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Holly LaFon
Holly LaFon
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Brandes Quarterly Letter: Margin of Safety, Long-Term Thinking and Succession Planning

Discussion by Charles Brandes's fund

April 11, 2018 | About:

Dear Clients and Friends,

As long-term investors, we have to be mindful and prepared for unexpected events—positive or negative—and how they might impact the investments we make on behalf of our clients. This is precisely why, as value investors, we seek a margin of safety;* we know that we cannot predict the future.

In the first quarter of 2018, our firm dealt with an unexpected event—the retirement of our Founder, Charles Brandes (Trades, Portfolio). Charles, who recently turned 75 years old, decided to retire following negative publicity surrounding his divorce. While the timing of Charles’ retirement was unplanned, well over 15 years ago, Charles and the senior leadership at the firm designed a mechanism that would support an orderly transition of Charles’ ownership whenever and for whatever reason he would leave the firm. In our opinion, this is an example of how we manage the firm in the same way we manage our client investments: in the spirit of margin of safety (i.e., by being mindful of unexpected events) and with a long-term focus. As a result, over a 15-day period in February, the firm reacted to that unexpected event by taking steps to ensure a smooth transition. The mechanics for the transfer of Charles’ ownership are clearly laid out in our partnership agreement and allow the remaining partners to purchase Charles’ stake over the next 10 years without having to secure outside financing.

The transition of a founder and a majority owner can be a significant concern. Over the last few weeks, we have had numerous meetings and calls with clients and prospects to address this topic. Oftentimes, this type of transition creates a liquidity event and can be a major distraction for firms like ours. But thanks to the long-term thinking that the firm’s leadership had when crafting the partnership agreement, this is not the case for us. Our succession program allows us to remain 100% employee owned and singularly focused on the stewardship of our clients’ investments. Our day-to-day operations—management of client portfolios and leadership of the business—are not impacted and our long-term strategic direction remains unchanged.

While Charles had always intended to work well into his 90s and the timing and circumstances around his retirement were not what he had planned, we recognize that he made the decision to retire in order to spare the firm any distraction and to enable us to focus on our jobs. As has been the case for the 44 years since he founded the firm, Charles always put client interests first—and that is a bedrock principle we carry forward.

As an investor, Charles never wavered in his belief in value investing. Over the years, he often drew on his vast investment experience to remind us that margin of safety and a long-term investment horizon are vital in pursuit of long-term investment success. As he moves on to a well-deserved retirement, we pledge to continue to faithfully practice those enduring value investing principles.


Brandes Investment Partners

* Margin of Safety: The discount of a security’s market price to what the firm believes is the intrinsic value of that security.

The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Strategies discussed are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. The Brandes investment approach tends to result in portfolios that are materially different than their benchmarks with regard to characteristics such as risk, volatility, diversification, and concentration. Market conditions may impact performance. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility.

The foregoing reflects the thoughts and opinions of Brandes Investment Partners® exclusively and is subject to change without notice. Brandes Investment Partners® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

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