“Find bargains and maintain discipline; if you can’t find bargains stay in cash…Stocks are very expensive. You have to be very careful these days…But I’m waiting for the market to break, so we can put our cash to work.” — Francis Chou
Background & Bio
Francis Chou is the President of the Toronto-based Chou Associates Management Inc. Chou immigrated to Canada from Allahabad, India in 1976 and his rags to riches background is a great example of his disciplined nature and drive for success.
When Chou arrived in Canada, he was 20 years old and had only $200 in his pocket. Chou landed a job with Bell Canada as a telephone repairman. He was quite ambitious and felt that he wanted more from life than being a telephone repairman. Despite having only a 12th grade education, Chou liked to read a lot. He became interested investing after reading books written by Ben Graham, such as “The Intelligent Investor: and “Security Analysis“.
In 1981, Chou started an investment club along with six of his Bell Canada co-workers. The club started with $51,000 and managed to turned into $1.5 million over the next five years.
In 1984, Chou left Bell Canada and became a retail analyst with GW Assets, where he met another notable investor Prem Watsa, who was also an immigrant from India. After 18 months with GW Assets Chou left and joined Prem Watsa at Fairfax Financial Holdings Limited, as one of its original investors.
In 1986, Mr. Chou turned the investment club into Chou Associates Fund.
Francis Chou: Investment philosophy
Chou’s investment Philosophy can best be summed up in two words “Buy Bargains”. Of course, buying bargains is no simple matter. Chou can best be categorized as a value investor. Some people have called him a bottom fisher; however, he will typically look for stocks that display the following characteristics:
- Above-average to excellent companies as measured by high ROE in excess of 15 percent sustained over 10 years or more.
- Companies run by skillful managers as measured by good controls maintained on receivables, inventory and fixed assets.
- Prudent deployment of capital as measured by a company’s capital expenditures, judicious acquisitions, and timely buybacks of its depressed shares.
- A stock price which is far lower than what a knowledgeable rational buyer would pay.
Chou is a highly disciplined investor and would much rather hold onto cash than overpay for a stock. He looks to purchase stocks in companies that fit into one of these three characteristics.
Companies with “Special Situations”. When he says Special Situations he means companies that are facing short term problems that have caused investors to overreact.
Companies whose shares are “CRAP”. These are companies that cannot realize a profit. Chou believes that investors will run from companies that have losses thus leaving the stock undervalued.
Companies that are well run and have the potential for strong earnings growth but for some reason are trading for less than they are worth. This approach is similar to Warren Buffett’s, and is the investing tactic that he uses most often. When using this tactic Chou rolls up his sleeves and does long hours of company research. He will need to know the following about the company:
- Does it have a strong balance sheet?
- What is the company’s cash flow position?
- How well does the company rank when compared to its peers?
- Is the company is run well and does it have good management?
- Why the stock is trading below intrinsic value, and are the problems short term?
Below are some thoughts from Chou that give an insight into his thoughts on investing:
- Chou thinks most investors