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Q & A: Which Gurus Are Not Hurt By Credit Crisis?

April 08, 2008

This is an interview GuruFocus had with Swiss magazine BILANZ. The questions and answers.

Q. How did the gurus master the actual financial crunch?

A. Gurus are hurt more with the financial crunch than with previous market crashes such as the internet bubble. Most of gurus avoided investing in internet bubble, and the bubble burst provided them a lot of opportunities. However, the financial crunch was mostly in traditional industries like banking, real estate, insurances etc, where gurus are heavily invested.

However, the financial crunch lowered the valuation of a lot of financial stocks. It provides opportunities for those who have cash in hands and they will benefit from this. That is why we see Warren Buffett is busy getting into bond insurance business.

Q.   Did most of them foresee this crunch and take measures early enough against the downturn?

No. Only a few of them have foreseen the credit crunch. Most of them did not anticipate the severity of the credit crunch. Among them, Wally Weitz, known as “the other oracle of Omaha” had Countrywide as one of his largest holdings; Bill Nygren, manager of Oakmark Fund and Oakmark Select Fund, had Washington Mutual as his largest holding. Famed contrarian investor David Dreman was buying FNM and Washington Mutual (WM) before their share prices collapsed, he has Washington Mutual (WM) as one of his largest holdings.

However, we do have other gurus foresee this. Among them, Robert Rodriguez of FPA Capital Fund has been warning us since 2005 (see: Robert Rodriguez's Perspective on Financial Stocks and Sub-Prime Loans, link: http://www.gurufocus.com/news.php?id=6532). Robert Rodriguez has been avoiding all financials during the past 3 years, he owns only 1% of financials in his fund. Additionally, Fairholme Fund’s Bruce Berkowitz observed that Freddie Mac (FRE) was getting aggressive with their accounting, and he unloaded his holding back a few years ago. Ken Heebner of the CGM Funds took the advantage of this, and he shorted financials.

Q. Who especially was successful with this?

So far we see that Ken Heebner is most successful with this. He shorted Countrywide during 2007. His CGM Focus Fund returned more than 80% in 2007 while others got hurt. Because of this, Ken Heeber was named Investment Guru of Year 2007 by GuruFocus users.

On the other hand, most of other gurus do not short stocks.

The gurus who benefit the most in long term will be the ones who buy bargain stocks now while people are in fear and the prices are distressed. Many of these investments have great upside potentials.

Q. Do you observe that the gurus start to invest because they find attractive opportunities now?

Absolutely! We have seen that gurus have reopened their mutual funds recently, for instance Dodge & Cox and Longleaf Partners. They are seeing opportunities. Wally Weitz wrote in his shareholder letter “We think this is a very good time for investing” (link: http://www.gurufocus.com/forum/read.php?1,21603). Longleaf Fund’s Mason Hawkins wrote: “The fourth quarter volatility gave long-term investors terrific opportunities to pursue… The environment is not dissimilar to that of the fall 2002, and as most of you remember, the aftermath in 2003 was particularly rewarding.”

I have seen that Gurus are buying into distressed banks, insurances, and housing related stocks.

Q. Can private investors like me imitate and invest like they do now, or are these only special situations the gurus are looking for and where private investors can’t follow?

I strongly believe private investors can imitate and invest in what Gurus are investing. Study shows that if one had followed Warren Buffett’s purchases months after his trades, one can still beat the market average by more than 10% a year.

To piggyback on gurus, it is important for private investors to choose the gurus with low portfolio turnovers and relatively concentrated portfolios. This is also why piggybacking Warren Buffett works since his turnover is low and his investments are concentrated around 5 stocks usually.

Buying the stocks Gurus have bought sometimes allows you to buy stocks at lower prices than Gurus have paid. Based on this principle GuruFocus set up a Bargain Portfolio, since Jan. 2007, this portfolio has outperformed the S&P500 by about 10%.

Rating: 4.4/5 (19 votes)


Mattray253 - 9 years ago    Report SPAM
great article!
Cm1750 - 9 years ago    Report SPAM
Great article - that is why Heebner's CGMFX is the largest position in my IRA. I can't think of a better fund for a tax-deferred account - he has huge turnover.
JustSayin - 9 years ago    Report SPAM
some twenty days before this article came this news about longleaf:

Memphis fund takes bn hit on UBS stake David Rothnie
JustSayin - 9 years ago    Report SPAM
Sorry, let me try to give the link again

Memphis fund takes bn hit on UBS stake David Rothnie
Venkys - 9 years ago    Report SPAM
Is the credit crisis officially over?

If not, it is too early to be taking inventory of which gurus have been hurt and which of them eventually made money on their picks.

I don't think Wally Weitz expected to make money in six months on Countrywide, for example.

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