Value Investing - do cheap stocks outperform?
Some interesting thoughts on foreign investing from Warren Buffett:
Buffett Speaks
January-26-2007
Buffett then picked up a copy of the 2004 Citigroup Investment Guide to Korean stocks and began flipping through the pages,
Buffett : "A couple of years ago I got this investment guide on Korean stocks. I began looking through. It felt like it was 1974 all over again. Look here at this company... Dehan , I don't know how you pronounce it, Flour Company. It earned 12,879 won previously. It currently had a book value of 200,000 won and was earning 18,000 won. It had traded as high as 43,000 and as low as 35,000 won. At the time, the current price was 40,000 or 2 times earnings. In 4 hours I had found 20 companies like this."
What Buffett said next is critical,
Referring to having found 20 or so companies like Dehan Flour Buffett remarks,
"When you invest like this, you will make money. Sure 1 or 2 companies may turn out to be poor choices, but the others will more than make up for any losses."
It's critical to understand the mental model Buffett has going into these investments in Korea. A portfolio of carefully selected stocks in understandable businesses trading at very attractive valuations generate abnormal returns. While I don't have Buffett's personal investment record, I am certain he was making 40-50% returns in Korea simply by choosing a portfolio of stocks with strong earnings records trading at very low multiples to earnings. Ironically, this model is not new...it was actually revealed by efficient market advocates Fama and French in there three-factor model. Over time, low P/E, low book, small companies tend to outperform. Apply a little more intensity, as Buffett is famous for doing, and you can make lots of money.
One of Buffett's most successful international investments was PetroChina, China's largest oil producer.
Buffett : "The whole company was selling for $35 billion. It was selling for one-fourth of the price of Exxon, but was making profits equal to 80% of Exxon. I was reading the annual report one day and in it I saw a message from the Chairman saying that the company would pay out 45% of its profits as dividends. This was much more than any company like this, and I liked the reserves."
The Chinese government owns 90% of PetroChina, so only 10% was available to outside investors. Even with this lopsided ownership, Buffett liked the company enough to buy 13% (actually 1.3% of 10%, but Buffett likes to joke that the company is owned by him and the Chinese gov't)
"I was considering buying this company, but I was also looking at Yukos in Russia. This was cheap, too. I decided I’d rather be in China than Russia. I liked the investment climate better in China. In July, the owner of Yukos , Mikhail Khodorkovsky (at that time, the richest man in Russia) had breakfast with me and was asking for my consultation if they should expand into New York and if this was too onerous considering the SEC regs. Four months later, Khodorkovsky was in prison. Putin put him in. He took on Putin and lost. His decision on geopolitical thinking was wrong and now the company is finished. Petro China was the superior investment choice. 45% was a crazy amount of dividends to offer but China kept its word. I am never quite as happy as I am in the US, because the laws are more uncertain elsewhere, but the point is to buy things cheap."
Once again, " the point is to buy things cheap." Because the company is not in the U.S., Buffett applies more filters before committing capital.
"So we own 1.3% of this company and it cost us around $400 million. Now it's worth $3 billion."
Look closer and you can see the real value in this investment...the dividend payout. When Buffett made his investment, PetroChina was paying a dividend of close to 9-10% (I know because I bought some shares the minute I heard of Buffett's stake and about 5 minutes of my own research.) At the time the stock price was about $30 per ADR, but Buffett purchased H shares directly in China at a lower price. The stock currently trades at about $125 per ADR and yields 5%...you do the math...about $6 per share on a $30 cost basis or even lower...margin of safety?
Buffett Speaks
January-26-2007
Buffett then picked up a copy of the 2004 Citigroup Investment Guide to Korean stocks and began flipping through the pages,
Buffett : "A couple of years ago I got this investment guide on Korean stocks. I began looking through. It felt like it was 1974 all over again. Look here at this company... Dehan , I don't know how you pronounce it, Flour Company. It earned 12,879 won previously. It currently had a book value of 200,000 won and was earning 18,000 won. It had traded as high as 43,000 and as low as 35,000 won. At the time, the current price was 40,000 or 2 times earnings. In 4 hours I had found 20 companies like this."
What Buffett said next is critical,
Referring to having found 20 or so companies like Dehan Flour Buffett remarks,
"When you invest like this, you will make money. Sure 1 or 2 companies may turn out to be poor choices, but the others will more than make up for any losses."
It's critical to understand the mental model Buffett has going into these investments in Korea. A portfolio of carefully selected stocks in understandable businesses trading at very attractive valuations generate abnormal returns. While I don't have Buffett's personal investment record, I am certain he was making 40-50% returns in Korea simply by choosing a portfolio of stocks with strong earnings records trading at very low multiples to earnings. Ironically, this model is not new...it was actually revealed by efficient market advocates Fama and French in there three-factor model. Over time, low P/E, low book, small companies tend to outperform. Apply a little more intensity, as Buffett is famous for doing, and you can make lots of money.
One of Buffett's most successful international investments was PetroChina, China's largest oil producer.
Buffett : "The whole company was selling for $35 billion. It was selling for one-fourth of the price of Exxon, but was making profits equal to 80% of Exxon. I was reading the annual report one day and in it I saw a message from the Chairman saying that the company would pay out 45% of its profits as dividends. This was much more than any company like this, and I liked the reserves."
The Chinese government owns 90% of PetroChina, so only 10% was available to outside investors. Even with this lopsided ownership, Buffett liked the company enough to buy 13% (actually 1.3% of 10%, but Buffett likes to joke that the company is owned by him and the Chinese gov't)
"I was considering buying this company, but I was also looking at Yukos in Russia. This was cheap, too. I decided I’d rather be in China than Russia. I liked the investment climate better in China. In July, the owner of Yukos , Mikhail Khodorkovsky (at that time, the richest man in Russia) had breakfast with me and was asking for my consultation if they should expand into New York and if this was too onerous considering the SEC regs. Four months later, Khodorkovsky was in prison. Putin put him in. He took on Putin and lost. His decision on geopolitical thinking was wrong and now the company is finished. Petro China was the superior investment choice. 45% was a crazy amount of dividends to offer but China kept its word. I am never quite as happy as I am in the US, because the laws are more uncertain elsewhere, but the point is to buy things cheap."
Once again, " the point is to buy things cheap." Because the company is not in the U.S., Buffett applies more filters before committing capital.
"So we own 1.3% of this company and it cost us around $400 million. Now it's worth $3 billion."
Look closer and you can see the real value in this investment...the dividend payout. When Buffett made his investment, PetroChina was paying a dividend of close to 9-10% (I know because I bought some shares the minute I heard of Buffett's stake and about 5 minutes of my own research.) At the time the stock price was about $30 per ADR, but Buffett purchased H shares directly in China at a lower price. The stock currently trades at about $125 per ADR and yields 5%...you do the math...about $6 per share on a $30 cost basis or even lower...margin of safety?
Following is the full question & answer session with Warren Buffett (you'll find some duplication from what was posted above).
Permanent Value: The Teachings of Warren Buffett
Published Wed, 2007-01-31
Permanent Value: The Teachings of Warren Buffett
Published Wed, 2007-01-31
Benjamin Graham's website : one more !
http://www.investinvalue.com perhaps this wil help somebody !
Nine lessons from nine years of theoretical portfolios
February 14, 2007
By John Dorfman
"In 1997 I began writing a stock market column for Bloomberg. Today I put away my quill to devote full attention to an investment firm I founded in 1999.
For my last column, I'd like to highlight nine lessons that emerged in those nine years."
February 14, 2007
By John Dorfman
"In 1997 I began writing a stock market column for Bloomberg. Today I put away my quill to devote full attention to an investment firm I founded in 1999.
For my last column, I'd like to highlight nine lessons that emerged in those nine years."
Most unfortunate, so much for my ~weekly fix.Taggart wrote:Nine lessons from nine years of theoretical portfolios
"In 1997 I began writing a stock market column for Bloomberg. Today I put away my quill to devote full attention to an investment firm I founded in 1999.For my last column, I'd like to highlight nine lessons that emerged in those nine years."
POSTED ON 21/02/07
He chooses the best of the bargain bin
Francis Chou's bottom-fishing puts him among top stock and bond investors
ANDREW ALLENTUCK
Special to The Globe and Mail
He is one of Canada's most successful mutual fund managers and also one of the most modest. At the age of 51, Francis Chou is in charge of $1.2-billion of other people's money. He is both a top stock picker and a record-setting bond manager.
He chooses the best of the bargain bin
Francis Chou's bottom-fishing puts him among top stock and bond investors
ANDREW ALLENTUCK
Special to The Globe and Mail
He is one of Canada's most successful mutual fund managers and also one of the most modest. At the age of 51, Francis Chou is in charge of $1.2-billion of other people's money. He is both a top stock picker and a record-setting bond manager.
His Associates and RRSP funds also have one of the best track records of equity funds for having low drawdowns (14 - 16% max) during the downturns in the last ten years. You can check at the Fundlibrary site.
My stake in his funds is the main reason I show nearly 9% in cash when I do a Morningstar analysis!
BTW he is the deepest of value managers yet shows the lowest risk. Kind of conflicts with a thread I see elsewhere...
My stake in his funds is the main reason I show nearly 9% in cash when I do a Morningstar analysis!
BTW he is the deepest of value managers yet shows the lowest risk. Kind of conflicts with a thread I see elsewhere...
I wonder if the "low drawdown" and low risk is related to the large cash holdings ...?brian3 wrote:His Associates and RRSP funds also have one of the best track records of equity funds for having low drawdowns (14 - 16% max) during the downturns in the last ten years...
My stake in his funds is the main reason I show nearly 9% in cash when I do a Morningstar analysis!
BTW he is the deepest of value managers yet shows the lowest risk.
And meanwhile, while we wait for the next "drawdown" (which is when?), you are paying an MER of 1.74% (on top of the FE load) and suffering a return drag for the privilege of holding cash and dampening volatility- when you could just hold the cash directly for much lower cost ...
Oh yes, I'm aware of his past returns- but that doesn't change the point of my question: large cash holdings are certainly- necessarily- part of the reason for "lower drawdown" and "lower risk", yet unitholders are potentially paying a large opportunity cost for those benefits. If Chou is as good as the publicity (which he may or may not be, I don't know, but that is not the point)- then imagine the returns you would earn if the fund was fully invested?brian3 wrote:Yogi, maybe you should read the article and look at the returns achieved while holding all that cash
I was simply pointing out that the benefits you were trumpeting do not come cost free- and indeed, paradoxically, the better Chou is in reality, the higher price you are paying for all that AUM in cash ... when you could hold it yourself much more cheaply.
No trumpeting - just the facts, Yogi. Obviously holding a large cash position is detrimental to achieving even higher returns than the current ones which are already quite respectable. Chou has stated repeatedly that he is currently having problems finding the value stocks he seeks and will hold large cash until they become available. I have no way of knowing if he has held such high ratios before, maybe another contributor here can help.
Yogi,NormR wrote:
I'd rather not see that thread invade this one. A suggestion only.
It seems to me that Norm politely asked you a few days not to invade this thread. Now you're back again. What is it with you? So you can stir up some more trouble. When I look up at the Financial Webring Forum title, I see a DIY with a red ring surrounding it. That means DIY in all it's many choices. If certain people can't accept that, and all they're going to do is regurgitate the mantra of efficient markets, in every damn investment thread, then there's no point in me hanging around here any longer.
Oh, I see- all views are permitted, so long as they agree with yours. Otherwise, questions are automatically branded as "stirring up trouble", the better to stifle debate.Taggart wrote:It seems to me that Norm politely asked you a few days not to invade this thread. Now you're back again. What is it with you? So you can stir up some more trouble. When I look up at the Financial Webring Forum title, I see a DIY with a red ring surrounding it. That means DIY in all it's many choices. If certain people can't accept that, and all they're going to do is regurgitate the mantra of efficient markets, in every damn investment thread, then there's no point in me hanging around here any longer.
Did you actually bother to read my posts today before mounting up and charging? If you had, you might have- shockingly!- discovered that they have absolutely nothing to do with "efficient markets", and a lot more to do with costs (and brian3 was answering my points effectively, in any case). Are costs also a no-go issue for you?
Your haste in attacking betrays insecurity- are you really that uncomfortable with any hint of dissent from your cherished orthodoxy?
But it is of course always OK with you when your hero Norm "invades" indexing threads to "regurgitate the mantra" of "value"-based stock picking in the name of "stirring the pot". Double standards? What is it with you?
That is a good idea, brian3, but there really is no need. Despite Taggart's misapprehension, my only point about the Chou funds was the extent of the cash holdings and the consequences that flow from that- nothing to do with indexing, efficient (or not) markets, etc. Indeed, I know very little about the funds, except by vague reputation, which is the reason I was somewhat shocked to read your comment on the proportion of cash in your portfolio!brian3 wrote:Moderator, why not migrate this latter part of the thread over to a restart of an earlier thread titled "Chou F Series". It may help cool the spat. Could maybe retitle "Deep Value Funds".
Your point that "Chou has stated repeatedly that he is currently having problems finding the value stocks he seeks and will hold large cash until they become available" is the best answer we are likely to have about the whys and wherefores of the cash position for now. The implications of large cash positions in mutual funds can be the subject of another thread at some point, perhaps in the "Funds" forum. In any case, if you are comfortable (and the MER is certainly much lower than most such funds), then nothing more need be said for now. I wish you (and Taggart, if he is also a Chou fund investor) continued great returns going forward!
- Bylo Selhi
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We already have one. Just substitute Chou for SarbitYogiBear wrote:The implications of large cash positions in mutual funds can be the subject of another thread at some point, perhaps in the "Funds" forum.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
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brian3, are you somehow under the impression that the moderator spends his every waking moment here? Just curious.brian3 wrote:Moderator? You are going to lose credibility. Add Bylo to list of those needing to cool it.
I think he has a day job, and he also probably takes time away from his computer to do stuff like eat.
Jo Anne I am suitably chastised.
1,2,3,4,5,6,7,8,9,10
I've been investing since 1992 mainly in mutual funds as a DIY. In that time I've made all the usual mistakes plus some, culminating in the tech wreck when I lost about 40% chasing hot performers, later compounded by trying to catch the bounce in fallen funds (it never came).
I am now a recovered investor that uses every scrap of usful info available on the web (FL, WB and now FWB). I am careful to select funds that have a history of not having large losses relative to their returns. Hence my reference to max drawdown at the FL - to me this is a better indicator of ultimate risk than standard deviation. Maybe even too conservative but that's OK. I only have one ETF and that's ishares XFN
I'm now 70 and at this time we have 100% in equities - I have a good DB pension plus CPP etc to support us in case... My target return is > 10% but we have bettered that comfortably with very low downside in the last 3-4 years.
When I look at Chou's funds I find -
- ample returns for my target
- high manager value added (alpha if you believe in it)
- low volatility
- he's quite young and seems 100% committed to his company.
The fact he has high cash has been explained by the shortage of deep value investments. But his performance has remained high despite that and he is positioned to pick up laggards as they appear. Bylo, doesn't look equivalent to Larry Sarbit's situation where he was parlaying with US/CAD currency movements. Anyway I don't mind having my money parking with the likes of Chou, along with Cundill, and Mutual, and PH&N etc.
1,2,3,4,5,6,7,8,9,10
I've been investing since 1992 mainly in mutual funds as a DIY. In that time I've made all the usual mistakes plus some, culminating in the tech wreck when I lost about 40% chasing hot performers, later compounded by trying to catch the bounce in fallen funds (it never came).
I am now a recovered investor that uses every scrap of usful info available on the web (FL, WB and now FWB). I am careful to select funds that have a history of not having large losses relative to their returns. Hence my reference to max drawdown at the FL - to me this is a better indicator of ultimate risk than standard deviation. Maybe even too conservative but that's OK. I only have one ETF and that's ishares XFN
I'm now 70 and at this time we have 100% in equities - I have a good DB pension plus CPP etc to support us in case... My target return is > 10% but we have bettered that comfortably with very low downside in the last 3-4 years.
When I look at Chou's funds I find -
- ample returns for my target
- high manager value added (alpha if you believe in it)
- low volatility
- he's quite young and seems 100% committed to his company.
The fact he has high cash has been explained by the shortage of deep value investments. But his performance has remained high despite that and he is positioned to pick up laggards as they appear. Bylo, doesn't look equivalent to Larry Sarbit's situation where he was parlaying with US/CAD currency movements. Anyway I don't mind having my money parking with the likes of Chou, along with Cundill, and Mutual, and PH&N etc.
- Bylo Selhi
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That was also Larry's excuse.brian3 wrote:The fact he has high cash has been explained by the shortage of deep value investments.
Ditto, Larry -- until ~2003.But his performance has remained high despite that and he is positioned to pick up laggards as they appear.
As I recall he had something like 80% (about two Chous) of the fund's assets sitting in AIC's US$ MMF so US$/CA$ wasn't a factor. In Larry's situation he was earning 1% or 2% on that MMF while US stock markets were dropping by 20% or 30% a year in 2000-2003. So he looked like a hero then simply by sitting on cash. That turned out to be not so smart in 2003+ when US markets recovered.Bylo, doesn't look equivalent to Larry Sarbit's situation where he was parlaying with US/CAD currency movements.
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Sedulously eschew obfuscatory hyperverbosity and prolixity.
Re Sarbit and his cash.
My recollection was that he was looking stellar as a US fund because he held the cash in CAD when it appreciated mucho. In Canadian terms his fund was flat. Not so?
Not Chou's situation, though. But he may be using his bonds' stellar performance to goose up his returns and still calling them "cash". Anyone else know details?
My recollection was that he was looking stellar as a US fund because he held the cash in CAD when it appreciated mucho. In Canadian terms his fund was flat. Not so?
Not Chou's situation, though. But he may be using his bonds' stellar performance to goose up his returns and still calling them "cash". Anyone else know details?