I just read your recent article called "Are There Any Good Ben Graham-Style Mutual Funds"…
I know Bruce Berkowitz and David Winters run relatively "focused" funds. Berkowitz moreso than David. I've been a long time investor with both funds since 2006… Both seem to follow the Ben Graham way with the exception of size and maybe in terms of diversification. But I would love to get your impression on Bruce and David.
I don’t really think of Bruce Berkowitz and David Winters as being similar to Ben Graham. They certainly are value investors. But they seem to be concerned with:
1. High-quality businesses
2. Good management
Which Ben Graham did not worry a lot about. Both of them talk a lot more about management than Ben Graham ever did – he basically never discussed a company’s management. Graham even suggested investors not meet with a company’s management before buying the company’s stock. He thought CEOs were good salesmen. And investors were not good judges of people.
Here’s something David Winters recently told Barron's:
“…investors can find high-quality global equities that over time will generate superior rates of return. People have essentially fled stocks for the safety of cash, so there's a lot of value right now. Investors can get good companies with dividend yields of 3.5% and 4%. Look for what we call the (trifecta) – good businesses, good management and shares trading at a discount.”
I can’t imagine words like that ever coming out of Ben Graham’s mouth. Especially: “good businesses, good management, and shares trading at a discount.” Graham wasn’t willing to pay up for good businesses or good management. And he didn’t talk about their being a lot of value out there. That’s something you hear a lot from Winters and Berkowitz – and I think it’s their honest opinion – but it’s a lot more sunny language than Ben Graham would use.
Ben Graham wanted a system. He wanted a process. A way of doing things so you could find safe stocks that would give you acceptable returns – as a group – in any market environment. I think Bruce Berkowitz and David Winters are pretty far from that part of Ben Graham.
So they may be true to the principles of Graham:
· Value stocks as pieces of a business
· Remember the Mr. Market parable
· Always have a margin of safety
But I don’t think they practice investing the same way a modern day Ben Graham would.
There some similarities between Ben Graham and these two fund managers. For example, David Winters is now engaged in shareholder activism with Consolidated Tomoka (CTO). Ben Graham was an activist investor (by the standards of his day). Especially when it came to how a company used its surplus assets.
But then David Winters has other positions that would probably not be in a Ben Graham portfolio:
“Tobacco companies are basically money machines because they have the ability over time to raise their prices. The stocks pay very good dividend yields, and companies are repurchasing shares. So they are essentially double-digit coupons.”
Graham liked low P/E ratios and high dividend yields. So, he might be attracted to some tobacco companies. But, in his own investments, he usually stuck pretty close to the tangible book approach. I can’t imagine Ben Graham ever saying he was buying a stock because a company could raise its prices and buy back its shares. Those are Warren Buffett reasons for buying a stock. Not Ben Graham reasons.
I’m looking at Fairholme right now – and it does look sort of like a Ben Graham fund by some metrics right now (average price to estimated earnings is around 8 times, price-to-book is about 0.7x, and so on). But, I think this is more of an illusion than a reality. Bruce Berkowitz is a very opportunistic investor. He jumps on what he thinks are the bargains of a lifetime. He definitely lives by the Warren Buffett motto: “Be fearful when others are greedy. And greedy when others are fearful.”
So, right now, Berkowitz is in some super cheap financial stocks. A good example is AIG (AIG). But that’s not a company Ben Graham would buy. These financial companies don’t pay good dividends right now – we all know why that is – which Ben Graham wanted. They lost a lot of money recently. And they are very complicated.
Bruce Berkowitz’s portfolio holdings have an average market cap of around $20 billion. So, to give you some idea of the differences I see between Ben Graham and Bruce Berkowitz, I’m going to put Bruce Berkowitz’s and David Winters’ actual top holdings – according to GuruFocus – in two columns and my best guess of the kinds of stocks with a market cap over $20 billion that Ben Graham would own today in the middle column.
Sure, it’s an imaginary list. But I think it illustrates the difference between Ben Graham and investors like Bruce Berkowitz and David Winters.
|Actual Bruce Berkowitz Holdings||Imagined Ben Graham Holdings||Actual David Winters Holdings|
|American International Group (AIG)||Corning (GLW)||Canadian National Resources (CNQ)|
|CIT Group (CIT)||Occidental Petroleum (OXY)||Philip Morris (PM)|
|Bank of America (BAC)||Chevron (CVX)||Berkshire Hathaway (BRK.A)|
|MBIA (MBI)||Intel (INTC)||Reynolds American (RAI)|
|Sears Holdings (SHLD)||Marathon Oil (MRO)||MasterCard (MA)|
|Berkshire Hathaway (BRK.A)||Walgreen (WAG)||Franklin Resources (BEN)|
|Leucadia National (LUK)||Southern Copper (SCCO)||Consolidated Tomoka (CTO)|
|St. Joe (JOE)||Freeport-McMoRan (FCX)||Coca-Cola (KO)|
|Citigroup (C)||Exxon-Mobil (XOM)||Google (GOOG)|
|Jefferies (JEF)||Microsoft (MSFT)||Coca-Cola Femsa (KOF)|
By the way, my imagined Ben Graham holdings are just the top stocks passing a screen I use to simulate what I think a modern day Ben Graham would buy. In reality, he would buy much, much smaller stocks. For this article, I put a minimum market cap of $20 billion into the screen so I would only get huge Ben Graham-type companies. Now, to be fair, Ben Graham would buy Norfolk Southern (NSC) right now which is actually a David Winters holding. It isn’t one of Winters' biggest holdings. But he likes the stock a lot. And that’s a stock a modern day Ben Graham would buy.
Generally, what Ben Graham suggested investors look for was:
· Adequate Earnings Yield (E/P)
· Adequate Dividend Yield
· Adequate Balance Sheet
Ben Graham, of course, bought net-nets – and in fact if I run my Ben Graham-style screen without any market cap restrictions it turns up George Risk Industries (RSKIA), The Stephan Co. (SPCO), and McRae Industries (MRINA) as being among a modern day Ben Graham’s 10 favorite stocks. These are either net-nets or near net-nets. And even the stocks on the list that aren’t net-nets right now may have been a net-net in the past.
But these are not the kinds of companies most people want to read about. I’m sure most people are interested in stocks with a market cap greater than $100 million. So, let me run my modern day Ben Graham screen with a market cap floor of $100 million and show you the top 10 results.
Stocks a Modern Day Ben Graham Might Buy
· AVX Corporation (AVX)
· MKS Instruments (MKSI)
· Communications Systems (JCS)
· Brooks Automation (BRKS)
· Flexsteel (FLXS)
· Superior Industries (SUP)
· Corning (GLW)
· Miller Industries (MLR)
· Ceradyne (CRDN)
· National HealthCare (NHC)
See how those don’t match the kinds of stocks that David Winters and Bruce Berkowitz own. Now, you could obviously say my attempt to mimic the sorts of stocks Ben Graham would be interested in today is badly flawed and Graham would really be more interested in the kinds of stocks Winters and Berkowitz own.
But I don’t think so. I think that’s actually a pretty accurate list of the kinds of stocks Ben Graham thinks belong in a modern day defensive investor’s portfolio.
Ben Graham wasn’t as focused on franchises. He didn’t care about moats. He wasn’t worried about the “jockeys” running his companies.
He just wanted statistically safe and cheap stocks. And he wanted a basket of them.
I don’t think Bruce Berkowitz and David Winters think that way.
I think their connection to Ben Graham’s principles is through the intermediary of Warren Buffett.
I really think Bruce Berkowitz and David Winters are followers of Warren Buffett rather than followers of Ben Graham.
Ask Geoff a Question about Ben Graham
Check out the Ben Graham: Net-Net Newsletter
Check out the Buffett/Munger Bargains Newsletter