Warren wannabes are everywhere. Here are four value stock managers who have earned their good reputations.
So even though Buffett recently bought into General Electric
Still, there is a whole generation of value investors that are following in the footsteps of Benjamin Graham, David Dodd and now Buffett. They look to buy companies that have a sustainable competitive advantage (sometimes referred to as a "competitive moat"), consistent earnings per share growth and high profit margins. They generally look for companies that are conservatively financed and have low debt. Strong management is an important requirement, and so is a return on equity of somewhere between 15% and 20%.
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Here are four well-known investors schooled in Graham and Dodd stock analysis. They're all carrying on the value tradition made famous by Buffett, the Oracle of Omaha and the richest man in the world.
Pabrai Investment Funds
After reading Buffett's autobiography in the mid-1990s, Mohnish Pabrai was inspired. "I was a moron in investing," says Pabrai. "I was not professionally trained." But Pabrai, who ran a technology consulting and systems integration company, found that he was able to pick up well on Buffett's value investing style and in 1999 started his own fund with $1 million from eight investors.
Today, his Pabrai Investment Funds has $231 million under management allocated among three funds--one for U.S. accredited investors, another for offshore/IRA Investors and a third for U.S. qualified investors. His performance has been impressive. A $100,000 investment in Pabrai's fund on July 1, 1999, and rolled into the U.S. Accredited Fund on Dec. 31, 2002, was worth $266,300 as of Dec. 31, 2008 (after all fees and expenses.) That comes to an annualized return of 10.9% per year. Over the same period, the best-performing index was the Dow, with an annualized loss of 0.2%.
Pabrai's claims his approach is like Buffett in the 1950s when he operated his own investment company, the Buffett Partnership. Instead of chasing diversification, which Buffett also shuns, he invests in industries and companies he is knowledgeable about. He looks for solid management and Buffett's famous "competitive moat," which gives companies an enduring competitive advantage. Before investing in a company, Pabrai estimates the intrinsic value of the company by considering the company's multiple of cash flow, its liquidation value and the value of its intangibles, such as brand. He also estimates what the intrinsic value will be over the next few years.
"The current environment is orgasmic in terms of opportunities," says Pabrai. "Historically, I was happy buying a company at half of what is worth. But now, everything is half of what is was worth so I go much deeper, looking for companies that are worth five to 10 times what the market is pricing it."
What does he like? Pabrai's fund currently owns Horsehead Holdings
"You could shut down the company and sell the plant and equipment and still double your money," he says. Besides, Pabrai sees growing demand for natural resources and over the long term.
Another company in his fund is the Argentina's Cresud
Pabrai says that since we're in the correction phase of a long-term bull market in agriculture, Cresud's aggressive strategy should pay off big over time. Last year gross profit increased by around 60%. In Pabrai's view, when you buy shares in Cresud, you get meat, milk, soybeans and corn, all sitting on rapidly appreciating land.
New York, N.Y.
Leon Cooperman, manager of New York City-based hedge fund Omega Advisors, says that while he is a value investor Warren Buffett, there are differences. "Warren is a far superior investor than I am," he says, "but I'm more eclectic."
The son of a plumber and now a billionaire, Cooperman grew up in New York City's South Bronx. He says that while Buffett's strategy is to buy the right stock or bond at any price, his strategy is to buy any stock or bond at the right price as long as the company has honest management.
While a student at Columbia University's business school, Cooperman used to carpool to class with Mario Gabelli, CEO of GAMCO Investors. The two studied security analysis under Roger Murray, a noted value investing professor and co-author of the fifth edition of Graham's Security Analysis, the bible of modern day value investing.
"Value investing became very appealing to me," says Cooperman. "Why wouldn't anyone want to get more for less?"
Cooperman, who was the head of research and a top strategist at Goldman, Sachs before launching Omega Advisors in 1991, says he shuns the risks of momentum investing, believing that a better long-term strategy is to know that he is making investments in stocks that are fundamentally mispriced.
His strategy has paid off. He says his Omega Advisors fund, with $2.7 billion under management, suffered badly in 2008 but was able to beat the 37% decline in the S&P 500 because he stayed away from financial stocks. While Cooperman believes it will be years before confidence improves and the economy and corporate earnings stabilize, some stocks are good buys now.
Among them: energy companies. His fund owns Transocean
Christopher Browne, William Browne, John Spears, Thomas H. Shrager and Robert Q. Wyckoff Jr.
New York, N.Y.
Tweedy, Browne's illustrious history goes back to 1920, when the company was founded by Forest Birchard Tweedy. From the beginning, the firm aimed to execute trades of stocks that were selling at discounted valuations. That method earned it many customers, including Graham. Tweedy's location was also helpful--just down the hall from Graham's investment company, Graham Newman. (Buffett later became one of his employees.)
In the 1940s, Howard Browne joined the firm and acted as a broker for Buffett, allowing him to accumulate a significant portion of a textile company, Berkshire Hathaway
Over the years, Tweedy, Browne evolved from a brokerage firm into a money management business, investing in companies instead of just executing trades. For the last three decades, Browne's sons Christopher and William have run the company, along with Spears, Shrager and Wyckoff.
"Our portfolios today are a mix of high-quality, Buffett-type businesses and Ben Graham-type bargains," says Wyckoff. When Tweedy, Brown's fund managers invest in companies, they are primarily looking to buy an interest in a business at a discount in the marketplace.
In Christopher Browne's book The Little Book of Value Investing, he explains that Tweedy, Browne likes nothing better than a stock that has fallen below its net worth, perhaps due to an overreaction in the market to a poor earnings report. So, Tweedy, Browne looks for companies selling below book value. This strategy allowed the company to make an investment in 1994 in National Western Life Insurance
Tweedy' Browne's three main funds invest in companies big and small that are undervalued. As its name implies, the Global Value Fund (TBGVX) invests in companies around the world. About 12% of its $3.4 billion in assets is invested in the Netherlands, with another 12% in Switzerland and 9% in Germany. The fund was down about 38% in 2008, mimicking the broader markets.
The Value Fund (TWEBX), which invests at least 50% of its $332.8 million in assets in U.S. companies, performed significantly better than the broader markets in 2008--down 24.3%, compared with 37% for the S&P 500.
While Tweedy, Browne's funds took a hit in 2008, healthy levels of cash reserves--and the fund manager's decision to sell falling knives such Freddie Mac
Today, Tweedy, Browne is again buying stocks, but it does not make the sort of big bets that Buffett does in individual companies. The company, which has $7.6 billion under management, follows a strict discipline of investing a small percentage of its portfolios, about 4%, into any one company. It also limits its exposure to 15% for any one industry.
"We look at everything Warren invests in, and if we recognize the value that he sees and it meets our criteria, we don't hesitate to invest alongside him," says William Tweedy.
One such company is Burlington Northern Santa Fe Corp
Like Cooperman, Tweedy sees value in the energy sector, specifically ConocoPhillips
The funds have recently been adding shares of European companies such as Swiss drug maker Roche Holding
While Tweedy, Browne has avoided the U.S. auto industry, it has invested in Honda
It shares recently traded at around $24, with a price-to-earnings ratio of 9. The dividend yields 1.41%.
Richard Cunniff, Robert Goldfarb and David Poppe
New York, N.Y.
If there was ever a legendary fund, it's Sequoia (SEQUX), managed by New York-based Ruane, Cunniff & Goldfarb. This mutual fund was co-founded by Richard Cunniff and William Ruane, Buffett's stockbroker, in 1970. It got a boost right from the beginning because Buffett, who was liquidating his own investment partnership, advised his clients to take their cash to Sequoia.
Ruane and Cunniff shared the Graham-inspired value underpinnings with Buffett and over the years developed a reputation for focusing on long-term growth of capital. The fund looks for undervalued companies with potential for growth and, like Buffett's Berkshire Hathaway, is willing to hold positions for many years, even decades.
Ruane died in 2005, and since then David M. Poppe and Robert Goldfarb have been managing the fund, which has $3.5 billion in assets. It closed just before history's greatest bull market began in 1982 and reopened last May, as the economy headed into a recession. Over the past 10 years, the fund has provided an average annual return of 6.26%, compared with the S&P 500, which was up just over 3%. While 2008 was a difficult year--Sequoia was down 27%--it still outperformed the S&P 500.
Part of the reason that Sequoia was better able to weather the downfall is that the fund looks for high-quality investments--companies that dominate their sectors and have strong revenue growth and improving margins. Even if a company trades at a steep premium to the overall market, Sequoia will still consider buying it--if its management is excellent and the prospects for its business are still strong.
Among the companies that Sequoia currently holds are: Martin Marietta Materials
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