VIDEO: Warren Buffett Interview on Fox Business (Oct. 18,2007)

The Fox Business Network which commenced operations last week, hit it off to a great start with this great one-hour interview with Warren Buffett. The interview was conducted by Liz Clayman, formerly of CNBC, who recently joined the network. This was not her first interview with Buffett, and as always, Buffett's humility, candor and wisdom does not disappoint.

Below are some of the video excerpts from the interview, along with the gems that I extracted and some personal thoughts (in blue and tagged with 'IV').

On the Economy (6 Minutes)

"We don't really worry that much about Fed policy, and actually we don't really worry that much about a recession - I hope I live to see a couple recessions."

IV: Value Investors do not pay too much attention to macroeconomic figures such as interest rates, inflation, unemployment figures or the trade balance. They only focus on the fundamentals of the business they are analyzing. As they are long term investors, they know that the businesses they invest in will one day go through a recessionary period. It is inevitable. It is for this reason that when analyzing a company, Value Investors look at the 10-year financial history, and assess how well the business fared during the tougher years.

IV: "I hope I live to see a couple recessions." - This is typical of the Value Investing philosophy - Value Investors love market weakness - as these are the times when the best buying opportunities are available. Incidentally, I recently met with the Managing Director of one of Israel's largest mutual funds businesses, and he was telling me how tough this environment was for him, and how these were dark times for the business. His fund managers are not seeking bargains now, but rather taking the market's lead, and exiting their positions.

"When the tide goes out, you see who's been swimming naked".

IV: This is one of my favorite Buffett quotes - one he has used many times. What he means by this is that it is easy to do well as an investor when the market has been rising and you are buoyed by it. The real test however is when the market suffers significant weakness, and investors flee to 'quality' and defensive companies. One such company is Buffett's Berkshire Hathaway (Ticker:BRK)- which has increased 20% since last July.

On Selling Petrochina (5 Minutes)

"Unfortunately I sold it a little too soon..... we made about $3.5 billion on a $500m investment... I still sold it way too soon.... Charlie would say 'you've done it again!".

IV: This type of comment is vintage Buffett, and which has endeared him to fans and investors around the world. He doesn't speak with bravado declaring 'look I turned $500m into $3.5b but rather - 'I screwed up' - I sold it too soon. It's this type of candid talk which Value Investors look for in the management of businesses they are analyzing.

"It was a 100% decision based on valuation."

"We think about 'how much is it selling for?... 'how much do we think it's worth?"

IV: Value Investors do not try to time the market. They do not seek 'bottoms' or 'tops'. Their investments are based on their estimate of what the entire business is worth.

When asked 'How did [Petrochina] come to your attention? How do you find a stock like that'?

"I sat there in my office, and read an annual report, which fortunately was in English - and it described a very good company..... I sat there and said to myself this company's worth about $100 billion (and at the time it was trading for $35 billion). Now I didn't look at the price first. I looked at the business first, and tried to figure out what its worth - because if I look at the price first I'll get influenced by that. I look at the business first, I try to value it and then I look at the price. If the price is way less than what I just valued it at, I'm going to buy it."

"Other guys read Playboy. I read annual reports....I just read every report I can and figure out whether something is cheap."

IV: Buffett's message is clear. You've got to do the work yourself. No shortcuts. Don't listen to analyst reports or rumors. Do your own independent research. Read the annual reports. Look for what the rest of the market is not seeing.

On Buffett's Best Investment Ever (30 seconds)

IV: Those who know Buffett's history will know already that this investment is GEICO. The story goes that whilst studying at Columbia under his mentor Benjamin Graham, the 21-year old Buffett discovered that Graham was on the Board of GEICO. One Saturday morning, he boarded a train and headed to GEICO's headquarters, which were closed. He found a janitor and pleaded with him to take him to someone who worked for the company. The janitor took him up to the only person in the building at the time - Lorimar Davidson, GEICO's Chief Investment Officer. The young Buffett made enough of an impression on the senior executive that Davidson ended up chatting with him for 5 hours. By the end of that Saturday Buffett recognized GEICO business potential, and why Graham had invested in the business. Soon after Buffett invested 75% of his net worth - $9,000 and sold a couple of years later for a 50% profit. In the late '70's Buffett returned to GEICO, and invested more than $47 million into the company. Today that investment is worth more than $9 billion.

You can read a 1951 analysis of GEICO written by a young Buffett here - "The Security I Like Best" - (thanks to Oded for the link).

Buffett on Bear Stearns (50 seconds)

Buffett on the Yankees (2 mins)

Buffett on Succession (1 min. 41 secs)

"All Three [CEO's] of them are far better than I am".

IV: In my opinion, this is one of the secrets to Buffett's success. Buffett's investment company owns 49 private businesses, that employ more than 217,000 employees. The CEO's that run these businesses are all independently wealthy and do not really need to work. Yet they continue to work under and remain extremely devoted and loyal to Buffett. The reason for this is simple: Buffett refuses to take credit for Berkshire's success. Rather he gives all the credit to his managers, often making statements like "All three are far better than me". This is how you earn long-term loyalty. In contrast, a CEO who takes all the credit for himself will inevitably chase away great executives and managers.

Value Investing Principle #2: Value Investors Are Highly Loss Averse

Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1

- Warren Buffett

Value Investors are not just risk averse – they are loss-averse. Protecting the initial investment always takes priority over the objective of capital growth. I liken this to special operations in the military, where there are always at least 2 primary objectives:

(1) the mission at hand
(2) that all operatives involved in the mission return home safely.

The safety of the soldiers always takes priority over the mission's objectives (at least in the Israel Defense Force, which does not believe in 'suicide missions') and their lives will never be endangered unnecessarily. As such all efforts are made to minimize the risks involved and if it is decided that the risks are too high, then the mission is not approved.

And so it is with Value Investing. Value Investors adopt an attitude of 'better safe than sorry'. They are extremely reluctant to take unnecessary risks. You might as well call them the "Chickens of the Investment World". (However, when the market is driven by fear and panic, or behaves irrationally Value Investors display courage and daring that is extraordinary – more on this later).

This also makes a lot of sense. If you invest in a portfolio of stocks worth $100,000 and a market correction occurs decreasing the value of your investment by 50%, what percentage increase is required to return your portfolio to its initial value? Not 50% as you would intuitively think - but 100%. It now has to move twice as much just to return it to its initial value.

So how do value investors assess risks and minimize the probability of investment loss?

(1) Value Investors demand a Margin of Safety
(2) Value Investors are committed to rigorous investigative research
(3) Value Investors only invest in businesses that they fully understand
(4) Value Investors seek businesses that possess 'Economic Moats'

I will discuss and explain each of these points individually in the next couple of posts.

Shabbat Shalom and Have a Great Weekend,

Avi

VIDEO: Fairholme's Bruce Berkowitz Interviewed on CNBC

Maria Bartiromo interviewed Fairholme's Bruce Berkowitz yesterday on CNBC's Money Masters Series. The $6 billion Fairholme Fund (FAIRX) which has adopted Warren Buffett's Value Investing playbook has outperformed the market in 7 of the last 8 years (including this year) since its inception. If you had invested $10,000 with Berkowitz when he set up the fund in 1999, that investment would be worth today nearly $36,000. That's an average annual return of 17.8%. A similar investment in the S&P 500 would have earned you just under $12,000. In the last year alone, the fund achieved 17% returns.

Street Smarts: Value Plays

A Gem from the Interview

When Bartiromo asked him how he screens the market, and what he looks for in an investment, Berkowitz's reply could have been scripted by Buffett himself:

1. Great Owner / Managers that do well in all economic environments.
2. Businesses that generate significant free cash flow.

The relevance of both these points to Value Investing cannot be emphasized enough. Firstly, Value Investors focus on free cashflow, not net profit. Net profit can be manipulated or distorted by one-time items or non-cash expenses (such as depreciation). Cashflow is the only thing that matters. Secondly, cashflow must be assessed across an entire business cycle - preferably 10 years and at least 7. And you need to be looking at what's happening to cashflow during the recessionary years. That's what Berkowitz meant when he said "in all economic environments".

What is Fairholme's Long-Term Performance?

1 Year: 23.33% (S&P 500 - 15.54%)

3 Year: 19.94% (S&P 500 - 13.90%)

5 Year: 19.79% (S&P 500 - 13.99%)

I think these returns speak for themselves.

How was this Performance Achieved?

Fairholme's Value Investing style is best viewed by looking at some of the Fund's metrics. In particular:

(1) Fairholme does not diversify - it has 24 holdings only. In fact, 2 of it's holdings - Berkshire Hathaway (BRK-A) and Canadian National Resources (CNQ) make up just over 35% of the entire portoflio's value.

(2) Fairholme is a Long-Term Investor - the fund's asset tunover is 20%, which means it holds its investments on average for 5 years. You couldn't ask for clearer proof of patience or analysis conviction.

(3) Fairholme is 'Cash-heavy' - Like most Value Investors, Berkowitz views cash as a strategic asset - to be stored and hoarded, and to only be used when great opportunities arise. The Fund does not feel compelled to be fully invested in the market, but rather waits for doom and gloom periods where better value can be found. It currently has 22.5% of its assets in cash.

Fairholme and Berkowitz's team have clearly demonstrated that stellar returns are achievable by a combination of good old fashioned patience, fundamental and research and rational analysis. Value Investing is not rocket science; It just demands that you think critically and independently.

Jean-Marie Eveillard interviewed on Wealth Track

Jean-Marie Eveillard, one of the most successful Global Value Investors in the last 25 years, was interviewed today on Consuelo Mack's Wealthtrack. The video can be viewed here. While the interview offers a glimpse of Eveillard and his outlook and expectations, a look at his portfolio and his current holdings is far more telling. But first, a bit of background info on Eveillard.

Who is Jean-Marie Eveillard?

The 67-year old Frenchman who resides in New York managed the $13.1 billion First Eagle Global Fund (SGENX) for 26 years before retiring in 2005. Earlier this year he returned to his post after the previous fund manager, Charles de Vaulx suddenly resigned. Eveillard has earned a reputation as a cautious, conservative and patient value investor that refuses to overpay for growth potential. Morningstar named him International Stock Fund Manager of the Year in 2001, and in 2003 he received Morningstar's Lifetime Achievement Award. Read on to discover why.

What is First Eagle Global's Long Term Performance?

The fund's long term performance is extremely impressive. It absolutely trounced the relevant benchmarks, with 10-year annualized returns that are more than double the returns of the benchmarks referred to below.

When compared to its peers over the past 20 years, Eveillard's fund outperformed the average global fund by an average of 5% per year.

The fund trailed the market from 1995 to 1999 as a result of Eveillard's reluctance to follow the crowds into the 'Internet hype'. Those investors in his fund who were willing to persevere through this period were well-rewarded in 2000, 2001 and 2002 when the fund returned 10% each year, while the overall market was losing value.

It is worth mentioning that Professor Bruce Greenwald of Columbia University (Buffett's Alma Mater, and where Benjamin Graham, 'Father of Value Investing', taught) recently joined the fund as Director of Research. He is also the author of 'Value Investing: From Graham to Buffett and Beyond'.

What Can We Learn From the Fund?

The very first thing we can observe is that Value Investing as an investment philosophy works - you've just got to possess the gumption, stamina and patience to ignore the what the market is doing, and focus on the long term. Now let's see how this was implemented in this fund:

Asset Turnover: The fund's asset turnover is 29%. Basically this means that 29% of the fund's portfolio is sold within a year. In other words, the fund holds each stock on average between 3 to 4 years.

Asset Allocation & Current Holdings: An examination of the fund's asset allocation and top holdings reveals much about Eveillard's near-term market outlook and expectations.

(1) The fund holds 20% of its assets in cash. This suggests that he is waiting for a correction and is now 'keeping his gun powder dry', and / or that he is unable to identify relevant value investment ideas. Whatever the reason - this suggests that he believes the market is expensive and is due for a correction.

(2) The funds top 3 holdings are:

• Gold (3.37% of the portfolio) - which is inversely correlated with the market (it moves in the opposite direction to the market). Gold is often viewed as an ideal investment option when seeking to protect one's investment portfolio in the event of a market downturn.

• Berkshire Hathaway (BRK) (2.51% of the portfolio) - Warren Buffett's investment holding company, which also holds $47 billion in cash (24% of Market capitalization). Berkshire is the ideal company to be invested in when the overall market outlook is uncertain and a when a market correction is anticipated.


• Costco Wholesale Corp (COST) (2.21% of the porfolio) - This high-volume, no frills warehousing chain offers the lowest prices and widest variety of products to consumers, and will benefit in the event of a weak global or US economy and when the market weakens. Costco, like Gold and Berkshire also represents an ideal defensive investment. Charlie Munger (Warren Buffett's partner), has difficulty hiding his zealot-like admiration for the company and serves on its board. In the 1999 Berkshire Annual Shareholders' Meeting he gushed:
  
  

  "I'm such an admirer of the Costco culture and the Costco system that I'm not sure I'm totally rational.I love the place."

Seeing the levels of cash and defensive holdings it is obvious that Eveillard is expecting a serious storm and is 'battening down the hatches'.

Eveillard Quote:

"The success we've had over the years has a lot to do with the fact that we don't try to keep up with the Joneses on a quarterly or even past-year basis. It's the willingness to take short-term pain that distinguishes us from other investors. We're looking to reward our long-term investors".

- from "Back in First Eagle's Nest", MarketWatch, Dow Jones, March 26, 2007

Further Reading:

The August 2007 edition of Financial Advisor Magazine features a 7-page article titled "The World According to Eveillard". In it, he outlines the Value Investing philosophy and why Value Investing is so difficult. You can read it here.

Business 2.0: Israel is One of the Top Places to Do Business in the Wired World

If you were asked to list the 12 top cities to do business in the 'wired world', which cities would you name?

In a recent article by Business 2.0, such a list is given. The cities include:Bangalore, Barcelona, Helsinki, Hong Kong, London, Seoul, Shanghai, Singapore, Stockholm, Talinn, Tokyo and yes - you guessed it - Israel's very own Tel Aviv.

Seeing Tel Aviv included on such a list, with the exclusion of major cities such as Sydney, Paris, Berlin and Rome, arouses a twinge of patriotric pride. Considering the fact that Israel is:

- less than 60 years old

- smaller than the size of Lake Michigan

- with an estimated population of around 7 million

- surrounded on all borders by unfriendly neighbors

- and has fought a war in every decade since it achieved independence

it is no small achievement that Tel Aviv is counted amongst the most technologically-friendly places to do business in the world.

Value Investing Principle #1: Value Investors are Voracious Readers

"Formal education will make you a living;
self-education will make you a fortune."
- Jim Rohn

The more that you read,
the more things you will know.
The more that you learn,
the more places you'll go.
- Dr. Seuss

OK OK – I know what you're thinking – you've already read the post last month on the 'Secret to Becoming a Successful Investor' – and you get it - reading is important. I am repeating the message one last time for good reason: As you will come to discover (and I assure you I will point it out), the 'reading principle' is the essential ingredient and a pre-requisite for almost all other Value Investing principles. Choose to ignore it and one stands little chance of successfully adopting and implementing a Value Investing philosophy.

In studying the Value Investing discipline, I quickly recognized the one trait that all successful Value Investors have in common: they are all voracious readers. They are curious individuals by nature, and possess a keen desire to make sense and meaning of the world they live in. It seems that what they read is not confined to the areas of investment and financial markets, but rather spans a diverse range of subjects that include psychology, economics, and science.

Warren Buffett reads 5 newspapers a day, and devotes 75% - 80% of his day just reading. His partner, Charlie Munger observed:

"Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you. Warren was lucky that he could still learn effectively and build his skills, even after he reached retirement age. Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is."

On another occasion Munger declared:

"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time – none. Zero. You'd be amazed at how much Warren reads – and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out of it."

And neither Buffett nor Munger are exceptions to the rule. Legendary GEICO Co-Chairman, Lou Simpson spends 5-6 hours of his day reading. Mohnish Pabrai and Whitney Tilson, two of the most recent generation of successful value investors are also known to read extensively.

So how does adopting the habit of extensive reading benefit your Value Investing performance? The obvious benefits are:

Investment Idea generation: reading will assist you in recognizing global trends that are unfolding and which can be capitalized on.

Learning Value Investing Rationale: As Mark Twain once said:"History does not repeat itself, but it does rhyme." It is highly beneficial to examine and understand the rationale behind the successful investments made by leading Value Investors. Getting into the minds of such investors will allow you to slowly recognize similar opportunities as they arise.

The Habit of Reading is also the secret weapon that allows the Value Investor to:

• Accurately Assess & Expand one's Circle of Competence
• Add New 'Tools' to your Mental Toolbox
• Improve one's ability to perform independent and critical analysis
• Strengthen one's Investment Conviction: enhancing one's ability and to ignore the experts and the 'consensus crowd' and to develop the courage to adopt contrarian positions.
• Enhance one's ability to maintain a rational outlook when the rest of the market is losing their heads and operating on pure emotions ('fear and greed').
• Adopt a Longer-term Investment Horizon and Ignore Short-term market fluctuations.
• Recognize the Difference between Value and Price.
• Identify and Embrace Change, and Learn and Adapt

I will discuss most of these in greater detail in future posts.

On a Personal Note:

Those who know me well will tell you that books have always been an important facet of my life and have played a formative role on how I view the world. As a child and throughout high school I read avidly; whilst doing my military service I always carried a novel in my kit; and since entering the workforce I have always carried a book, journal or magazine that I could turn to whilst riding or waiting for the bus or train. I have relocated 3 times – to 3 different continents – and each time the important books ('the keepers') have come with me. I can look at any one of these books and tell you where I bought it (or who gave it to me), when I read it and who recommended it. I seem to surround myself with friends that are also readers, and I especially enjoy sharing the knowledge with them. I absolutely love and appreciate great book recommendations.

On first dates and in interviewing employees I often asked 'candidates' about the books they were currently reading or what books had influenced them. I firmly believe that you can tell much about a person's intellectual curiosity from what they are 'feeding their mind'.

I'll sign off with some advice dispensed by Emerson and highly applicable when one meets a successful Value Investor:

"If we encounter a man of rare intellect, we should ask him what books he reads." - Ralph Waldo Emerson

You can view a comprehensive list of books recommended by Warren Buffett and Charlie Munger here.

Other Quotes of Significance:

"What we become depends on what we read after all the professors have finished with us." - Thomas Carlyle

"If a man empties his purse into his head, no one can take it away from him. An investment in knowledge always pays the best interest." - Benjamin Franklin

"A home without books is a body without a soul." - Cicero

"I have often reflected upon the new vistas that reading opened to me. I knew right there in prison that reading had changed forever the course of my life. As I see it today, the ability to read awoke in me some long dormant craving to be mentally alive." - Malcolm X

"It isn't what the book costs; it's what it will cost if you don't read it." – Jim Rohn

"Learning is the beginning of wealth. Learning is the beginning of health. Learning is the beginning of spirituality. Searching and learning is where the miracle process all begins." – Jim Rohn

"Ignorance is not bliss. Ignorance is poverty. Ignorance is devastation. Ignorance is tragedy. And ignorance is illness. It all stems from ignorance." – Jim Rohn

"What you don't know will hurt you." – Jim Rohn

What is Value Investing?

The raison d'etre of this blog is to explore Value Investing opportunities that are abound in Israel. Before I begin to discuss why Israel presents some great value investing opportunities, I think it might be worthwhile looking at what Value Investing is really all about. The next 20 or so posts will examine the different principles that make up Value Investing. After that – a bit about Israel – and then – hopefully dear reader, we will have the tools to begin analyzing some real deals.

So what is Value Investing?

Value Investing is an investment philosophy based on the framework developed and taught by the late Benjamin Graham and practiced by some of the world's most successful investors. The entire framework rests on the belief that the stock market will on occasion behave irrationally, and offer to willing buyers prices that are extremely attractive. In such instances, Value Investors, just like savvy shoppers, will swoop down and pick up 'bargains'.

Numerous research studies have demonstrated that Value Investing has shown superior returns over the long term when compared to other investment philosophies. One such recent study can be viewed here.

While Value Investing is easy to learn (there are no complex formulae), the discipline, focus, patience and extent of research that is required makes it difficult to implement.

Value Investors do not buy stocks; they invest in businesses. The difference between the two is like night and day and must be understood at the onset.

A typical Value Investment possesses all three of the following characteristics:

(1) A Great Business
(2) Run by Great Management
(3) Invested at a Great Price

Finding a business that meets all 3 criteria is not easy. This is why when such an opportunity is located Value Investors tend to invest a 'meaningful amount' of their funds – what Mohnish Pabrai refers to as 'backing up the truck'. This is also why Value Investors tend to be long-term oriented – once we've found 'value', we want to benefit as much as possible from the 'value' we discovered. Value Investors ignore the market and daily-fluctuations of stock price, and rather focus on business fundamentals such as sales, profit margins, cashflow, debt levels and inventory management.

Pretty simple huh? No fancy-shmancy PhD-level statistics and no Greek letters – just plain-old common sense.

You probably now have some / all of the following questions on your mind:

(1) What do Value Investors define as a great business?
(2) How do Value Investors locate great businesses?
(3) How do Value Investors recognize 'great' management?
(4) What do Value Investors consider a 'great' price

All these questions – and more - will be addressed in the coming posts.

I'll sign off with a relevant passage from Warren Buffett's 1992 Berkshire Hathaway Letter to Shareholders:

"We think the very term "value investing" is redundant. What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening).

Whether appropriate or not, the term "value investing" is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase."