PICK STOCKS LIKE WARREN BUFFETT PART 8 pps

CHAPTER 29 James Gipson of the Clipper Fund O n the tenth anniversary of the Clipper Fund, in 1994, I asked James H. Gipson, the manager, why his fund—unlike so many other con- trarian funds—had been so successful. “We do a more diligent job of analyzing companies,” he answered. “Also, other people say they’re contrarians but they don’t invest that way.” This was before the ascension of Bill Miller, the Legg Mason money manager (Legg Mason Value Trust) who committed heresy by purchasing a variety of Internet stocks. Questions and Answers Q. Do you look for a catalyst that will revive a stock that’s out of favor? J.G. In some cases, you can find a catalyst. But that’s too clever by half. Most of the time we don’t try to be that clever. One of the hardest things to do is to know what stock will go up and when. You never know. Still, 75 percent to 80 percent of our stocks work out. 205 CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 205 Q. What else do you do differently? J.G. We concentrate to a greater degree. We have only 30-odd stocks. That’s very unusual. If you’re intellectually honest, you know that your top 10 best ideas will do better than your 40 to 50 best ideas. If you have the courage of your convictions, you feel that your best ideas will do best. Gibson, Michael Sandler, and Bruce Veace, the managers of Clip- per, were named Morningstar’s stock fund managers of the year for 2000. As Morningstar noted, by sticking with seemingly cheap stocks, and retreating to bonds and cash when stocks just didn’t look attractive, the fund trailed the Standard & Poor’s 500 for four consecutive years. The year 1999 was the worst: As investors sought big tech stocks, the S&P 500, dominated by such stocks, rose 20 per- cent; Clipper fell by 2 percent. The year 2000 saw the righteous re- warded: Clipper rose 35 percent, the S&P 500 went down 10 percent. (See Figure 29.1.) The three men look for stocks with powerful franchises, stocks that are selling for 30 percent less than their intrinsic value. Its stocks aren’t “supersexy,” said Sandler, “but they have fundamen- tally strong businesses and throw off a lot of excess cash.” Among Clipper’s big winners in 2000: Philip Morris, Freddie Mac, Fannie Mae. Sandler calls Philip Morris “a cash machine,” apparently not be- ing frightened away by its legal woes. 206 JAMES GIPSON OF THE CLIPPER FUND FIGURE 29.1 Clipper Fund’s Performance, 1994–2001. Source: StockCharts.com CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 206 A far more volatile version of Clipper is UAM Clipper Focus, without the cash or the bonds. Recently it had 35 stocks, but the top five made up 36.5 percent of the portfolio. It has not only more stocks than Clipper; it has two more managers: Douglas Grey and Peter Quinn. The minimum is $2,500. Phone: 877-826-5465. Web address: UAM.com. You can buy this fund through Waterhouse and Schwab. Clipper is an unusually stable fund, with a beta of only 0.37. Its correlation with the S&P 500 is only 25 percent. But its turnover was surprisingly high for this kind of fund: 63 percent in 1999, 65 percent in 1998. Recently it held 31 stocks and was 28 percent in cash. Morningstar rated the fund “highest” both vis-à-vis other stock funds and vis-à-vis other large-value funds. With some exag- geration, Morningstar called Clipper “a good choice if you can hang on for 15 years.” QUESTIONS AND ANSWERS 207 Basics Minimum First Investment: $2,500 (IRAs: $1,000) Phone: 800-776-5033 Web Address: clipperfund.com. CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 207 CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 208 CHAPTER 30 Michael Price of the Mutual Series Fund I n 1999 the Mutual Series family of funds held a press conference at the Yale Club in New York to mark the family’s 50th anniversary. The very first fund in the family, Mutual Shares, was founded in 1949 by the late Max Heine and by Joseph Galdi. I suspect that the conference was also held to point out that—de- spite the decision of the former manager, Michael Price, to play a lesser role—the funds haven’t fallen off a cliff. Many investors (including me) left when Price stepped down after he sold Mutual Series to the Franklin family, which levels sales charges. Franklin Mutual Series’ assets shrank from $32 billion to $22 billion. The conference was top notch. All the Franklin Mutual managers who spoke were interesting and shrewd—and funny. 209 Michael Price (Photo courtesy Mutual Series Fund). CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 209 Robert L. Friedman, then chief investment officer, recalled that Max Heine had said that if you were a true value investor, over a decade you would enjoy one fantastic year, suffer one horrible year, and have eight good years. The challenge, according to Heine, is to stick with value stocks even during the horrible year. Heine, a lawyer who emigrated from Nazi Germany in 1933, “had a flair for bargain-hunting,” Friedman said. He used a three-pronged investment approach that the fund family still employs, Friedman went on, buying: • Undervalued common stocks • Risk arbitrages (buying the acquired companies before mergers and selling the acquirer) • Bankruptcies and distressed companies What put the Mutual Series funds on the map, Friedman went on, was Heine’s buying Penn Central bonds for 10 cents on the dollar af- ter the railroad went bankrupt in 1976. “He figured that even if they just melted down all the track, they could repay the debt.” That episode underscored the family’s edge: “courage in the face of panic; patience; and hard-core research.” Price, who succeeded Heine, began putting pressure on compa- nies to work to raise their stocks’ prices, Friedman said. Today, he added, all of the family’s senior people are ready to urge top manage- ments of companies the funds have invested in to make their compa- nies more efficient. The fund managers have three choices: (1) to sell the stock, (2) to say something privately, and (3) to say something publicly. If No. 2 doesn’t work, Friedman explained, they will try numbers 1 or 3. Another speaker, Larry Sondike, then co-manager of Mutual Shares, said that the under-a-cloud stocks that the fund buys may have been in deals that fell through, in litigation, or “in pain.” We don’t mind pain, Sondike commented, “as long as it’s not ours.” David Marcus, co-manager of Mutual Discovery, said that he trav- els abroad again and again to talk with a company’s executives. (Dis- covery invests heavily abroad.) Even in Europe, the family’s habit of buying unloved stocks startles people. When Marcus was buying 3 percent of a French water company called Suez, “a French stockbroker told me that I was stupid.” The stock tripled in a little more than three years. Suez officers were grateful that Discovery had buoyed up their stock, so when they 210 MICHAEL PRICE OF THE MUTUAL SERIES FUND CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 210 came to this country later on, they hurried to New Jersey (the family is in Short Hills) to meet with their benefactors. Traveling abroad really helps, Marcus went on, because you can learn what the truth really is. When foreign executives come to New York to meet with money managers, he said, “they talk about re- structuring, about shareholder value, about buy-backs.” They tell the analysts what the analysts want to hear. “But it’s just puffery,” Marcus said contemptuously. “You can see it in their faces.” David Winters, the funds’ young (39) and new chief investment offi- cer, is an unabashed admirer of Warren Buffett and attends Berk- shire’s annual meetings. The secret of Michael Price’s strategy, I suggested to Winters, is something Price once said to me: “We really kick the tires.” He and his analysts go in and find out what a company’s book value really is. Yes, he agreed, that’s what he learned working for Price. “Do the work.” That’s what Mutual Series is all about: hard work. Is he also an admirer of Ben Graham? “Graham wrote the Bible,” he answered. “Buffett, Heine, Price, Carret, and all the others are commentators.” When he interviews job candidates, Winters said, one of the first questions he asks is: “Have you read Ben Graham?” Depending on the answer, “You’re either in or out. On the train or off.” Highlights of an interview with Price before he stepped down from the Franklin Mutual Series funds: • No, he’s not burned out. “I come to the office every day. I still get up every day and read the newspaper. I care about this place, and I’ll always pay it a lot of attention. And I’ll always be a money man- ager. I’ll always be interested in the market. But I’m not going to start a hedge fund.” (A hedge fund, an adventuresome investment for very wealth investors, would probably make him more money.) • If anyone wants to purchase a first Mutual Series fund, a good choice would be Mutual Beacon, Price suggests. It’s 25 percent in- vested in Europe, the rest U.S., and it’s conservative. “One fund gets you a good mix.” (See Figure 30.1.) • On the stockbrokers who now sell his funds, which used to be no-loads: “They’ll keep you out of trouble. They’ll steer you to the right funds.” MICHAEL PRICE OF THE MUTUAL SERIES FUND 211 CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 211 I had asked for an interview after seeing part of a PBS documen- tary about problems in the American economy, “Surviving the Bot- tom Line with Hedrick Smith.” Price “had a feeling” that the interviews on the program would be a “hatchet job,” but “I thought it would be more balanced.” The program ends with Smith proclaiming that while people have been tragically losing their jobs “the winners ride off with their gains.” Then you see Michael Price, a polo player, riding off on a horse. Welcome to tabloid television. I had told Price’s secretary, Irene Christa, that the program had been a hatchet job. She replied that others had told them the same thing. Price and a few others are portrayed as nineteenth-century black- guards, guilty of forcing companies to lay off their loyal employees, meanwhile themselves becoming disgustingly rich. There’s a lot of film of Price atop a horse and playing polo—polo, of course, being a sport for the rich and decadent. Later on, Smith, a South African journalist, follows Price as he meets with some people in an office. The camera lingers on the label in Price’s jacket: “Made for Michael F. Price.” 212 MICHAEL PRICE OF THE MUTUAL SERIES FUND FIGURE 30.1 Mutual Beacon Fund’s Performance, 1994–2001. Source: StockCharts.com CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 212 On the program, Price’s sin is that, as Chase Manhattan Bank’s biggest shareholder, he pressured Chase to raise its share price. Eventually Chase agreed to merge with Chemical Bank, and—there being a lot of duplication—closed offices, throwing 12,000 people out of work. Chase officers are quoted as saying that they had been trying to fo- cus on the long term, but they were forced to make short-term deci- sions thanks to pressure from Price and other shareholders. So they laid off workers—the first layoffs in Chase’s history. The heroes of the program are, first, the executives at Chase Bank. Now, I happen to know that these guys wouldn’t dream of playing so priggish a game as polo. Heck, come a Friday night you can find Chase guys bowling and happily swilling beer at Nick’s Bowl-a-Rama on Eighth Avenue, just like you and me. Sometimes, you’ll even catch them hanging out at the roller derby, recalling old times with old Tuffy Brasoon herself, who would be in the Roller Derby Hall of Fame (if there were one). Custom-made clothes? Forget it. Chase guys always buy stuff off the rack at Filene’s Basement. I told Price about a shamefully forgotten Chase executive named Al Wiggin. While chairman of the Chase National Bank (a predeces- sor of Chase Manhattan), he sold short 42,506 shares of Chase in 1929, borrowing money from Chase to do so. (When you sell stock short, you bet on the price going down.) Al did it sneakily, in the name of his daughters. In no time at all, he romped away with $4,008,538. Selling a stock short helps drive down the price—not exactly what Chase, in the year 1929, was paying Wiggin $275,000 a year for. By the way, I know that Wiggin lived on Park Avenue and sum- mered at his place in Greenwich, Connecticut, and that he belonged to the Metropolitan Club, the New York Yacht, The Links, and other exclusive clubs, but I have not been able to ascertain whether he was guilty of playing polo. Still, if you’re really looking for true vil- lains, Al is your man. Price seemed, understandably, a little ticked off by the TV pro- gram. He began by talking about polo. He plays because he likes riding horses and he loves team sports. “My knees are shot, so I can’t play other team sports. [He had played football in high school.] Polo is hard work. It’s not glamorous. If you don’t ride, you won’t understand.” Besides, polo isn’t that expensive. “I spend less, as a percentage of MICHAEL PRICE OF THE MUTUAL SERIES FUND 213 CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 213 my income, on polo than the average American pays to buy reels and lines at Wal-Mart for bass fishing.” In any case, the money he uses to play polo he earned “making money for 25 years for the average American. We’ve provided terrific risk-adjusted returns, and at Wal-Mart prices.” The Mutual Series funds do have superb records, though most new buyers must now pay sales charges. As for his custom-made suits, he apologized: He weight-lifts, so his arms and shoulders are too big to fit into ordinary suits. Obviously, he was being too defensive. If I myself were really well- to-do, I’d wear custom-made suits, too. Why try to become rich if you’re not supposed to enjoy spending money? Should Bill Gates live in a one-room flat, drive an old jalopy, and dine at Wendy’s? You ex- pect me to be ashamed that I blew several thousand dollars visiting Italy last year? In any case, Price wasn’t born with a silver spoon in his mouth. When he graduated from the University of Oklahoma, “I had no money. Zilch.” And, last I looked, the U. of O. wasn’t in the Ivy League. The PBS program didn’t mention that Price just gave $18 million to his alma mater. On Chase Bank: The Mutual Series funds, Price said, have in- vested a lot of money to help banks and other institutions stay in business. “In just 1991 through 1993, we saved seven banks from go- ing under.” Other firms that the fund bailed out include Penn Central and “a lot of companies no one heard of.” The consolidation of banks was inevitable because there were too many, Price went on. “They’ve gone from 12,000 nationwide a few years ago to 5,000 now, on their way down to 2,000 eventually.” The TV program itself, Price pointed out, was sponsored by the Al- fred P. Sloan Foundation, Sloan having been an executive at General Motors. Price couldn’t sleep the other night, and began watching the film Roger and Me on TV, about the former bumbling chairman of GM, Roger Smith, and his refusal to confront the havoc GM caused in towns where it closed factories. The Mutual Series funds began buying Chase at $33. “We thought it was worth $65.” Company officers, he learned, had been promised a huge cash bonus if the price rose to $55 in two years. “We told them that we had a plan, that Chase could sell this off and spin this out. Why don’t they do it tomorrow? We felt a sense of urgency.” 214 MICHAEL PRICE OF THE MUTUAL SERIES FUND CCC-Boroson 5 (185-242) 8/28/01 1:29 PM Page 214 [...]... ( 185 -242) 8/ 28/ 01 1:29 PM Page 236 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 237 CHAPTER 32 Putting Everything Together T o invest like Warren Buffett, you have a variety of choices—and you can mix them up • Buy shares of Berkshire Hathaway • Buy individual stocks that Berkshire owns, possibly along with stocks that seem to fit Buffett s criteria, possibly along with stocks in Buffett -like funds, like. .. saw no opportunities? M.P That’s how it works Cash balance goes up if we don’t find stocks If we find stocks, cash comes down We don’t come in saying, “Let’s raise cash.” We come in saying, “Let’s buy stocks. ” 217 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 2 18 2 18 MICHAEL PRICE OF THE MUTUAL SERIES FUND Q Is the hardest part deciding when to sell? M.P That’s really hard because you never know what the... U.S large-company growth stocks “The world is a dangerous place today,” he said “And not even [Alan] Greenspan [chairman of the Federal Reserve] walks on water “There is an enormous discrepancy between big growth stocks and small value stocks on the other hand,” he went on “Quite a few small value stocks are reasonably priced, nothing like S&P 500 225 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 226 226... pitfall is that the stocks you invest in may be out of favor—as value stocks were R 221 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 222 222 A VARIETY OF OTHER VALUE INVESTORS for several years before the year 2000 Another problem: Running value funds in particular is never a cakewalk “Investing in growth stocks is much more fun,” Royce says candidly “There are lively stories, the stocks are doing well... that bought stocks 227 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 2 28 2 28 A VARIETY OF OTHER VALUE INVESTORS such as AOL and Cisco (I think this is called “running with the foxes and hunting with the hounds.”) He described two styles of “capitulation”: (1) “Buying those ridiculous dot-coms that aren’t making any money” and (2) “Just not buying good cheap stocks, like those selling at only six times... Richard Strong of the Strong Funds; and Donald Yacktman of the Yacktman Funds CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 239 BUFFETT S INVESTMENT STRATEGY Buffett s Investment Strategy In Russell Train’s Money Masters of Our Time (HarperBusiness, 2000), he tried to summarize Buffett s investment strategy, and Buffett himself apparently read over the list with approval: • You must be a fanatic—“fascinated... 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 233 ROBERT A OLSTEIN hiring people, he looks for similar qualities: people who will “sacrifice for success.” He became interested in investing when he kept overhearing wealthy investors talk about stocks while he caddied at golf clubs in Westchester County He bought his first stocks when he was 13; he helped finance his own education at graduate school by trading stocks. .. exodus from those stocks. ” 233 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 234 234 A VARIETY OF OTHER VALUE INVESTORS • “The three most important factors we consider when purchasing stocks for our portfolio are price, price, and price.” • “Mispriced securities rarely turn around overnight, as crowd misperceptions are slow to change.” • “Momentum investors who trade in overvalued stocks based on crowd... even on one floor, so we can meet quickly We try to avoid stocks that in three or four years will be known as value stocks and to buy stocks that we hope someday will be known as growth stocks unpopular to not-very-popular stocks with low-to-average expectations of profits We’re not knee-jerk contrarians, but we’re always going to be looking at stocks whose prices are dropping Of course, if a stock is... is better than being great one year every now and then So, which portfolio manager did Michael Price tell me that he admired the most? William Ruane 219 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 220 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 221 CHAPTER 31 A Variety of Other Value Investors Charles Royce unning a mutual fund isn’t as easy as it looks That’s the dry comment of Charles “Chuck’’ . $2,500 (IRAs: $1,000) Phone: 80 0-776-5033 Web Address: clipperfund.com. CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 207 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 2 08 CHAPTER 30 Michael Price. to 80 percent of our stocks work out. 205 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29 PM Page 205 Q. What else do you do differently? J.G. We concentrate to a greater degree. We have only 30-odd stocks. . find stocks. If we find stocks, cash comes down. We don’t come in saying, “Let’s raise cash.” We come in saying, “Let’s buy stocks. ” QUESTIONS AND ANSWERS 217 CCC-Boroson 5 ( 185 -242) 8/ 28/ 01 1:29