Investment Conference Handout
Presented by Ronald R Redfield CPA, PFS
September 14, 2006
Please see Disclaimer at bottom of document
1. We formally started our investment management practice on December 31, 1995. Prior to that date, we were selectively advising clients. Our Assets Under Management has grown from under $2M in 1995 to over $57M as of today.
2. We manage money on a discretionary basis. We typically charge 1% of managed assets. We attempt to use a “value approach” to investing. You will hear more about “value investing,” later on in this program.
3. Why do people use us? Typically, we would be employed by clients who feel that we are the best accumulators and protectors of their capital for a long period of time. We will discuss what we consider the definition of long period of time later in this program. We are unbiased in our approach to investing. We do intensive amounts of research. We look for values. We use our accounting expertise to help us decipher financial statements. We examine cash flows, recurring cash flows and quality of earnings. Examples I will discuss are Enron, Microsoft, Ciena and some of the mortgage lenders today.
4. Many investors ask about our “typical performance” over the years. We certainly identify to these investors, that each portfolio is different, each has it’s own peculiarities. It is very important to realize that past performance is not a reflection of future results. I don’t write that because of disclosure requirements. I write that because I truly believe that to be an accurate statement. We survived with strength the crash of 2000 to 2002. I don’t think if there was a crash again, that our portfolios would perform in anyway shape or form, in the same manner. Our tax-deferred portfolios have one of their highest common stock allocations in the history of our investing. That is an important concept, as tax deferred accounts do not allow for short selling. Over the years we have used short selling as a hedge to our net long portfolios. With all that said, here are some tables of performance and current allocations. When looking at these tables, please be mindful of our recurring themes of long term investing and again, PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
Typical Annualized Returns and Comparative Indexes*
|Account Type||10 years||5 Years||Last 12 Months|
|Taxable Accounts (+/- 3%)||10%||16%||30%|
|Tax Deferred (+/- 3%)||10%||15%||15%|
Our returns above have been reduced for 1% annual fee and all trading expenses. Comparative Index returns have not been reduced for trading costs or fees.
Typical Portfolio Allocations as of September 14, 2006 (see disclosures above and allocations will vary from portfolio to portfolio)
|Type||Taxable Account||Tax Deferred Account|
|US Common Stocks||50%||74%|
The difference in allocations is primarily due to the use of short sales. Tax deferred accounts will tend to have a greater allocation to fixed income. The greater fixed income allocation is often done for taxation reasons.
The following has been our 3 largest Common Stock Holdings. These do not include Fixed Income, Mutual funds or Short Positions. These are presented as of end of period.
|December 31, 2004||December 31, 2005||September 14, 2006|
|Merck||Time Warner||Not Disclosed, Sorry|
When you look at the table above, all 8 positions remain core holdings. These 8 positions currently account for about 50% of a portfolios composition.
I have designed http://www.rbcpa.com/ to be a financial hub. It really does have a wealth of information. It ain’t pretty, but it is worthwhile.
Some of our Investment Themes and Random Thoughts
1. Investing should only be done with a long-term outlook. The need for liquidity in the short term is important, and one needs to make sure that short term money is invested in short term, liquid instruments. Don’t be fooled by someone telling you the instrument is short term and liquid. Make sure you understand what you are investing in.
2. Every day I come into the office, or wherever I might be working, and determine, “What will I work on today?”
3. Doubt is central to understanding. This is a recurring theme in our investing. I constantly try to poke holes in my research, thought process, valuation techniques and so forth.
4. Avoid investing around noise and macro issues. There are a lot of what appear to be natural occurrences in the world. These include, wars, elections, major world events, weather, booms, inflation, transportation, communication and so forth. We do not try to predict these events. Yet, when there is a paradigm shift, we will do our best to embrace it. One example is our focus in the telecommunications industry. If you review our website, you will see we have been following that industry closely since 1998. Fortunately, we perceived over-valuation and typically profited during the crash of 2000 – 2002. Now we have exposure to the industry on the long side. Hopefully in the future, I will be able to discuss that we were “fortunate” in being involved with that industry.
5. How do we determine on investing in a company?
a. We might come across a company via a friend, observations of children, and observations at work. Then we will investigate the financials of the company.
b. We will try to project their future earnings. We will try to determine the “quality of the earnings.” We will look at bad case and good case scenarios.
c. We will study the industry, the competitors, the suppliers, the customers and the management. We like to invest in companies or situations where the management’s livelihoods are in sync with the shareholders.
6. Examples of earnings quality and some quick company mentions. Please understand that the mentions below are certainly not recommendations, nor are they solicitations to buy, sell or hold any companies mentioned.
a. Enron – Enron was a fraud. It is nearly impossible for an investor to detect widespread manipulative fraud. I won’t get into how I think Ken Lay got off easy by dying. Enron showed fantastic earnings and earnings growth. Yet, if one could figure out their financials, they would see that their cash generation was much weaker than their earnings. I tried to figure out Enron, I wanted to own it. I just couldn’t figure it out. I certainly questioned my competence during that time. Luckily, I passed on that investment.
b. Ciena – Ciena was the darling of the optics industry. They claimed to be generating earnings. I would spend countless days and months trying to tear apart their financials. I would try and figure out how their business was valued at extreme multiples of revenues. They would often present earnings claims. I would look at their reported earnings, factor in stock option compensation, inventory issues and so forth, and found the presentations to be different than reality. With that said, our clients made a great deal of money on the share price collapse of Ciena. We now own Ciena as a core long position. We recently reduced our exposure for issues that were concerning to us. Yet, we still own the company. If you look at our website, you will see that all during the period of over-valuation and our short position, we always admired management. The same management exists today. Yet, we have developed some “potential” concerns.
c. Microsoft – We initiated a long position in Microsoft during March of 2005. We have been accumulating shares since. We are greater accumulators when the price drops. I won’t get into our investing reasons and so forth for this presentation. I wanted to emphasize that Microsoft is known as a conservative organization in regards to their accounting and disclosures. Microsoft is unusual as they report most software development costs as expenses. They are now developing Vista and new Office Suites. All of their costs are being immediately expensed. Even with those costs, Microsoft is generating free cash flow in excess of $1B per month. Of course, like any technology company Microsoft does have disruption risk.
A little bit of our investment process – “Marching to the beat of a different drummer”
1. We typically like to accumulate positions. We typically like to hold these positions for a long time. Warren Buffett (he is the old guy who works at Dairy Queen according to one of Bill Gates’ children) mentions that his favorite holding period is forever. We do not always succeed in holding for long periods. Yet, I will forever try.
2. We do trade fixed income positions with frequency if necessary. We are always looking for bargains.
3. I invest like I shop. I look for quality, but bargains.
4. Key words that come to mind in our investing process are, “doubt,” “scrutiny,” “professional skepticism,” “responsibility” and “respect.”
5. I have studied Marty Whitman, Martin Zweig, James Rogers and countless others over the years. They have a common theme of always being concerned. Marty calls it, “always run scared.” As I get older, I need to never lose sight of that. Anyone who knows me, understands that I am always concerned or contingency planning. I am like that in sports, entertainment and business. That is my make-up. I mention that because, as I was preparing for this conference, I realized, I do not want my constant concern to ever be numbed because of things usually working out. Things have worked out because of my “concern.” Hence, I find it important to stay focused, unbiased, alert and open minded. I will always verify and exercise doubt. That is I. I know “thyself.” (Of course, my family, friends and such often will get insulted, when they hear my often repeated phrase, “Are you sure?”
6. Our focus and methods are often contrarian. We often work inversely to the crowd. Someone I once knew ran into a friend of mine a few weeks ago. The person said, “How is Ron? He always marched to the beat of a different drummer.” I felt hurt when I heard it. My close and long time friend, said, “I shouldn’t have told you he said that.” I thought about it for weeks, googled it, talked to my sister, etc. You know, what I initially thought was an insult, really wasn’t. I think there is a lot of truth to what he said. Anyway, from an investment point of view, you don’t need the warmth of a crowd to invest, but you do need to “march to the beat of a different drummer.”
7. Look for a “margin of safety.” This means, be prepared if you are wrong in your thesis, and get a good handle on possible worst-case scenarios. Try to follow Buffett’s 2 golden rules. Rule number 1, “never lose money.” Rule number 2, “never forget rule number 1.”
8. Beware of what Seth Klarman calls “value pretenders.” Make sure you are competent and thorough in your analysis. Again, you must, “know thyself.” How do I know myself? I stick to my inherent core competencies. I know what I am good at, and I hope I know what I am not good at.
9. Value investing requires time, competence and discipline. It never ends. The analysis always evolves.
10. We practice “focus investing.” We try to have as few companies as possible to watch. Put all of our eggs in that basket, and watch that basket closely. We currently have around 17 common stock positions. 8 of these positions make up about 50% of a portfolio position.
The “Book I Wrote,” Examples of our Investment Philosophy
The book is typically a chronological history of our thoughts, words and so forth. I think it gives a valuable reference to an investor, as well as to a prospective client. It is filled with information. Our website is also a valuable tool, and the “book” is on our website. It also gives the reader an opportunity to look back and see if our thoughts were prudent.
As I re-read the book for this presentation, I had an unusual reaction. I looked at our letter dated March 24, 2001. I noticed I talked of companies such as AT&T, Lucent, Global Crossing and Avanex. Most of these investments got destroyed (if they were lucky enough to even survive). I asked myself, with horrible picks such as that, how did our portfolios perform so well over time? As I pondered, thought, revisited, I realized the answer was again, “wait for the fat pitch.” The fat pitch was not there for those companies, and we did not allocate great amounts of capital to those investments.
I try to read the book at least once a year. It gives me an opportunity to re-evaluate, look at things in a different perspective. I can search for errors, and there are plenty J.
Some of my most recent observations of the “book.”
a. May 31, 1996 – Sounds like it could have been written in 2006. Same old stuff. I was concerned.
b. October 29, 1998 – concerned with the possibility of a prolonged bear market. I emphasized portfolio diversification and defensiveness.
c. January 28, 2000 – I discussed low equity weightings. My concern of severe over-valuation, and how I looked forward to one day having 75% or greater Common Stock allocations. Now, it is late summer 2006, our tax deferred accounts have 75% Common Stock allocations, and I am concerned.
d. May 14, 2002 – This is a real favorite of mine. This was written, as accounting scandals were everywhere. I discussed how we were concerned and suspicious with presentations, accountings and so forth (not Enron) and believed that the future would uncover further scandals. I predicted scandals in revenue recognition (Dell today), Cash Flow presentations (Altera and Ebay), pension assumptions and underfundings (wait a year or so), and accrual accounting (quality of earnings (Countrywide). Also interesting for me, was that I was waiting for “capitulation.” We wrote a piece called, “Crisis is the Seed of Opportunity.” This writing also predicted future accounting scandals.
e. November 15, 2002 – concern with housing prices and consumer spending.
f. March 10, 2000 – Urging non-clients to examine their portfolios. We were concerned with a permanent impairment of asset values, “ a major valuation downturn.” NASDAQ was at 5048.62, as I write this, the NASDAQ is at 2227.67. The NASDAQ is still down 44% off of her highs. How is that for long term investing?
g. September 16, 2001 – A difficult letter for me to write, but one I am proud to have written. I still cry whenever I see the missing towers.
- Read anything by Seth Klarman. This is easier said than done, as his awesome book, “Margin of Safety,” is out of print. You can read our notes on the book (all 19 pages at this 2006_05_03.html
- One of my favorite books is called, “Winning The Loser’s Game,” by Charles D. Ellis. I will soon read this again. This book discusses the teamwork approach between investor and investment manager.
- Bill Ruane (1925 – 2005)- Founder of the Sequoia Fund and long time friend of Warren Buffett) said, as an investor all you have to do is read and apply, Benjamin Graham’s “Security Analysis,” and all of Warren Buffett’s letters. We have an extensive section on our website in regards to Warren WEB.html
- Investments, like children need nurturing. Be patient. Look at your investments over the long term. We stress that 5 years is only long-term for the impatient investor. On the other hand, constantly monitor investment philosophy.
- Invest when others are fearful, sell when others are giddy.
- Arnold Van Den Berg said in the most recent issue of Outstanding Investors Digest (8/30/06) the following about buying value stocks. “You never feel good about buying a great bargain. When you buy a great bargain, you’re doing it with sweaty palms, you’re leaning against the crowd, engaging in contrary thinking, and you’re pretty much alone.”
- Always ask difficult questions. Your money is at stake. Do not worry about insulting anyone. Exercise doubt!
Post meeting Notes
We had 50 people in attendance. Berkshire Hathaway had 12 people attend their 1981 annual meeting 🙂
During the meeting we stressed our sole reliance on long term investing. We used hall of fame baseball player, Rod Carew as an example. Rod had a lifetime batting average of .328. It was fairly predictable over the course of an ordinary season, Rod would hit over .270. With that said, I would “invest” in most years during his prime that he would bat over .270. That is called “waiting for the fat pitch.” If someone were to ask me to wager that he would bat over .270 in his next 20 at bats, I would typically not make that bet. Anything can happen over the short term. For example a sickness or plain old fashioned slump. Rod typically batted over 500 times during the year. Hence, the long term would be considered at least 500 at bats. The short term would be the 20 at bats. Hence, I would “invest” a great deal of money, if given the opportunity to “invest” well below Rod’s expected batting average for a single season. This gives the investor a “margin of safety.”
I also mentioned the fact that with 50 attendees, we would have over a 90% chance of two attendees having matching birthdays. We had 4 matches. I had offered the first person to raise their hand a 10 dollar bet, that we would have matching birthdays. I would not take that persons money, as I knew the odds were overwhelmingly in my favor, and for him it would be a fools bet. Once again, that would be considered “waiting for the fat pitch.” That is how we try and invest our clients funds. Unfortunately, investing is not that simple. If you would like the statistical explanation of the birthday formula, just send a request.
We have added some useful tools to our website. Please check the following links at our website.
1. Warren Buffett letters to partners 1959 – 1969 WEB_Letters_pre_berkshire.html
2. Benjamin Graham letters to partners 1946 – 1958 benjamin_graham/Graham-Newman_letters.html
3. Current Commentary (includes notes above) commentary.html
If you are a client of ours, and if you have questions regarding any investment mentioned in this document, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading these notes, we urge you to do your own research. We will not be responsible for any person making an investment decision based on these notes. these notes are a “by-product” of our research. We are not responsible for the accuracy of these notes. We are not responsible for errors that may occur in these notes. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate our long or short position of any investment mentioned in this document from our portfolios. We will not notify readers revisions to these notes. We are not responsible to keep readers of these notes updated for changes or material errors or for any reason whatsoever. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have any investment mentioned in this document in their portfolios. There could be various reasons for this. Again, if you would like to discuss any investment mentioned in this document, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).
Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment and are subject to change without notice. This publication is provided to you for information purposes only and is not intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any investments mentioned in a report or discussion.