Readers need to go to the site to view the 26 minute interviewGreat investor traits
1) Intensity about work
2) Attention to detail
3) Disciplined investment process
4) Independence of thought and deed
The FPA Contrarian Policy Statement
Goal: “to provide, over the long-term, an equity-like return with less risk than the stock market”
Philosophy:
1) Absolute value investors
2) Long term focus “…accept short term underperformance in exchange for long term success”
3) Downside protection/risk minimization
Process
…seek the out-of-favor, unloved, or misunderstood. We are, in a word, “contrarian”
Interview notes
Bottoms up manager, prefers large cap stocks
1) Small cap stocks more nimble but doesn’t grow faster than large cap
2) Not necessarily as Russell 1000 (large cap) outperformed Russell 2000 (small cap) for last 15 years consecutively
3) Small cap today trading at 20% premium due to large cap companies have more overseas exposure
Avoid value traps, industries that offer growth opportunities, which may not be entirely understood by the marketplace, e.g., CVS (CVS) may benefit due to 1) aged population 2) branded drugs going to generic, pharmacies making more money from generic than branded, and eliminating distributors (branded drugs).
WMT: Stock did nothing, company’s earnings grew tremendously, stock price a little bit expensive, P/E multiple is less, raised dividend 18% CAGR last decade, repurchased 7% of shares last 12 months, company has 27% overseas sales exposure, company earns 4-8% prospectively, pro forma dividend yield 3% so now we got 7-11% ROI, better than stock market for next 5 years, assuming multiple remains constant.
MSFT: Cheap stock, tons of cash flow, huge market share, upside optionality if management makes the appropriate changes, which I wrote about briefly here Microsoft Corp. (MSFT, Financial) – an Undervalued Stock with Strong Business Predictability Part 1 and Part 2
Most people tend to look at short-term performance, and get scared by volatility. The best performing fund in the new millennium generated 18%. The average shareholder in that fund returned -14%. Thus, a 32% swing because average shareholder in a nutshell buys high sell lows.
Ergo, value investors need to exercise patience and be a true contrarian in order to generate alpha in the market. What is your position in the market now? Take a vote here and you can view your fellow voters’ results on the same page.
