Topic 6: Beyond Buffett

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Topic 6 Beyond Buffett
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Beyond Buffett

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

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Christopher Davis

• Davis Advisors 10 year performance11.7 vs.
  9.1 for SP
• Likes depressed large caps and insurance
• Summer Thrilled at PG and WMT
• Said of him, Besides a superb track record,
  Davis has integrity.
• Recent picks
• MSFT Market leader and biggest launch in 10
  years
• News Corp Priced like old media, but positioned
  for digital age

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John Neff (retired)

• 1964-95 Vanguard Windsor 5546 return
• Bought Citicorp after SL crisis
• Looks for stocks depressed for no good reason
• Looks for 40 50 discount to market
• Likes dividends ? certainty and consistency
• Would favor
• Bank America P/E 40 below market and total
  return more than double the market

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David Dreman

• 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.
• Likes
• Chubb well managed insurance company
• Pfizer 13 times earnings and good dividend
• United Health Knocked down after disclosure of
  CEO pay, but otherwise is solid company

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Wally Weitz

• Since 1983 15.4 vs. 14 SP
• Smaller cap than Buffett
• Like Buffett
• Both in Omaha and attribute style strongly to Ben
  Grahams Margin of Safety
• Looks for businesses generating excess cash and
  have honest managers
• But, Smaller cap than Buffett
• Less complex, less bureaucratic, less covered and
  more accessible
• Low liquidity (lower turnover)
• Higher margin of safety

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Wally Weitz contd

• 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
• 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.

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Mason Hawkins

• Longleaf Partners 10 year 13.7 vs. 11
• More international focus, but same song
• 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.

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Mason Hawkins contd

• Challenges
• Different accounting standards
• Currency/Country risk
• Difficult to tire kick
• Likes
• DELL International opportunities and management
  stock ownership

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Bill Miller

• Legg Mason Value Beat SP 15 years
• Despite Value some bets on pricey tech
• Recent Sherwin-Williams potential liability
• Likes
• DELL Lowest cost provider w/ room to grow
• SEARS put it away and forget about it
• United Health Aetna

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Bill Miller contd

• 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
• 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.

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Bill Miller contd

• Tech problems
• 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.
• 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.
• Hagstrom has good case study of AOL

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Eddie Lampert

• ESL Investments (hedge fund) since 1988 30/year
  
• Buys cheap stocks and holds
• Calls himself concentrated value
• Eats his own cooking
• Employs only 20 people
• Like Fisher side of Buffett picks stock by
  immersion
• But, hands on Doesnt leave managers alone

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Continuing themes

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