Mason Hawkins, CEO of LongLeaf, on Asset Correlation

    The latest from Mason Hawkins of LongLeaf

    “I think the future of equities will be roughly the
    same as their past; in particular, common-stock
    purchases will prove satisfactory when made at
    appropriate price levels. It may be objected that it
    is far too cursory and superficial a conclusion;
    that it fails to take into account the new factors
    and problems that have entered the economic
    picture in recent years — especially those of … the
    movement towards less consumption and zero
    growth. Perhaps I should add to my list the
    widespread public mistrust of Wall Street as a
    whole, engendered by its well-nigh scandalous
    behavior during recent years in the areas of
    ethics, financial practices of all sorts, and plain
    business sense.” — Excerpt from June 1974 speech
    by Benjamin Graham, printed in Financial Analyst
    Journal, September/October 1974
    The opportunities created in the equity market
    disarray of the early 1970’s cited above
    precipitated the 1975 founding of Southeastern
    Asset Management. Similarly, uncertainty relating
    to various global economic conditions has created
    numerous opportunities for today’s long-term
    investor. We have endured material stock price
    declines in the last few months as macro fear
    around well-known issues of European sovereign
    debt, U.S. deficit reduction, and Chinese inflation
    control rendered company fundamentals
    irrelevant. As evidence of how little the market
    discriminated among businesses, stock price
    correlations in both the U.S. and Europe
    surpassed the level experienced in 2008 after
    Lehman’s collapse. The closer correlation moves
    to 100%, the less differentiation there is in how
    individual stocks trade. Correlation in September
    reached 85% for the FTSE 100, and the S&P 500
    hit 90% compared to its historic average of 30%.
    In other previous periods of high correlations,
    including 1982, 1990, and 2008, Southeastern
    suffered short-term underperformance. The third
    quarter of 2011 was no different. Out of favor
    companies became more disdained, and any
    perceived challenges became magnified in
    people’s minds. Similar to past periods, the
    companies that most negatively impacted results
    were economically sensitive businesses and/or
    those with some financial leverage. Following
    these periods, Southeastern has posted

    substantial outperformance when company
    fundamentals return to the spotlight and
    correlations fall back to normal levels. Severely
    discounted prices tend to snap back like a tightly
    compressed spring.
    If we know this common refrain, why not alter
    our investment strategy to avoid the types of
    companies that suffer when pessimism and
    correlations rise? Warren Buffett commented on
    this idea in his July 1966 Partnership Letter.
    “I am not in the business of predicting general
    stock market or business fluctuations. If you think
    I can do this, or think it is essential to an
    investment program, you should not be in the
    partnership… We don’t buy and sell stocks based
    upon what other people think the stock market is
    going to do, (I never have an opinion) but rather,
    upon what we think the company is going to do.
    The course of the stock market will determine, to
    a great degree, when we will be right, but the
    accuracy of our analysis of the company will
    largely determine whether we will be right… Who
    would think of buying or selling a private
    business because of someone’s guess on the stock
    We are incapable of knowing what stocks will do
    in the short run. To make investments based on
    correlation changes would require two correct
    calls — when to sell and when to reinvest. Being
    accurate in either prediction is a low probability,
    but when the two probabilities are multiplied, the
    chance of success is remote. Patience and
    discipline historically have rewarded our partners
    who believed in intrinsic value-based investing
    and who stayed owners through full market or
    correlation cycles. Price declines are painful, but
    do not equate to capital losses if investors stay
    long-term and business values remain intact.

    Exclusive: York Capital to wind down European funds, spin out Asian funds

    Jeffrey Aronson Crossroads CapitalYork Capital Management has decided to focus on longer-duration assets like private equity, private debt and collateralized loan obligations. The firm also plans to wind down its European hedge funds and spin out its Asian fund. Q3 2020 hedge fund letters, conferences and more York announces structural and operational changes York Chairman and CEO Jamie Read More

    Full letter below:

    11q3letter LongLeaf


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    Mason Hawkins, CEO of LongLeaf, on Asset Correlation