Interview With Francis Chou

[Parsad]

I can answer these for you based on my understanding behind the purchase.

 

 

2) Is it reasonable for an investment manager to deploy such a significant amount of $s (?$70M +) in a purchase other than his own fund? Does the alignment of interests hold?

 

Most of his wealth is still tied up in the Chou Funds, so it isn't like his interests aren't aligned with Chou Fund investors.  It would be no different than if he owned a $70M apartment or commercial property outside of the Chou Funds. 

 

Am asking these questions as a longtime Chou investor (>10 yrs), with significant portion of portfolio in Chou Funds who is considering the pros and cons of staying in the Fund.

 

His investment in Stonetrust should have zero influence on your decision to stay a Chou Funds investor. 

 

Cheers!

 

Sanjeev, I'm trying to understand your thought process here. It seems you are saying that it would be ok for you as someone who runs an investment fund to have 25% or 40% of your net worth held in an investment vehicle outside of the fund you run for investors? ...am I missing something important here?

 

Of course!  People have homes, family businesses, other assets that aren't in a fund.  Do you expect all fund managers to have 90% of their assets in their fund? 

 

I expect a fund manager to have a healthy portion of their net worth in any fund they run, but I don't expect them to have all of their assets or even the 90% threshold that are met by managers like Buffett and Watsa.  That's just not really fair or rational.

 

When I started out, I didn't have much in my funds, but today I have alot in my funds.  My behavior hasn't changed at all in how I run the funds.  You are either dealing with ethical people or you are not.  I'm sure Bernie Madoff had a lot in his funds, and he still screwed over everyone!

 

Francis is one of the most ethical people you will ever meet.  Whether he has 90% of his assets in Chou Funds, or 50%, or even nothing, he will not behave any differently.  Cheers! 

[investmd]

Chou Opportunity over the past 5 years as an average negative return of .15%

 

S&P 500 has averaged 13.89%.

 

Even the MSCI ACWI ex US has averaged 4.85%

 

Keep in mind that a big piece of CHOEX is in US stocks too.

 

He has performed worse than Longleaf even.

 

Unfortunately 2019 only exacerbated the underperformance - 1.3% return for Chou Associates in a year when markets were up 25-30%. Five year annualized return is negative 1.3%. What boggles my mind is that he is a very bright investor - much more astute than I - and still has returns like that. What bothers me is that he doesn't explain in his letters why his returns are so much below expectations.

 

10 yr annualized 5.5% & 15 yr annualized of 4.5%.

 

After over a decade in the fund, I did exit. However, I hope for him, his thesis and his investors that he does have a really big bounce back year soon.

[stahleyp]

I got out of Chou about a year and a half ago (was selling throughout 2018). Probably good that he shut down his US funds. If he opens another one just to get rid of the track record, that would be in very poor taste.

[Rod]

Chou gets a lot of credit for being a "nice guy", etc. But it's possible he's also a really bad investor.

[RichardGibbons]

But it's possible he's also a really bad investor.

 

It's possible, but remember that back in 2004, when Morningstar named him Fund Manager of the Decade, he had a nice 27-year track record of 11.5% annually. That's a long time.

 

So, I guess the most likely things that could explain the discrepancy are:

[*]He got lucky for 27 years, and unlucky afterward

[*]He got brain damaged and nobody said anything

[*]He changed what he does

[*]His value investing style is really out of favour, leading to bad returns

[*]The world has changed and what worked for 27 years no longer works

My best guess is it's mostly #4 with a spattering of #1.

[stahleyp]

Well he's trailed the S&P 500 since inception. Is 33+ years not long enough? Now, to be fair he's had some Canadian stocks so it's not 100% right to compare. But he even underperformed before the S&P 500 went ballistic (from inception to 1994, let's say). Even with the 1990 recession he still didn't outperform!

 

He trailed the S&P 500 from inception (1986) to 2001 too (I'm cherry picking these since he started surpassing shortly after from inception).

 

He had massive outperformance from 2000-2009. He's underperformed massively since.

 

 

[bci23]

But it's possible he's also a really bad investor.

 

It's possible, but remember that back in 2004, when Morningstar named him Fund Manager of the Decade, he had a nice 27-year track record of 11.5% annually. That's a long time.

 

So, I guess the most likely things that could explain the discrepancy are:

[*]He got lucky for 27 years, and unlucky afterward

[*]He got brain damaged and nobody said anything

[*]He changed what he does

[*]His value investing style is really out of favour, leading to bad returns

[*]The world has changed and what worked for 27 years no longer works

My best guess is it's mostly #4 with a spattering of #1.

 

The world has changed and what worked 27 years ago no longer works. I see many value funds who used to crush it 10-20 years ago who have lagged the market big time over the last 10 years ago. The markets are dynamic, they are always changing and you need to stay close enough to it in order to recognize when that has happened. You have to keep evolving as old things die and new opportunities present themselves.

[undervalued]

But it's possible he's also a really bad investor.

 

It's possible, but remember that back in 2004, when Morningstar named him Fund Manager of the Decade, he had a nice 27-year track record of 11.5% annually. That's a long time.

 

So, I guess the most likely things that could explain the discrepancy are:

[*]He got lucky for 27 years, and unlucky afterward

[*]He got brain damaged and nobody said anything

[*]He changed what he does

[*]His value investing style is really out of favour, leading to bad returns

[*]The world has changed and what worked for 27 years no longer works

My best guess is it's mostly #4 with a spattering of #1.

 

The world has changed and what worked 27 years ago no longer works. I see many value funds who used to crush it 10-20 years ago who have lagged the market big time over the last 10 years ago. The markets are dynamic, they are always changing and you need to stay close enough to it in order to recognize when that has happened. You have to keep evolving as old things die and new opportunities present themselves.

 

I think that's it. As more and more technology companies become a big chunk of the Index, maybe those valuation methods need to be updated. Asset based valuation methods are less useful and also these days you have a smaller pools of those asset based companies to pick from.

[Rod]

I suspect he may be leaning too heavily on book value as a measure of intrinsic value, something that I think worked pretty well 20 years ago, but seems to have fallen apart in more recent times. Nowadays relying heavily on Price/Book gets you involved in a lot of value traps. Chou may have been a one trick pony in this regard.

 

I say this without any real insight into his process, except for looking at what he owns. I've read some of his reports and I don't feel that he's telling me much about what he's doing and why.

[investmd]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

[stahleyp]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

Sign that "cheap" stocks are about to outperform again.  :P

[Rod]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying.

[bearprowler6]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying.

 

With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing.  Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering  unit holders who bought into his previous approach all those years feel now?

[patterson]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying.

 

With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing.  Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering  unit holders who bought into his previous approach all those years feel now?

 

I owned CHOEX from 2016 until the fund shut down about a year ago. It's the worst investment I've ever made, and thankfully wasn't too large of a position. It was a lesson for me about the riskiness of declining businesses that look cheaper than they are, and the importance of quality. It's encouraging to see Chou becoming more concerned with earnings growth, but buying AAPL and GOOG here does seem like quite a pivot.

[Cevian]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying.

 

With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing.  Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering  unit holders who bought into his previous approach all those years feel now?

 

I agree. I just don't understand how Chou funds in total could still have hundreds of millions under management, mostly at ~2% fees, even with his 10-15 year record. I never thought funds were that sticky but maybe so.

[randomep]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

Sign that "cheap" stocks are about to outperform again.  :P

 

+1

 

absolutely what I was thinking

 

My belief is that you cannot make big money by following the crowd.... in the early 2000s the investing world discovered religion (aka value investing) just when it was suffering a 15year drought.

 

Now everyone including buffet are growth investors.  This is  when the S&P500 is trading at 20x earnings during an unprecedented epidemic that has shutdown the world economy.  I really want to ask those growth investors, what are you expecting? a 30x earnings multiple? are you expecting the S&P500 earnings to grow at 12%? what?

[Parsad]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

 

 

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying.

 

With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing.  Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering  unit holders who bought into his previous approach all those years feel now?

 

Why is it criminal if Pabrai or Chou pivot, but when Buffett did it with Apple, it was applauded.  I owned Apple before Buffett, does that make me a better investor than Buffett?  I don't own any Apple right now...does that make me worse than Buffett?  Managers evolve...your investing style evolves depending on how and what you are allocating capital into. 

 

Chou allocates capital into an insurance business now as well, which cannot handle the same volatility his funds can, because the funds aren't leveraged and losses won't affect his ability to invest capital.  In an insurance business, it directly affects his ability to write insurance contracts.  Cheers!

[bearprowler6]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

 

 

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying.

 

With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing.  Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering  unit holders who bought into his previous approach all those years feel now?

 

Why is it criminal if Pabrai or Chou pivot, but when Buffett did it with Apple, it was applauded.  I owned Apple before Buffett, does that make me a better investor than Buffett?  I don't own any Apple right now...does that make me worse than Buffett?  Managers evolve...your investing style evolves depending on how and what you are allocating capital into. 

 

Chou allocates capital into an insurance business now as well, which cannot handle the same volatility his funds can, because the funds aren't leveraged and losses won't affect his ability to invest capital.  In an insurance business, it directly affects his ability to write insurance contracts.  Cheers!

 

Criminal? your choice of words....certainly not mine.

 

You say the change is due to an evolution....I say its more likely due to a capitulation.

 

BTW....I am not saying the move is a bad thing....long overdue if you ask me.....

[Parsad]

Recorded conversation with Francis Chou and Mohnish Pabrai at a Harvard business class :http://chaiwithpabrai.libsyn.com/mohnish-pabrai-lecture-at-harvard-university-april-7-2020

 

‪Neat to see evolution of thinking in Value Investing as Chou moves from philosophy of picking cheap stocks to picking companies that are actually growing. Prediction is returns for investors in his fund will be better over next decade than past decade. ‬...long podcast - 2 hrs....Chou has bought Appl & Google...They both speak about a transition in philosophy of buying companies with growing earnings rather than looking for companies that are only trading at a discount to intrinsic value.

 

 

 

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying.

 

With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing.  Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering  unit holders who bought into his previous approach all those years feel now?

 

Why is it criminal if Pabrai or Chou pivot, but when Buffett did it with Apple, it was applauded.  I owned Apple before Buffett, does that make me a better investor than Buffett?  I don't own any Apple right now...does that make me worse than Buffett?  Managers evolve...your investing style evolves depending on how and what you are allocating capital into. 

 

Chou allocates capital into an insurance business now as well, which cannot handle the same volatility his funds can, because the funds aren't leveraged and losses won't affect his ability to invest capital.  In an insurance business, it directly affects his ability to write insurance contracts.  Cheers!

 

Criminal? your choice of words....certainly not mine.

 

You say the change is due to an evolution....I say its more likely due to a capitulation.

 

BTW....I am not saying the move is a bad thing....long overdue if you ask me.....

 

Sure, "criminal" might be extreme.  Some comments by others were harsher than yours...thus why I used it.

 

But if you have a choice of buying Apple at a discount or Hawaiian Airlines at 1/3rd of book for your insurance business...you're probably going to choose Apple, so that any volatility has minimal impact on statutory surplus.  Cheers!

[stahleyp]

I invested in Chou America when it was opened. Mistake on my part. I think it ended up somewhat profitable but I would have been better indexing it. The fact that he waived his management fee actually built loyalty with me and that just led me to keep the fund longer. haha

 

For Chou Associates, he has underperformed S&P 500 index since inception by a huge amount. Yeah I know it's a Canadian fund so it isn't apples to apples but most of his stocks are US based.

 

$10,000 invested at inception in Chou Associates would be about $149,000 vs about $239,000 in VFIAX. Yeah, yeah the S&P 500 has been on a tear recently but...he also trailed it almost the entire time from inception to 2001!  So you had almost 15 years of underperforming and paying (I'm assuming the fee) of almost 2% per year. Great deal...for him. And that's before taxes.

 

The crazy thing is that from inception to 2015 his fund would have been worth about $242,000 vs $160,000 for VFIAX. So he gave up all of that outperformance is actually down since then.

 

Incredibly, he didn't outperform that much in 2007-2009 even though I believe he helped fairfax with the subprime trade. Looks like he outperformed S&P 500 by about 4% from Jan 1st, 2007-March 9th,2009.

 

I agree that he's capitulating.