On March 22, 2005, Mason Hawkins spoke at the Ben Graham Centre for Value Investing at the University of Western Ontario. Here is a link to the video. Having a great search strategy is critical to being a successful value investor. Hawkins gives some valuable nuggets on how he does it.
1. Good character is important. Whatever you do, behave as if your mother was going to read about it in the paper the next day.
2. The two main texts at The Ben Graham Centre for Value Investing are “The Intelligent Investor” and “Value Investing: From Graham to Buffett and Beyond” by Greenwald.
3. At Southeast, Hawkins’ investment company, they focus on the main points from the Intelligent Investor: the Mr. Market parable, that buying a stock is buying part of a business, and margin of safety.
4. Investing is insuring the return of your capital plus an adequate return. Anything else is speculating.
5. Many “investors” don’t pay attention or even understand intrinsic value.
6. Over time, a good business will retain earnings and its intrinsic value will increase.
7. If the intrinsic value is growing at 12% per year and you can buy the business at 50% of its intrinsic value, you can get a 29% annual return if it takes five years for the price to rise to the level of intrinsic value.
8. The key to great returns is purchasing a business at $.50 on the dollar.
9. In the Internet bubble, Diageo became very cheap because people were selling it to buy internet stocks. Diageo was a great business with hidden assets, a great competitive position and great management.
10. For Hawkins to invest the business has to pass both quantitative and qualitative hurdles. Management must be able to run the business to generate free cash flow and reinvest the cash. Finding both is tough.
11. Hawkins mentions that he had just spoken to Bruce Greenwald’s class at Columbia. Greenwald outlines three things to be successful as an investor: 1) a great search strategy, 2) the ability to value a business, 3) discipline to buy only cheap stocks. You also need patience.
12. Hawkins started in the early 70’s which was a great time to start because stocks got cheap. At that time Hawkins ran computer screens against the Compustat database to find cheap stocks: 1) ROC > 12% and less than 8x earnings, 2) < 10x free cash flow, 3) below net asset value, 4) below net asset value plus 20% of PP&E, 5) below book value after taking out intangibles.
13. He does not run the screens today because over the past 35 years they have already valued most of the businesses they understand and it takes little time to update the values.
14. They look at every company on the new low list each day.
15. They scan every Value Line issue thinking both quantitatively and qualitatively about the companies.
16. They used to look at every S&P tear sheet.
17. They look at 13F’s of the best investors. Mentions Peter Cundill. They particularly like to find stocks in the 13F’s that have since gone down. That gets their attention.
18. They read everything in the business press: Forbes, Fortune, WSJ, Barron’s, etc.
19. They read trades in every industry they can understand.
20. They revalue the top 200 businesses in the world every week to see if they are less than 60% of value.
21. They visit with many management teams and they always ask who their best competitor is to find new ideas for investments.