LongLeaf Partners Semi Annual Shareholder Release 2011

The latest from legendary value investor Mason Hawkins.

Excerpt followed by full document in Scribd.

The second quarter exhibited investors’
temperamental nature aptly characterized by
Peter Cundill, a highly regarded devotee of Ben
Graham’s investment teachings. Peter, who was a
good friend, died earlier this year. He started his
Canadian investment firm the same year that
Southeastern formed. We shared many similar
views. The recent book about Peter,
There's Always Something to Do by Christopher Risso-Gill,
quoted an early, insightful journal entry on page 8.
My primary objective is to make
money for my clients and then to
make my business profitable. I believe
that the way to achieve this is through
associating with truly competent
people with unshakeable business
integrity, to ensure strict financial
controls, a culture of thoroughness, a
measured capacity for action; i.e. no
seat of the pants stuff and a spirit of
humility and cohesive teamwork. What
I am beginning to perceive is that
investors tend to follow trends and
fashion rather than taking the trouble
to look for value. This must offer
opportunity for the professional
investment manager, as a result of the
short term mispricing of securities.
Peter’s observation that investors are unwilling
to do valuation work occurred before the
development of 24/7 business networks and
“always on” connectivity. Instantaneous reaction
and speculation dominate stock swings today. In
May and June sentiment dramatically changed
with more speculation around slower global
economic growth and Greek debt default. No

significant new developments accompanied the

confidence reversal. Market fluctuations are

nothing new, but the speed and magnitude of the

market’s mood change indicated a reactive rather

than reflective environment. Equity funds, which

had positive flows through April, experienced

outflows every week in May and June, with

significantly larger withdrawals in the final three

weeks of the quarter. Conversely, bond fund flows

peaked in May and were strong again in June. We

saw similar movement among institutions as the

pace of pension plan “de-risking” increased. The

Advisors Sentiment report in Investors Intelligence

measured the rapid and dramatic confidence

swing. The 57% of advisors who were bulls in

early April fell to 37% in mid-June, while fewer

than 16% started as bears but grew to 28% over

the same period. The difference between bulls and

bears, therefore, went from over 41% to under

10% in fewer than three months.

These market observations did not impact our

investment decisions, but they provide context

for the opportunity change over the last three

months. At the end of the first quarter we noted

that few new companies met our qualifications

and the cash in our portfolios would give us

flexibility if markets declined. One of

Southeastern’s advantages is our discipline of

doing detailed business analysis and generating

in-depth company appraisals. Armed with our

long-term investment horizon and conservative

appraisals, we capitalized on the short-term

mispricing created by the market’s rapid reversal.

By the end of June we had found five new

qualifiers as well as added to nine existing

holdings across the three Funds.

Even though returns in 2011 have been positive,

the price-to-value ratio (P/V) has grown more

attractive in each Fund for three reasons: 1) we

have sold and trimmed more fully priced names,

2) we have bought and added to holdings that

were trading below 60% of appraisal, and 3) the

values of most companies have grown. We believe

the Funds contain a great deal of compounding

opportunity. Not only are they selling at a large

discount to appraisal, but the high quality,

competitively advantaged businesses we own and

the capable corporate stewards running them

should drive additional strong value growth for

the foreseeable future.
LongLeaf Semi-Annual Shareholder Letter
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