more on CHou from Moneysense a canadian business magazine:
"Reading Graham taught Chou that most people buy stocks the wrong way. They get carried away by emotion and buy shares that are rocketing upward. But that strategy is doomed to failure. Think about the mentality of a smart shopper: she doesn't load up on eggs because their price is shooting upward. Instead she looks for bargains. "All you have to do is transfer that mental approach to stocks," Chou says. "But when people buy stocks, instead of looking for bargains, they tend to listen to stories and chase stocks that are going up."
To put his reading into practice, Chou helped launch an investment club at Bell Canada in 1981. He and six co-workers began with a total of $51,000. Five of those original investors are still in the fund to this day, and four of them are now millionaires. In fact, if you had invested just $50,000 with Chou when he turned the investing club into the Associates Fund back in 1982, you would be worth $1.6 million yourself.
His mantra from day one was to always invest with what Graham called a margin of safety. Chou won't buy a stock unless he can get it at a 40% or 50% discount to what he estimates its true value to be. When he began investing in the '80s, he was delighted to find that the market was swimming with such bargains — but he now finds that the obvious deals have disappeared. "As recently as 1999 there were some sectors that you could buy for cheap," Chou says, "but right now, almost all sectors are fairly valued. The mispricings disappear when there's a lot of money chasing deals."
If that sounds discouraging, keep in mind that Chou is a natural pessimist, and his investors have become used to his annual forecasts of doom and gloom. In his 2004 annual report, for instance, Chou wrote: "In today's climate, almost all sectors are overvalued … We would caution all investors that from these overvalued levels the chances of a large permanent loss of capital are extremely high." He added that the double-digit returns of the past would be "virtually impossible to duplicate." So what kind of return did his Associates fund reap in 2005? A rock-solid 13.7%.
Despite his dire warnings, Chou has been remarkably consistent through good markets and bad. In 24 years of investing, his Associates fund has had only three losing years, and because his strategy doesn't rely on rising markets, his performance has almost no correlation with other funds. For instance, his worst year in recent history (-9.6% in 1999) took place during the tech boom, when most Canadian investors were flying high. After the crash, in 2001 and 2002, he posted successive annual returns of 21.4% and 30%.
Chou applies Graham's value strategy using three tactics. First, he keeps his eyes peeled for what he calls "special situations" — companies facing short-term problems that result in temporary mispricings under unusual circumstances. Second, he likes to buy shares in what he jokingly refers to as CRAP (Cannot Realize A Profit) companies. Chou says the market is prone to overreacting when stocks are heading for the toilet, so failing companies are often irrationally valued for less than they would be worth if they liquidated their assets. He buys baskets of such companies, knowing that he may lose money on three out of 10, but more than make up for those losses with profits on the other seven.
His final tactic is more akin to the way that Warren Buffett invests and it's increasingly Chou's favorite. It entails spending countless hours searching for well-run companies with growth potential that, for some reason, are trading for much less than they're worth. Because the market is so efficient, such companies are extremely rare and often only found among those with short-term problems, but they offer excellent long-term prospects if they're blessed with strong management. Chou is lucky to find one or two during a whole year of searching. But once he's found one, Chou doesn't hesitate to bet 5% or more of his portfolio on that single stock. "When you know you're buying a good company, it's like getting a straight flush," he says. "They're hard to find, so when you've got one, you have to capitalize on it."
Taken together, Chou's three approaches have delivered a very strange portfolio, packed with unfamiliar names and companies most investors wouldn't touch with a barge pole. Just over six months ago, for instance, the troubled retailer Sears Holdings made up a whopping 16% of the equities portion of Chou's Associates Fund. MCI, which is basically the smoldering remains of an imploded WorldCom, was his No. 2 holding, along with Boskalis Westminster, an international dredging contractor that clears mud out of waterways.
What does Chou see in these dogs? As always, a margin of safety. He invested in Sears Holdings, for instance, because most analysts thought Wal-Mart was going to crush the department store chain, so the stock was selling for peanuts. "But I calculated that the real estate holdings alone for Sears were worth more than $40 or $50 (U.S.) a share, and I was able to buy it for just $25 a share," Chou recalls. "Later, the analysts said the real estate was worth more like $75 to $100 a share." A year and a half after Chou bought its stock, Sears was trading for over $120. " |
