Steve Forbes recently did a comprehensive interview with CEO of the Tocqueville Funds family Robert Kleinschmidt.
The main Tocqueville fund has a pretty decent track record of outperforming the market over that past 19 years using a contrarian value investing approach. They are a little more diversified than what I would consider necessary holding 60 to 80 positions typically. But their method seems to work.
Here is their most recent fact sheet: http://www.tocquevillefunds.com/pdfs/Tocqueville_Fund_FS.pdf
And here is the interview:
Forbes: You’re called a contrarian investor. Is that any different from a value investor? How do you define your discipline for the market?
Kleinschmidt: Well, I think it is a little bit different than a value investor. We certainly have a value orientation and we look for value when we’re investigating stocks. But as a contrarian, we’re looking to be away from the consensus point of view. In our case, certainly in my case, that also fits my personality. So it’s not only what I believe from an investment point of view –
Forbes: Are you a troublemaker?
Kleinschmidt: I was an authority-resistant troublemaker, exactly. But I rather firmly believe that the consensus, more or less, gets priced into the market. So it’s very hard to make money if you’re in the consensus; that’s basically what the prices in the market are reflecting. And the consensus very often is correct; it’s not that it’s always wrong. But it’s very hard to make money from that point of view.
So what we try to do is we try to take a point of view that’s contrary to the consensus and then build a value case behind it that is convincing to us, so that we can believe that the consensus over time will change and come around to our point of view.
In that way, we think we’re eliminating most of the risk to equity investing, or at least a great deal of it. And we’re positioning ourselves to make some money if the consensus goes our way. It’s not so much the contrarian as it is that we want to be opposite or away from where the consensus view is.
Distinction Metrics
Forbes: So what screens or metrics do you use? How do you find these securities? You make the distinction between large stocks and small-cap, mid-cap stocks.
Kleinschmidt: Right.
Forbes: Define the metrics for both of them.
Kleinschmidt: Well, the larger-cap stock are easier to find. It’s not hard to determine what the consensus point of view is on larger-cap stocks. So we normally have a lot more large-cap names in our portfolio than we have smaller-caps and mid-caps, where it isn’t so immediately apparent.
In the case of the smaller names, it’s not so much as being out of favor as it is being ignored or investor ennui that we’re playing against. With the large-cap names you only have to open up the newspaper or turn on the television set to know what is currently not in favor and where the consensus point of view is negative.
And so that’s the way I do it. We have analysts that use screens – the new low list is a pretty good screen that I tend to look at. And there are any number of real techniques. But I think that the ideas for real investment managers come out of the ether. They’re floating around and you can find them.
Forbes: How dare you say that.
Kleinschmidt: Yeah. It’s true though, it’s true. I used to do screens. I used to do them in the early days. And I found that what appeared on the screens were exactly the names that I expected were going to appear on the screens once I laid out the criteria.
Once you start laying out the criteria, you can pretty much predetermine what’s going to end up on other side of that process. So I don’t use them, but I know our analysts do and I know that some of the work that they do comes as a result of screening.
Forbes: How many issues would you have? You personally manage – with $12 billion plus in the fund – $2 billion, $2.5 billion?
Kleinschmidt: Yes. The group that I oversee manages about $2 billion, $2.5 billion. Probably closer to $2 billion today, closer to $2.5 billion a couple of weeks ago. We will have about 50 names in the portfolio. And the largest names will be in the 3%, 3.5% range. And we’ll have the smaller name might go as low as a .5%.
Forbes: Now, you make it a discipline that nothing can get bigger than, say, 4% or 5%?
Kleinschmidt: Yes. And the reason for that is really risk. I have seen too many good companies, good stocks, fall out of bed as a result of something that came in out of left field that nobody expected. The one example I like to use is when Merck announced that they were pulling Vioxx off the market.
Merck is a $55 stock, and then you woke up and it was a $30 stock. There was no way of predicting that that was going to happen. Wall Street didn’t have any notion that that was going to happen. But if you owned, as a couple of my nondiscretionary clients did at that time, a disproportionately large position in Merck, you’re going to get hurt.
So I’m willing to give up some of the upside that can occur when you have an outsized position in order to buy more risk prevention in the event that something that you own has a hiccup that you couldn’t possibly foresee. And you want that to have as minor an impact on the portfolio as possible. So 3%, 3.5%, up to 4%, I think, is about the limit that we use.
Forbes: Now, some of measurements you use – free cash flow yields. How do you come up with that number? What’s the big number?
Kleinschmidt: These days it’s specific to specific situations, right? You’re willing to have a lower free cash flow yield for certain types of companies – companies that are growing more rapidly or companies that are actually spending money in the right way to grow their business.
But these days, in a zero interest rate world, if you can see free cash flow yields of 7%, 8%, 9%, 10%, that’s pretty attractive, I think. And so we do look at that, and that falls out of models that the analysts compile for the investment committee.
Link to remainder of the interview: http://www.forbes.com/sites/steveforbes/2011/08/23/steve-forbes-interview-robert-kleinschmidt-contrarian-investor/
The main Tocqueville fund has a pretty decent track record of outperforming the market over that past 19 years using a contrarian value investing approach. They are a little more diversified than what I would consider necessary holding 60 to 80 positions typically. But their method seems to work.
Here is their most recent fact sheet: http://www.tocquevillefunds.com/pdfs/Tocqueville_Fund_FS.pdf
And here is the interview:
Forbes: You’re called a contrarian investor. Is that any different from a value investor? How do you define your discipline for the market?
Kleinschmidt: Well, I think it is a little bit different than a value investor. We certainly have a value orientation and we look for value when we’re investigating stocks. But as a contrarian, we’re looking to be away from the consensus point of view. In our case, certainly in my case, that also fits my personality. So it’s not only what I believe from an investment point of view –
Forbes: Are you a troublemaker?
Kleinschmidt: I was an authority-resistant troublemaker, exactly. But I rather firmly believe that the consensus, more or less, gets priced into the market. So it’s very hard to make money if you’re in the consensus; that’s basically what the prices in the market are reflecting. And the consensus very often is correct; it’s not that it’s always wrong. But it’s very hard to make money from that point of view.
So what we try to do is we try to take a point of view that’s contrary to the consensus and then build a value case behind it that is convincing to us, so that we can believe that the consensus over time will change and come around to our point of view.
In that way, we think we’re eliminating most of the risk to equity investing, or at least a great deal of it. And we’re positioning ourselves to make some money if the consensus goes our way. It’s not so much the contrarian as it is that we want to be opposite or away from where the consensus view is.
Distinction Metrics
Forbes: So what screens or metrics do you use? How do you find these securities? You make the distinction between large stocks and small-cap, mid-cap stocks.
Kleinschmidt: Right.
Forbes: Define the metrics for both of them.
Kleinschmidt: Well, the larger-cap stock are easier to find. It’s not hard to determine what the consensus point of view is on larger-cap stocks. So we normally have a lot more large-cap names in our portfolio than we have smaller-caps and mid-caps, where it isn’t so immediately apparent.
In the case of the smaller names, it’s not so much as being out of favor as it is being ignored or investor ennui that we’re playing against. With the large-cap names you only have to open up the newspaper or turn on the television set to know what is currently not in favor and where the consensus point of view is negative.
And so that’s the way I do it. We have analysts that use screens – the new low list is a pretty good screen that I tend to look at. And there are any number of real techniques. But I think that the ideas for real investment managers come out of the ether. They’re floating around and you can find them.
Forbes: How dare you say that.
Kleinschmidt: Yeah. It’s true though, it’s true. I used to do screens. I used to do them in the early days. And I found that what appeared on the screens were exactly the names that I expected were going to appear on the screens once I laid out the criteria.
Once you start laying out the criteria, you can pretty much predetermine what’s going to end up on other side of that process. So I don’t use them, but I know our analysts do and I know that some of the work that they do comes as a result of screening.
Forbes: How many issues would you have? You personally manage – with $12 billion plus in the fund – $2 billion, $2.5 billion?
Kleinschmidt: Yes. The group that I oversee manages about $2 billion, $2.5 billion. Probably closer to $2 billion today, closer to $2.5 billion a couple of weeks ago. We will have about 50 names in the portfolio. And the largest names will be in the 3%, 3.5% range. And we’ll have the smaller name might go as low as a .5%.
Forbes: Now, you make it a discipline that nothing can get bigger than, say, 4% or 5%?
Kleinschmidt: Yes. And the reason for that is really risk. I have seen too many good companies, good stocks, fall out of bed as a result of something that came in out of left field that nobody expected. The one example I like to use is when Merck announced that they were pulling Vioxx off the market.
Merck is a $55 stock, and then you woke up and it was a $30 stock. There was no way of predicting that that was going to happen. Wall Street didn’t have any notion that that was going to happen. But if you owned, as a couple of my nondiscretionary clients did at that time, a disproportionately large position in Merck, you’re going to get hurt.
So I’m willing to give up some of the upside that can occur when you have an outsized position in order to buy more risk prevention in the event that something that you own has a hiccup that you couldn’t possibly foresee. And you want that to have as minor an impact on the portfolio as possible. So 3%, 3.5%, up to 4%, I think, is about the limit that we use.
Forbes: Now, some of measurements you use – free cash flow yields. How do you come up with that number? What’s the big number?
Kleinschmidt: These days it’s specific to specific situations, right? You’re willing to have a lower free cash flow yield for certain types of companies – companies that are growing more rapidly or companies that are actually spending money in the right way to grow their business.
But these days, in a zero interest rate world, if you can see free cash flow yields of 7%, 8%, 9%, 10%, that’s pretty attractive, I think. And so we do look at that, and that falls out of models that the analysts compile for the investment committee.
Link to remainder of the interview: http://www.forbes.com/sites/steveforbes/2011/08/23/steve-forbes-interview-robert-kleinschmidt-contrarian-investor/
