Commentary by John Dorfman
I refuse to believe, though, that people with a long track record of investment prowess have suddenly become stock-market eunuchs.
So I think it’s worth looking not only at what these four men did wrong last year, but at what they’re doing with their portfolios today.
Three of these four celebrated investors run mutual funds, so their results are easy to track:
-- The DWS Dreman High Return Equity Fund fell 45 percent - - including reinvested dividends -- in 2008, and the fund’s board has since deposed Dreman as manager.
-- Heebner’s CGM Focus Fund dropped 48 percent. It had ranked in the top 1 percent of its peer group in 2000, 2001, 2003, 2005 and 2007.
-- A 55 percent decline cursed Miller’s Legg Mason Value Trust. From 1991 through 2005, Miller had the investment world’s longest winning streak, beating the Standard & Poor’s 500 Index 15 years in a row.
Buffett is the chief executive officer and 33 percent owner of Berkshire Hathaway Inc. Berkshire’s stock fell 32 percent last year.
Thus, Buffett was the only one of the four who beat the 37 percent loss for the S&P 500, but it’s safe to say he wasn’t pleased. He compared the experience of investors last year to that of “small birds that had strayed into a badminton game.”
I believe that these investors’ past success, and investment experience, worked against them in 2008. Experience may have told them that the U.S. stock market doesn’t decline much more than 35 percent, especially when interest rates aren’t high or rising.
Their judgment may have told them that, after the sour tone of the first nine months of the year, a rebound was likely. Instead, stocks collapsed in October and November.
Relying on judgment and feel honed over a few decades is usually a wise course. But it can give a false reading when the market succumbs to panic.
Buffett’s company recently bought shares of U.S. Bancorp, a bank based in Minneapolis that is a major custodian for mutual funds. The bank has tangible common equity of 3.2 percent of tangible assets, indicating it is one of the nation’s more solid large banks. Its stock sells for 15 times earnings.
Berkshire Hathaway has also increased its holding in Union Pacific Corp., the second-largest U.S. railroad, which is based in Buffett’s home town of Omaha, Nebraska. In April, Union Pacific reported that profit had declined less than expected, thanks to lower fuel costs and job cuts. The stock sells for 11 times earnings.
Another recent purchase is Johnson & Johnson, based in New Brunswick, New Jersey. That acquisition replenished a holding that Buffett had depleted reluctantly to fund large fixed-income investments in Goldman Sachs Group Inc. and General Electric Co.
Dreman, in the DWS Dreman Small Cap Value Fund, recently acquired shares in Legg Mason Inc. The Baltimore-based money- management firm has posted losses five quarters in a row, but retains a good reputation in the financial industry.
The fund also expanded its holdings in Helen of Troy Ltd. (hair-care products), RPM International Inc. (maker of Rust- Oleum paint and specialty chemicals) and General Cable Corp. (a maker and distributor of cable).
Heebner is known to change his holdings frequently and abruptly, so information based on regulatory filings is sometimes misleading. With that caveat, as of March 31 the biggest position in his CGM Focus Fund was Morgan Stanley.
Too Much Leverage
The New York-based investment bank’s stock sells for 1.1 times book value (corporate net worth) and 0.7 times revenue -- attractive ratios. Personally, I wouldn’t buy Morgan Stanley unless it deleverages considerably. Right now, debt is more than 13 times equity.
Also new, and almost as large a holding, was Amazon.com Inc. The Seattle-based Internet retailer’s earnings held up well in 2008, a recession year. The company earned a record $1.39 a share before one-time items, up from $1.12 in 2007.
As for Miller, perhaps his next hot streak has already begun. After 15 years of beating the S&P 500, his Legg Mason Value Trust trailed it three years running in 2006-2008. This year through May 29 he is up 12 percent, while the S&P is up only 3 percent.
Miller recently added to his holding in State Street Corp., which as of March 31 was more than 3 percent of his fund. Like U.S. Bancorp, it is one of the leading custodians for mutual funds.
State Street’s Appeal
I agree with Miller that State Street looks attractive. Though not immune from the recession, it has held up well, with first-quarter earnings of $1.04 a share before items, down from $1.39 last year. Net income has grown at a 20 percent clip the past five years, yet the stock sells for 10 times earnings.
I predict that at least three of these four investment titans will have good years in 2009.
Disclosure note: Personally and for clients I own shares of Berkshire Hathaway. I have no long or short positions in the other stocks discussed in this week’s column. My firm has a business relationship with U.S. Bancorp.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
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