Chou 2016 semi annual report

[CorpRaider]

I like him and his process a lot.  I think open end mutual funds are walking dinosaurs, however, and will almost certainly never own another actively managed open end equity mutual fund (barring massive changes in the taxation of RICs and total overhaul of the in-kind creation and redemption process).  Just the cash drag alone from having to try and anticipate redemptions is a pretty huge disadvantage. 

[fareastwarriors]

I like him and his process a lot.  I think open end mutual funds are walking dinosaurs, however, and will almost certainly never own another actively managed open end equity mutual fund (barring massive changes in the taxation of RICs and total overhaul of the in-kind creation and redemption process).  Just the cash drag alone from having to try and anticipate redemptions is a pretty huge disadvantage.

 

How come decent managers never launch closed end funds with respectable expense ratios?

[benhacker]

Probably the wrong place for this, but open-ended funds can be designed well.  Did you know that you can have (somewhat) of performance fees in open ended funds?  You can also have redemption penalties for those who sell, and have those redemption penalties paid to other shareholders?  The latter helps offset the cost of carry cash for redemption or not and just blowing out positions quickly and paying bid-ask spread.

 

What's shocking about open-ended funds isn't that they are dinosaurs, it's that features that could make them competitive aren't used by most fund manager.

 

I think Bridgeway and Tilson were one of the only ones to use performance fees (that I'm aware of) in the open ended space (Tilson's fees were so high as to not be relevant though), and Vanguard is one of the few to use redemption penalties intelligently.

 

Seems like both of these features when combined can promote long term mentality and behavior and also provide a more fair / reasonable fee structure.

 

I'm sure there are some reasons they aren't use more... but it's a bummer.

 

I like Chou, I can understand the pain though for those who highlight the lack of performance on the medium / long term.  It does raise the question as to how much patience should one have, and what is truly the right benchmark.  It's been a weird 5 or so years...

[wondering]

Francis has my vote.  My philosophy is that I buy his funds after a really bad year, and hold.  I don't get too excited about a bad stretch of performance.  I am fairly confident over the long haul, the performance would be better than anything I could do.

 

 

[cwericb]

I have been invested with Chou for 8 or 9 years and don’t pay a lot of attention to it - kind of set it and forget it - which by the way, is why I invest in a fund in the first place. But when I looked at it a couple of months ago and saw how much it had dropped I decided that just maybe I should pay a little more attention.

 

My personal verdict is that yes, some of his investments give me some concern but he has done very well for me in the past.

 

Very few other funds go up all the time. Also his ethics are beyond reproach, he is scrupulously honest and doesn’t charge when he has bad performance.

 

Now out of the thousands of funds out there, how many fund managers can I say that about?

 

Hmmmm.....

 

Yeah, I think I’m quite happy to let Francis handle a portion of my money.

 

eb

[fareastwarriors]

Is MER in Canada and TER in the USA equivalent?  I thought his Chou America Funds were expensive at 1.2% but it looks like some of his Canadian funds top at 1.8%... It seems really expensive..

[Spekulatius]

The funds look quite terrible. It's not just the performance (or lack thereof) that is bothersome - but when I look at the portfolios, I see a pattern of the largest position (by cost) going bust, while a lot of the smaller ones work out. Maybe he averages down on bad bets?

 

The rationale for VRX looks amateurish too. I would not put a penny in these funds.

[alwaysinvert]

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!

 

I understand the frustration, but this can't be a surprise. The average investor in the Magellan fund under Lynch lost money... The investing public is so fickle and have such different goals and frames of reference that I think we often are blind to it as professionals.

 

I have close friends who have gotten interested in the markets in the past year or so, but do they take tips from me or even listen to any wisdom I might have? No! They aren't in the least bit impressed with my actually very good returns (that also have size drag that they wouldn't have) or the boring companies I invest in.

 

But we have to accept that this is probably at least not only due to their irrationality or fickleness. They actually have a completely different time frame preference. They aren't interested in maybe getting somewhat wealthy in 20 years from eking out 7% CAGR. Few people really are. And even if they are, that takes serious commitment and ability to defer gratification, a description that fits even fewer people. 

 

What individual investors often really want is the chance at a moonshot that will make a big difference in their lives, or something they at least can dream about for a while before those dreams are smashed, and to be fair the stock market is no worse a place to be for that than state lotteries.

[Parsad]

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.

 

 

I don't hate my investors.  I hate the fact that for some of them, their emotional constitution gets far better of them than their rational side.

 

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

 

I would surmise that if and when the smoke clears, many will be kissing his ass again.  People had the same comment back in 2007/2008 about him when the fund was down 70%. 

 

I know of very few managers (cannot even count them on one hand) that continued to manage their fund after such a loss and recoup those losses for his partners.  Munger would be the only comparable I could bring forth. 

 

Pabrai could have easily taken the much-followed route of shutting his fund down and then start a new one in 2009 like many investment managers did.  No need to try and get back up to a high watermark...but he didn't and he made every penny back.

 

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

 

Most managers cannot beat the markets long-term.  I just think that the assumption that those that did for many years are suddenly poor investors or incapable of doing so is shortsighted.

 

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?

 

With an operating company, there are no expectations to manage.  The capital is captive and you can take a very long-term view.  The operating manager can look stupid for many years until proven right...think Prem and his deflation bet.  Far easier than managing a fund where investors can pull capital on you whenever they get scared or start to second-guess your abilities.

 

Cheers!

 

[Ballinvarosig Investors]

The funds look quite terrible. It's not just the performance )or lack thereof) that is bothersome - but when I look at the portfolios, I see a pattern of the largest position (by cost) going bust, while a lot of the smaller ones work out. Maybe he averages down on bad bets?

 

The rationale for VRX looks amateurish too. I would not out a penny in these funds.

That is exactly what I was thinking.

 

When I look at Francis' portfolio, I see a few stocks I have owned myself, along with others where I can see why they are in his portfolio. Some are up a little, some are down, but as a whole, he's winning. As you've correctly pointed out, the problem is in over-sized losing positions. My natural assumption as to the reason for this is the same as yours - Francis is doubling down on bad positions. It almost looks to me like he's unwilling to accept a loss, so instead of just cutting the loss, he doubles down his position without paying attention to the deteriorating fundamentals. I mean, when you look at his large positions (Sears, Valeant, the Greek bank), you can hardly say that the fundamentals of these companies were anywhere near as strong as they were when Chou first went into these positions.

[tede02]

I think a lot of retail investors, who have moved to indexing strategies in recent years, may be in for a nasty surprise.  The masses simply don't understand how central bank policy has pushed up asset prices broadly.  Corporate earnings have declined for four consecutive quarters and yet, stock prices have been rising.  I worry that people are plowing into these strategies at a terrible time (of-course, after they've done well). 

 

Low interest rates and QE are giving people a false impression that indexing is somehow less risky and always does better. 

 

My experience also is that the vast majority of people cannot do what is necessary to outperform, that is hold portfolios that significantly differ than the market.  Although this is what's required to outperform, it is a virtual guarantee that at some point, being different from the market means you will underperform.  The average person cannot fathom the idea that a portfolio would underperform while the broader market is rising.  When it happens, they head for the exits. 

[stahleyp]

I think a lot of retail investors, who have moved to indexing strategies in recent years, may be in for a nasty surprise.  The masses simply don't understand how central bank policy has pushed up asset prices broadly.  Corporate earnings have declined for four consecutive quarters and yet, stock prices have been rising.  I worry that people are plowing into these strategies at a terrible time (of-course, after they've done well). 

 

 

 

Besides managing it on their own, what else do you think they should do?

[Uccmal]

I think a lot of retail investors, who have moved to indexing strategies in recent years, may be in for a nasty surprise.  The masses simply don't understand how central bank policy has pushed up asset prices broadly.  Corporate earnings have declined for four consecutive quarters and yet, stock prices have been rising.  I worry that people are plowing into these strategies at a terrible time (of-course, after they've done well). 

 

 

 

Besides managing it on their own, what else do you think they should do?

 

I think people are in for a really rude awakening.  But, I dont think there is anywhere to hide. 

 

To answer your question Paul: What I advise anybody who is not a decent investor (I know ONE who is not a member of this board - just buys good stocks on dips and never sells)

 

1) Use extra cash to pay down your mortgage

2) I suggest index funds for those who are finished 1) or dont have 1).  But I suggest adding to the fund over time. 

 

Since no one actually wants the advice and will do what the far lower skilled person at the bank suggests its all a moot point.  And to tell the truth I dont give investing advice or stock tips anyway. 

 

The problems with actively managed mutual funds, even for the buy and never sell folks, is that redemptions come when stocks have tanked.  This causes forced selling and the remaining unit holders suffer for it. 

 

I will tell you one thing.  In Canada, if I was to invest in a mutual fund, it would be with Francis, and no one else.  I suspect he is constantly reassessing what works, amd what doesn't much like I do, and at some point the tide will turn. 

 

And I honestly dont understand why Francis bothers to run a public mutual fund.  It doesn't strike me as fun but thats me.  I cant imagine that the pay check moves the needle for him much anymore.  I believe he holds 40 million in Fairfax shares and surely has substantial other assets. 

[tede02]

I think indexing is perfectly fine, as long as they can stick with it for a long time.  But what I forsee happening is a bear market, or at the very least, a period of stagnant returns, and then many of the same people who moved to an index approach late in the current bull market get frustrated, sell and move on to the next trendy strategy.  The buy high sell low cycle repeats. 

 

Immediately after the 08-09 turmoil the trendy strategy being pitched was "tactical" investing.  What a bunch of bull shit.  It was essentially code for market timing.  But retail investors got sucked in because the idea of "moving to cash" sounded so appealing after the big losses people suffered.  Of-course, what happened was these strategies massively underperformed as the bull market got underway and now the same people who thought "tactical" was a good idea are moving to an index approach with virtually all metrics suggesting stocks are expensive.

 

The one thing I've learned is although a lot of investment "advice" provides no value (negative in some cases), financial professions can provide unmeassurable value by protecting people from themselves, even if that means telling them to buy the S&P500, and year after year, telling them to just hold it.  So many people just can't help themselves but to tinker around and it usually doesn't do anything but detract from their returns. 

[Packer16]

IMO the real question is where are long-term rates going.  If they are what they are today, the stock market is undervalued, Buffett has said as much.  If rates increase, then a nasty bear market is in store.  If we look at history I am in the camp of lower for longer so I am not as concerned with a large bear market due to the fact that where is the money going to go and there is a good amount of fear in the market already based upon the relative value of stocks versus bonds.  For example, the 20 yr TIPS are at rate of 0.5% and the ERP is close to 5 - 6% per Damodaran's data.  This implies a P/E in the upper teens, where it is today.  We will see.

 

Packer

[stahleyp]

Al and ted,

 

I agree with most of what you guys said. For what it's worth, I think Chou is a solid manager and super ethical. Regardless of my person feelings towards him, his CHOEX results since inception have been poor (relative to the market).

[CorpRaider]

I think indexing is perfectly fine, as long as they can stick with it for a long time.  But what I forsee happening is a bear market, or at the very least, a period of stagnant returns, and then many of the same people who moved to an index approach late in the current bull market get frustrated, sell and move on to the next trendy strategy.  The buy high sell low cycle repeats. 

 

I like the way I heard Greenblatt put it one time.  Something like investors pile into stocks when they are up a bunch and they pile out when they are down.  Similarly, when an active manager has out performed recently, investors pile into their fund and then when they invariably underperform, investors pile out of the fund/strategy.  For most people he recommended an index fund because with an index fund at least investors have half as many opportunities to make bad, performance chasing decisions.  hah!

[BargainValueHunter]

The current atmosphere of "the way things currently are is the new normal and that won't change anytime soon" reminds me of dotcom in '99 and the U.S. housing boom in '05.

 

A lot of capitulation during those times from very surprising corners of the investing/financial world.

[racemize]

This thread might as well have been applied to almost every big value investor for quite a while.  I know my performance since 2013 hasn't been doing too well relative to indexes, and it's beating most of the big value guys (not much of a consolation though).  Even the relentless Packer is struggling a bit this year.

[LR1400]

I think a lot of retail investors, who have moved to indexing strategies in recent years, may be in for a nasty surprise.  The masses simply don't understand how central bank policy has pushed up asset prices broadly.  Corporate earnings have declined for four consecutive quarters and yet, stock prices have been rising.  I worry that people are plowing into these strategies at a terrible time (of-course, after they've done well). 

 

Low interest rates and QE are giving people a false impression that indexing is somehow less risky and always does better. 

 

My experience also is that the vast majority of people cannot do what is necessary to outperform, that is hold portfolios that significantly differ than the market.  Although this is what's required to outperform, it is a virtual guarantee that at some point, being different from the market means you will underperform.  The average person cannot fathom the idea that a portfolio would underperform while the broader market is rising.  When it happens, they head for the exits.

 

Couldn't agree more.

 

I've started buying real estate in a stable area. When interest rates rise it will hurt me some in the short term but not bad in the long term. It's a catch 22 there, low interest rates give cheap ability to borrow, but will of course hurt me for a bit if I had to sell some of them in the short term. I try to buy on the fundamentals and not worry too much about all the shit swirling around the world, same thought process as Buffett.

 

Averaging into and index fund may not hurt you too bad.

[LR1400]

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.

 

Did Buffett shift consciously or did it just happen over time? He may have noticed this, but I believe it was a gradual thing. He also, has always said to look at stock investing like you are buying a portion of the company's assets and earnings from those assets. He gained control of operating businesses while still using the partnership, though not many.

 

I have wondered how his performance would have been had he simply maintained the partnership and never used Berkshire as the vehicle. I believe Munger stated that Buffett would've been even more wealthy in his opinion.

 

From what I can find, Buffett wound down the partnership because: 1. the overvalued markets, 2. he was tired of the pressure and scrutiny associated with managing other people's money.

[CorpRaider]

Kind of a no brainer because he would have maintained a 25% performance incentive fee versus like nothing in compensation ($100K and a use of a jet).

[Jurgis]

Kind of a no brainer because he would have maintained a 25% performance incentive fee versus like nothing in compensation ($100K and a use of a jet).

 

I don't think it's no brainer. Yes, his compensation would have been higher with investment format. But he would have faced at least couple of issues:

 

- flighty capital, especially when his AUM would have become large

- complications in acquiring full businesses. I guess hedge funds can do this, but there are likely issues. I think with just stock investing Buffett would have performed worse than he did with buying whole businesses.

- possible regulations if his AUM got to BRK size?

- no float? Though some hedge funds now have insurance companies for float, but then how is this different from BRK?

[Spekulatius]

Kind of a no brainer because he would have maintained a 25% performance incentive fee versus like nothing in compensation ($100K and a use of a jet).

 

I don't think it's no brainer. Yes, his compensation would have been higher with investment format. But he would have faced at least couple of issues:

 

- flighty capital, especially when his AUM would have become large

- complications in acquiring full businesses. I guess hedge funds can do this, but there are likely issues. I think with just stock investing Buffett would have performed worse than he did with buying whole businesses.

- possible regulations if his AUM got to BRK size?

- no float? Though some hedge funds now have insurance companies for float, but then how is this different from BRK?

 

I think Buffet would have hit a wall in terms of size when he had continued to operate as a partnership. I don't think it would have been possible to acquire the many business in BRK under an LP umbrella, and there is the issue with non-permanent capital as well.

[Spekulatius]

IMO the real question is where are long-term rates going.  If they are what they are today, the stock market is undervalued, Buffett has said as much.  If rates increase, then a nasty bear market is in store.  If we look at history I am in the camp of lower for longer so I am not as concerned with a large bear market due to the fact that where is the money going to go and there is a good amount of fear in the market already based upon the relative value of stocks versus bonds.  For example, the 20 yr TIPS are at rate of 0.5% and the ERP is close to 5 - 6% per Damodaran's data.  This implies a P/E in the upper teens, where it is today.  We will see.

 

Packer

 

I think we get the next bear market with zero percent interest rates and the Fed will try to find a way to ease further.