Mr. Ganucheau: We're long-term investors, and today that's not just a word you throw out, because in today's volatile environment much of the money is being moved by momentum and short-term investment. We believe this has been exacerbated by the rise of hedge funds, many of which seem to be run by momentum investors in disguise, who short controversial stocks, betting their price will fall. This increased selling for short-term reasons has increased discounts to intrinsic value, providing opportunities for long-term investors like us to take advantage of. This is especially true in the wake of Enron, as panic selling has become common. In the recent past many investors were chasing stable growth companies; now many seem to be chasing price momentum. We're not short-term momentum players, so we're a little different from the rest of the crowd. When we look at a prospect, we're looking for something that can provide an attractive rate of return over a five- to seven-year period. We're trying to take advantage of volatility created by momentum investors, or by negative psychology in general, and that's usually how you get a chance to invest in a sound business at a significant discount to its intrinsic value. One other way that we're differentiated is that we emphasize fundamentals as well as valuation. Some value investors buy companies that are cheap on a price to book value basis, regardless of their long-term growth prospects. We believe that a company's opportunity to reinvest cash at attractive rates of return is an extremely important consideration. We try to buy businesses that have growing end markets, because we believe that, longer term, sales and earnings growth create wealth. Buying them when they're out of favor, when they're significantly under-priced relative to intrinsic value due to short-term negative fundamental outlook that creates a selloff, can drive opportunity for substantial investment results. It's a difference in time horizon. Someone with a three- month time horizon might be selling a security, and that would give us an opportunity if we have a three- to five- or seven-year time horizon. We would be classified as contrarians, and I believe over time there may be a differentiation within value between contrarians focusing on the current and future free cash flow stream and those focusing more on cheap companies based on metrics such as price to book value without much consideration of the company's ability to reinvest earnings to drive growth. If you want to buy something that's 'cheap,' you may find yourself heavily weighted in finance companies with low price to book value ratios. Given the commodity nature of some companies, the competitive dynamics of the industry, and significant leverage, we feel that many should trade at low valuations. Or you may find yourself in utilities with low growth and few opportunities to reinvest their retained earnings at favorable rates of return. Focusing solely on 'cheapness' may not lead you to companies with above-average prospects that have negative psychology priced into them. Something could be at an all-time high and still be cheap on a price to book value basis. It depends on the return on equity that the company earns. End-market growth and competitive advantages determine its opportunity to reinvest capital at attractive rates of return. Today's market is providing ample opportunity to buy market-leading, cash-generating companies at significant discounts to intrinsic value. I'm not trying to be promotional, but being an active investor now, especially on the value side with a contrarian philosophy, is exciting because we can see significant potential for future outperformance given the merchandise that has become available, high quality companies that have strong free cash flow and good balance sheets, trading at significant discounts to intrinsic value.
Tickers included in this excerpt: ABI, AMP, BMY, CA, CD, ERBITUX, MRK, PBM, PFE, PKI, SGP, TYC, WYE
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