Monday, April 27, 2009
When Pigs Fly
Although the swine flu may turn out to just be a wake up call for developed nations' health authorities to dust off their "pandemic plans" and actually see if they are workable, there is little doubt in my mind that this event will stress test the world markets.
With the memory of SARS still fresh in the minds of Torontonians and in particular, the citizens of Hong Kong, fear will probably dictatet o the markets until the coast is clear. I think this will be particularly pronounced in highly populated Asian centres if the flu breaks out there.
Of course, there is no need to panic. You and your family should be prepared for this just like any other natural disaster such as an earthquake. Make sure you have a source of fresh water and lots of canned food. It might be nice to have a supply of N95 masks at home for when you need to enter public places with a high traffic rate of potentially infected people like a grocery store or an airport. Soap and water is plentiful in every home-- use it. A small container of hand disinfectant can be carried around and used each time doors are opened and hands are shook. All simple stuff.
When it comes to a financial strategy, I don't think changing tack makes sense to me. I've used the rally to sell my weaker positions into relative strength and consolidated my portfolio a bit. The majority of my holdings are debt free companies with prodigious free cash flows OR are net-net stocks with unlocked value (i.e. a pile of cash the management needs to be forced to distribute to shareholders...). I think that the game plan should not change one iota. If fear knocks down quality companies' market prices well below intrinsic value, then you should buy them, just like always.
It just so happens that Pharma stocks have been out of favour for a few years now and have some of the best balance sheets and cash flows of any sector. I've been accumulating shares in various companies (NVS, SNY, BMY) over the past 3 years and only sold one (SGP).
One could speculate that some of the Pharma companies will get a boost from world wide stockpiling of anti-viral agents and vaccines; however, I think that this is probably overblown. Roche and Glaxo-Smith-Kline have seen little boosts in their share price because they have Tamiflu and Relenza in their portfolio. Novartis' share price actually dropped a bit this morning despite being assigned the task (and being best positioned to do so) of developing a H1N1 vaccine by WHO and the CDC. This process takes 6 months using the "egg" technique, so they've been told to get cracking. I doubt very much that NVS (which I own, BTW) will profit much from this activity in the short term. I think that it is a great company with excellent prospects, but not because of the swine flu.
Morningstar's article on this topic.
Globe and Mail article.
Pork producers could be hurt temporarily and irrationally by the pandemic. Russia has banned all pork products from North and Latin America and other countries are likely to follow suit. The virus is not spread by ingesting the meat or by dead animals; however, governments are likely to react in this fashion to garner political brownie points from their paranoid electorate. I'm watching SEB carefully for an opportunity to add to my position.
Saturday, April 25, 2009
Watching the insiders
Read this Ockham research article.
And this Kenyon one too...
for this amongst many other reasons, I've been selling into strength-- mostly positions that I've either lost confidence in because of changing business dynamics or realizing that I made a mistake in my original analysis. Fortunately, with the 6 week bear market rally (is that what this is?) and the favourable forex, I've either broken even or made a modest profit on most of the positions.
I'm raising cash to exploit a few special situations that may present catalysts in the nearer term but I'm waiting for a market pullback before committing too deeply to them. I'm prepared to wait up to and including the fall if I have to.
And this Kenyon one too...
for this amongst many other reasons, I've been selling into strength-- mostly positions that I've either lost confidence in because of changing business dynamics or realizing that I made a mistake in my original analysis. Fortunately, with the 6 week bear market rally (is that what this is?) and the favourable forex, I've either broken even or made a modest profit on most of the positions.
I'm raising cash to exploit a few special situations that may present catalysts in the nearer term but I'm waiting for a market pullback before committing too deeply to them. I'm prepared to wait up to and including the fall if I have to.
Sunday, April 12, 2009
Wednesday, April 8, 2009
Chou gets crushed
My only mutual fund holdings are Chou Bond and Chou Associates. I've discussed in the past why I'm a fan of this modest but highly skilled capital allocator.
Like many (including the humbled author of this blog), he has suffered from premature accumulation syndrome. Jumping in too early is tough to avoid and one wonders if you're not just lucky if you don't. It's easy to confuse skill with luck until you look at long term track records-- Mr. Chou has one of the best.
Another lesson I learned the hard way is to only entrust your hard earned capital to a person of the highest integrity. Any red flags at all should make you run in the other direction. See below for why I have no plans to redeem my units despite short term underperformance:
News from globeandmail.com
Thursday, April 2, 2009
ROB CARRICK
The mutual fund industry is going to hate this.
Investors will be angry that they don't see more of it.
Unhappy at the returns he has generated for clients, money manager Francis Chou is refunding almost all the management fees collected by his Chou Europe fund since it opened for business in September, 2003.
"We have not made money since inception," explained Mr. Chou, a widely respected investing figure whose financial career began in an investment club he formed in 1981 with six Bell Canada co-workers. "I don't like negative numbers long term. Short term - one year, two years or three years, if you do badly that's fine. But long term, you want to make sure you're making money for your unitholders."
What a difference there is between Mr. Chou's tiny, eponymous fund company and his big-boy competition. He looks out for unitholders. They look out for shareholders.
Investors are lax about understanding the cost of owning mutual funds, which means they may not realize that the fees charged by funds don't typically vary with results they produce for investors. Among the 15 largest equity and balanced funds by assets, losses for the 12 months to Feb. 28 range from 16 to 38 per cent. Don't waste your time waiting for fee rebates from any of them.
Mr. Chou's company, Chou Associates Management, has five funds in its lineup and their losses in 2008 ranged from a better-than-average 17.6 per cent for Chou Asia to a lower-than-average 44 per cent for Chou Europe.
As of the end of February, Chou Europe had lost a compound average annual 6.2 per cent since inception. This is the result that prompted him to ask the Ontario Securities Commission for guidance on how to do what may never have been attempted before by a fund company: Rebate all fees taken in by a fund throughout its history.
"It was the right thing to do," Mr. Chou said from his office in the Toronto suburb of North York, which is way off Bay Street.
In fact, Mr. Chou has rebated fees on a limited basis several times in the past. Most recently, he decided to waive roughly 77 per cent of the management fees collected last year from Chou Bond, a fund that holds high-yield corporate bonds. In the mid-1990s, he waived 19 months' worth of fees taken in by Chou RRSP. In 1990, he waived fees for Chou RRSP and his flagship fund, Chou Associates.
These moves are costly, even for a small firm like Mr. Chou's. About $700,000 extra will be available in Chou Bond so it can be invested for the benefit of unitholders, and a total of $547,000 will be put back into Chou Europe.
It's not only unique for a fund company to give back fees it has collected, it's also difficult because of the need for regulatory, legal and accounting advice. "When you go and give back money, you sometimes have to jump through hoops to get it done," Mr. Chou said.
What eased the way was an unusual clause in the prospectus for the Chou family of funds. It states that the matter of waiving management fees entirely or in part is reviewed annually at the discretion of the manager without notice to unitholders.
Management fees are what fund companies pay themselves from their mutual fund returns to cover the costs of running a fund. Some companies have fixed their management fees so they can't rise, others leave themselves the flexibility to charge more.
Mr. Chou's take: "I look at it more that you have to earn that fee rather than have it given to you. If I feel I earned it, I take it."
Here's something else Mr. Chou takes - responsibility for his investment returns, both good and bad. In 2008, the results were largely bad as a result of his value investing approach of seeking beaten-down stocks with the potential to rebound. In the financial crisis that blew up last year, these stocks have been pounded still lower.
In his annual report to clients, Mr. Chou wrote about how he was worried about irresponsible lending and the U.S. housing market, but did not foresee how severely the financial system would be hurt when the bubble burst.
"And so, based on the information we had in 2007, we purchased some stocks at prices that, in hindsight, were too high," Mr. Chou wrote. Go contrast that with the explanations you're going to be seeing from other fund companies as they explain the fiasco of 2008.
***
The Wisdom
of Francis Chou
THE MARKETS
"I think the economy may go south somewhat, but the stock market may not go along. The stock market tends to be a leading indicator by nine months to a year. So it could go up if the economy goes south."
PICKING SECTORS
"All sectors are cheap. Right now, we're just trying to wade into some financials."
FURTHER OPPORTUNITIES
"Everything is depressed, but corporate bonds are more mispriced than equities."
HOW LONG A COMMITMENT INVESTORS SHOULD MAKE TO HIS FUNDS
"I would prefer 10 years."
Like many (including the humbled author of this blog), he has suffered from premature accumulation syndrome. Jumping in too early is tough to avoid and one wonders if you're not just lucky if you don't. It's easy to confuse skill with luck until you look at long term track records-- Mr. Chou has one of the best.
Another lesson I learned the hard way is to only entrust your hard earned capital to a person of the highest integrity. Any red flags at all should make you run in the other direction. See below for why I have no plans to redeem my units despite short term underperformance:
News from globeandmail.com
The manager who gave back his fees
Thursday, April 2, 2009
ROB CARRICK
The mutual fund industry is going to hate this.
Investors will be angry that they don't see more of it.
Unhappy at the returns he has generated for clients, money manager Francis Chou is refunding almost all the management fees collected by his Chou Europe fund since it opened for business in September, 2003.
"We have not made money since inception," explained Mr. Chou, a widely respected investing figure whose financial career began in an investment club he formed in 1981 with six Bell Canada co-workers. "I don't like negative numbers long term. Short term - one year, two years or three years, if you do badly that's fine. But long term, you want to make sure you're making money for your unitholders."
What a difference there is between Mr. Chou's tiny, eponymous fund company and his big-boy competition. He looks out for unitholders. They look out for shareholders.
Investors are lax about understanding the cost of owning mutual funds, which means they may not realize that the fees charged by funds don't typically vary with results they produce for investors. Among the 15 largest equity and balanced funds by assets, losses for the 12 months to Feb. 28 range from 16 to 38 per cent. Don't waste your time waiting for fee rebates from any of them.
Mr. Chou's company, Chou Associates Management, has five funds in its lineup and their losses in 2008 ranged from a better-than-average 17.6 per cent for Chou Asia to a lower-than-average 44 per cent for Chou Europe.
As of the end of February, Chou Europe had lost a compound average annual 6.2 per cent since inception. This is the result that prompted him to ask the Ontario Securities Commission for guidance on how to do what may never have been attempted before by a fund company: Rebate all fees taken in by a fund throughout its history.
"It was the right thing to do," Mr. Chou said from his office in the Toronto suburb of North York, which is way off Bay Street.
In fact, Mr. Chou has rebated fees on a limited basis several times in the past. Most recently, he decided to waive roughly 77 per cent of the management fees collected last year from Chou Bond, a fund that holds high-yield corporate bonds. In the mid-1990s, he waived 19 months' worth of fees taken in by Chou RRSP. In 1990, he waived fees for Chou RRSP and his flagship fund, Chou Associates.
These moves are costly, even for a small firm like Mr. Chou's. About $700,000 extra will be available in Chou Bond so it can be invested for the benefit of unitholders, and a total of $547,000 will be put back into Chou Europe.
It's not only unique for a fund company to give back fees it has collected, it's also difficult because of the need for regulatory, legal and accounting advice. "When you go and give back money, you sometimes have to jump through hoops to get it done," Mr. Chou said.
What eased the way was an unusual clause in the prospectus for the Chou family of funds. It states that the matter of waiving management fees entirely or in part is reviewed annually at the discretion of the manager without notice to unitholders.
Management fees are what fund companies pay themselves from their mutual fund returns to cover the costs of running a fund. Some companies have fixed their management fees so they can't rise, others leave themselves the flexibility to charge more.
Mr. Chou's take: "I look at it more that you have to earn that fee rather than have it given to you. If I feel I earned it, I take it."
Here's something else Mr. Chou takes - responsibility for his investment returns, both good and bad. In 2008, the results were largely bad as a result of his value investing approach of seeking beaten-down stocks with the potential to rebound. In the financial crisis that blew up last year, these stocks have been pounded still lower.
In his annual report to clients, Mr. Chou wrote about how he was worried about irresponsible lending and the U.S. housing market, but did not foresee how severely the financial system would be hurt when the bubble burst.
"And so, based on the information we had in 2007, we purchased some stocks at prices that, in hindsight, were too high," Mr. Chou wrote. Go contrast that with the explanations you're going to be seeing from other fund companies as they explain the fiasco of 2008.
***
The Wisdom
of Francis Chou
THE MARKETS
"I think the economy may go south somewhat, but the stock market may not go along. The stock market tends to be a leading indicator by nine months to a year. So it could go up if the economy goes south."
PICKING SECTORS
"All sectors are cheap. Right now, we're just trying to wade into some financials."
FURTHER OPPORTUNITIES
"Everything is depressed, but corporate bonds are more mispriced than equities."
HOW LONG A COMMITMENT INVESTORS SHOULD MAKE TO HIS FUNDS
"I would prefer 10 years."
Friday, April 3, 2009
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