Topic 6: Beyond Buffett

Beyond BuffettBeyond Buffett Buffett – circle of competenceBuffett – circle of competence

Not much in technology Not much in technology

Until recently little international Until recently little international

Few small companiesFew small companies

Can’t invest here? Can’t invest here? Similar concepts still arise with peersSimilar concepts still arise with peers

““Good businesses that generate economies Good businesses that generate economies

run by smart managers available at cheap run by smart managers available at cheap

pricesprices

Christopher DavisChristopher Davis Davis Advisors – 10 year performanceDavis Advisors – 10 year performance

11.7% vs. 9.1% for S&P11.7% vs. 9.1% for S&P Likes depressed large caps and Likes depressed large caps and

insuranceinsurance Summer – Thrilled at P&G and WMTSummer – Thrilled at P&G and WMT Said of him, “Besides a superb track Said of him, “Besides a superb track

record, Davis has integrity.”record, Davis has integrity.” Recent picks:Recent picks:

MSFT – Market leader and biggest launch in 10 MSFT – Market leader and biggest launch in 10 yearsyears

News Corp – Priced like old media, but positioned News Corp – Priced like old media, but positioned for digital agefor digital age

John Neff (retired)John Neff (retired) 1964-95 Vanguard Windsor 5546% 1964-95 Vanguard Windsor 5546%

returnreturn Bought Citicorp after S&L crisisBought Citicorp after S&L crisis Looks for stocks depressed for no good Looks for stocks depressed for no good

reasonreason Looks for 40 – 50% discount to marketLooks for 40 – 50% discount to market Likes dividends → certainty and Likes dividends → certainty and

consistencyconsistency Would favor:Would favor:

Bank America – P/E 40% below market and Bank America – P/E 40% below market and total return more than double the markettotal return more than double the market

David DremanDavid Dreman Dreman Value since ’88 – 14% vs. 11.6%Dreman Value since ’88 – 14% vs. 11.6% ““Stay away from the trading trap and stick Stay away from the trading trap and stick

to fundamentals. Buy stocks that are to fundamentals. Buy stocks that are cheap and whose outlooks are good. cheap and whose outlooks are good. Ignore the weekly wiggles in prices. Think Ignore the weekly wiggles in prices. Think of long-term risks and long-term rewards.”of long-term risks and long-term rewards.”

Likes:Likes: Chubb – well managed insurance companyChubb – well managed insurance company Pfizer – 13 times earnings and good dividendPfizer – 13 times earnings and good dividend United Health – “Knocked down after disclosure United Health – “Knocked down after disclosure

of CEO pay, but otherwise is solid company” of CEO pay, but otherwise is solid company”

Wally WeitzWally Weitz Since 1983 – 15.4% vs. 14% S&PSince 1983 – 15.4% vs. 14% S&P ““Smaller” cap than BuffettSmaller” cap than Buffett Like BuffettLike Buffett

Both in Omaha and attribute style strongly to Both in Omaha and attribute style strongly to Ben Graham’s Margin of SafetyBen Graham’s Margin of Safety

Looks for businesses generating excess cash Looks for businesses generating excess cash and have honest managersand have honest managers

But, “Smaller” cap than BuffettBut, “Smaller” cap than Buffett Less complex, less bureaucratic, less covered Less complex, less bureaucratic, less covered

and more accessibleand more accessible Low liquidity (lower turnover)Low liquidity (lower turnover) Higher margin of safetyHigher margin of safety

Wally Weitz – cont’dWally Weitz – cont’d ““Our primary value-added as Our primary value-added as

investment mangers may be our investment mangers may be our willingness to make contrary bets when willingness to make contrary bets when our clients are most fearful and to take our clients are most fearful and to take chips off the table when investors are chips off the table when investors are overly-enthusiastic.”overly-enthusiastic.”

Likes Liberty InteractiveLikes Liberty Interactive “ “It sells at a substantial discount to the It sells at a substantial discount to the

underlying value of its assets and we underlying value of its assets and we believe Malone should be able to both grow believe Malone should be able to both grow net asset value and shrink the discount at net asset value and shrink the discount at which the stock sells.”which the stock sells.”

Mason HawkinsMason Hawkins Longleaf Partners – 10 year 13.7% vs. Longleaf Partners – 10 year 13.7% vs.

11%11% More international focus, but same More international focus, but same

songsong ““Consider the quality of business and Consider the quality of business and

the managements that run them.”the managements that run them.” ““Focus on securities of companies Focus on securities of companies

believed to have unrecognized intrinsic believed to have unrecognized intrinsic value and the potential to grow their value and the potential to grow their economic worth.”economic worth.”

Mason Hawkins – cont’dMason Hawkins – cont’d ChallengesChallenges

Different accounting standardsDifferent accounting standards Currency/Country riskCurrency/Country risk Difficult to “tire kick” Difficult to “tire kick”

LikesLikes DELL – International opportunities and DELL – International opportunities and

management stock ownershipmanagement stock ownership

Bill MillerBill Miller Legg Mason Value – Beat S&P 15 Legg Mason Value – Beat S&P 15

yearsyears Despite “Value” – some bets on pricey Despite “Value” – some bets on pricey

techtech Recent Sherwin-Williams potential Recent Sherwin-Williams potential

liabilityliability LikesLikes

DELL – Lowest cost provider w/ room to growDELL – Lowest cost provider w/ room to grow SEARS – put it away and forget about itSEARS – put it away and forget about it United Health & AetnaUnited Health & Aetna

Bill Miller – cont’dBill Miller – cont’d ““We focus on the assessment of intrinsic value and We focus on the assessment of intrinsic value and

the risk adjusted return potential. We are long the risk adjusted return potential. We are long term investors and not traders. When our term investors and not traders. When our approach leads to underperformance, there is approach leads to underperformance, there is increasing pressure to change or do something increasing pressure to change or do something different. It is our willingness to own securities different. It is our willingness to own securities which other people regard as wrong which which other people regard as wrong which historically has been part of the long term success historically has been part of the long term success of the fund.” of the fund.”

Differs from Buffett on TechDiffers from Buffett on Tech ““These companies represent superior economic These companies represent superior economic

franchises with the ability to earn above cost of franchises with the ability to earn above cost of capital as far as the eye can see. Price and capital as far as the eye can see. Price and value are two different things. We estimate the value are two different things. We estimate the intrinsic business value of Yahoo, Amazon and intrinsic business value of Yahoo, Amazon and eBay at more than double the current price.” eBay at more than double the current price.”

Bill Miller – cont’dBill Miller – cont’d Tech problemsTech problems

High P/E – “value does not depend on High P/E – “value does not depend on price, it depends on future cash flows”price, it depends on future cash flows”

Young – “Most value future based on Young – “Most value future based on past. Just need to envision the future.”past. Just need to envision the future.”

““The trick is to value the future cash The trick is to value the future cash flows rationally and buy them at big flows rationally and buy them at big discount.”discount.”

Unstable growth – Buffett keeps error Unstable growth – Buffett keeps error rate low. – Miller willing to accept higher rate low. – Miller willing to accept higher error rate if margin of safety is higher.error rate if margin of safety is higher.

Hagstrom has good case study of AOLHagstrom has good case study of AOL

Eddie LampertEddie Lampert ESL Investments (hedge fund)– since ESL Investments (hedge fund)– since

1988 30%/year 1988 30%/year Buys cheap stocks and holdsBuys cheap stocks and holds Calls himself “concentrated value”Calls himself “concentrated value” ““Eats his own cooking” Eats his own cooking” Employs only 20 peopleEmploys only 20 people Like Fisher side of Buffett “picks Like Fisher side of Buffett “picks

stock by immersion”stock by immersion” But, hands on = Doesn’t leave But, hands on = Doesn’t leave

managers alonemanagers alone

Continuing themesContinuing themes Circle of competence – only tackle Circle of competence – only tackle

what you understandwhat you understand Focused investing – invest Focused investing – invest

meaningful amount meaningful amount Patience – wait for the “fat pitch” Patience – wait for the “fat pitch” Buy at significant discount – “cigar Buy at significant discount – “cigar

butt” and price < intrinsic valuebutt” and price < intrinsic value Trustworthy and competent Trustworthy and competent

managementmanagement Competitive advantage.Competitive advantage. See ya in Omaha.See ya in Omaha.