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from Outstanding Investor Digest's July 31, 2000 Edition

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LONGLEAF PARTNERS FUNDS'
MASON HAWKINS, C.T. FITZPATRICK & STALEY CATES

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That's what it's all about. Yet people never seem to do it.
    Hawkins: Everything depends on your ability to plot what a business is worth. We've been around for 30 years or so. And the longer we do what we do, the more we realize that very few people value businesses. At a cocktail party or reading the newspaper or watching CNBC, all they talk about is price: "What's the stock trading at?" No one ever says, "What's it worth?"
    When you buy your house, you say, "What's it worth? What did the house next door sell for per square foot?" When you buy your car, you really get down there and look at what it's worth. You know, if you put $25,000 in a car or $300,000 in a home, you really just grind away trying to figure out what it's worth. You ask the question.
    But boy, people looking at publicly-traded equities never seem to ask that question. That's what it's all about. But very few do it in the ephemeral world of stock prices.

We're the investing equivalent of the Maytag repairman.
    Hawkins: That's all we do at Southeastern. So there's not a lot of buying to do here unless there's a big deviation from economic value. But when there is, you then need to assess your partners correctly - and, as we've said before, it's businesses/people/price.... And at Southeastern, our question is would you put your entire net worth in it, because we do have approximately $240 million of our money in these four funds - between our retirement plan, our foundation and our personal stakes. And unlike any other mutual fund family, none of us can invest outside of the four Longleaf Funds.
    So is it worth a substantial premium to the price and, second, do we believe its value will grow over time? You can't separate value from growth. We're interested in both. We want a huge premium to what we pay and we're interested in that economic worth moving north....

A closing discount can provide most of your return.
    Hawkins: And here's why. If you buy a company that's able to grow its value by only 12% per year at a 50% discount to its value and its price rises to reflect that value five years hence, you achieve a compound annual return of 29% per annum. If you paid fair value, you would earn a total return of 12% a year as the underlying value accrues. If you bought it substantially above its value and the market reflected economic value five years hence, you would break even or lose money. That tells you how incredibly important price is. The price you pay - the closing of [that 50%] discount - provides you with two-thirds of your total return.
    So the margin of safety that Ben Graham talked about is important for two reasons: First, if you buy a dollar bill for 50¢, you're not going to lose any money. Your capital is protected. And that's very important to everybody. But equally important, in terms of offensive considerations, the closing discount can provide you with most of your return.... And it's very unlikely that 50¢ dollars are going to stay there long in a freely-traded capitalistic society....

Over the next five years, the NASDAQ has to go down.
    Hawkins: In the NASDAQ world, I don't know what growth rate you'd need to have to equal its P/E, but it's a huge growth rate.... So, quoting Mr. Buffett, you want to be approximately right instead of precisely wrong. You need a lower multiple and a higher growth rate to make sense out of those values.
    We can assure you that in the next five years, those prices will go down. They have to go down because the economic profitability of those enterprises - even with really fast growth rates - does not equate to the price....
    March 10th will long be remembered. It was not only the day I turned 52, but the day when Longleaf Partners Funds again began to deliver above-average absolute and relative returns. We thank you for your patience....