Sunday, January 08, 2006

Fund Managers Hope for a Bit of the Buffett Effect

The NY Times has an article today about a number of mutual funds holding significant positions in Berkshire Hathaway.

As the article points out: “Morningstar data shows that of the 15 domestic stock funds with the greatest percentage of their assets in Berkshire, most were classified as blend funds, which straddle the line between growth and value.”

I enjoyed the reference to straddling the line. This observation is in keeping with WEB’s view that "Many investment professionals see any mixing (of value and growth) as a form of intellectual cross-dressing. We view this as fuzzy thinking….In our opinion, the two approaches are joined at the hip."

Consequently, buying great businesses at a fair price is often a far more successful approach than buying an ordinary business just because it is cheap.

Think about Greenblatt’s approach in “The Little Book that Beats the Market,” which endorses a simple summation of ranking of ROIC with ranking of value (EV/EBIT.)

As you can ascertain, I love high return businesses that provide a valuation opportunity because of a short-term issue. I generally avoid commodity businesses (with the notable exception of my recent views of chicken processing.)

I tend to look for a few other criteria as well.

I love businesses that have the ability to generate free cash flow...such businesses have the greatest flexibility to ride our difficult spells in an industry, have the ability to make acquisitions, and have the ability to return capital to us through share buybacks or dividends.

Having a management that treats shareholders as partners in the enterprise is important. Evidence of decent corporate governance is very important. We as shareholders must act like owners; we entitle management to act on our behalf, not the other way around. Imagine if you had your capital invested in an apartment building and your property manager were to dictate all aspects of your capital decision-making and would tell you nothing about why he was making these decisions…how long would you put up with this attitude? Why put up with it in securities markets?

No rocket science here…no new discoveries…just sticking to a simple discipline and developing the ability to say no to at current prices, most ideas. What can I add that Warren and Charlie haven’t already drummed into our heads?

A few noteworthy holders of Berkie were not mentioned in the article and deserve your attention:

Ruane Cuniff & Goldfarb As Munger says, I have nothing to add. Simply the best.

Davis Advisors- We have remained steadfastly dedicated to the same patient, long-term investment discipline for more than 35 years. We seek to invest in durable, well-managed businesses that can be purchased at value prices and held for the long term.

First Manhattan- Who needs a website when smart people come knocking anyway?

Fairholme Capital Management- Our primary strategy is to concentrate investments in attractive businesses run by proven owner-managers. We also employ other strategies designed to profit from a discrepancy between market value and intrinsic value. All of our investments strategies demand a price low enough to provide the right combination of limited risk and high prospective return.


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