Baupost’s 2014 Letter To Investors: A Tale Of Two Halves

2014: A tale of two halves

2014 was a tale of two halves for Baupost. After a strong first half, the fund struggled in the second half with few resounding successes and several minor mistakes. Overall, Baupost’s partnerships gained approximately 7 to 8% for the year, lagging the S&P 500 but outpacing the broader Russell 2000.

Depending on how you measure this performance it was either a great success or minor failure. However, it should be kept in mind that value strategies rarely outperform in a bull market. With the S&P 500 pushing to a new high almost every month during 2014, Baupost’s value-driven investment strategy was always going to struggle to keep up with the wider market.

“ … I must remind you that value investing is not designed to outperform in a bull market. In a bull market, anyone…can do well, often better than value investors. It is only in a bear market that the value investing discipline becomes especially important…it helps you find your bearings when reassuring landmarks are no longer visible …” — Seth Klarman commenting on the market in a letter to partners published during the dot-com bubble.

Baupost has never aimed to outperform the wider market. The fund’s main goal has always been capital preservation and over the past 32 years, it has accomplished this with only two down years.

“We don’t mind being out of sync with the herd, and we don’t let that get to us. While we enjoy the challenge of analytically complex situations, we begin by looking for low-hanging fruit while eschewing the “high-hanging” kind.” — Seth Klarman 2014 letter.

Read the rest of the article at ValueWalk.com

The Superinvestors of Graham-and-Doddsville: Rick Guerin

Rick Guerin: One of the best in the world

Like many of the ‘Superinvestors’ Rick Guerin never went to business school but that didn’t stop him from managing money. He turned out to be rather good at it and his results speak for themselves. Between 1965 and 1983, against a compounded gain of 316% for the S&P 500 Guerin achieved a return of 22,200% — that’s not a typo. Warren Buffett was quite convinced that Guerin’s education, or lack of it, helped him achieve such lofty returns:

“[The] idea of buying dollar bills for 40 cents takes immediately to people or it doesn’t take at all… A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he’s applying it five minutes later. I’ve never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn’t seem to be a matter of IQ or academic training. It’s instant recognition, or it is nothing.”

55018c3be7b4cRick_Guerin.png

What happened to Rick?

Little is known about Rick Guerin and his style of investing, but after 1983 he virtually disappeared and readers of the ‘Superinvestors’ essay started to ask, “What happened to Rick?” Even Buffett was once asked and he attempted to answer this question by saying that Rick wanted to get too rich too fast. As a result, he used margin to leverage his funds excessively, magnifying both profits and losses. This increased volatility could have been a reason for pushing him out of the money management business.

You can see in the chart above how volatile Guerin’s returns became over the years. Indeed, he suffered a 62% cumulative loss in the period 1973 to 1974 due to high levels of leverage and as a result of these two disastrous years, Guerin’s CAGR collapsed to 3.7% between 1972 and 1977 — that’s a compound return of 19.97% over five years, hardly ‘Superinvestor’ performance.

– See more at: http://www.stockopedia.com/content/the-superinvestors-of-graham-and-doddsville-rick-guerin-94339/#sthash.m73PAPda.dpuf

 

Notes on Berkshire Hathaway’s 50th Anniversary Letter [Part One]

**This post first appeared on ValueWalk.com.

With over 43 pages of text, the Berkshire 50th anniversary letter cannot be summed up easily. Nevertheless, below are a selection of key quotes from the Oracle of Omaha‘s anniversary letter, which value investors may find useful.

If you’re looking for a complete analysis of the Berkshire letter, I would highly recommend heading over to the Wall Street Journal. The publication as gathered three dozen Buffettologists, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) shareholders, value investors and academics together to analyze the letter and puts its contents — including annotations — online for readers to study.

Berkshire Hathaway: A new way to measure performance

After some commentators started to call out Buffett last year over his poor performance, he has now presented Berkshire Hathaway’s returns in a different light. Last year, it emerged last year that Berkshire’s book value growth (Buffett’s favored measure of performance) had, for the first five-year period in the group’s life, “failed to surpass” returns generated by the S&P 500.

A year later and Buffett has changed his reporting style, adding a column to the performance tables noting Berkshire Hathaway’s “Per Share Market Value”. Using this metric, as seen in the table below, Berkshire has outperformed the S&P 500 for four of the past five years. Considering the fact that Berkshire Hathaway is in this game for the ultra long-term, the group’s performance over five years is not really relevant. Compound growth of around 20% per annum for the past 40 to 50 years is the relevant factor here.

berkshire returns

Berkshire Hathaway: Intrinsic value

The intrinsic value of a business is a huge part of Buffett’s investment philosophy (becoming so after Charlie Munger came to Berkshire). So, it makes sense that Buffett should comment on the intrinsic value of Berkshire Hathaway within his annual letter.

The marketable securities on Berkshire Hathaway’s balance sheet are valued on the group’s balance sheet at market prices, so any gains – including those unrealized – are immediately reflected. However, the value of businesses acquired are never revalued upward.  The unrecorded gains in the value of Berkshire’s subsidiaries have become huge, with these growing at a particularly fast pace in the last decade.

GEICO is the perfect example. As I cover later, GEICO’s size gives it a huge advantage over its peers, and Buffett believes that Geico, which is carried on the books at $2 to 3 billion, has true economic goodwill approaching $20 billion — this appears to be a conservative estimate, others have valued the business at $50 billion.

GEICO is the US’s second-largest auto insurer, with premiums of $21 billion, underwriting gains of $1.2 billion, and industry leading expense ratio of 16.6% versus an industry average of 26%, float of $13.5 billion and the fastest policies-in-force growth of all major auto insurance carriers. Something investors should bear in mind when looking at any business, “how much is the moat worth”? It can often be more than meets the eye.

IBM

On a personal note, it always struck me as odd that the majority of Wall Street has been calling out Buffett on his IBM stake for much of the past year. Anyone who has done any research on Buffett’s past will find that he is not one to sell after only a year of underperformance. Buffett added to Berkshire’s International Business Machines Corp. (NYSE:IBM) holding during 2014 — Q4 — and he is unlikely to make a decision to sell anytime soon. Berkshire Hathaway’s interest in IBM during the year rose from 6.3% to 7.8%. Unlike Tesco, which Buffett sold out of during 2014 (see below) IBM has continued to impress the Oracle of Omaha, a potential vote of confidence for beleaguered CEO Ginni Rometty?

A big mistake

Tesco was Buffett’s big sale of the year. Previously making it into the list of Berkshire’s largest common stock investments, by the end of 2014 the Tesco holding had been completely sold:

“In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind.)

During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

We sold Tesco shares throughout the year and are now out of the position. (The company, we should mention, has hired new management, and we wish them well.)” — Warren Buffett Berkshire 2014 letter.

Tesco’s problems, for the most part, can be traced to its previous management (the one that was in place when Buffett first started to build his position). The fact that Buffett started to sour on the management installed during 2013 is only due to timing. Indeed, the previous CEO had lead years of overexpansion into international markets, underinvestment in the company’s home market and had installed a poor working culture into the Tesco business. This story highlights the importance of selling a position as fast as possible if things start to move against you.

Berkshire Hathaway: A history lesson

Berkshire Hathaway’s 50th anniversary letter is more of a history lesson than annual report. One of the most important lessons the letter covers is Berkshire Hathaway’s most important acquisition, National Indemnity and its sister company, National Fire & Marine, for $8.6 million. Today, based on GAAP principles, these businesses are worth $111 billion, a value which exceeds that of any other insurer in the world.

National Indemnity provided Buffett with more than just an insurance business:

“One reason we were attracted to the property-casualty business was its financial characteristics: P/C insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume…”Warren Buffett Berkshire 2014 letter.

Buffett has sought out additional float from the moment he made his first investment in American Express Company (NYSE:AXP) in the wake of the Salad Oil Scandal. He found float soon after in casualty insurance, and later in Blue Chip Stamps. With these floats behind him, Buffett has been able to use Berkshire in a way no other investment manager would have been able too. In the words of legendary value investor, Walter Schloss:

“By setting up Berkshire Hathaway Inc., Warren has done everything very rationally.

1. By having insurance companies, he is able to use stocks as well as bonds as reserves. By having large reserves he doesn’t have to pay dividend[s]. If Berkshire was only a very profitable manufacturing company with no insurance companies it would have to pay out some dividends.

2.By keeping all the earnings, Berkshire can keep reinvesting their profits and compound their results. By owning a growth stock, he is able to increase the value of the company…Since it is [Berkshire] in effect a closed-end investment company, Warren doesn’t have to worry about investors redeeming their shares…”

Berkshire Hathaway also has the benefit of size on its hands. As Buffett notes in the letter, the majority of the insurance industry operates at a loss on the underwriting level but due to the size of GEICO, the company can undercut many competitors on pricing:

“When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the company enjoyed compared to the expenses borne by the giants of the industry. It was clear to me that GEICO would succeed because it deserved to succeed. No one likes to buy auto insurance. Almost everyone, though, likes to drive…GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after year. (We ended 2014 at 10.8% compared to 2.5% in 1995, when Berkshire acquired control of GEICO.) The company’s low costs create a moat – an enduring one – that competitors are unable to cross…” — Warren Buffett Berkshire 2014 letter.

Finding Value With The Piotroski F-Score Part 2

**This article first appeared on Seeking Alpha and was published on 06/02/2015.

This is the second in a series of articles looking at the investment performance of the Piotroski F-Score over the space of year.

You can find the first part of this series, which explains the methodology behind the F-score, as well as an initial summary for each company, here.

Finding value

The F-Score was designed to hunt out value opportunities that are profit-making, have improving margins, don’t employ any accounting tricks and have strengthening balance sheets.

However, as usual, this strategy cannot be employed alone, it needs to be combined with another screening tool to produce a suitable set of results. One point is awarded for each criteria the company passes and the stocks that score the highest, eight, or nine are regarded as being the strongest candidates for recovery.

Piotroski recommended scoring the bottom 20% of the market in terms of price to book value and then working from there. Using the following system, Piotroski’s April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted.

In this series of articles I’m testing the F-Score, as both a way to discover value stocks and trade them without fundamental analysis, the screening criteria and investments are based purely on the financials. 20 companies have been selected, those that both meet Piotroski’s criteria and were, at time of initial investment, trading below book value per share.

I’ve made a slight change to the assessment since publishing part one. In part one I noted that the stocks in the portfolio would be sold after they reverted back to a P/B value of 1. However, I’ve now changed the criteria to more closely reflect Piotroski’s test and the stocks will be sold after one year. The companies that met all of criteria were: Noble (NYSE:NE), Ternium SA (NYSE:TX), Unit (NYSE:UNT)Ocean Rig (NASDAQ:ORIG), CYS Investments (NYSE:CYS), Pacific Drilling (NYSE:PACD), Hornbeck Offshore Services Inc (NYSE:HOS), OM Inc. (NYSE:OMG), Speedy Motorsports (NYSE:TRK), Gulfmark Offshore Inc (NYSE:GLF), Schnitzer Steel Industries Inc (NASDAQ:SCHN), Bill Barrett (NYSE:BBG), Penn Virginia (NYSE:PVA), Steel Excel Inc (OTCQB:SXCL)McClatchy Co (NYSE:MNI), Ducommun Inc (NYSE:DCO), Vantage Drilling Co (NYSEMKT:VTG), Nuverra Environmental (NYSE:NES), Willis Lease Finance (NASDAQ:WLFC) and Ellington Residential Mortgage (NYSE:EARN).

Current performance

How has the portfolio performed to date?

(click to enlarge)

(click to enlarge)

Values taken just after close of trading 02/05/2015

The portfolio has a hypothetical $1,000 invested in each company, excluding commissions. These positions are based on financial data only, there’s no weighting to fundamental factors.

Unfortunately, the portfolio is overweight oil, so has been pushed down in line with the oil price over the past two months. The stand out performers were Ducommun Inc, up 13%, OM Group, up 9.2% and Speedway Motorsports Inc., up 16.3%.

The dogs of the portfolio so far have turned out to be Nuverra Environmental, down 58%, Pacific Drilling, down 43.8% and Vantage Drilling, down 42.35% during the period.

Overall, since inception the portfolio has fallen 17.9%, losing $3,578.57.

I’m tempted here to provide some commentary on how the company’s have performed and why they have performed as such but that’s not the point. The Piotroski F-Score is designed to be used with financials only and no fundamental analysis.

Finding Value With The Piotroski F-Score

The following is part of a series originally published at the end of November on SeekingAlpha. The series was designed to test the effectiveness of the Piotroski F-Score in today’s market. The F-Score was designed to help investors outperform the market, but if it was really that good, surely everyone would be using it? The stocks below were selected using computer screens, no human interaction was involved, the stocks that qualified for the F-Score screen, entered the test portfolio.

I’ve always believed that computers are, and will always be, terrible at stock picking, and a human with experience is needed to pick out the ‘duds’ as it were from the results given by the computer….there’s also a need to double-check the computer data.

So the article was essentially an experiment, not a very scientific one granted, but an experiment nonetheless.

I will be updating on a monthly basis.

Finding Value With The Piotroski F-Score

First published on 20/11/2014

This is the first in what will be a series of articles looking at the investment performance of the Piotroski F-Score.

Finding value

In the world of value investing, there are many ways to hunt for value opportunities. However, few are as well defined as the Piotroski F-Score, which aims to identify the healthiest companies amongst a basket of value stocks through applying a set of nine accounting-based stock selection criteria.

The F-Score was designed to hunt out value opportunities that are profit-making, have improving margins, don’t employ any accounting tricks and have strengthening balance sheets. However, as usual, this strategy cannot be employed alone, it needs to be combined with another screening tool to produce a suitable set of results. One point is awarded for each criteria the company passes and the stocks that score the highest, eight, or nine are regarded as being the strongest candidates for recovery.

Piotroski recommended scoring the bottom 20% of the market in terms of price to book value and then working from there. Using the following system, Piotroski’s April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted. According to the American Association of Individual Investors, year to date the F-score screening criteria with a low P/B value would have returned 3.4%. Over the past five years this return would have been 33.9% and the ten-year return was 26.7%.

The screen

Throughout this series I’m testing the F-Score, as both a way to discover value stocks and trade them without fundamental analysis, the screening criteria and invests are based purely on the financials in an attempt to remove any emotional bias — something that holds back investment performance.

The F-Score screening criteria are as follows:

Profitability Signals

1. Net Income – Score 1 if there is positive net income in the current year.

2. Operating Cash Flow – Score 1 if there is positive cashflow from operations in the current year.

3. Return on Assets – Score 1 if the ROA is higher in the current period compared to the previous year.

4. Quality of Earnings – Score 1 if the cash flow from operations exceeds net income before extraordinary items.

Leverage, Liquidity and Source of Funds

5. Decrease in Leverage – Score 1 if there is a lower ratio of long term debt to in the current period compared value in the previous year.

6. Increase in Liquidity – Score 1 if there is a higher current ratio this year compared to the previous year.

7. Absence of Dilution – Score 1 if the Firm did not issue new shares/equity in the preceding year.

Operating Efficiency

8. Gross Margin – Score 1 if there is a higher gross margin compared to the previous year.

9. Asset Turnover – Score 1 if there is a higher asset turnover ratio year on year (as a measure of productivity).

And 20 companies that qualify in the current environment are as follows:

Criteria
Ticker Company 1 2 3 4 5 6 7 8 9 F-Score Price to book
1 (NYSE:NE) Noble 1 1 1 1 1 1 1 1 1 9 0.7
2 (NYSE:TX) Ternium SA 1 1 1 1 0 1 1 1 1 8 0.8
3 (NYSE:UNT) Unit 1 1 1 1 1 0 1 1 1 8 0.9
4 (NASDAQ:ORIG) Ocean Rig 1 1 1 1 0 1 1 1 1 8 0.6
5 (NYSE:CYS) CYS Investments 1 1 1 1 1 0 1 1 1 8 0.8
6 (NYSE:PACD) Pacific Drilling 1 1 1 1 1 0 1 1 1 8 0.6
7 (NYSE:HOS) Hornbeck Offshore Services Inc 1 1 1 1 1 1 1 0 1 8 0.8
8 (NYSE:OMG) OM Inc. 1 1 1 1 1 1 1 1 0 8 0.8
9 (NYSE:TRK) Speedy Motorsports 1 1 1 1 1 1 1 0 1 8 1
10 (NYSE:GLF) Gulfmark Offshore Inc 1 1 1 1 1 0 1 1 1 8 0.7
11 (NASDAQ:SCHN) Schnitzer Steel Industries Inc 1 1 1 1 0 0 1 1 1 7 0.8
12 (NYSE:BBG) Bill Barrett 0 1 1 1 1 1 1 1 1 8 0.7
13 (NYSE:PVA) Penn Virginia 1 1 1 1 1 1 0 1 1 8 0.6
14 (OTCQB:SXCL) Steel Excel Inc 1 1 1 1 1 0 1 1 1 8 0.8
15 (NYSE:MNI) McClatchy Co 1 1 1 1 0 1 1 1 1 8 0.9
16 (NYSE:DCO) Ducommun Inc 1 1 1 0 1 1 1 1 1 8 1
17 (NYSEMKT:VTG) Vantage Drilling Co 1 1 1 1 1 1 1 1 1 9 0.5
18 (NYSE:NES) Nuverra Environmental 0 1 1 1 1 1 1 1 1 8 0.5
19 (NASDAQ:WLFC) Willis Lease Finance 1 1 1 1 1 0 1 1 1 8 0.8
20 (NYSE:EARN) Ellington Residential Mortgage 1 1 1 1 1 0 1 1 1 8 1

P/B figures rounded to the nearest whole number.

To assess the F-Score I’m starting a hypothetical portfolio with a $1,000 investment in each company. Holdings will be sold when the P/B value exceeds 1.1. Investment prices are based on the closing price on 11/18/2014. These positions are based on financial data only, there’s no weighting to fundamental factors. I’ve decided to use this method in an attempt to take all of the emotion out of the trading and running of the portfolio, only when a stock qualifies under the set criteria will it be brought and it will be sold on the same basis.

A quick run through of the qualifying companies.

Noble

Even though Noble has been hit by an offshore drilling industry slowdown over the past few months the company’s low P/B and solid balance sheet helps it to qualify.

Ternium

Latin American steel producer, Ternium qualifies for every criteria apart from leverage. The company’s debt has increased this year, although a debt to equity ratio of 0.4 for a steel producer is hardly worrying.

Unit

Is a oil and natural gas contract drilling company and passes ever criteria apart from number six, an improving current ratio. The company’s current ratio currently stands at 0.6 according to Finviz.

Ocean Rig

Contract driller Ocean Rig is facing the same pressures as Noble. The company is currently trading below book and passes all of the F-Scores criteria apart from decreasing long-term debt. The company is still building up its fleet so long-term debt continues to rise.

CYS

Specialty finance company CYS invests in residential mortgage pass-through certificates in the United States. It also focuses on investing in residential mortgage-backed securities. The company passes all criteria apart from an improving current ratio.

Pacific Drilling

Pacific is yet another offshore driller that fits the F-Score bill. The company passes all of the criteria apart from the improving current ratio, which currently stands at 0.8.

Hornbeck Offshore Services

Hornbeck is not another driller but a supplier of offshore supply vessels and multi-purpose support vessels. Trading at a P/B of 0.8 the company passes eight of the nine F-Score criteria. The company falls criteria number eight as it gross margin is contracting.

OM Inc.

Operates as a specialty chemicals company producing chemicals for technology-driven industrial applications. The company passes all of the F-Score criteria but falls down on asset turnover, a measure of productivity. It seems as if the company is becoming less productive.

Speedy Motorsports

Speedy is one of the most expensive companies in the group trading at a P/B of 0.96. The company passes eight of the nine F-Score criteria falling down on number eight as the company’s gross margin is contracting.

Gulfmark Offshore Inc

Gulfmark is yet another provider of offshore marine support and transportation services. The company, like many of its peers in the sector trades at a low P/E of 0.7 and passes eight of the nine F-Score criteria. The company falls down on criteria number six, as its current ratio has not improved over the past year. That being said, at present the company has a current ratio of 2.5 so there’s nothing to worry about.

Schnitzer Steel Industries Inc

Schnitzer is the lowest scoring of the group, passing only seven of the nine F-Score criteria. The company has both, a rising level of long-term debt and a deteriorating current ratio. According to FinViz the company currently has a current ratio of 2.6 and a debt to equity ratio of 0.4.

Bill Barrett

Bill Barrett is an independent energy company, so the stock has fallen in line with the rest of the oil & gas sector. Still, as a recovery play on the sector the group appears to be well placed, it passes eight of the seven criteria and trades at a P/B of 0.7. Unfortunately, the criteria where Bill falls down is criteria number one: Score 1 if there is positive net income in the current year.

Penn Virginia

Penn is another independent energy producer. The company passes eight of the nine criteria falling at number seven: Absence of Dilution – Score 1 if the Firm did not issue new shares/equity in the preceding year. This could be a warning to potential investors that further dilution is down the line.

McClatchy Co

McClatchy publishes newspapers and related digital and direct marketing products in the United States. The company passes all criteria apart from criteria number five, as group debt is rising, not falling. Still, with a P/B of 0.9 and an F-Score of eight the company looks to be an interesting turnaround bet.

Ducommun Inc

Ducommun provides engineering and manufacturing products and services primarily to the aerospace, defense, industrial, natural resources, medical, and other industries. With a P/B of 1, the company is slightly expensive at present levels but it still trades below my P/B benchmark of 1.1. The company passes eight of the nine F-Score criteria, falling at number four, quality of earnings.

Vantage

Vantage is facing similar pressure to Noble but the company’s improving balance sheet and cash generative operations are helping it recover quickly.

Nuverra Environmental

Nuverra provides full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations. The company is still loss making so only passes eight of the nine F-Score criteria, falling at the first hurdle. Nuverra trades at a P/B of 0.5.

Willis Lease Finance

Willis Lease Finance Corporation is engaged in leasing commercial aircraft engines and equipment worldwide. The company passes eight of the nine F-Score criteria, apart from number six, an improving current ratio.

Ellington Residential Mortgage

Ellington Residential Mortgage REIT, a real estate investment trust, which focuses on investing in residential mortgage-backed securities. The company passes all criteria apart from an improving current ratio.

The Superinvestors of Graham-and-Doddsville: Charlie Munger

Table 5 is the record of a friend of mine who is a Harvard Law Graduate, who set up a major law firm. I ran into him in about 1960 and told him that law was a fine hobby but he could do better…”– Warren Buffett’s introduction to Charlie Munger in his essay: The Superinvestors of Graham-and-Doddsville.

This is the fourth part of a six part series on Warren Buffett’s essay, The Superinvestors of Graham-and-Doddsville. Click to read the earlier articles on Walter SchlossTweedy, Browne and Bill Ruane.

Buffett’s essay was a homage to the value investing philosophy of Benjamin Graham. It referenced seven of Graham’s former employees who went on to become some of the greatest investors of all time. Fourth on the list is a man that later became Buffett’s number two at Berkshire: Charlie Munger.

Charlie Munger: Starting out

Charlie Munger originally started out as a lawyer, before being (in the words of Warren Buffett) convinced that there was much more money to be made in managing other people’s money. Charlie started his own investment partnership in 1962, after meeting Buffett in 1959.

Of all the ‘Superinvestors’, Munger is probably the most influential. He’s widely credited as the man who helped change Buffett’s strategy from a deep value, cigar butt approach, to a quality and value approach, helping Buffett to get to where he is today. Munger also favoured a highly concentrated portfolio — three to four large holdings of quality companies — rather than a well-diversified portfolio of 15 to 20 stocks. This approach worked extremely well, although it did make his record much more volatile.

– See more at: http://www.stockopedia.com/content/the-superinvestors-of-graham-and-doddsville-charlie-munger-93196/#sthash.gZ0vmVmA.dpuf

The Superinvestors of Graham-and-Doddsville: Bill Ruane

The Sequoia Fund

At the time of winding down his early investment partnerships, Buffett asked his friend Bill Ruane to set up the Sequoia Fund to ensure that the partners would have their money well looked after.

Buffett didn’t just pick Ruane’s name out a hat. He chose him because he was taught by and worked with Ben Graham. And since leaving the Graham-Newman partnership, Ruane’s performance had put many other asset managers to shame.

During its first 14 years of operation — from 1970 to 1984 — The Sequoia Fund outperformed the S&P 500 by an average of 8.2% per annum

Large-cap value

Ruane achieved his impressive returns over the years by using a strategy many investors will be familiar with: taking concentrated positions in good businesses that appeared to be trading at attractive valuations. It’s a strategy similar to the one Buffett uses today.

And here are eight key traits of Ruane’s investment strategy that helped him outperform the market consistently during his time running the Sequoia Fund.

1. First of all, forget the level of the wider market. Nobody knows what the market will do today, tomorrow or two years from now. It’s pointless to try and figure out whether the market will go up or down. The only thing that matters is the specific situation having to do with your stocks. The level of the FTSE 100 is not going to affect the everyday business activities of many companies.

2. Secondly, change your perception of the market. Look at the company as a whole, not as a piece of paper or stock ticker on a screen. If you spend your time concentrating on a company’s stock price, you’re a speculator, not an investor. Invest in the underlying business. You don’t need inside information. You don’t need charts and mumbo jumbo. It isn’t about momentum.

3. Use your own research when deciding whether or not to make an investment. This is only way you can truly get to know a company. If you don’t understand how to assess an investment correctly, find someone to manage your portfolio. Your own research is key in developing the positive convictions required to own and hold concentrated investment positions. After conducting your own, detailed analysis you’re less likely to make a silly mistake that costs you money; like selling too early.

– See more at: http://www.stockopedia.com/content/the-superinvestors-of-graham-and-doddsville-bill-ruane-92382/#sthash.5H3qzSZD.dpuf