Morningstar Advisor - Fall 2007 - 52

Morningstar Conversation maybe it will no longer go up, or maybe come down a bit over the next year or two. MW: I must say one thing. You and me, we like to look at what’s wrong with what we’re doing. And let me say what’s wrong most of the time with what we do in buying into very well financed companies at a discount from readily ascertainable net asset value, which is 90% of our portfolios. First, most of the time, the near-term earnings outlook sucks. That gives us the price. Two, we’re in bed with highly conservative managements, who most of the time are willing to sacrifice return on assets and return on equity in order to get the insurance policy of a strong financial position. Saying that, we do get our fair share of deadheads. Obviously, you’re dealing with A term Whitman often uses to describe corporate managers who are lax at creating shareholder value. Too much money is often left by value investors on the table because the stock is sold too soon. Jean-Marie Eveillard MW: Measure anything. JME: That’s right. Buy and Hold JME: In your April quarterly, you wrote something that intrigued me. You said the entry point into a stock is important, and the entry point must be at a bargain level. Because once you hold the stock, you’re a buy-and-hold investor, and accordingly, you do not sell the stock, even if it’s fairly valued; you only sell the stock if you think you’ve made a mistake, or if you think the stock is grossly overvalued. MW: Or for portfolio reasons. JME: Or for portfolio reasons, right. MW: I think buy-and-hold makes much more sense than people give it credit for. Because one, value is not static. It is very dynamic. If you’re in a reasonably good company on a long-term basis, the business continues to create value. And I’ve had a long career in learning my lesson. I’d own a stock for three years; it would double; and I’d sell it to somebody for whom it would triple in the next six months. We should also talk about shortcomings. I think your discipline and my discipline works an awful lot better on the buy side than the sell side. Therefore, unless you have compelling reasons, why sell? JME: That’s right. Too much money is often left by value investors on the table because the stock is sold too soon. Truly, as value investors and as long-term investors, we should not worry too much about the fact that after the price of the stock has moved up, companies with very strong financial position. By definition, we have selected a population that doesn’t need access to Wall Street. And many of them just don’t give a damn. It’s certainly a shortcoming of what we do. I think we pretty much have overcome it. You pretty much have overcome it. JME: Yes. Most of the time, in my opinion, management of companies should not listen to Wall Street. It’s almost always, “You have to optimize your balance sheet”—by which, of course, they mean to take on a lot of debt. And I agree with you that if you have cash sitting on the balance sheet, then you can seize opportunities when you see them. MW: Leveraged companies have disadvantages. They can’t be opportunistic, and they don’t have any insurance policy against the unknown and uncertainty. 52 Morningstar Advisor Fall 2007

Morningstar Advisor - Fall 2007

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