Larry Pitkowsky: What we’re trying to do is to find a few sensible investments that will allow us to compound our hard-earned money and our shareholders’ hard-earned money without taking a lot of risk. We started the GoodHaven fund a little over two years ago. Since we started the Fund and through the end of May, we were up around 40% while holding a lot of cash. Better than the market and much better than most hedge funds. So far, so good.
Wally Forbes: Holding a fair amount of cash and achieving that kind of a return is good.
Keith Trauner: Yes – it’s not just about return but how much risk you assume to make that return. As a general rule, we think there are two basic approaches to trying to deal with investments and what happens the day after you buy them. One is you can try and predict the future. But we don’t think very many people are good at that and we certainly don’t think we have a crystal ball. Or, two, you can position yourself to react to what happens. That’s one of the reasons why we like having liquidity around when people are generally more positive and there’s not as much fear – recently, people seem to think the world is wonderful, but there are still plenty of reasons to be cautious.
But when you have liquidity and other people don’t, the value of that liquidity multiplies under stress. So we try to follow Buffett’s rule, you know, which is “Be greedy when most are fearful, and fearful when most are greedy.”
Forbes: What is the percentage range of your liquidity when everybody’s negative? Do you build it up when everybody’s happy? Is that what you do?
Trauner: It’s really not a timing issue. I mean it’s a function of three things. Liquidity is a function of inflows or outflows into the mutual fund. It’s a function of the opportunity set we see at any given time. And it’s a function of being a mutual fund.
If we see something with a juicy return, we’re happy to buy it if we have the cash. And in a mutual fund structure you always want to have some cash. Because having cash is a tremendous cushion — especially for stressful times. We want our shareholders to have a long-term view and understand that when the rest of the world is going crazy, we have a cushion that’s not going to put us in a position where we’re forced to sell under stress. We never want to be in that position. We always want to be in the position where we can actually buy something under stress because of liquidity that we’ve husbanded from better times.
Forbes: Is there some percentage you usually maintain as a minimum?
Trauner: No. Since we started, Wally, we’ve probably averaged 20% or 25% cash and yet our returns have been pretty good. We’re north of 30% today, and that’s on the high side of our comfort zone. We really don’t want to have too much more than that. But we don’t let it burn a hole in our pocket.
Pitkowsky: One other thing before we get into specific recommendations, Wally. GoodHaven’s tag line is: “Our money is with yours.” It’s very important. When we look at companies, we prefer management teams that have skin in the game and the shareholdings in their companies are important to them as a percentage of their net worth. We behave the same way – our personal investments in the fund and separate accounts represent all of our investable assets except for our homes and some cash. And that’s the way we think it should be.
Forbes: I see. So you also have your own investments in your fund.
Pitkowsky: We certainly do. And we think that’s the only way it should be.
Forbes: Then you’re able to talk with some conviction about your funds.
Trauner: Well – why would a shareholder have confidence in our investments if we don’t? Mutual fund shareholders should expect their managers to have skin in the game.
The only other general comment I would make is that we have tried to set up the fund to have as many degrees of freedom as we could. We can look at a wide variety of securities and investments. So while our favorite investment is always going to be a dominant company with a great balance sheet and talented capital allocators – that we can buy at a price where we start out with a pretty high free cash return on our cost – we’re willing to look at other things as well.
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