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Chou vs Berkowitz


mhdousa
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2 contrarians.

 

The US vs Canadian mutual fund managers of the decade.

 

You have one to give your money to for the next 30 years (in their available open-end mutual fund vehicles).

 

Who do you pick and why?

 

This is a real exercise in that, while I personally manage my non-qualified account, I prefer to invest my retirement money with managers and am trying to decide between Fairholme and Chou America.

 

-M

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2 contrarians.

 

The US vs Canadian mutual fund managers of the decade.

 

You have one to give your money to for the next 30 years (in their available open-end mutual fund vehicles).

 

Who do you pick and why?

 

This is a real exercise in that, while I personally manage my non-qualified account, I prefer to invest my retirement money with managers and am trying to decide between Fairholme and Chou America.

 

-M

 

Both are very good managers.  You have to be willing to trust them and allow them to work though.  Alot of Fairholme investors bailed, many near the bottom, because they didn't trust Berkowitz's judgement and analysis.  My family knows if I die tomorrow, then put half of our money with Francis.  I know him.  I trust him more than anyone else in this industry.  Prem trusts him intimately.  When people talk about managers who would fit in at Berkshire or Hamblin-Watsa, without a doubt I would put Francis on that list...skill, honesty, ethics, and love for what he does...if he applied to Buffett, he would be hired on the spot.  I'm also running a fund today because of his friendship and support, and because he's a great role model for any fund manager! 

 

His results can be a little more volatile than what you may like.  His behavior with his fund is more straight forward, Ben Graham, value investments rather than just contrarian.  He buys because things are cheap, like Buffett, and doesn't worry about the world ending tomorrow or a Depression that people may fear is coming.  He doesn't use leverage.  He's refunded parts of his management fees in years he wasn't happy with his results.  And finally, to quote Good Will Hunting, "My boy's wicked smart!"  Cheers!

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I'm biased, but I do think in this case the difference in AUM is an important consideration. It is much more difficult to outperform with $10Bn than with $1Bn. Haven't checked the exact numbers for quite a while, but there is a big difference.

 

 

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There is never an apples to apples comparison in the money management business (AUM, fees, leverage, concentration, mandates, ...) but Chou vs. Berkowitz is with the assumption Chou is the best in Canada appears incorrect to me.

 

Compare Sprott Canadian Equity return over the last 14 1/2 years vs Chou and there is absolutely no comparison.  Chou is a fine manager but Sprott has absolutely killed the returns Chou has achieved.

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There is never an apples to apples comparison in the money management business (AUM, fees, leverage, concentration, mandates, ...) but Chou vs. Berkowitz is with the assumption Chou is the best in Canada appears incorrect to me.

 

Compare Sprott Canadian Equity return over the last 14 1/2 years vs Chou and there is absolutely no comparison.  Chou is a fine manager but Sprott has absolutely killed the returns Chou has achieved.

 

33.8% in gold equities, 24.1% in silver bullion, 15% in silver equity, 5.4% in gold bullion,...

 

How good would they have done without the metal bull market? Just something to take into consideration.

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The point is, Sprott has had an amazing ability to be in the right markets at the right time (uranium, precious metals, even tech at times), not over the last 10 or 15 years but over 30 years.  Over 15 years there is no comparison whatsoever with Chou's performance.

 

>>>  How good would they have done without the metal bull market? Just something to take into consideration.

 

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I'll pick Chou, I think he does his homework better and digs in.  I think Berkowiz relies on others too much (perhaps his size), you are still underwater if you bought 5 years ago.

http://finance.yahoo.com/q/bc?s=FAIRX+Basic+Chart&t=my

 

This is true with most financial issues though. Berkowitz has been thrown to the pigs by many because he has the stones to invest in what is truly hated and feared in the markets. Since he is so heavily concentrated in financials (his professed circle of competence), this is bound to happen in such a volatile market. This is why the very long term is the great equalizer in measuring investment returns. I'd not be surprised to see him back on top with the punditry in another year or two. This is to take nothing away from Chou. Their investment styles are very different...

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Hi all -

Thanks for the replies. 

 

Sanj - I agree with you that trust and ethics are huge.  Not that Bruce isn't trustworthy, but I've heard you repeatedly say just how unique Francis is in the industry.

 

Mr. B - AUM is certainly a huge consideration, especially given the timeframe I'm looking at. 

 

Bookie71 - I've heard you mention the underwater after 5 years on a couple threads.  I don't think that's true though.

http://quote.morningstar.com/fund/chart.aspx?t=FAIRX&region=USA&culture=en-US (click on the 5-year tab)

 

Thanks again and I'd love to hear more opinions if people have them.

-M

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Parsad just curious how do you know Chou? I read that he started out as a locksmith and turned a small amount of money to 7 figs in few years.. Is that all accurate? It's an interesting story

 

Any idea how many analysts he works with?

 

Francis is the kindest person I know in the financial industry, and that says alot because I know Prem, Mohnish and Tim McElvaine, and they are also some of the most generous people I know.  But Francis is unique...very unique!  If I were a captain in the investment industry, he is who you hire to be your right hand man.  His honesty is beyond reproach!  And he will never take credit for anything.  Has anyone ever heard from Francis that the CDS idea was his?  Nope!  You heard it from Brian Bradstreet.  We all know how talented the team is at Hamblin-Watsa, but all those principals there hold Francis in very high regard.  That should tell you something.  Everyone else can have Sprott, I'll take Francis.  Cheers!

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Parsad just curious how do you know Chou? I read that he started out as a locksmith and turned a small amount of money to 7 figs in few years.. Is that all accurate? It's an interesting story

 

Any idea how many analysts he works with?

 

Oh yeah sorry, he works with only one analyst...himself!  He and his administrative assistant, Jing, look after $1.2B.  He started as a worker at Bell, where he grew a investment club fund of $50,000 to $1M over five years.  It was then converted to the Chou Funds after he got his CFA.  Fairfax has funds invested in the Chou Funds.  Cheers!

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The point is, Sprott has had an amazing ability to be in the right markets at the right time (uranium, precious metals, even tech at times), not over the last 10 or 15 years but over 30 years.  Over 15 years there is no comparison whatsoever with Chou's performance.

 

>>>  How good would they have done without the metal bull market? Just something to take into consideration.

 

Do you think the ability to market time something like commodities is really a sustainable advantage? Some people have great instincts on macro opportunities (Soros) but it seems like you end up playing a dangerous game by investing in them because you're hoping they'll continue to be able to do something that's just really really hard.

 

I'd rather look at value managers who have an understandable process in place with a great long-term track record.

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Parsad just curious how do you know Chou? I read that he started out as a locksmith and turned a small amount of money to 7 figs in few years.. Is that all accurate? It's an interesting story

 

Any idea how many analysts he works with?

 

Francis is the kindest person I know in the financial industry, and that says alot because I know Prem, Mohnish and Tim McElvaine, and they are also some of the most generous people I know.  But Francis is unique...very unique!  If I were a captain in the investment industry, he is who you hire to be your right hand man.  His honesty is beyond reproach!  And he will never take credit for anything.  Has anyone ever heard from Francis that the CDS idea was his?  Nope!  You heard it from Brian Bradstreet.  We all know how talented the team is at Hamblin-Watsa, but all those principals there hold Francis in very high regard.  That should tell you something.  Everyone else can have Sprott, I'll take Francis.  Cheers!

 

so Prem's CDS idea was Chou's? thats interesting b/c prem is known as a macro guy, and chou value. does Chou make macro calls?

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Parsad just curious how do you know Chou? I read that he started out as a locksmith and turned a small amount of money to 7 figs in few years.. Is that all accurate? It's an interesting story

 

Any idea how many analysts he works with?

 

Francis is the kindest person I know in the financial industry, and that says alot because I know Prem, Mohnish and Tim McElvaine, and they are also some of the most generous people I know.  But Francis is unique...very unique!  If I were a captain in the investment industry, he is who you hire to be your right hand man.  His honesty is beyond reproach!  And he will never take credit for anything.  Has anyone ever heard from Francis that the CDS idea was his?  Nope!  You heard it from Brian Bradstreet.  We all know how talented the team is at Hamblin-Watsa, but all those principals there hold Francis in very high regard.  That should tell you something.  Everyone else can have Sprott, I'll take Francis.  Cheers!

 

so Prem's CDS idea was Chou's? thats interesting b/c prem is known as a macro guy, and chou value. does Chou make macro calls?

 

They were in a Hamblin-Watsa investment meeting back in late 2004 or early 2005, and Prem was asking the team for investment ideas.  Things were over valued and no one had a compelling idea.  Brian and Francis had previously discussed CDS' and no one was throwing any ideas out, so they looked at each other and then said to Prem...there's these credit default swaps!  Actually Francis did try to buy CDS' for the Chou Funds, but had to get regulatory approval as they are mutual funds.  He got approval after a few months, but prices had started to move up already.  Not exactly clear on why he likes RSH, but it is distressed and cash flows are good.  Cheers!

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Parsad just curious how do you know Chou? I read that he started out as a locksmith and turned a small amount of money to 7 figs in few years.. Is that all accurate? It's an interesting story

 

Any idea how many analysts he works with?

 

Oh yeah sorry, he works with only one analyst...himself!  He and his administrative assistant, Jing, look after $1.2B.  He started as a worker at Bell, where he grew a investment club fund of $50,000 to $1M over five years.  It was then converted to the Chou Funds after he got his CFA.  Fairfax has funds invested in the Chou Funds.  Cheers!

 

50k into 1m in 5 years?  Was he using options or some other kind of investment that wasn't more then just common stock?  Was there large additions into the club fund that helped toward the 1m?  Only asking bc my mouth dropped in awe after reading your statement.

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Parsad just curious how do you know Chou? I read that he started out as a locksmith and turned a small amount of money to 7 figs in few years.. Is that all accurate? It's an interesting story

 

Any idea how many analysts he works with?

 

Oh yeah sorry, he works with only one analyst...himself!  He and his administrative assistant, Jing, look after $1.2B.  He started as a worker at Bell, where he grew a investment club fund of $50,000 to $1M over five years.  It was then converted to the Chou Funds after he got his CFA.  Fairfax has funds invested in the Chou Funds.  Cheers!

 

50k into 1m in 5 years?  Was he using options or some other kind of investment that wasn't more then just common stock?  Was there large additions into the club fund that helped toward the 1m?  Only asking bc my mouth dropped in awe after reading your statement.

 

Let me clarify that.  I was describing the fact that he grew the assets to $1M before converting it to the Chou Funds.  There was capital also contributed by the club members over the years.  I believe the actual investment return was something like 50% annualized though, excluding capital contributions.  Not sure what he was doing, but certain it was heavily concentrated and possibly leveraged.  Feel free to ask him at the AGM or dinner this year.  Cheers!

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"Bookie71 - I've heard you mention the underwater after 5 years on a couple threads.  I don't think that's true though.

http://quote.morningstar.com/fund/chart.aspx?t=FAIRX&region=USA&culture=en-US (click on the 5-year tab)

.

I've always wondered whare they get their performance as I put 10,000 in to watch Fairholme (it is easy to see gain or loss, all dividends reinvested) five years ago and it is still less than 10,000.

I had hoped he was one to move our portfolio to, but have decided not to.  Don't say it's "concentrated" as 2/3 my portfolio is in 3 stocks.

 

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I have recently (last Fall) put a good portion of my retirement account with Fairhome.  I think his portfolio has many of the characteristics that Howard Marks hightlights as key to outperform the market, namely: little known or not fully understood, fundamentally questionable on the surface, controversial, unseemly or scary, deemed inappropriate for "respectable" portfolios, unappreciated, unpopular and unloved, trailing record of poor returns and recently the subject of disinvestment, not accumulation.  I probably should have put more in.  I think the most we can ask of these managers is consistency to strategy so we can invest in that way.  Both Fairholme and Chou provide this.  Both Chou and Berkowitz are great analysts and have been right more times then they have been wrong.  An interesting constrast in Berkowitz and Pzena.  Berkowitz stuck to his guns and Pzena changed his concentration strategy at the bottom falling victom to Mr. Market.    These types are not for all investors as some will panic once they see underperformance.  So when I recommend these funds to others, I tell them that this fund is volatile and you should not invest wth money you are going to need in the next 3 to 5 years.  Unfortunately, I did miss out on the rally in some of Farholmes biggest names link SHLD, AIG and BAC as I was invested elsewhere.

 

Packer 

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I have recently (last Fall) put a good portion of my retirement account with Fairhome.  I think his portfolio has many of the characteristics that Howard Marks hightlights as key to outperform the market, namely: little known or not fully understood, fundamentally questionable on the surface, controversial, unseemly or scary, deemed inappropriate for "respectable" portfolios, unappreciated, unpopular and unloved, trailing record of poor returns and recently the subject of disinvestment, not accumulation.  I probably should have put more in.  I think the most we can ask of these managers is consistency to strategy so we can invest in that way.  Both Fairholme and Chou provide this.  Both Chou and Berkowitz are great analysts and have been right more times then they have been wrong.  An interesting constrast in Berkowitz and Pzena.  Berkowitz stuck to his guns and Pzena changed his concentration strategy at the bottom falling victom to Mr. Market.    These types are not for all investors as some will panic once they see underperformance.  So when I recommend these funds to others, I tell them that this fund is volatile and you should not invest wth money you are going to need in the next 3 to 5 years.  Unfortunately, I did miss out on the rally in some of Farholmes biggest names link SHLD, AIG and BAC as I was invested elsewhere.

 

Packer

 

Hi Packer - you elucidated my thoughts much more effectively than I could, and it's exactly why I'm considering each of these managers.

Also, I had asked you about this in your  Exelon thread but you must not have seen it.  Are you adding to your EXC leaps at their current prices?

Thanks.

-M

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I am not adding but may add some 2014 LEAPs as some my other ideas approach fair value.  I don't have as great a record using LEAPs as I have with stocks because of the timing aspect of the trade.  The 2013 LEAPs sure are cheap but will the market realize the value before Jan 2013 is the bigger question given the abundance of NG is NA which is driving down electricity prices.  I thought once the merger arb pressure was gone there would be a jump but I guess I was wrong.  The 2014 LEAPs are more expensive but still have alot of leverage and give you another year for nat gas to recover.

 

Packer

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