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%|
|Small Cap Fund (1989)||1028.10%||194.89%||28.24%||53.10%||22.96%|
|International Fund (1998)||205.87%||94.23%||-18.27%||9.85%||21.23%|
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:
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.
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.
- Mason Hawkins Undervalued Stocks
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