Author Topic: CHOU 2020 Letter to unit holders  (Read 1836 times)

Bryggen

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CHOU 2020 Letter to unit holders
« on: May 08, 2020, 07:31:44 AM »
Find attached CHOU's latest letter to unit holders for the Chou Funds.

I thought worth sharing since some of his holdings are the same as FFH and I liked his candid and honest view on some of them. Furthermore, he shares his view on the COVID-19 crisis and value investing.

Enjoy!

Bry


petec

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Re: CHOU 2020 Letter to unit holders
« Reply #1 on: May 08, 2020, 09:51:07 AM »
I wish Prem could write that clearly. The section on value investing is good.

Also annoying to see RFP announce a $100m buyback and not execute any of it in 1Q.
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A

Viking

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Re: CHOU 2020 Letter to unit holders
« Reply #2 on: May 08, 2020, 01:57:16 PM »
I wish Prem could write that clearly. The section on value investing is good.

Also annoying to see RFP announce a $100m buyback and not execute any of it in 1Q.

Yes, good read; having followed Francis for many years it is good to understand what he is doing thinking. Nice that he admitted a number of errors and said the poor multi year performance was primarily due to poor stock selection.

I am not sure how value investing and resource stocks fit in the same sentence (predicated on predicting where natural gas and oil prices are going)?

At Dec 31 he had 50% in Associates Fund in financials and another bunch in BRK; very concentrated (although he said he was selling banks in Q1). Looking at his multi year results i think he was a little late to the party.

Goes to show the importance of being inquisitive, open minded and to keep learning to be a successful long term investor. Evolution is important to surviving.

petec

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Re: CHOU 2020 Letter to unit holders
« Reply #3 on: May 08, 2020, 02:17:02 PM »
Value investing suits resource sectors very well. Nobody knows where commodity prices are going in the short term, but they’re fluctuate fairly predictably around the marginal cost of production in the long term. That creates the opportunity for value investors to buy when the market is panicking. In theory at least, cyclical sectors are far more likely to provide value opportunities than non-cyclical ones, where the value opportunities are rarer and more company-specific.
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A

vinod1

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Re: CHOU 2020 Letter to unit holders
« Reply #4 on: May 08, 2020, 04:17:57 PM »
We believe the intrinsic values of airline stocks have been worsened by roughly 30%, but the stock prices have dived by more than 50%.

This goes to the core of the problem. Take a look at his stocks and see how many times this situation played out.

Nokia, MBIA, Sears, Blackberry, Valeant, Posco, Endo, Teva...

The majority of the time if you have to cut down IV estimate but it still looks attractive, you are just fooling yourself into rationalizing the error.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

Bryggen

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Re: CHOU 2020 Letter to unit holders
« Reply #5 on: May 08, 2020, 04:28:44 PM »
I wish Prem could write that clearly. The section on value investing is good.

Also annoying to see RFP announce a $100m buyback and not execute any of it in 1Q.

Yes, good read; having followed Francis for many years it is good to understand what he is doing thinking. Nice that he admitted a number of errors and said the poor multi year performance was primarily due to poor stock selection.

I am not sure how value investing and resource stocks fit in the same sentence (predicated on predicting where natural gas and oil prices are going)?

At Dec 31 he had 50% in Associates Fund in financials and another bunch in BRK; very concentrated (although he said he was selling banks in Q1). Looking at his multi year results i think he was a little late to the party.

Goes to show the importance of being inquisitive, open minded and to keep learning to be a successful long term investor. Evolution is important to surviving.

Love your quote ''Goes to show the importance of being inquisitive, open minded and to keep learning to be a successful long term investor. Evolution is important to surviving.''

I will keep it and put it up on my office's wall :)

vinod1

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Re: CHOU 2020 Letter to unit holders
« Reply #6 on: May 08, 2020, 04:47:08 PM »
I am getting Buffett flashbacks reading this letter.

In general, our experience with a commodity business that has virtually no pricing power is to be
cautious when management talks about investing in new equipment or upgrades that would
significantly lower the cost structure compared to its competitors. That may be true for six
months to a couple of years, but in time, competitors will have a new cost structure that is as
competitive if not superior to the company. It is the same treadmill where hardly anyone in the
industry can make a decent return on the assets invested in the company.


Chou



Over the years, we had the option of making large capital
expenditures in the textile operation that would have allowed us
to somewhat reduce variable costs.  Each proposal to do so looked
like an immediate winner.  Measured by standard return-on-
investment tests, in fact, these proposals usually promised
greater economic benefits than would have resulted from
comparable expenditures in our highly-profitable candy and
newspaper businesses.

     But the promised benefits from these textile investments
were illusory.  Many of our competitors, both domestic and
foreign, were stepping up to the same kind of expenditures and,
once enough companies did so, their reduced costs became the
baseline for reduced prices industrywide.  Viewed individually,
each company’s capital investment decision appeared cost-
effective and rational; viewed collectively, the decisions
neutralized each other and were irrational (just as happens when
each person watching a parade decides he can see a little better
if he stands on tiptoes).  After each round of investment, all
the players had more money in the game and returns remained
anemic.
-Berkshire, 1985 Annual Letter

The fundamental algorithm of life: repeat what works. –Charlie Munger

Xerxes

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Re: CHOU 2020 Letter to unit holders
« Reply #7 on: May 08, 2020, 07:36:55 PM »
What is the logic of keeping a bad investment.

i presume that there was thesis that went behind Resolute investment both for Chou and FFH (i don't know who copied whom), but at some point in the past ten years, it must have been obvious that it was a mistake. You are ultimately judged by the return that the market gives you get and not by the unfairness and irrationality of capital markets. What are the options available to a rational investor when you get a Resolute:

- sell right off the bat, when the thesis doesn't hold anymore
- turn it into an opportunity, by buying the whole on the cheap and now you have control and access to cash flows
- keep for no reason

Eurobank / Blackberry investment looks to fall in the second bucket and i liked that. Stuff happens and you make the best of situation.
but i have a hard time making sense of Resolute at all as it was fall in the third bucket.