In the past, I have mentioned the great Canadian value investor Francis Chou. Chou has been part of Prem Watsa’s investment team at Fairfax Financial for over twenty-five years. He also runs the Chou Funds where in 2005 he was named the Canadian fund manager of the decade.
I came across an article on Chou in Canadian Business Online that contains some good information on Chou.
Chou invests using three different tactics:
First, he keeps his eyes peeled for what he calls “special situations” — companies facing short-term problems that result in temporary mispricings under unusual circumstances.
Second, he likes to buy shares in what he jokingly refers to as CRAP (Cannot Realize A Profit) companies. Chou says the market is prone to overreacting when stocks are heading for the toilet, so failing companies are often irrationally valued for less than they would be worth if they liquidated their assets. He buys baskets of such companies, knowing that he may lose money on three out of 10, but more than make up for those losses with profits on the other seven.
His final tactic is more akin to the way that Warren Buffett invests and it’s increasingly Chou’s favorite. It entails spending countless hours searching for well-run companies with growth potential that, for some reason, are trading for much less than they’re worth. Because the market is so efficient, such companies are extremely rare and often only found among those with short-term problems, but they offer excellent long-term prospects if they’re blessed with strong management. Chou is lucky to find one or two during a whole year of searching. But once he’s found one, Chou doesn’t hesitate to bet 5% or more of his portfolio on that single stock. “When you know you’re buying a good company, it’s like getting a straight flush,” he says. “They’re hard to find, so when you’ve got one, you have to capitalize on it.”
Here are some additional observations from the article:
1. Chou thinks most investors make the mistake of buying a stock because its price is going up instead of buying stocks when they are on sale – the way people like yo buy their groceries or other merchandise.
2. Chou wants his investments to be made with a margin of safety. He typically wants to buy a stock when its is selling for a 40% to 50% discount from his estimate of intrinsic value.
3. Chou is not averse to making a concentrated bet when he has conviction and a large margin of safety. At one point he had 16% of his fund in Sears Holdings. Chou estimated that the company’s real estate holdings were worth $40 to $50 per share and Chou was able to buy it at $25 per share.
4. Chou does not attribute his investing success to having a high IQ. “George Athanassakos, professor of finance and the Ben Graham Chair in Value Investing at the Richard Ivey School of Business in London, Ont., thinks that Chou might be right: perhaps he’s not outperforming because of superior intelligence, better connections or charisma. Maybe it’s because Chou’s natural disposition just happens to be a perfect match to the investing style he’s chosen.”
According to Buffett, “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
For many, this may be the X-factor that is the key to outsized returns.
5. It is fascinating to me that Chou mentions that buying good businesses is increasingly becoming his favorite tactic. I have seen Joel Greenblatt make similar comments.
More on Chou: