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CHOU 2020 Letter to unit holders


Bryggen
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I wish Prem could write that clearly. The section on value investing is good.

 

Also annoying to see RFP announce a $100m buyback and not execute any of it in 1Q.

 

Yes, good read; having followed Francis for many years it is good to understand what he is doing thinking. Nice that he admitted a number of errors and said the poor multi year performance was primarily due to poor stock selection.

 

I am not sure how value investing and resource stocks fit in the same sentence (predicated on predicting where natural gas and oil prices are going)?

 

At Dec 31 he had 50% in Associates Fund in financials and another bunch in BRK; very concentrated (although he said he was selling banks in Q1). Looking at his multi year results i think he was a little late to the party.

 

Goes to show the importance of being inquisitive, open minded and to keep learning to be a successful long term investor. Evolution is important to surviving.

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Value investing suits resource sectors very well. Nobody knows where commodity prices are going in the short term, but they’re fluctuate fairly predictably around the marginal cost of production in the long term. That creates the opportunity for value investors to buy when the market is panicking. In theory at least, cyclical sectors are far more likely to provide value opportunities than non-cyclical ones, where the value opportunities are rarer and more company-specific.

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We believe the intrinsic values of airline stocks have been worsened by roughly 30%, but the stock prices have dived by more than 50%.

 

This goes to the core of the problem. Take a look at his stocks and see how many times this situation played out.

 

Nokia, MBIA, Sears, Blackberry, Valeant, Posco, Endo, Teva...

 

The majority of the time if you have to cut down IV estimate but it still looks attractive, you are just fooling yourself into rationalizing the error.

 

Vinod

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I wish Prem could write that clearly. The section on value investing is good.

 

Also annoying to see RFP announce a $100m buyback and not execute any of it in 1Q.

 

Yes, good read; having followed Francis for many years it is good to understand what he is doing thinking. Nice that he admitted a number of errors and said the poor multi year performance was primarily due to poor stock selection.

 

I am not sure how value investing and resource stocks fit in the same sentence (predicated on predicting where natural gas and oil prices are going)?

 

At Dec 31 he had 50% in Associates Fund in financials and another bunch in BRK; very concentrated (although he said he was selling banks in Q1). Looking at his multi year results i think he was a little late to the party.

 

Goes to show the importance of being inquisitive, open minded and to keep learning to be a successful long term investor. Evolution is important to surviving.

 

Love your quote ''Goes to show the importance of being inquisitive, open minded and to keep learning to be a successful long term investor. Evolution is important to surviving.''

 

I will keep it and put it up on my office's wall :)

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I am getting Buffett flashbacks reading this letter.

 

In general, our experience with a commodity business that has virtually no pricing power is to be

cautious when management talks about investing in new equipment or upgrades that would

significantly lower the cost structure compared to its competitors. That may be true for six

months to a couple of years, but in time, competitors will have a new cost structure that is as

competitive if not superior to the company. It is the same treadmill where hardly anyone in the

industry can make a decent return on the assets invested in the company.

 

Chou

 

 

 

Over the years, we had the option of making large capital

expenditures in the textile operation that would have allowed us

to somewhat reduce variable costs.  Each proposal to do so looked

like an immediate winner.  Measured by standard return-on-

investment tests, in fact, these proposals usually promised

greater economic benefits than would have resulted from

comparable expenditures in our highly-profitable candy and

newspaper businesses.

 

    But the promised benefits from these textile investments

were illusory.  Many of our competitors, both domestic and

foreign, were stepping up to the same kind of expenditures and,

once enough companies did so, their reduced costs became the

baseline for reduced prices industrywide.  Viewed individually,

each company’s capital investment decision appeared cost-

effective and rational; viewed collectively, the decisions

neutralized each other and were irrational (just as happens when

each person watching a parade decides he can see a little better

if he stands on tiptoes).  After each round of investment, all

the players had more money in the game and returns remained

anemic. -Berkshire, 1985 Annual Letter

 

 

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What is the logic of keeping a bad investment.

 

i presume that there was thesis that went behind Resolute investment both for Chou and FFH (i don't know who copied whom), but at some point in the past ten years, it must have been obvious that it was a mistake. You are ultimately judged by the return that the market gives you get and not by the unfairness and irrationality of capital markets. What are the options available to a rational investor when you get a Resolute:

 

- sell right off the bat, when the thesis doesn't hold anymore

- turn it into an opportunity, by buying the whole on the cheap and now you have control and access to cash flows

- keep for no reason

 

Eurobank / Blackberry investment looks to fall in the second bucket and i liked that. Stuff happens and you make the best of situation.

but i have a hard time making sense of Resolute at all as it was fall in the third bucket.

 

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  • 4 months later...

Its just incredible to me how one ends up owning such a diverse portfolio of dogs. I get underperforming if you run high concentration strategies...duh. A position or two of size will hurt you if its goes against you. But its like everything some of these dudes own you wouldn't have been able to match if you dreamed up a perfect short portfolio. WFC, RFP, BHC, XCO....its almost funny. Just not as bad as Einhorn, who matches Chou 1 for 1 on the long side but then does the same thing on the short side as well. I remember one year he actually had the nerve to joke about how he owned like 3 of the top 5 worst performing S&P components, and was short 2 of the top 5 best performers....But it was just "bad luck"...

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A deep value investor would have bought RFP years ago based on whatever thesis was out there at the time.

A patient deep value investor (not me certainly) would have bought it at $1-2 during the downdraft.

 

If value investing was all about margin of safety, that aspect has become ten-times more important in todays market.

If you are a cigarbutt type investor, 20 cent on the dollar is the new 60 cents on the dollar.

 

"Having said that, it is quite comical to experience how a commodity stock can be hammered beyond all logical comprehension. RFP paid a special dividend of US$1.50 a share in 2018, and it was trading as low as US$1.17 per share in April 2020. Back in March 2020, the company announced that it would buy back 15% of its common shares for US$100 million. At the lowest year-to-date price of US$1.17, the whole market capitalization would be approximately US$99 million. In other words, instead of buying back 15% of the company with US$100 million, it could repurchase 100% of the company at one point. RFP shares have since recovered 300% to US$4.69 as of August 25, 2020."

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I read his letter and think it’s odd that he doesn’t think banks have been impaired. That doesn’t make any sense to me. Sure, we can debate If bank stocks have been overly punished, but there is little debate that they have been seriously impaired by higher loan losses and lower interest rates.

 

This alone would question me a money manager’s judgment.

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