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How Long Should We Continue To Consider Longleaf Partners Worthy Of Guru Status?

March 23, 2013 | About:
Canadian Value

CanadianValue

210 followers
I was recently watching an interview with Monish Pabrai. In the interview Pabrai was asked where he looked for investment ideas.

According to Pabrai, one of his favorite sources of finding new ideas is perusing the holdings of investors that he respects. And I certainly agree, why not cherry pick the very best ideas from the very best investors?

That approach takes you immediately to a short list of the “best of the best” and also in my opinion greatly reduces your risk of making a big error. An idea found this way has also been vetted by the critical eye of a world class investor, usually someone very unlikely to make a major error.

While answering the question posed, Pabrai listed a few investors that he uses as idea sources. One of those investors that Pabrai named was Southeastern Asset Management (Longleaf Partners).

When I heard Pabrai mention Longleaf it got me to thinking.

And what I was thinking was……should we still consider Longleaf (Southeastern) a "Guru" worthy of copying ideas from?

Below is Longleaf’s most recent performance data taken from its annual report:

Cumulative Returns At December 31, 2012
Partners Fund Inception 10 Year 5 Year 3 Year 1 Year
Partners Fund (1987) 1301.23% 83.52% 1.27% 33.46% 16.53%
S&P 500 779.12% 98.58% 8.59% 36.30% 16.00%
Small Cap Fund (1989) 1028.10% 194.89% 28.24% 53.10% 22.96%
Russel 2000 666.18% 152.79% 19.09% 41.43% 16.35%
International Fund (1998) 205.87% 94.23% -18.27% 9.85% 21.23%
EAFE Index 73.16% 120.21% -17.13% 11.06% 17.32%


I should first state that I’ve long been a fan of Longleaf. But an objective look at this performance record over the past ten years has to result in the conclusion that it is pretty mediocre (at best).

Both the Partners Fund and the International Fund have performed very poorly relative to their indices over the ten-year window. The Small Cap Fund looks a lot better.

Much of the Partners Fund struggles over the past ten years can be attributed to two high profile (and somewhat controversial holdings). When you run a concentrated portfolio like Longleaf, two struggling picks can really hurt performance.

Dell – Value Trap

The first major problem has been Dell, which has been an absolute value trap for Longleaf. It has looked cheap on a free cash flow basis for a long time and has a great balance sheet. Dell’s problem has been a deteriorating business which is justifying the attractive-looking valuation:

145450131.jpg

Chesapeake – Depressed Natural Gas

Chesapeake has been a real headache for Longleaf for a long time now. Despite continually voicing their support for controversial CEO Aubrey McClendon, also for a long time, in 2012 Longleaf led a shareholder revolt to take back the Board of Directors from McClendon who is now departing as CEO.

Despite the flamboyant McClendon, the real problem for Chesapeake has been long-depressed natural gas prices which have killed its cash flow.

845129133.jpg

Personally, I think Longleaf should still be considered a “Guru.” A ten-year time period is certainly long enough to assess performance, and Longleaf would likely admit that they haven’t done a great job. However, I believe the firm’s investment beliefs (stated below) are exactly what concentrated value investing is all about.

Longleaf’s Investment Beliefs

· Our in-depth, conservative business appraisals underpin all decisions.

· Long-term horizon provides us with "time horizon arbitrage" opportunities.

· Volatility offers us opportunity.

· Margin of safety determines entry and exit limits.

· "Cheap" is not enough – we want sustainable competitive advantages and value growth.

· Our corporate management partners greatly impact our outcome.

· Concentrated portfolios in our 18 - 22 best investments adequately diversify, reduce risk, and improve return.

· Build bottom-up, benchmark-agnostic portfolios to own the highest quality, most discounted businesses.

Given more time, I believe Longleaf will get back on track.

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 3.8/5 (21 votes)

Comments

Bob_in_Maryland
Bob_in_Maryland - 1 year ago
Excellent topic.

Suggest consideration be given to: (1.) Marc Lasry (Avenue Capital Group); (2.) Michael Novogratz (Fortress Investment Group); (3.) Kenneth Tropin (Graham Capital Management.

Either of the three would be super additions.

Bob
sersoylu
Sersoylu - 1 year ago
If you look at the first few pages of Berkshire Hathaway's annual report where Warren Buffett discusses company performance by means of comparing Berkshire's annual BV changes against S&P, you'll see that in the last 48 years Berkshire only lagged the S&P 9 times. But 5 of those lags occurred in the last 10 years. Out of the remaining 5 years in this period, in 3 of them Berkshire beat the S&P by a couple of percentage points only.

Of course Buffett has a very large portfolio compared to Longleaf or most other gurus for that matter, but if this is what arguably the best investor in the world can deliver, then the decade must have been a rough one.
robertcray
Robertcray - 1 year ago
I believe Longleaf also owned a fair amount of General Motors stock before it went bankrupt.
waup7707
Waup7707 - 1 year ago
Going into 2008, Longleaf owned very large positions in Sprint, Sun Microsystems, UBS, Cemex etc. These stocks crashed during financial crisis and stayed low for many years. Except Cemex, Longleaf sold other positions for big losses and they are still in the red for Cemex. I believe there are some blind spots in Longleaf's research and investment decisions. To be under-performing the market for an extended period of time (say 10+ years), you have to make a lot of big mistakes.
vgm
Vgm - 1 year ago
I agree with the comments above and the general thesis of the article. I'd add LVLT, Allied Irish Bank and Carrefour to the Longleaf faux pas list. Waup7707 makes a valid point in thinking they have "blind spots".

The question of who should be a Guru and who not, came up in various discussions around Hussman. I suggested that a systematic metric should be used to compare all Gurus to separate the wheat from the chaff. One idea was to use rolling 5-year period performance numbers. Buffett used exactly this data in the Berkshire annual a few weeks ago to highlight the fact that they had outperformed the S&P for all such periods (43 in total; see p 103 of the letter). GuruFocus crunched the numbers and published the results for the Gurus here recently.

Based on the fact that investors expect capital growth of their investment, another suggestion was to look at the growth of say a $10,000 investment since inception for all Gurus. If I remember well, I think Longleaf's stated goal is to return 10% pa above inflation.
waup7707
Waup7707 - 1 year ago
For 47 years since Buffett took over Berkshire in 1965, there has been 38 rolling 10-year periods. Buffett has out-performed the market, most significantly, for any one of the 38 periods. Going forward, it's remotely possible that Buffett/Berkshire would under-perform the market for any 10-year period. We need to take a very hard look at any GURU who under-performs, from time to time, the market for a 10-year period.

Prem Watsa is another datapoint (p18 of 2012 letter, 1986-2012) showing that a true guru is not even remotely likely to under-perform the market for any 10-year period for decades of performance records.

In my opinion, it's really difficult to come up with credible explanations or excuses for under-performing the market for one or more 10-year periods.

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