Legg Mason fund manager, Robert Hagstrom was one of the interviewees on last Monday's edition of WealthTrack.
In my opinion, Hagstrom's greater contribution to the world is not as an asset allocator, but rather as a best-selling author. His books The Warren Buffett Way, The Warren Buffett Portfolio, and Latticework all raised the level of understanding and awareness with regards to Value Investing. In my opinion, all three are invaluable resources for becoming a more successful long-term investor.
In the last 5 minutes of the WealthTrack interview, the host provides a tight summary of Hagstrom's first book - which is about Warren Buffett's Value Investing Philosophy.
Below I provide some excerpts from Hagstrom's comments in the interview. As you will see from my thoughts (tagged IV in blue), I wasn't as impressed as I was from his books.
"It's true, the economy is weak, and it's true, there's a lot of negativity in the market, but these times are also the seeds of future excess returns. I think it's time to be cautious, a time to stay with quality, but I think if you look back at periods like this - these are the opportunistic periods that allow you to build a portfolio that's going to generate very high returns, much better than the market rate of returns".IV: Why do some investors see what's happening in the market now as a terrible thing, while others are actually glad? The difference between these 2 camps is their 'investment horizons'. Short term oriented investors are having trouble dealing with the recent market weakness. Those investors that adopt a longer investment horizon view these periods as an opportunity to invest in great companies at bargain prices. Hagstrom's fund has an average holding perid of 3 to 4 years - so it is little wonder that he is concerned.
IV: In the interview Hagstrom indicated that his fund is now 100% fully invested in the market (i.e. it's cash holdings are minimal). I found this strange considering the fact that his previous comment suggested that this is the opportune time to look for great prices. If he thinks this is the case, why doesn't he keep some cash in reserve - like Fairholme's Berkowitz or First Eagle's Eveillard? Perhaps Legg Mason's team believe that the worst is already behind us? I don't know.
"We've taken the Warren Buffett Way, the Warren Buffett Process, and tried to apply it to the new economy".
IV: Hagstrom's top 5 holdings are Nokia, Yahoo, Amazon, Qualcomm and E-Bay. They make up a little over 30% of the fund. So he's definitely 'new economy'. I can see how he applies Buffett's principles of businesses with economic moats (you could argue that each is the dominant brand in its space), but what about predictability of future cashflows? You know there's going to be growth - but isn't that already factored into the high valuation multiple? How does one seek a 'Margin of Safety', the centerpiece to the 'Warren Buffett Process', when it is not easy to forecast future cashflows? This is why I wrote in my last analysis of SanDisk that Warren Buffett would not touch it.
When WealthTrack's host, Consuelo Mack, asked Hagstrom whether those stocks offer protection in a weak economy he replied:
"If we go into a recession, there's not much of anything that you can own that will do exceptionally well."
IV:Now I'm not sure about you, but I find this reply a little strange. How about company's that hold large positions of cash? Like Buffett's Berkshire Hathaway (BRK). That's what Sequoia, Fairholme and Eveillard have done - invested heavily in a business with strong cashflows and a strong cash position. When the market really craps out - you can count on Buffett to be pick out the treasure from the trash. How about Charlie Munger's favorite Costco (COST)? Costco will benefit in a recessionary environment as people seek ways to save money - and Costco is certainly one of the obvious places to do so. Another is GEICO - with a reputation as a cheap Insurance provider. Oh - that's right - it's owned by Berkshire.
If you can think of any other investment ideas whose business might benefit from a recessionary period - I'd love to hear them.
Signing off for today: "May you always possess the Wisdom to see what the market does not, and the Courage to act on it".
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