore but haven't sold any lately either.

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Ourkid8 & stahleyp, I'm in the exact same boat. I have held a large position with Chou for a decade. Long history of underperforming, but one knows that he has the knowledge and skill set to excel - IF - he can avoid the losses. Was adding more during downturns (being a contrarian) but I stopped adding 2-3 years ago and have been holding/waiting for the thesis to play out.

V. frustrating.

 

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I always wonder how he got to the level of fame that he has today. I have to say he is a respectable guy in terms of integrity. He even returns management fee at one point due to under performance.

He is a nice guy...but that itself doesn't guarantee investment success. He under-performed the market and made several big mistakes along the way.

 

he came to our class once and talked about value investing. That was a good lecture and I think he understands value investing...but like a great UFC trainer, they don't always win in UFC ring.

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I really respect Mr. Chou and have followed what he has written, bought and sold.

However 5 and 10 year periods are sufficiently long to evaluate performance and smooth statistical fluke.

 

The tide may change but survival is about adaptation.

 

I submit though that the oration being spelled out may be too severe as it reminds me of the death of equities mentioned in some 1970's headlines.

 

Value investing is not dead. The best days are ahead.

 

Past performance is not indicative of future returns and I suggest that Mr. Chou's returns will be relatively better.

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Well said again Cigarbutt.

The fact that Mr. Chou has the intellect and understanding to make such brilliant bets but also lose badly on many others has been an eye-opener to me. Although I haven't seen any evidence, hopefully, he has been able to incorporate into his practice a few danger signs that will allow him to steer away from the big losses. That will result in your prediction of his returns being relatively better in the future.

After 10 years am trying hard to continue to believe in his thought process and hold on.

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  • 11 months later...

interesting tidbit...sheesh, Chou and Berkowitz reaklly took it on the chin by sticking with SHLD

 

Sears Holdings

In hindsight, our initial assessment of Sears Holdings being worth more than $50 per share a few

years ago was most likely too optimistic. This is taking into consideration that we received in

excess of $23 per share in distributions from various spin-offs and right offerings, which we later

sold in the market.

In 2017, we initiated a stock lending program where the Fund received interest on the shares lent.

For Sears Holdings, the total security lending interest we received for the year was about $7.25

million or about $6.41 per share, all in U.S. dollars. This shows how heavily shorted the common

shares of Sears Holdings have been. For the six-month period ending on June 30, 2018, the total

security lending interest received was $483,596 or about $0.43 per share, all in U.S. dollars. In

spite of the interest income earned from security lending, plus the approximately $23 per share

received in distributions from various spin-offs and rights offerings, it has not been a good

investment.

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This thread was started a year ago in view of  poor 10 year results and surprising lack of vision as to improve process going forward. A year later, it's the same letter basically says that picking on last 10 years doesn't have merit and that investment decision process could improve but no insight to what changes could be made.

 

Disappointing that he hasn't given investors anymore insight.

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This thread was started a year ago in view of  poor 10 year results and surprising lack of vision as to improve process going forward. A year later, it's the same letter basically says that picking on last 10 years doesn't have merit and that investment decision process could improve but no insight to what changes could be made.

 

Disappointing that he hasn't given investors anymore insight.

 

Looking at the Chou RRSP fund, I notice that even though the portfolio is very concentrated, several of his investments are down around 90%. Clearly these were bad bets. Yet the commentary mostly ignores this and blames poor performance on the market not respecting value. I would think some admission of mistakes is in order here.

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