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Make as Much Money as You Can Without Taking on Lots of Risk - Interview with Goodhaven Fund Managers

April 09, 2014 | About:

Larry Pitkowsky and Keith Trauner, Co-Founders, Managing Partners, and Co-Portfolio Managers, GoodHaven Capital Management & the GoodHaven Fund

Larry Pitkowsky: Keith and I started our firm and the GoodHaven Fund to capitalize on our prior success and take advantage of our decades of experience in value investing. We approach investing in a businesslike manner and spend our time trying to find bargains –investments where we think we’re getting a lot more value than we’re giving. In simple terms, we’re trying to make as much money as we can, without taking on lots of risk.

Wally Forbes: Sounds like a good combination.

Pitkowsky: Well, we are significant personal investors in the fund and that should be important to our shareholders. If we’re not willing to own a security personally, we won’t buy it for our fellow shareholders. As one of us likes to say, “Avoiding all losses is impossible, but it is a worthy goal.” So the GoodHaven Fund is set up to concentrate our investments in our best ideas – what we think is the best combination of risk and reward. They are primarily, equities. But we will also invest in other types of securities from time to time. We look at equity, debt, big companies, small companies. That includes those that trade inside the United States and those that trade outside the United States.

So we’ve got a lot of flexibility. We tried to create a structure that would let us go wherever we see good value. Also, we are opportunistic and believe it is not necessary to be fully invested at all times. If bargains are scarce, we’ll hold more cash or investments we think are less sensitive to general market fluctuations. Sometimes that’s a significant percentage of the portfolio. That said, we wake up every day and keep searching diligently. We only need to find a couple of things to do each year to make a difference and generate attractive, risk-adjusted returns for our shareholders and ourselves.

Keith Trauner: We’re approaching the fund’s three-year anniversary. And our executive summary is: so far, so good. We’re up about 15% per annum through the end of last year, which is similar to the market since we started. But we’ve probably averaged about 25% cash during that period. And we believe our portfolio has less risk than the overall market. We believe it has also materially outperformed most hedge funds over that period of time.

Forbes: At this point, where are you in terms of the percentage in cash or non-equities, versus equities?

Trauner: Cash has come down a little bit since the end of our fiscal year. But I’d say it’s still a little bit north of 25% of total assets right now.

Pitkowsky: Cash and cash equivalents.

Trauner: Some of that, by the way, is outside the United States dollar. But it’s essentially highly liquid short-term investments. And it’s worth noting that the Fund doubled in size last year. We had a lot of cash come in during the middle of the year. As you know, last year was an extraordinary year for the indexes that had no cash. So that did help drag down our recent returns. But that doesn’t bother us. It just means that our investment choices were probably a little bit better than they seemed in the second half of the year. So for us, it’s not just about returns. But it’s how you get those returns. We want to compound our money in a way that we’re not taking outsized risks since we’re significant investors in the fund personally.

Forbes: A reassuring policy.

Trauner: We’re always looking for areas of fear or disinterest to find sensible investments. And if you’re looking for bargains, you’re not likely to find them where people are optimistic and valuations are high. So if I was going to borrow from Mr. Buffett, I guess I’d say that we’re most comfortable when most people are fearful about the world. And we’re less comfortable when most seem greedy.

We’re not macro guys. But if you compare where things were a year or two ago to right now, there’s not very much fear out there right now. Five years after the panic lows, most stock indexes are at or near record highs and margin debt is at record levels — which is typically a negative sign. Investment advisory sentiment is also hugely positive — which is typically a negative sign.

There’s been very little downside volatility for an extended period of time. So, we feel a little bit like we just passed a sign on the highway that says, “Dangerous curves ahead.” And we’ve let up on the accelerator a little bit — while most people are still whizzing by at 70 or 80 miles an hour.

Forbes: Got you.

Trauner: But now, having said that, we always assume that there are potentially attractive things to do out there. We just have to keep digging deeper and looking harder. We’ve seen this movie before since both of us have been around for decades and we’ve seen some of these periods before. When you see these kinds of things, you want to be a little more cautious than normal. Our caution gene is now working overtime.

Continue reading: http://www.forbes.com/sites/wallaceforbes/2014/04/01/make-as-much-money-as-you-can-without-taking-on-lots-of-risk/

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