One part of the big loses, which the article highlights, comes from being to early in sectors where macroeconomic forces were against them. I know Bill Miller invested in housing related stocks just as the bubble was bursting. Pzena made a couple presentations on Fannie-Mae and Freddie Mac. Whitman has been in the middle of the thunderstorm as he continues to invest bond insurers. Even the contrarian maestro himself David Dreman has been burned by Washington Mutual. Now, Jeremy DeGroot, chief investment officer at Litman/Gregory made brings up an interesting point which I had not thought of:

“There’s a fine line between stubbornness and discipline”

Could it be that these so called “gurus” are to stubborn to admit they were wrong in the first place and have lost millions of dollars in assets?

Did Martin Whitman continue to invest in MBIA due to his much publicized war against Bill Ackman?

I have no clue what goes on in their minds, but some of their bets are questionable. Personally, I have been burned by investing in financials. American Insurance Group (AIG) appeared like the ultimate bargain as it traded at low valuation ratios. Ultimately, the stocks price lagged as management continued to announce more capital would be needed (after it said everything is fine) due to write offs,etc.. Stubbornly, I held on as I convinced myself the numbers do not lie. Finally, I sold and have not regretted that decision.

Richard Pzena aknowledges there are “not the best of times” but continue to be optimistic about the future

“But this is a once-in-a-lifetime opportunity for valuations, for all financials. When we look back historically, we will be writing about the irrational panic of 2007 and 2008.”

It may be a once in a lifetime opportunity, but at the same time Pzena has lost a ton of money in one year. Its tempting to jump into financials but it appears there is are more write offs/downs to come. I am in the Bruze Burkowitz camp in which he continues to say ” I have no idea what is on their (finiancials) balance sheet, and I am not sure the CEO/CFO’s know what they hold.” If I had to invest in financials, USB and WFC appear to be the only one’s that have avoided the mess.

First the link: Francis Chou
The article brings up an interesting point, a good amount of value investors are lagging the market. The first person that comes to mind is Bill Miller and I believe he is down 19%. Ouch. According to their first quarter shareholder letter, Dodge and Cox is down almost 12% (S&P 500 was down a little over 9%). There are various other value firms who are under performing the market. Have they lost their touch or is it a sign of the times? I believe it’s the latter. One thing about contrarian-value investors is we are usually early to the party and leave early as well. We hate crowds.Just about every “guru” underestimated the magnitude of the housing/credit crisis and their performance reflects it. Mohnish Pabrai and Bill Miller come to mind.

Value investing is a proven strategy that will continue to work in the future. Unfortunately, many of the value investors missed the commodity train and are lagging. In the 90’s, most value investors avoided technology and lagged behind growth and technology funds. Now, not only did they miss the commodity boom, but were early in financials. A double whammy. So what now? Start cherry picking bargains. As the article states, just about every retail business is undervalued. As a matter of fact, Chou mentions Office Depot. Sounds familiar? Not to brag but…… I I wrote about Office Depot wayyyy back on February 24. Anyone reading this blog at the time could have researched the company, watch the stock plummet 20% after “worst than expected earnings”, and buy the stock at $10.xx. The stock is still a bargain and any positive comment made about the economy will push the stock higher.

A particular quote by Chou caught my attention in which he states:

“Look at our long-term record. We have always bounced back.”

Value Investing always bounces back. America always bounces back. It is a matter of being patient and ignoring the current headlines. Andrewc left an interesting comment on a recent post (Gurus Loading Up On Healthcare Stocks) in which he states:

I like seeing how the “gurus” picks are completely different than what the media is buzzing about. All last summer the funds managers were guying natural gas when the talking heads said that was dead money. Now, with gas prices going through the roof and TV programs talking constantly about rising oil prices, you see very few new positions in the energy. They don’t follow the momentum- they already had there positions and are enjoying big profits. And while CNBC and others hype up CHK and others, the gurus quietly move to others areas of value, like Healthcare. Watching when the experts enter and exit positions keep me from getting caught in the herd.

In summary, that’s what contrarian-value investing is all about.
1. Go against the crowd.
2. Wait for crowd to realize they made a mistake
3. Sell to crowd at a significantly higher price

As stated in my response, years from now CNBC will be flashing headlines dealing with financials and retailers. As usual, here is a classic Ben Graham quote that helps out when the headlines news is causing doubt in security analyses

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”