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LONGLEAF PARTNERS FUNDS'
MASON HAWKINS, C.T. FITZPATRICK & STALEY CATES
(continued from preceding
page)
Hawkins: Margin of safety pertains to what the business is worth versus what you pay. And the lower the price-to-value ratio, the greater the safety and the higher the potential return. So to the extent that we have 15% [of our assets] committed to a company that we believe is worth close to $50 a share that sells at $17, we believe very strongly - as would Dr. Graham or Warren Buffett - that we've lowered our price-to-value and, therefore, we've lowered our risk and improved our potential future return. It's an opportunity to buy more of the company at a lower price than we would have if the stock were higher.
If we had other equal opportunities in terms of price-to-value, competitiveness, endurance, lack of technological risk - what have you - it would be fine with us to have 10-15% of our assets in some other positions. You don't put 15% of your capital in something that's selling for what it's worth. You only put 15% of your capital in something that is so discounted that you have a great probability of making a lot of money two or three years hence when the market begins to weigh the economics of that situation as opposed to voting on the basis of the psychological issues that are being voted on today.
We agree with Buffett - there's less risk in concentration.
Cates: And the large position isn't just due to that discount. It's
due to the quality. Again, the quality of the landfill business is really hard to match -
especially at this point in time. A quick look at Solid Waste Digest and what landfill pricing is
doing right now will highlight that.
We constantly use, as you say,
Graham's thoughts on margin of safety.
However, we also use Buffett's thoughts on diversification - which is that there's less risk adding
heavily to things you know very well than there is to having a greater number of things you don't
know as well.
And we just think Waste Management is compelling. We know it really well.
And it's incredibly high quality.
We wish we had been able to back up the truck on UCAR.
Lee Harper: You're right, too, that had we not had the limits on
UCAR,
we probably would have added [to that position] when the disparity got so big between its
price and value after its price had dropped. And we would have benefited from that. This year,
that stock has added a huge amount to our returns in Longleaf Partners Fund….
VERY SIMPLE - INVESTOR PSYCHOLOGY.
We're putting our money where our mouth is….
Hawkins: C.T. [Fitzpatrick]
wanted to make a couple of comments
about Longleaf Partners Realty because it's been the subject of a number of questions. It's also
been the recipient of much of our personal cash flow into our four funds lately….
Page 9 of 12
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