I’ve done more than 25 of these “Dozen Things” posts now and I feel the commentary by me is getting repetitive. If you want commentary on what Mason Hawkins said below, read what I said on the other posts. I thought that instead of specific commentary on these quotations below from Mason Hawkins I would write a more general paragraph of commentary on value investing trying to “omit needless words.”
Value investing has just four core principles: (1) buy at a discount to intrinsic value (margin of safety); (2) a share of stock is a partial interest in a business; (3) make the market your servant and not your master; and (4) be rational. The “core of the core” of value investing is the first principle (margin of safety). The hardest thing about value investing is the fourth principle (be rational). Value investing is simple, but not easy (in no small part since the struggle to be rational is a life long endeavor). There are other aspects of value investing beyond the four core principles which depend on the value investor’s individual style which can vary somewhat from investor to investor. Value investing is more of an art than a science since any valuation involves risk, uncertainty and ignorance. The future is never predictable with certainty.
1. “We want to own companies with the following qualitative characteristics. 1) Unique assets having distinct and sustainable competitive advantages that enable pricing power, long-term earnings growth, and stable or increasing profit margins. 2) High returns on capital and on equity as measured by free cash flow rather than earnings. 3) Capable management teams.”
2. “[In] commodity businesses, being a low cost provider is not enough of an advantage for an overweight position since the commodity price is subject to going below the cost of production for an unpredictable period of time.
3. “We only want to buy when we can pay less than 60% of a conservative appraisal of a company’s value, based on the present value of future free cash flows, current liquidation value and/or comparable sales…. trying to create a big margin of safety
4. “About 85% of the time, the markets are in some close proximity to central value. It’s that other 15% of the time that you need to concern yourself with.”
5. “We sell for four primary reasons: when the price reaches our appraised value; when the portfolio’s risk/return profile can be significantly improved by selling, for example, a business at 80% of its worth for an equally attractive one selling at only 40% of its value; when the future earnings power is impaired by competitive or other threats to the business; or when we were wrong on management and changing the leadership would be too costly or problematic.”
6. “It is very important to pass on opportunities when you can’t calculate a conservative assessment of the business’s value.”
7. “Statistical analysis shows that security-specific risk is adequately diversified after 14 names in different industries, and the incremental benefit of each additional holding is negligible. We own 18-22 companies to allow us to be amply diversified but have the flexibility to overweight a name or own more than one business within an industry.”
8. “Limiting the portfolios to our 20 most qualified investments allows us to know the companies we own and their managements extremely well while providing ample security-specific diversification.”
9. “From the third quarter of 2008 through the first quarter of 2009, we were given an opportunity to own best-in-class companies at price levels I’ve never seen in my experience…. If you were forced to sell because you were fearful, and if you liquidated in the fourth quarter of 2008 as opposed to buying, which we were doing, you took a permanent loss, and you used Mr. Market to your detriment. As we have said often, Mr. Market is there to serve you, not to determine your outcome. When he is fearful, you should be greedy, as Mr. Buffett has said. When Mr. Market is greedy, you should be cautious and use those times to sell businesses at full appraisal if they get there.”
10. “The great investors throughout history – the Medicis, the Morgans, the Rothschilds, and Buffett recently. Those great investors with terrific long-term records were always in a position to be liquidity providers. Each was willing to hold cash until someone was in distress, under duress, and they could provide that liquidity at very attractive prices.”
11. “Capitalism has a way of turning a good idea at a low price into a bad idea at a high price. It makes sense to buy at 6x operating cash flow, but at 14x operating cash flow it is very problematic and harmful to do so using massive leverage.”
12. “If you are not willing to look stupid in the short run, you are not likely to be a successful investor in the long-run.”