Friday, January 26, 2007

Letters, letters, and more letters

As we mentioned in our most recent post, the start of the new year is prime time for making New Year's Resolutions. It also happens to be prime time for investment managers' fourth quarter commentaries.

We'll start with Ron Muhlenkamp of Muhlenkamp & Company, whose letter focuses primarily on expecations for the economy and market in 2007. Muhlenkamp is looking for a soft-landing until the spring, when he sees the onset of an economic expansion. Even better than the letter is the attached Q&A from a November investment seminar that goes through what the firm looks for in its holdings; discusses its views for the homebuilding, technology, and pharmaceutical industries; and touches on the hot-button issues of outsourcing and executive compensation.
What I have learned over the years is that if you have good companies at good values, sooner or later, somebody will come along and buy you out ... whatever method buys us out doesn't matter. As long as we've got good companies at cheap prices, sooner or later, someone will bid up the price.
Next, the folks over at Tilson who attribute a good portion of the performance in their Focus Fund to avoiding losses, emphasizing that "It is our nature to focus on playing defense by only investing in situations in which we think the risk of permanent capital loss is very limited". They also touch on their selling philosophy, outlining the four factors that they weigh when deciding to exit a position:
1) If a stock has risen to intrinsic value.
2) If they find a better investment.
3) If the story changes materially in a negative way.
4) To balance their portfolio.
Good ideas to keep in mind, especially since so much of the literature and efforts are often focused on stock picking and buying, without considering that exiting at the right time is just as important, if not more so.

The gents at Tweedy, Browne comment at length on the world's position "awash in a sea of liquidity" which has stimulated demand, driven up asset prices, reduced volatility, and sent risk premiums into the ground. Their opinion? It's not time to buy now - they are remaining cautious.
In general, as value investors, we tend to add the most value when we are being well compensated for the risks we are bearing. This is not one of those times ... bargains still remain scarce.
Backing up Tweedy, Browne's claim is Wally Weitz at Weitz Funds, whose letter starts with thoughts on the "changing changelessness" of human nature, pointing out that regardless of what happens in the world, "short-term thinking leads to alternating bouts of fear and greed". He then goes on to look to buying opportunities going forward which are, in his opinion, not very good.
So, what next? There have only been a few times when stocks were so cheap that good returns seems assured - and those times were so scary that it was not clear that stocks would not fall a lot more before finally doing well. Stocks in general don't seem particularly cheap today.
Oh, those value investors. It's just optimism around every corner with them!

Thought you might like this post, backtests Buffett's holdings to 2000. Going to redo it with a bunch of other individual hedge funds (let me know if you have any of particular interest). . .

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