Francis Chou

Francis Chou is out with his 2012 annual report. There are many interesting remarks from the famous value investor. However, we found Francis Chou’s comments on Greece and a company he bought there to be of particular interest. Below is a brief quote followed by the full report in scribd:

What Will Happen if Greece Reverts to the Drachma?

In our last letter, we wrote with regard to investment in the Euro countries and Greece in particular. “When investors are optimistic of the future, it is hard to find bargains in the market. But introduce some fear and uncertainty and you will find a plethora of bargains. The Eurozone is the perfect environment for finding bargains. For example, there are plenty of Greek companies with fine economics, strong balance sheets and a shareholder friendly management that are selling for less than 4-times after tax earnings.

Let’s say that Greece, for one reason or another, leaves the Euro and reverts to the drachma. If this currency were then devalued by 50%, that stock would then be valued at 8-times earnings (in Canadian dollars because of the devaluation), which is still very cheap. The same scenario is starting to play out in Spain and Italy.”

Our enthusiasm over this is tempered by the fact that the devaluation of the drachma versus the Euro or the Canadian dollar or any of the major currencies may be greater than 80%. We have seen many examples of this happening to international currencies in the past. One example is the Indonesian rupiah during July 1997 to June 1998, when the currency was devalued by about 90% against the U.S. dollar. We saw a similar situation in Russia, from August 1998 to March 1999, when the ruble was devalued by about 78% against the U.S. dollar as well as in Argentina, from January 2002 to June 2002, when the peso was devalued by around 74% against the U.S. dollar. We believe it would be safer and more prudent to buy stocks after any devaluation of the local currency
– at least, that is what our research is showing. The key point is that returns of the Chou Funds will be measured in Canadian dollars and not in drachmas.

Therefore, substantial currency devaluation is an important factor to consider when investing in troubled countries. The other alternative is to look for companies that are undervalued and also have a substantial operation outside of Greece. We did buy Trastor Real Estate Investment Co., a Greek real estate firm, for Chou Europe Fund.

When we purchased the stock (average cost Euro 0.46), the dividend yield was approximately 20%, the price-to-book value was less than 30% and the company had substantial net cash on the balance sheet. I am happy to say that this purchase has worked out quite well. It is currently trading at Euro 0.71. In Chou Associates Fund, we bought Nokia, the phone manufacturer, at an average cost of $2.28 per share and it is currently trading at $3.43. It is surprising how manic depressive the stock market can be on certain stocks. In the case of Nokia, it was selling way below the value of its patents. The same story can be said of Research in Motion (now called Blackberry). We purchased it at an average cost of $7.12 in Canadian dollars for the Chou RRSP Fund and currently it is trading at $15.40.

Francis Chou 2012 Annual Report letter to shareholders


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