Who should buy the Chou Funds?
Before buying the Chou Funds, prospective investors should consider the following factors:
- 1) They have read the Prospectus and the annual letters of the manager and feel comfortable with the manager's investment philosophy and its execution (sufficiently comfortable that they will not call the Manager if they are worried about the performance of their investment at any particular time);
- 2) They are long term oriented; and
- 3) They have modest expectations (any positive single digit annual return will make them happy).
How much money should investors invest in the Chou Funds?
The minimum investment is $5,000 per fund. However, investors should also consider the following before investing:
- 1) While the Chou Funds historically have never suffered large annual losses, they are certainly possible. Markets are inherently volatile in the short term and can adversely affect the Chou Funds. Therefore, investors should be comfortable that their financial position can withstand a significant decline - say, 40% - in the value of their investment;
- 2) Although the Chou Funds have done better than the market long term, we typically underperform the market 40% of the time. Investors should be aware of this statistic so they will not feel the need to call the manager when the Funds are underperforming the market; and
- 3) In general, we recommend that investors do not borrow money to invest in the Chou Funds.
What is your expectation of future returns?
Based on most common valuation methods such as dividend yield, P/E ratio and premium to book value, the market is not cheap. Therefore, from current market levels, any positive single digit annual return is a good return. We believe that greater emphasis should be placed on "Return of Capital" (i.e., not losing capital) than "Return on Capital".
What is your cardinal principle in investment?
The cardinal principle underlying the investments in the Chou Funds is to pay far less than what the company is worth, measured by sustainable earning power and/or hard assets that are not depreciating in value. In other words, we want an adequate 'Margin of Safety' and this concept, while unappreciated and ignored by most, is what distinguishes investment from speculation.
Is 'Margin of Safety' dependent on the price paid?
Yes, to a large extent. At some price, you get a steal and at another price you get fleeced.
How important is this 'Margin of Safety' concept to the Chou Funds? Can it absorb mistakes?
The Fund's annual returns over 15 years (and since inception) have demonstrated that this concept is so profound and powerful that in spite of making a number of investment decisions the manager wished later he had made differently, being blindsided by unpredictable events and getting snookered by unscrupulous management, the Funds still managed to achieve very satisfactory long term returns.
Will you overpay for stocks to keep up with the Joneses?
ABSOLUTELY NOT! We are diligently looking for undervalued stocks and will buy them only when they meet our price and quality criteria. However, we will not chase stocks to keep up with the market averages. If given a choice, we would prefer to lose half of our unitholders rather than half of our unitholders' money.
Should we switch out of the Chou Associates Fund to the other Chou Funds?
Should we get bothered by the ugly names in the portfolio?
In general, you won't find bargains unless there is a stink or cloud (financial or otherwise) overhanging the stock. We carefully analyze the company and if our analysis indicates that the stock price has more than fully discounted the problem, we hold our nose and may purchase the stock.
What's your criteria in assessing different investment opportunies? What metrics do you usually look for?
- > Sustainable earning power (look at owner’s earnings) for the last 10 years, generally not in mining, commodities, or IT
- > Management showing reasonable allocation skill
- > Companies that are not highly leveraged
- > Companies selling for less than 10 times earnings
- > Liquidation value
- > Potential turnaround situation
- > Sum of the parts valuation
CRAP (cannot realize a profit) companies:
- > Look at bonds first, start with the most senior bonds in the capital structure
- > Assume it’s going bankrupt and assess what each part could sell for to a rational business person
How do you distinguish between a bargain value investment and a company that is selling cheap for a good reason?
The key thing in investment is your accuracy in estimating the company’s intrinsic value. A company that is selling cheap for a good reason means that the value may not be as high as perceived by the investors.
What indicators do you use to decide: When to sell winners? When to sell losers?
"The main indicator we use is current price in comparison to intrinsic value. We start scaling out when it reaches 90% of its intrinsic value.
With losers, you always recheck your premises and re-estimate the intrinsic value, before deciding to sell or not.
How much research do you do before you have conviction to take a position?
For most stocks, we've been following them for 30 years, and when it falls within the range of undervaluation, we may then begin to start thinking about buying it. We like to invest when the odds are at least 80% in our favor before taking a position and not commit unless we have high certainty.
Rising interest rates are inevitable. How would you allocate assets to protect one's portfolio in such an environment?
Buying good companies with good balance sheets can insulate us to a degree, either in a deflation or an inflation scenario. We don't let the inflation/deflation talk sidetrack us from buying financially sound undervalued stocks.
How has your investment strategy evolved to fit with your strengths and personality?
At the beginning, we went with Ben Graham’s style when looking for companies, but as my business knowledge grew, we invested into different types of securities such as convertibles, junk bonds or turnarounds.
How do you deal with fund redemption in times of crisis?
With redemptions during times of crisis, it can accentuate fund performance negatively. Having large positions of cash makes it less of a jarring experience to investors who maintain their positions as we don’t have to sell off stock to support redemptions.