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Gordon Pape
Gordon Pape


April 05, 2009

In his recently-published 2008 annual report, award-winning money manager Francis Chou quotes an unhappy investor who suggested the poor performance of the Chou funds was due to "premature accumulation".

Mr. Chou, who has always accepted full responsibility for bad results, agreed. "We purchased some stocks at prices that, in hindsight, were too high," he frankly admits. "The ensuing economic crisis, credit freeze and deleveraging severely impacted the intrinsic values of some of the stocks we purchased...As a consequence, we suffered a permanent loss of capital investing in those companies."

The powerful rally we've seen in the stock markets in recent weeks leaves me wondering if this isn't another example of "premature accumulation", albeit on a much larger scale. As of Friday's close, the S&P/TSX Composite Index was up 21% from its intra-day low for 2009 of 7,480, touched on March 6. In New York, the Dow was up more than 23% and the S&P 500 was ahead by 26%. Those are powerful moves. A lot of people have been doing a lot of buying.

So have they been guilty of premature accumulation? I think the answer is yes. Despite all the smiles and handshakes at the G20 meeting in London and the promises of a new global economic order, the fact remains that in the real world things are still in a mess. The latest U.S. unemployment numbers, which pushed the jobless rate to 8.5%, served as a grim reminder of how far we have to go before things turn around.

World leaders, including our own Stephen Harper, went out of their way to dampen hopes for a quick turnaround at their closing press conferences in London. So they should. It now looks as though the recession will continue at least until the end of 2009 and possibly into 2010. The stock markets may be leading indicators, but they don't lead by a year or more. I believe what we are experiencing is a classic bear market rally.

Yes, there are signs that the situation may be stabilizing, as contributing editor Irwin Michael points out in his column elsewhere in this issue. But the stabilization is taking place at a very low point in economic terms. What the politicians are telling us, behind the smiles, is that they are hopeful the rate of GDP contraction will not get worse. As for growth, that's a long way off.

There is certainly more bad news to come. Despite the terrific results posted by Research in Motion last week, most first-quarter earnings reports are going to make for depressing reading. Unemployment rates will continue to rise, as more companies downsize. More U.S. bank failures and/or nationalizations are likely.

One area to watch closely is world trade. The G20 leaders made a big issue of the importance of combating protectionism but the reality is that many governments, most especially the U.S., are succumbing to political pressures to pass measures that theoretically will protect domestic jobs. International trade has already seized up (China's exports have fallen dramatically). If that pattern continues, another depression building block will be cemented into place.

I agree with Irwin that we are going to see continued volatility in the markets for the next several months. That means more triple-digit days, up and down, which will fray investors' nerves. Active traders love markets like this, where they can make big profits in a few days (assuming they make the right calls). But for most people who are trying to save for retirement, or a new home, or their children's education, it's a nightmare. No wonder many Canadians have retreated to GICs, despite their low yields.

My advice to readers who want to retain some stock market exposure is to avoid buying during these strong rebounds except in cases where the share price has not moved up significantly. Otherwise, identify companies you want to own for the long term and then wait for the next inevitable correction. Start to gradually build positions on the downturns, but only make small commitments each time.

Remember Francis Chou's experience: stocks that look like great values today may be even cheaper tomorrow as the world continues to reprice risk and intrinsic values are eroded. So don't fall into the premature accumulation trap. It cost Mr. Chou and his clients a lot of money. Not only did his funds plunge in value but he took a personal hit by returning a big chunk of his management fees because of the poor results. He felt it was the fair thing to do for his investors. The fund industry as a whole would do well to follow his example.

About the author:

Gordon Pape
Gordon Pape is the best-selling author/co-author of many acclaimed investment books, including the recently-published Sleep-Easy Investing (Viking Canada ). He is also publisher and editor of five investment newsletters, including the Internet Wealth Builder, Mutual Funds Update, The Income Investor, and The Canada Report, which was created specifically for U.S. residents interested in investing in Canada . He is a columnist for several magazines and websites and a frequently quoted media source. He has been a featured speaker at numerous events including the World Money Show in Orlando . His websites can be found at www.BuildingWealth.ca and www.TheCanadaReport.com.

Rating: 2.2/5 (5 votes)


Makadia - 10 years ago    Report SPAM

Simple question. What is the difference between Dividend yield of bitten down stocks and intrest rates you get on your bonds and cash?
Batbeer2 premium member - 10 years ago
Dividend is the first to be cut.
Silverpill23 - 10 years ago    Report SPAM
Incredible initiative on Chou's behalf to return a majority or all of management fees in light of prolonged underperformance.
Batbeer2 premium member - 10 years ago
>> in light of prolonged underperformance.

Not underperformance. Unsatisfactory absolute performance.
Silverpill23 - 10 years ago    Report SPAM
yeah, that sounds better.
Batbeer2 premium member - 10 years ago
It's not about sounds.

Look up the performance of his funds. They are not bad in a relative sense. If I'm not mistaken, his WORST fund (Europe) is down 50%; his main fund is down ~40%. From their peaks that is.

Not something to be happy about in absolute terms but the term underperformance does not correctly describe the situation. There are not a lot of fund managers out there that did better.
Silverpill23 - 10 years ago    Report SPAM
yes, you are correct.

I think the thrust of my post was to highlight the fact that he return a portion or all of management fees from his Europe fund.

Perhaps I could have worded that better.
Batbeer2 premium member - 10 years ago
A good post and it reminded me that Chou's report was due.

I had not checked there for a while. I read the report after your post brought Chou back to my attention. Thank you.

My comment was meant to further drive home the point you made not to correct it.

I'm a fan of Chou but I can't bear to hold those stocks. Not good for my sleep. He seems to know what he is doing though.

NTZ, BVF, McClatchy, Topps tiles, Cryptologic, BRK... WOW !

Find the odd one out.
Silverpill23 - 10 years ago    Report SPAM
Definitely agree; you need some serious cajones to handle those securities.

I think the evolution of his investing over the years is something I find personally impressive. Not to mention his ethics.

I think it's interesting how close Chou and Fairfax are. Some of their stock selections overlap. I recall him commenting something to the effect that: he has picked up on quite a bit more about how business truly function after working with Fairfax.

If you haven't had the chance to look over his (and some other) lectures at Richard-Ivey...


Good luck investing.

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