David Winters, portfolio manager of the Wintergreen Fund, recently appeared on Wealth Track. I decided to take notes for fellow Gurufocus readers because I found the interview to be very informative (as I've come to expect from Mr. Winters); for some background on Wintergreen, here’s a current list of the fund's top ten holdings as of June 30th, 2012:
Here are some notes from the interview, with my own commentary when appropriate; enjoy:
A major market misconception (and what that means for us equity investors) – “The notion that stocks are never going to go up again creates an enormous opportunity for the few of us left who are working on equities and actually do the work, and I think it’s a misconception that has forced the public even further from the equity market…and the reality is there’s this enormous disconnect between price and value which creates huge opportunity.” This isn’t a big surprise among GuruFocus readers and contributors: most of us seem to be simply baffled by the hatred for great companies at relatively attractive valuations, particularly in comparison to the “return-free risk” currently offered by treasuries.
Treasuries – “People lose purchasing power on a daily basis; I think inflation is very real… if you have your money not growing over time, you get crushed.” Again, this goes back to point #1: for anybody with a long term time frame, a diverse group of blue chips with dividend yields roughly twice as large as the yield on treasuries – and most importantly, pricing power to handle bouts of inflation – appears like a no-brainer in comparison to fixed income.
The decline of the active investor – “Basically, there are fewer people doing the work; and people’s time frames have been compressed, and they don’t want any price fluctuation, [etc]… If you go back to the essentials, back to what Benjamin Graham wrote in the Intelligent Investor in 1949, it was Mr. Market… and you take advantage of the fluctuations.” I think there are two key points in this: the first is on time frame compression; as I’ve noted in the past, you have no reason being an active investor if you don’t know your competitive advantage – and the clear one for any individual is to focus on long term opportunities in an increasingly short-term market. Secondly, I think it’s critical that investors look at price fluctuations as opportunity, and not as risk (though academia tells us the exact opposite); as I noted recently, we must work at what we can control – the process – and avoid letting noise (short term market volatility) scare us from sticking with a good investment as it becomes increasingly attractive.
Dealing with macro (political and economic) uncertainty – “You’ve got to, I think, select what is really important and also what you can control – and most of it as individuals, we can’t control; but what we can control is how we react, and if we react by saying, “what can I do to find an opportunity in this mess?”, that’s, I think, the key way that we’ve thought about it.” I think this is so critical – and partially justifies why it may be more productive for most investors to simply ignore macroeconomic factors in company-specific analysis. Again, I think that the important thing is to focus on process – that which we can control – rather than attempting to predict the macroeconomic future – a task that very few (if any) people have shown the ability to accurately do over any period of time; my personal philosophy is that a truly sound analysis process will likely detect anomalies that may underlay unsustainable macroeconomic trends (for example, if you’re looking at home builders and see industry growth outpacing demand by a wide margin, that should cause you to think twice before accepting recent results as an indication of normalized earnings across a market cycle).
Opportunities in China – “People worry about China, and many people have never been there. I was there for a month earlier in the year, and I can’t tell you I know exactly what’s going to happen, but I do know that you’ve got a lot of people and they all want to look good. It’s just a basic human emotion, and the Chinese are just like everybody else.” In David’s portfolio, they’ve positioned themselves for this growth with names like Jardine Matheson, Swatch, Nestle, etc; personally, I agree 100% - and I prefer the cheap and repeatable consumer packaged goods route, via names like Nestle (I don’t own it currently but will soon enough), Procter & Gamble (PG), PepsiCo (PEP), etc.
Tobacco companies (four in the company’s top ten holdings) – “We don’t advocate smoking, but the cigarette companies are huge free cash flow generators, and especially the international ones (BAT and Phillip Morris) - Phillip Morris raised its dividend 10% yesterday (9/12/2012); it yields 3.8% - you get paid to wait.” Again, these companies look so much more attractive than long term bonds – significant pricing power, solidly growing dividends, and going-in yields that put treasuries to shame.
Berkshire Hathaway (BRK.B) – “Berkshire put in a buyback at 110% of book, and we added to the position at 112% of book – so we have 2% downside, really, and a lot of upside.” When he says 2% downside, Mr. Winters isn’t referring to a hard floor – but with tens of billions to spend, I’ve yet to hear a persuasive argument for why Berkshire had more than 5% downside (I’m referring to when I was loading up, back around $80); personally, I agree 100% with Mr. Winters – even after the recent run-up to $90+, I still think that BRK.B looks go at what I believe is roughly a seventy-five to eighty-cent dollar (it remains my largest position – and I’ll be buying more if we see a good pullback).
Apple (AAPL) – “It’s a great company… the problem of Apple, or most of the technology companies, is the product cycle is so short, and I can’t tell you whether the next product is going to be widely received… and if we don’t know, we don’t participate.” I agree with this thought process completely – I personally don’t think the argument for the company’s moat is strong enough, and that inability to innovate in a big way beyond the iPhone will be an issue for a company that has seen truly astounding earnings growth over such a short period of time (net income tripled over the past three years) – but I’ve categorized as “too hard,” and simply will not participate.
| Holding | % of Total Net Assets |
| Jardine Matheson Holdings | 7.8% |
| British American Tobacco plc | 6.0% |
| Altria Group, Inc. | 5.1% |
| Berkshire Hathaway, Class B | 4.9% |
| Swatch Group | 4.6% |
| Imperial Tobacco Group plc | 4.4% |
| Franklin Resources | 4.2% |
| Phillips Morris International | 4.0% |
| Genting Malaysia Bhd | 3.9% |
| MasterCard, Class A | 3.9% |
| Top 10, As % of Net Assets | 48.8% |
Here are some notes from the interview, with my own commentary when appropriate; enjoy:
A major market misconception (and what that means for us equity investors) – “The notion that stocks are never going to go up again creates an enormous opportunity for the few of us left who are working on equities and actually do the work, and I think it’s a misconception that has forced the public even further from the equity market…and the reality is there’s this enormous disconnect between price and value which creates huge opportunity.” This isn’t a big surprise among GuruFocus readers and contributors: most of us seem to be simply baffled by the hatred for great companies at relatively attractive valuations, particularly in comparison to the “return-free risk” currently offered by treasuries.
Treasuries – “People lose purchasing power on a daily basis; I think inflation is very real… if you have your money not growing over time, you get crushed.” Again, this goes back to point #1: for anybody with a long term time frame, a diverse group of blue chips with dividend yields roughly twice as large as the yield on treasuries – and most importantly, pricing power to handle bouts of inflation – appears like a no-brainer in comparison to fixed income.
The decline of the active investor – “Basically, there are fewer people doing the work; and people’s time frames have been compressed, and they don’t want any price fluctuation, [etc]… If you go back to the essentials, back to what Benjamin Graham wrote in the Intelligent Investor in 1949, it was Mr. Market… and you take advantage of the fluctuations.” I think there are two key points in this: the first is on time frame compression; as I’ve noted in the past, you have no reason being an active investor if you don’t know your competitive advantage – and the clear one for any individual is to focus on long term opportunities in an increasingly short-term market. Secondly, I think it’s critical that investors look at price fluctuations as opportunity, and not as risk (though academia tells us the exact opposite); as I noted recently, we must work at what we can control – the process – and avoid letting noise (short term market volatility) scare us from sticking with a good investment as it becomes increasingly attractive.
Dealing with macro (political and economic) uncertainty – “You’ve got to, I think, select what is really important and also what you can control – and most of it as individuals, we can’t control; but what we can control is how we react, and if we react by saying, “what can I do to find an opportunity in this mess?”, that’s, I think, the key way that we’ve thought about it.” I think this is so critical – and partially justifies why it may be more productive for most investors to simply ignore macroeconomic factors in company-specific analysis. Again, I think that the important thing is to focus on process – that which we can control – rather than attempting to predict the macroeconomic future – a task that very few (if any) people have shown the ability to accurately do over any period of time; my personal philosophy is that a truly sound analysis process will likely detect anomalies that may underlay unsustainable macroeconomic trends (for example, if you’re looking at home builders and see industry growth outpacing demand by a wide margin, that should cause you to think twice before accepting recent results as an indication of normalized earnings across a market cycle).
Opportunities in China – “People worry about China, and many people have never been there. I was there for a month earlier in the year, and I can’t tell you I know exactly what’s going to happen, but I do know that you’ve got a lot of people and they all want to look good. It’s just a basic human emotion, and the Chinese are just like everybody else.” In David’s portfolio, they’ve positioned themselves for this growth with names like Jardine Matheson, Swatch, Nestle, etc; personally, I agree 100% - and I prefer the cheap and repeatable consumer packaged goods route, via names like Nestle (I don’t own it currently but will soon enough), Procter & Gamble (PG), PepsiCo (PEP), etc.
Tobacco companies (four in the company’s top ten holdings) – “We don’t advocate smoking, but the cigarette companies are huge free cash flow generators, and especially the international ones (BAT and Phillip Morris) - Phillip Morris raised its dividend 10% yesterday (9/12/2012); it yields 3.8% - you get paid to wait.” Again, these companies look so much more attractive than long term bonds – significant pricing power, solidly growing dividends, and going-in yields that put treasuries to shame.
Berkshire Hathaway (BRK.B) – “Berkshire put in a buyback at 110% of book, and we added to the position at 112% of book – so we have 2% downside, really, and a lot of upside.” When he says 2% downside, Mr. Winters isn’t referring to a hard floor – but with tens of billions to spend, I’ve yet to hear a persuasive argument for why Berkshire had more than 5% downside (I’m referring to when I was loading up, back around $80); personally, I agree 100% with Mr. Winters – even after the recent run-up to $90+, I still think that BRK.B looks go at what I believe is roughly a seventy-five to eighty-cent dollar (it remains my largest position – and I’ll be buying more if we see a good pullback).
Apple (AAPL) – “It’s a great company… the problem of Apple, or most of the technology companies, is the product cycle is so short, and I can’t tell you whether the next product is going to be widely received… and if we don’t know, we don’t participate.” I agree with this thought process completely – I personally don’t think the argument for the company’s moat is strong enough, and that inability to innovate in a big way beyond the iPhone will be an issue for a company that has seen truly astounding earnings growth over such a short period of time (net income tripled over the past three years) – but I’ve categorized as “too hard,” and simply will not participate.
