Chou America Funds!

[Guest]

I like Chou and I respect the fact that he doesn't charge a management fee on his funds (though there are still custodian fees and what not). I invested about the time he opened Chou America and added more as his performance swooned hoping that there would be a mean reversion.

 

I do wonder though how well the fund would hold up if we go through another downturn. He has a lot of cash which, obviously would help. Do you really think though that the holdings would do better than the market if another recession happened?  He does have roughly 40% in cash and the one junk bond. A lot of his holdings have a lot of debt (VRX for example) or bank warrants. Those would likely get slaughtered in a deep downturn. It's really sad if you think about it. Even with the warrants skyrocketing the past couple of years, he's managed to lose money over the past 3 and 5 year period. A $10,000 investment in CHOEX at inception would be worth about $12,700 now vs $30,300 for VFIAX (vanguard 500 admiral). Thankfully my original investment wasn't the larger one. :P

[StevieV]

It seems to me as though true value should perform over a time period as long as 10 years.

 

If I buy an undervalued stock, it may remain out of favor for a while.  However, eventually, the growth of the company, dividends, buybacks, etc., should eventually lead the stock to outperform.  That may not happen over 1 year, 2 years or perhaps even longer.  It should happen over a 10-year time period.

 

If they don't outperform over 10 years, the problem may be that Mr. Chou (or whoever) is not actually buying "value" stocks, at least as I would define the term.  Someone above mentioned Sears and Valeant.  I am not sure if Mr. Chou was invested in those stocks, but those certainly were not values (i.e., worth more than what investors paid for them).  Rather the dreaded value trap.

[blainehodder]

Wading into garbage at a "cheap" valuation is not a strategy a fairly heavily concentrated investor should pursue yet we see it time and again.

 

If you are going to buy the bottom of the barrel, you need to diversify, as you never know which ones will rocket and which will fade away. An at least moderately diversified approach to capturing market anomalies is much more likely to do well over time.

[LC]

Concentrate in compounders

Diversify in the dump

 

;D

[vinod1]

 

Earlier today, read a report (Steven Romick) commenting on the present situation:

http://fpafunds.com/docs/quarterly-commentaries-crescent-fund/crescent-q4-2017-vfinal-with-disclosures.pdf?sfvrsn=2

 

"Traditional value investing – buying a business or asset at a discount that offers the potential for upside appreciation while providing downside protection – isn’t what it used to be. First, good historic returns for value investors attracted a lot of capital that arbitraged inefficiencies from the market. Then the world began to change ever more quickly."

 

 

Quote from the FPA Funds Report:

 

The macro picture is only an afterthought. The larger environment might help explain why we buy more or

less of something but it certainly does not drive the Fund’s overall exposure. Understanding where the

world is and the prices markets are offering us for the assets we’d like to own helps to explain the Fund’s

positioning.

 

We lack any ability to prognosticate, but here’s what we know…

 

Global stock markets have not been inexpensive enough for a number of years to offer the potential for

high single-digit rates of return and are now trading at new highs. We continue to believe there isn’t

enough of a margin of safety to warrant a fully-invested portfolio.

 

In one paragraph he says we are not macro investors and in the very next paragraph he makes a macro call on valuations to limit exposure to stocks.

 

This is the issue. Once you begin to develop a view about macro valuations, it is very difficult to avoid taking the next step, which is acting out on them. Even though you know better.

 

The only way out I see is to stop thinking about macro. I know it is difficult.

 

They way I came to handle this is to spend a couple of days of the year, usually in late January to read up everything you want to take a look at from a macro perspective write out a few thoughts (what you think about it and how it might play out) and never look back again until next year.

 

After you have done this for a few years, reading up on what you have written would be a good source material for comedy. And it would also help in not taking macro seriously.

 

Vinod

 

 

 

 

[vinod1]

Quote attributed to Mr. Charles Darwin:

"It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change."

 

Mr. Buffett has been amazing with adaptation and for such a long time. I would say that adaptation allowed BH to compound at similar levels to the market of this era.

 

I would think that Mr. Graham (who was said to be extremely bright) would have done quite poorly under present circumstances.

 

The environment does change (out of your control).

Perhaps helpful to remember that most evolutive changes result in failure and that the efficient crowd does not always know where it's going.

 

At the end of the line, fiduciary or not, this is a personal decision.

 

+1

 

Very good points.

 

- Investing is a continuously evolving process. The same thing that worked in 40s would not work in 60s and so on. We see that with Net-Nets, high dividend yield, low PE strategies, etc. What was difficult in one era either because of informational advantage or available knowledge, becomes easier to execute in the next era which makes the past strategies lose their effectiveness.

 

- Graham in fact is also evolving he keeps tinkering with his recommendations in each edition of his book. He probably would have been very successful in this era as well.

 

Vinod

[vinod1]

Buffett made the following comments in the Annual Meeting last year I think:

 

I don’t think it’s sufficiently appreciated—I believe that, probably, the five largest American companies by market cap—on a given day, they have a market value of over $2.5 trillion. That $2.5 trillion is a big number. That’s probably getting up close to 10% of the whole market cap of the United States. If you take those five companies, essentially, you could run them with no equity capital at all, none. That is a very different world than when Andrew Carnegie was building a steel mill and then using their earnings to build another steel mill and getting very rich in the process, or Rockefeller was building refineries and buying tank cars.

 

Generally speaking, for a very long time in capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example. That world has really changed and I don’t think people quite appreciate the difference.

 

Our world was built and when we first looked at it, our US, our capitalist system, basically, was built on tangible assets and reinvestment and all that sort of thing. And a lot of innovation and invention to go with it, but this is so much better if you happen to be good at it. To essentially be able to build hundreds of billions of market value without really needing any capital, that is a different world than what existed in the past, and I think it’s a world that’s likely to continue. I don’t think the trend in that direction is over by a long shot.

 

Besides infatuation with Macro, I think many value investors have paid no attention to the the change that Buffett was talking above. These two along with the growth of Indexing/ETF's, I think are the main sources of underperformance for value investors.

 

Vinod

 

[tylerdurden]

I respect Chou and follow him on a regular basis as much as possible. Having said that, I think he could be a little bit more honest with himself and his investors. Let's look at his Sears investment for example: I think at this point, most observes would say a bankruptcy is in the cards and it is a matter of time only however he has been writing all the same thoughts about this investments for the last I don't know how many letters. "We bought it at an expensive price but the idea still holds etc etc." Come on man, I saw this with Berkowitz, Pabrai and probably others. It is hard to manage other peoples' money I guess as some of you guys know better. It is really hard to admit mistakes straight it seems. Warren Buffett does it pretty well but not all managers have the same type of reputation which gives him the luxury to be more honest...

 

Anyways, I like him and we all know that not all of your ideas will work even in 10 years timeframe, especially last ten years but he can and should be more honest I think overall.

[Jurgis]

After you have done this for a few years, reading up on what you have written would be a good source material for comedy. And it would also help in not taking macro seriously.

 

It's also possible to look at CoBF Macro threads a year or two later and read what you or others have written there couple years ago. Pretty good source material too.  8)

 

 

Not that my company-specific writings from past years lack comedy material...

[Cigarbutt]

Buffett made the following comments in the Annual Meeting last year I think:

 

I dont think its sufficiently appreciatedI believe that, probably, the five largest American companies by market capon a given day, they have a market value of over $2.5 trillion. That $2.5 trillion is a big number. Thats probably getting up close to 10% of the whole market cap of the United States. If you take those five companies, essentially, you could run them with no equity capital at all, none. That is a very different world than when Andrew Carnegie was building a steel mill and then using their earnings to build another steel mill and getting very rich in the process, or Rockefeller was building refineries and buying tank cars.

 

Generally speaking, for a very long time in capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example. That world has really changed and I dont think people quite appreciate the difference.

 

Our world was built and when we first looked at it, our US, our capitalist system, basically, was built on tangible assets and reinvestment and all that sort of thing. And a lot of innovation and invention to go with it, but this is so much better if you happen to be good at it. To essentially be able to build hundreds of billions of market value without really needing any capital, that is a different world than what existed in the past, and I think its a world thats likely to continue. I dont think the trend in that direction is over by a long shot.

 

Besides infatuation with Macro, I think many value investors have paid no attention to the the change that Buffett was talking above. These two along with the growth of Indexing/ETF's, I think are the main sources of underperformance for value investors.

 

Vinod

 

 

Interesting insights.

Some things change.

Thinking about this thread and Mr. Chou, isn't the execution of a suboptimal strategy better than an optimal strategy that you can't execute?

I would say that Mr. Chou has clearly laid out his investment process. One could argue that he could have closed his funds a few years ago when at the peak, from his perspective. But, then, who would do that? Perhaps somebody who could spot the intangibles embedded in the newspaper business when it was available at discount prices and during inflationary times.

 

A word about the "unrecognized" value of intangible assets now and going forward. Asset-light businesses have accomplished a lot and this is only the beginning (big data analytics and AI). However, when looking at the large caps that Mr. Buffett refers too, I would submit that, mostly, the firms have focused on consumer conveniences. Nothing wrong with that but somehow the rise of FANG/FAANG stocks has not translated into a satisfying capex profile or real productivity growth. For instance, AMZN (which is more than retailing, I know) has been able to capture the value in connecting two large industries which are themselves asset-heavy and it will be interesting to see the return on capital when tangible investments will be made. The hedonistic improvements are fun but we are not at the stage that Keynes thought would happen with improved standards of living. The rentier is far from being euthanized and most consumers live from paycheque to paycheque. Facebook is great but I would humbly say that we need significant investments in infrastructure, education and in real assets that will incorporate innovation as way to result in real productivity gains. All I'm saying is that, on a relative basis, "investors" may come to appreciate more the value of productive assets (manufacturing and industrial applications) that can efficiently combine labor and capital. That may be even more relevant if the US repatriates some capital intensity.

 

To conclude, perhaps in the same vein as the comment about "stocks are cheap" (if...), interesting to note that, even if Mr. Buffett praises everything that is virtual and digital, most of his investments are still tangible assets with a lot of capital devoted to burdensome, old-fashioned and inflexible asset-heavy assets (utilities, energy, transportation etc). :)

 

Lately, the industries with the highest multiples are those with the lower percentage of physical assets.

I'm long innovation and valuable intangible assets but I'm also long concerning the relatively under-appreciated effects that tangible assets will have on the real economy.

Somehow, the value gap may close.

 

[rb]

Yea.. that Buffett quote from the annual meeting is bullshit and he knows it.

[mhdousa]

And the funds are being liquidated:

https://www.mutualfundobserver.com/discuss/discussion/50315/chou-opportunity-and-chou-income-funds-to-liquidate