You have in the past invested in loss-making companies. What is your thought process there?
One of my largest and most successful investments has been in a company called American Tower (owner and operator of wireless and broadcast towers). It is hard on a GAAP accounting basis to understand what is really going on because on a GAAP basis it does not really show up. In fact, they are growing their free cash flow per share in the upper-teens, if not in the low-twenties, and they have been like that for years. So we take a look at that and we can see how the company is adding value by adding more towers, by adding more tenants per tower, and by charging more rent per tenant. They have the shelter of depreciation, which makes it look like they are not making any money. You cannot look at the traditional measures there to understand it. But we can see the growth in the free cash flow per share. Looking at stuff that way has allowed us to make an investment which formed one of our major purchases in October of 2002 at 80 cents a share. Last night the stock was at near $59. That is a very attractive investment. It is not even 10 years and the stock is more than 60 times our cost.
You are known for not selling your holdings anytime soon. Why don't you have sell targets?
Our strategy is to compound our capital at an above-average rate and at below-average risk. The way we hope to do that is by identifying what we call our compounding machines. We know that periodically the market will both overvalue and undervalue the businesses we own. Let us talk about the case of them being overvalued. If the business model is intact and if the people's behaviour is the kind of thing that we respect and if the re-investment opportunities and the historical record continue to be terrific, then we rarely sell something simply because it has become expensive. The reason is that the really good ones are hard to find. Remember that we run concentrated portfolios; we do not want to own lots of things. We want to own exceptional things, and the really good ones are hard to find. That is the reason that we often hold things for the very long period.
Will I be better off if I sold them at the top and bought them at the bottom? Of course! Am I able to tell when that is going to be? No. My life experience is that if the stock is at $40 and I think it is worth $25 and I sell it at $40 because I want to buy it back at $25, my experience is that it trades down to $25.05 and then goes to $300 and I don't ever get my position back. Therefore, we are always trying to make sure that we own the compounders.
How did you navigate the financial crisis of 2008?
Largely we stayed with our investments and they went down a lot. It was quite a frightening time for me and my clients and we have tried to make some adjustments as a result. We now try to better incorporate our world view into our individual security selection.
Therefore, we now have investments in Dollar Tree (a chain of discount stores that sells every item for $1.00 or less) and Ross Stores (another discount store). Those are two businesses designed to allow consumers to stretch the dollar. We think that is very appropriate in today's economy where we have very high levels of unemployment, reduced access to credit, and higher food and energy prices. The consumer does not have as much cash to spend and so businesses designed to help stretch the dollar are particularly well positioned.
Your view on the dollar — where do you think it is headed?
Maybe I can answer that question by going back. You know that Standard & Poors cut the debt rating of the United States a few months back. What do I think of that? Well, philosophically they are absolutely correct. The way the U.S. government manages its balance sheet is deplorable, but it is not going to default. And the reason they are not going to default is that they own the printing press. I am not making a prediction but on my radar screen is something like we had in the 1970s — stagflation, i.e., low levels of growth and interest rates going up dramatically, having the effect of devaluing the currency. Therefore, when you think of how we could get out of the financial crisis, one possible outcome that I think is reasonable is having the value of our currency diminish pretty significantly.
The dollar is likely to remain as a reserve currency, maybe the reserve currency because there are not enough other choices — there are not enough Swiss francs in the world! That is my view but I do not make any investments that are premised on what I think the dollar is going to do relative to other currencies.
You have seen many decades in the market and have witnessed a number of booms and busts. When do you see the next boom coming?
I have no idea. But what I do believe is that because we have no clear path to solving the financial crisis in the United States and Western Europe, the U.S. stock market and quite likely those of Western Europe can continue to be very volatile as they respond to good news and bad news which will pop up on a regular basis. From my perspective, this is actually good news — that kind of volatility will increasingly give us opportunities periodically.
Two, I do not expect a boom in our economy anytime soon. But I also recall that in the middle of January 1991 the US stock markets exploded. It was the day the US troops went into Kuwait to free the Kuwaitis from Saddam Hussain. The stock market went straight up all the way to the first quarter of 2000 with the exception of the big hiccups in 1998 of the Russian sovereign debt default and the failure of Long Term Capital Management (LTCM).
Now, our economy was in real bad shape from 1991 through 1994 — we had the Resolution Trust Company (RTC), a government agency, absorbing financial institutions and spewing out the assets at distressed prices. There were no tower cranes in the skyline of Washington DC for a period of three to four years and all economic activity had come to a halt. Yet, the stock market went up all through that time. I think it was because it could see that there were solutions that were going to work. Therefore, the markets can go up even when economic activity has not picked up. But my expectation is a fair amount of volatility for some time.
So how long before the next boom?
No predictions about where the market is going. I have never had five cents worth of good fortune trying to do that.
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