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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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Bargains used to be scarce. Today, they're abundant.
    Cates: Only two years ago at this very same meeting, we mentioned the difficulty we were having finding new names. Our cash position was huge and our average price-to-value ratio was 77%. Well, today, that 77% is down to 53%.
    If that drop had been entirely due to our companies' stock prices declining, the Fund would have been down over 30% in those two years. Instead, we've been essentially flat - still an ugly number, but much better than a negative 30% return - because underlying values have grown and our portfolios have been managed out of high price-to-value names into lower ones.

Just to reach a normal discount, our fund will need to pop.
    Cates: More importantly, as we look forward, once our price-to-value ratio gets back from 50%+ to around 70%, that would imply a significant bounce back - nearly 40%. Then, from that normal 70% level, our goal will be to make the same strong absolute and relative returns that we've achieved over the history of our company.
    That's one of the reasons why, as we mentioned before and as Mason said earlier, we believe that those returns have been deferred and not foregone forever....

These aren't exactly wide-eyed, lusty valuations....
    Cates: I'd also like to highlight the conservatism of our valuation appraisals - how we get to these numbers.... One example ... is Knight Ridder [KRI/NYSE] - the newspaper company which many of you know. Because of concerns about the classified advertising part of the newspaper industry, we value newspapers at a historically conservative multiple of only 8-1/2 times cash flow. And appraising Knight Ridder at that multiple gives us our estimated value per share of $69....
    However, Tribune [recently] agreed to buy Times Mirror - a chain with lower growth prospects and a weaker web presence than Knight Ridder - for 11 times cash flow. Even if Tribune gets all of the synergies and cost benefits it expects from the deal, they will have paid 10 times cash flow. And we're only using 8-1/2 times for what we think are better properties.
    Another example is General Motors. To arrive at our $150+ per share value, we've appraised their car and truck business at $40 billion. However, a few years ago, Chrysler sold for $39 billion. And GM's certainly a lot more valuable than Chrysler by any measure. So to summarize, what we own is incredibly cheap.