An interview with Larry Pitkowsky and Keith Trauner of the GoodHaven Fund that appeared in Value Investor Insight on October 31, 2014. The interview discusses GoodHaven’s investment process as well as several significant portfolio holdings.
Interview with Larry Pitkowsky and Keith Trauner of the GoodHaven Fund
Your bona fides as contrarians are well intact. What’s the philosophy behind that?
GoodHaven Fund’s Keith Trauner: The analogy we use is that sometimes you smell smoke and most people want to run, thinking there’s a fire. We’re wired to walk toward the smell and check it out. Maybe it’s a fire, maybe not. Maybe we go into the building, maybe we don’t. But we’ll definitely take a look. The basic idea is that if you’re looking for bargains, you’re far more likely to find them among the unloved or unknown.
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One of our first big purchases after starting GoodHaven was Microsoft Corporation (NASDAQ:MSFT), when the stock was in the low-to-mid-$20s and trading at 8-9x earnings. We play a game sometimes and pull out a Value Line sheet or something similar and cover up the name and say, “What would you pay for this?” If you did that with Microsoft, which had tripled revenue and more than quadrupled profits over the previous decade, you wouldn’t come up with 8-9x earnings. But everyone had given up and thought it was dead money. Those are situations that interest us.
GoodHaven Fund’s Larry Pitkowsky: Our goal is to put money into situations where we feel there’s a lot of upside and very little downside. Risk can be greatly attenuated if you pay a low price and if expectations are already so low that the remaining downside is limited. That’s clearly not the case with ideas everyone loves and knows about.
Give an “unknown” example.
GoodHaven Fund’s Larry Pitkowsky: We bought into Spectrum Brands Holdings, Inc. (NYSE:SPB), which has a broad portfolio of consumer brands, not long after it emerged from bankruptcy in 2009. The company had gone bankrupt not because there was anything horribly wrong with the business, but because its private-equity owners had loaded it down with too much leverage.
As we looked into it, we found a decent set of businesses, with capable new management, and a stock trading at 5x free cash flow. There was little Wall Street coverage, and the financials were off-putting because of a number of extraordinary charges. We thought it was a real gem and while it’s done very well, we still own it and think it trades at a modest valuation.
Before talking about an idea or two, describe how you think about holding cash.
GoodHaven Fund’s Keith Trauner: There are two rules of thought on Wall Street about the future. The one most people follow is to try to decide what the world is going to look like going forward and on that basis make judgments on the industries and companies they buy.
The other school of thought, which we follow, says you respond opportunistically to what actually happens. It’s not that we ignore the earnings power of a business or its competitive dynamics over time, but we’re more interested in reacting to turmoil in the market that can cause forced selling. The best way to take advantage of that is to have cash available. If you look at public companies that have been run by great capital allocators – Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), Leucadia National Corp. (NYSE:LUK), Liberty Media Corp (NASDAQ:LMCA) – most of the time they have a fair amount of cash.
When markets get rocky, they spend it on bargains and use that liquidity to great advantage. Eventually the stresses pass and cash starts to build up again. We’ve tried to take that lesson to heart.
In an up market the liquidity looks like it’s hurting you, but when prices on average are high, people don’t think about the optionality value of cash. That value reflects what cash can buy in the future versus what it can buy today. Sometimes the difference can be enormous.