Topic 6: Beyond Buffett

Beyond Buffett Buffett – circle of competence Buffett – circle of competence Not much in technology Not much in technology Until recently little international Until recently little international Few small companies Few small companies Can’t invest here? Can’t invest here? Similar concepts still arise with peers Similar concepts still arise with peers “Good businesses that generate economies run by smart managers available at cheap prices “Good businesses that generate economies run by smart managers available at cheap prices

Christopher Davis Davis Advisors – 10 year performance 11.7% vs. 9.1% for S&P Davis Advisors – 10 year performance 11.7% vs. 9.1% for S&P Likes depressed large caps and insurance Likes depressed large caps and insurance Summer – Thrilled at P&G and WMT Summer – Thrilled at P&G and WMT Said of him, “Besides a superb track record, Davis has integrity.” Said of him, “Besides a superb track record, Davis has integrity.” Recent picks: Recent picks: MSFT – Market leader and biggest launch in 10 years MSFT – Market leader and biggest launch in 10 years News Corp – Priced like old media, but positioned for digital age News Corp – Priced like old media, but positioned for digital age

John Neff (retired) Vanguard Windsor 5546% return Vanguard Windsor 5546% return Bought Citicorp after S&L crisis Bought Citicorp after S&L crisis Looks for stocks depressed for no good reason Looks for stocks depressed for no good reason Looks for 40 – 50% discount to market Looks for 40 – 50% discount to market Likes dividends → certainty and consistency Likes dividends → certainty and consistency Would favor: Would favor: Bank America – P/E 40% below market and total return more than double the market Bank America – P/E 40% below market and total return more than double the market

David 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 to fundamentals. Buy stocks that are cheap and whose outlooks are good. Ignore the weekly wiggles in prices. Think of long-term risks and long-term rewards.” “Stay away from the trading trap and stick to fundamentals. Buy stocks that are cheap and whose outlooks are good. Ignore the weekly wiggles in prices. Think of long-term risks and long-term rewards.” Likes: Likes: Chubb – well managed insurance company Chubb – well managed insurance company Pfizer – 13 times earnings and good dividend Pfizer – 13 times earnings and good dividend United Health – “Knocked down after disclosure of CEO pay, but otherwise is solid company” United Health – “Knocked down after disclosure of CEO pay, but otherwise is solid company”

Wally Weitz Since 1983 – 15.4% vs. 14% S&P Since 1983 – 15.4% vs. 14% S&P “Smaller” cap than Buffett “Smaller” cap than Buffett Like Buffett Like Buffett Both in Omaha and attribute style strongly to Ben Graham’s Margin of Safety Both in Omaha and attribute style strongly to Ben Graham’s Margin of Safety Looks for businesses generating excess cash and have honest managers Looks for businesses generating excess cash and have honest managers But, “Smaller” cap than Buffett But, “Smaller” cap than Buffett Less complex, less bureaucratic, less covered and more accessible Less complex, less bureaucratic, less covered and more accessible Low liquidity (lower turnover) Low liquidity (lower turnover) Higher margin of safety Higher margin of safety

Wally Weitz – cont’d “Our primary value-added as investment mangers may be our willingness to make contrary bets when our clients are most fearful and to take chips off the table when investors are overly-enthusiastic.” “Our primary value-added as investment mangers may be our willingness to make contrary bets when our clients are most fearful and to take chips off the table when investors are overly-enthusiastic.” Likes Liberty Interactive Likes Liberty Interactive “It sells at a substantial discount to the underlying value of its assets and we believe Malone should be able to both grow net asset value and shrink the discount at which the stock sells.” “It sells at a substantial discount to the underlying value of its assets and we believe Malone should be able to both grow net asset value and shrink the discount at which the stock sells.”

Mason Hawkins Longleaf Partners – 10 year 13.7% vs. 11% Longleaf Partners – 10 year 13.7% vs. 11% More international focus, but same song More international focus, but same song “Consider the quality of business and the managements that run them.” “Consider the quality of business and the managements that run them.” “Focus on securities of companies believed to have unrecognized intrinsic value and the potential to grow their economic worth.” “Focus on securities of companies believed to have unrecognized intrinsic value and the potential to grow their economic worth.”

Mason Hawkins – cont’d Challenges Challenges Different accounting standards Different accounting standards Currency/Country risk Currency/Country risk Difficult to “tire kick” Difficult to “tire kick” Likes Likes DELL – International opportunities and management stock ownership DELL – International opportunities and management stock ownership

Bill Miller Legg Mason Value – Beat S&P 15 years Legg Mason Value – Beat S&P 15 years Despite “Value” – some bets on pricey tech Despite “Value” – some bets on pricey tech Recent Sherwin-Williams potential liability Recent Sherwin-Williams potential liability Likes Likes DELL – Lowest cost provider w/ room to grow DELL – Lowest cost provider w/ room to grow SEARS – put it away and forget about it SEARS – put it away and forget about it United Health & Aetna United Health & Aetna

Bill Miller – cont’d “We focus on the assessment of intrinsic value and the risk adjusted return potential. We are long term investors and not traders. When our approach leads to underperformance, there is increasing pressure to change or do something different. It is our willingness to own securities which other people regard as wrong which historically has been part of the long term success of the fund.” “We focus on the assessment of intrinsic value and the risk adjusted return potential. We are long term investors and not traders. When our approach leads to underperformance, there is increasing pressure to change or do something different. It is our willingness to own securities which other people regard as wrong which historically has been part of the long term success of the fund.” Differs from Buffett on Tech Differs from Buffett on Tech “These companies represent superior economic franchises with the ability to earn above cost of capital as far as the eye can see. Price and value are two different things. We estimate the intrinsic business value of Yahoo, Amazon and eBay at more than double the current price.” “These companies represent superior economic franchises with the ability to earn above cost of capital as far as the eye can see. Price and value are two different things. We estimate the intrinsic business value of Yahoo, Amazon and eBay at more than double the current price.”

Bill Miller – cont’d Tech problems Tech problems High P/E – “value does not depend on price, it depends on future cash flows” High P/E – “value does not depend on price, it depends on future cash flows” Young – “Most value future based on past. Just need to envision the future.” Young – “Most value future based on past. Just need to envision the future.” “The trick is to value the future cash flows rationally and buy them at big discount.” “The trick is to value the future cash flows rationally and buy them at big discount.” Unstable growth – Buffett keeps error rate low. – Miller willing to accept higher error rate if margin of safety is higher. Unstable growth – Buffett keeps error rate low. – Miller willing to accept higher error rate if margin of safety is higher. Hagstrom has good case study of AOL Hagstrom has good case study of AOL

Eddie Lampert ESL Investments (hedge fund)– since %/year ESL Investments (hedge fund)– since %/year Buys cheap stocks and holds Buys cheap stocks and holds Calls himself “concentrated value” Calls himself “concentrated value” “Eats his own cooking” “Eats his own cooking” Employs only 20 people Employs only 20 people Like Fisher side of Buffett “picks stock by immersion” Like Fisher side of Buffett “picks stock by immersion” But, hands on = Doesn’t leave managers alone But, hands on = Doesn’t leave managers alone

Continuing themes Circle of competence – only tackle what you understand Circle of competence – only tackle what you understand Focused investing – invest meaningful amount Focused investing – invest meaningful amount Patience – wait for the “fat pitch” Patience – wait for the “fat pitch” Buy at significant discount – “cigar butt” and price < intrinsic value Buy at significant discount – “cigar butt” and price < intrinsic value Trustworthy and competent management Trustworthy and competent management Competitive advantage. Competitive advantage. See ya in Omaha. See ya in Omaha.