Chou 2016 semi annual report

[Guest 50centdollars]

Chou talks about Valeant, Exco, negative yielding bonds and a test to see if you're a value investor.

 

http://choufunds.com/pdf/2016%20Semi%20Annual%20vFFINAL.pdf

[John Hjorth]

Chou talks about Valeant, Exco, negative yielding bonds and a test to see if you're a value investor.

 

http://choufunds.com/pdf/2016%20Semi%20Annual%20vFFINAL.pdf

 

I really liked the value investor test in the letter. It gave a good laugh. Thanks for posting, 50centdollars.

[stahleyp]

I like Chou a lot but his CHEOX fund has gotten killed. Bottom 100% of category for 1 year, 99% 3 year and 100% for 5 years. Perhaps that means he'll do better going forward though.

[Jurgis]

Chou seems to be a nice guy and clearly Toronto/Canadian crowd likes him, but the performance and portfolio seems to be bad.

 

I guess just shows that being nice and talking good talk is not enough.

[stahleyp]

To Chou's very admirable personality, I believed he waived the management fee due to the less than desirable performance.

[oddballstocks]

Chou seems to be a nice guy and clearly Toronto/Canadian crowd likes him, but the performance and portfolio seems to be bad.

 

I guess just shows that being nice and talking good talk is not enough.

 

Or maybe it is?  He runs funds, has AUM, earns a living with terrible performance.  In some ways he proves the point, if you can tell a good story and pull on those value heart strings performance doesn't matter.

[Pelagic]

The fund decreased its holdings of Berkshire Hathaway by 50% and increased its position in Sears Holdings Corporation by 60%

 

:o This has to be some kind of value investing sacrilege, selling down BRK to buy more SHLD.

[NormR]

Chou seems to be a nice guy and clearly Toronto/Canadian crowd likes him, but the performance and portfolio seems to be bad.

 

I guess just shows that being nice and talking good talk is not enough.

 

Or maybe it is?  He runs funds, has AUM, earns a living with terrible performance.  In some ways he proves the point, if you can tell a good story and pull on those value heart strings performance doesn't matter.

 

The long term numbers for his Canadian flagship fund remain very good.  He also helped make FFH a pot-load of money on the CDS position in 2008.  That and he has been extraordinarily good to the FFH community.  He is well liked for very good reasons.   

[oddballstocks]

Chou seems to be a nice guy and clearly Toronto/Canadian crowd likes him, but the performance and portfolio seems to be bad.

 

I guess just shows that being nice and talking good talk is not enough.

 

Or maybe it is?  He runs funds, has AUM, earns a living with terrible performance.  In some ways he proves the point, if you can tell a good story and pull on those value heart strings performance doesn't matter.

 

The long term numbers for his Canadian flagship fund remain very good.  He also helped make FFH a pot-load of money on the CDS position in 2008.  That and he has been extraordinarily good to the FFH community.  He is well liked for very good reasons. 

 

Norm,

 

Thanks for the comments.  I agree he's well liked.  Maybe the bigger shame is he couldn't turn the CDS trades into trades for his fund.  I don't doubt his talent for making money, he's made a lot of people a boat load.  I think that's apparent by the crowd that follows him in April looking for tips or ideas.  Maybe a mutual fund structure isn't the best for his ideas.

 

Nate

[Parsad]

I think investor expectations are so f**king wacky that investors themselves don't know what they are talking about.  Buffett hasn't beaten the indices over the last 7 years...is he suddenly retarded?  Not good enough?  A has been?  Apparently Chou, Pabrai and Watsa don't know what they are doing anymore!

 

I've made money for my partners since May of 2006...beating the indices over those years by about 3.5% annualized...that's the top 1% of money managers during that span.  Even this year, we are up 9% for the first half, while the market is up 3%, but I've got a partner who is pulling some money because I don't report often enough or consistently enough. 

 

I suppose they would prefer if I expounded on the markets, macroeconomics, stock picks and all of the other value investing bullshit you could put into a letter, instead of making money for them and working my ass off!  Incidentally, that 9% is on a portfolio holding about 45% PDH which hasn't moved...so I've returned about 18% at June 30th on half of the portfolio I could allocate into ideas.  Again, it must be time to part ways with me, since I have no f**king clue what I'm doing.  Maybe Francis should be put out to pasture with me...Pabrai too...he's really sucking ass right now. 

 

Anyone else you guys can think of that are poor performers?  Cheers!

[glorysk87]

I think investor expectations are so f**king wacky that investors themselves don't know what they are talking about.  Buffett hasn't beaten the indices over the last 7 years...is he suddenly retarded?  Not good enough?  A has been?  Apparently Chou, Pabrai and Watsa don't know what they are doing anymore!

 

I've made money for my partners since May of 2006...beating the indices over those years by about 3.5% annualized...that's the top 1% of money managers during that span.  Even this year, we are up 9% for the first half, while the market is up 3%, but I've got a partner who is pulling some money because I don't report often enough or consistently enough. 

 

I suppose they would prefer if I expounded on the markets, macroeconomics, stock picks and all of the other value investing bullshit you could put into a letter, instead of making money for them and working my ass off!  Incidentally, that 9% is on a portfolio holding about 45% PDH which hasn't moved...so I've returned about 18% at June 30th on half of the portfolio I could allocate into ideas.  Again, it must be time to part ways with me, since I have no f**king clue what I'm doing.  Maybe Francis should be put out to pasture with me...Pabrai too...he's really sucking ass right now. 

 

Anyone else you guys can think of that are poor performers?  Cheers!

 

To be fair, and I'll admit I'm not very familiar with Chou, his letter doesn't inspire much confidence. The section on Valeant is almost cringeworthy reading. It reads like it was written by an 18-year-old college student who fancies themself an "investor"...

[Parsad]

I think investor expectations are so f**king wacky that investors themselves don't know what they are talking about.  Buffett hasn't beaten the indices over the last 7 years...is he suddenly retarded?  Not good enough?  A has been?  Apparently Chou, Pabrai and Watsa don't know what they are doing anymore!

 

I've made money for my partners since May of 2006...beating the indices over those years by about 3.5% annualized...that's the top 1% of money managers during that span.  Even this year, we are up 9% for the first half, while the market is up 3%, but I've got a partner who is pulling some money because I don't report often enough or consistently enough. 

 

I suppose they would prefer if I expounded on the markets, macroeconomics, stock picks and all of the other value investing bullshit you could put into a letter, instead of making money for them and working my ass off!  Incidentally, that 9% is on a portfolio holding about 45% PDH which hasn't moved...so I've returned about 18% at June 30th on half of the portfolio I could allocate into ideas.  Again, it must be time to part ways with me, since I have no f**king clue what I'm doing.  Maybe Francis should be put out to pasture with me...Pabrai too...he's really sucking ass right now. 

 

Anyone else you guys can think of that are poor performers?  Cheers!

 

To be fair, and I'll admit I'm not very familiar with Chou, his letter doesn't inspire much confidence. The section on Valeant is almost cringeworthy reading. It reads like it was written by an 18-year-old college student who fancies themself an "investor"...

 

LOL!  I can assure you that Chou is the type of investment manager that Buffett would not hesitate to hire.  He once said that he was looking for someone like Peter Cundill...well Chou embodies everything that Cundill was about.

 

If Berkshire shareholders had no clue who Ajit Jain was, it is likely they would not hire the man who has made more money than anyone outside of Buffett for Berkshire.  Cheers!

[Jurgis]

Parsad, no need to get emotional. Investor judgements come with territory. You can hate your investors as much as you want, but if you manage OPM, you're gonna get judged - fairly or unfairly. If you manage a company, you'll be judged too.

 

And, sorry, but IMO Pabrai is not a great investor.

 

In general though, I think it is going to be very very very hard for people to outperform indexes long term going forward.

 

Sure, maybe next month market crashes, index goes nowhere for next 5 years, all the value investors make out like pigs and then you can judge me.  :D

 

Buffett BTW is very smart in that he shifted into operating businesses rather than just investments. This is potential area where people can outperform by running and growing great businesses. But then running operating businesses is not easy either - right, Parsad?

 

Take care.

[Eye4Valu]

Going to have to agree with Parsad. The mob is fickle. Even members of it that are intelligent.

[stahleyp]

Are markets just so much more efficient now that almost every value manager (or most growth managers) can't beat the index? Or are we in a giant bubble due to QE? Something else? I know value managers under performed significantly back then for several years. A low cost S&P 500 index fund has been a monster the past few years. It's in the top 6% of it's peers for 3 years and top 10% for the past 5 years - even top 21% for 10 years.

[longtermdave]

I don't know why it isn't in the link that started this thread, but in the SEC filings there is an additional note. This is what integrity looks like:

 

Goodwill

We have not done as well as the market for a couple of years and we wanted to take this opportunity to address that:

1. We could explain that we have been managing money for than 30 years and explain that there will always be times where we are going to underperform for a period of time.

2. We could point out that in 2004, we won the Morningstar Manager of the Decade award in Canada.

3. We could write a lengthy tome of more than 100 pages on each of our significant holdings with the goal of demonstrating convincingly why we believe that they are so cheap and why we believe that the market is so wrong.

4. We could write about why we believe that our sound investment principles and a commitment to integrity and being fair to our investors should translate into better results over the long term business cycle.

 

But at the end of the day, when all is said and done, the reality is that we have not done well in the recent past and, particularly, in the previous reporting period and the previous year. So, as a gesture of goodwill and what we believe to be the fairest way to behave, we made a voluntary capital contribution in February 2016 of $918,468 which approximates to the 2015 management fees that we were paid by Chou Opportunity Fund. We have also decided to voluntarily waive the fee going forward for the calendar year 2016.

[Picasso]

It hasn't been a couple years though?  CHOEX has compounded between 2-3% with reinvested dividends for the past ten years.  It's possible that he's about to swing the other way, but I feel like ten years is enough time to judge someones performance?

 

That said I have tremendous respect for his integrity.  It's a rare quality in the investment world.

[KinAlberta]

Are markets just so much more efficient now that almost every value manager (or most growth managers) can't beat the index? Or are we in a giant bubble due to QE? Something else? I know value managers under performed significantly back then for several years. A low cost S&P 500 index fund has been a monster the past few years. It's in the top 6% of it's peers for 3 years and top 10% for the past 5 years - even top 21% for 10 years.

 

Long ago, Buffett had a few things to say about performance vs the indexes:

 

Our Performance in 1961

 

...

I have continuously used the Dow-Jones Industrial Average as our measure of par. It is my feeling that three years is a very minimal test of performance, and the best test consists of a period at least that long where the terminal level of the Dow is reasonably close to the initial level.

...

You may feel I have established an unduly short yardstick in that it perhaps appears quite simple to do better than an unmanaged index of 30 leading common stocks. Actually, this index has generally proven to be a reasonably tough competitor.

...

I do not present the above tabulations and information with the idea of indicting investment companies. My own record of investing such huge sums of money, with restrictions on the degree of activity I might take in companies where we had investments, would be no better, if as good. I present this data to indicate the Dow as an investment competitor is no pushover, and the great bulk of investment funds in the country are going to have difficulty in bettering, or perhaps even matching, its performance.

 

Our portfolio is very different from that of the Dow. Our method of operation is substantially different from that of mutual funds.

 

...

 

Our job is to pile up yearly advantages over the performance of the Dow without worrying too much about whether the absolute results in a given year are a plus or a minus. I would consider a year in which we were down 15% and the Dow declined 25% to be much superior to a year when both the partnership and the Dow advanced 20%. I have stressed this point in talking with partners and have watched them nod their heads with varying degrees of enthusiasm. It is most important to me that you fully understand my reasoning in this regard and agree with me not only in your cerebral regions, but also down in the pit of your stomach.

 

For the reasons outlined in my method of operation, our best years relative to the Dow are likely to be in declining or static markets. Therefore, the advantage we seek will probably come in sharply varying amounts. There are bound to be years when we are surpassed by the Dow, but if over a long period we can average ten percentage points per year better than it, I will feel the results have been satisfactory.

 

Specifically, if the market should be down 35% or 40% in a year (and I feel this has a high probability of occurring one year in the next ten--no one knows which one), we should be down only 15% or 20%. If it is more or less unchanged during the year, we would hope to be up about ten percentage points. If it is up 20% or more, we would struggle to be up as much. The consequence of performance such as this over a period of years would mean that if the Dow produces a 5% to 7% per year overall gain compounded, I would hope our results might be 15% to 17% per year.

 

http://csinvesting.org/wp-content/uploads/2012/05/complete_buffett_partnership_letters-1957-70_in-sections.pdf

[Packer16]

The markets are more efficient than in the past.  This board itself is leading to a portion of that efficiency.  It is tough to tell prospectively if some one is just having a dry spell or missed the target of outperformance.  All I can say for my style of investing the past 6 months has been brutal.  I have not underperformed the US averages in such a favorable environment for stocks since I started in 2000.  I do have a large portion invested in non-US assets however.

 

Packer

[Picasso]

I think investor expectations are so f**king wacky that investors themselves don't know what they are talking about.  Buffett hasn't beaten the indices over the last 7 years...is he suddenly retarded?  Not good enough?  A has been?  Apparently Chou, Pabrai and Watsa don't know what they are doing anymore!

 

I've made money for my partners since May of 2006...beating the indices over those years by about 3.5% annualized...that's the top 1% of money managers during that span.  Even this year, we are up 9% for the first half, while the market is up 3%, but I've got a partner who is pulling some money because I don't report often enough or consistently enough. 

 

I suppose they would prefer if I expounded on the markets, macroeconomics, stock picks and all of the other value investing bullshit you could put into a letter, instead of making money for them and working my ass off!  Incidentally, that 9% is on a portfolio holding about 45% PDH which hasn't moved...so I've returned about 18% at June 30th on half of the portfolio I could allocate into ideas.  Again, it must be time to part ways with me, since I have no f**king clue what I'm doing.  Maybe Francis should be put out to pasture with me...Pabrai too...he's really sucking ass right now. 

 

Anyone else you guys can think of that are poor performers?  Cheers!

 

Always better to weed out the partners who don't appreciate your process.

 

I have a couple theories as far as why a lot of managers start underperforming once they become popular.  Say you manage $20 million and grow it to $100 million over ten years without raising new AUM.  Once you have that track record and your first partners can trust your judgement and deal with the volatility a little better, it's easier to stick with the same process and keep doing what you do best.  Maybe even take on some investments that other managers would shy away from.

 

But now imagine someone throws another $200 million at you, so you have to manage $300 million.  The $200 million investor(s) don't like the idea of losing money.  But your original partners are a little better about that because you've already made a ton and proven yourself.  Since the fees on $300 million are much higher, you kind of change your process to bend over to the new investor(s) because you don't want to risk losing them.  I think this kills a fund or long-term track record.

 

One guy who comes to mind is that Arlington Value fellow.  He's raised so much over the past few years that I don't know how one can expect him to keep the same investment process.  It's simply very difficult to subject new money to lots of volatility no matter how great your previous track record is.  It becomes much harder when your capital base grows five fold.

 

The best long-term track records often come from those who basically shut down to outside capital after a certain period of time.  They stop caring about bringing in tons of new management and incentive fees and cashing in on their track record.  It becomes more about making money for their original partners and the pure enjoyment of the investing process.  Like Buffett.

 

Which ties a bit into my second theory.  It becomes much more fun to focus on things other than investing once you've made a killing if you don't love investing.  Look at Berkowitz.  He's too busy running some art exhibit or something.  And the game gets harder over time so you need to always have a passion for the game or you'll end up "being thrown out to pasture."  I'm sort of amazed by how many young people I meet that have a great sense for deep, insightful value investing.  The competition is so much harder today.

 

Anyway that's my theory.  It's very tempting to raise a lot of AUM but I think the slow process of being very mindful of your LP's and when you raise capital is a very big part of a solid long-term track record.  And mental health for the manager.

 

Congrats on good results by the way.

[Liberty]

I think investor expectations are so f**king wacky that investors themselves don't know what they are talking about.  Buffett hasn't beaten the indices over the last 7 years...is he suddenly retarded?  Not good enough?  A has been?  Apparently Chou, Pabrai and Watsa don't know what they are doing anymore!

 

I've made money for my partners since May of 2006...beating the indices over those years by about 3.5% annualized...that's the top 1% of money managers during that span.  Even this year, we are up 9% for the first half, while the market is up 3%, but I've got a partner who is pulling some money because I don't report often enough or consistently enough. 

 

I suppose they would prefer if I expounded on the markets, macroeconomics, stock picks and all of the other value investing bullshit you could put into a letter, instead of making money for them and working my ass off!  Incidentally, that 9% is on a portfolio holding about 45% PDH which hasn't moved...so I've returned about 18% at June 30th on half of the portfolio I could allocate into ideas.  Again, it must be time to part ways with me, since I have no f**king clue what I'm doing.  Maybe Francis should be put out to pasture with me...Pabrai too...he's really sucking ass right now. 

 

Anyone else you guys can think of that are poor performers?  Cheers!

 

All I can add is a Parsadism: Cheers! :)

[fareastwarriors]

I have shares in SEQUX (5+ years) and FAIRX (7+ yrs) in my IRA. I haven't been shaken by their poor performance in the last few years (and longer) of underperformance. I added money every year.  But many more years should I give them before I just switch to the S&P 500 index? I just don't know anymore.

 

 

 

 

[sarganaga]

FWIW, I bought CHOEX (Chou Opportunity Fund) in late June for the following reasons:

(1) Chou's stock/security selections are very different from other stocks I own. Put another way, he buys things I would never buy or don't understand such as SHLD & VRX.

(2) His long term record is pretty good.

(3) The fee reimbursement for 2015 & waiver for 2016 is not commonplace & IMO demonstrates a lot of integrity.

 

[stahleyp]

If someone would have given you this portfolio in 2009, it would have looked pretty strong. look at all the funds that have solid, long term records (value and growth managers) that have underperformed  (some really badly) for the 5 past years:

 

FCNTX

FAIRX

OAKLX

SEQUX

LLPFX

CHOEX

FLPSX

DODGX

AGTHX

 

There are a handful of quality mutual funds that were good back then that have beaten the market (VPMCX and FDGRX). I'd bet that Pabrai, Baupost and Greenlight have also not beaten the S&P 500 since then. If someone gave me this list 5 years ago and told me that none of these funds would have beaten the S&P 500 I would have thought they were crazy.

[wisdom]

I am starting to get interested in the Chou funds. It is great to see the pessimism build. Keep it coming!