The Unsung Guru

While many value investing sites sing platitudes about the usual suspects — Buffett, Munger, Klarman, Berkowitz, Lampert, Pabrai, et al — one name seems to slip under the radar: Robert Rodriguez of First Pacific Advisors. Of all my 13F filing breakdowns, Rodriguez’s is one of the least viewed. For what reason, who can say? It is definitely not his track record because Rodriguez achieved the highest 25-year returns of all diversified equity mutual funds. He literally beats them all.

Bloomberg published a nice piece on Rodriguez this morning. Among the interesting tidbits:

  • At times, Rodriguez holds large amounts of cash, a big no-no for regular mutual funds. Since 1998, the FPA Capital fund has averaged (averaged!) 30% cash.
  • In the silly discussion over whether the Fed can spot bubbles, Rodriguez (and many others) clearly saw both the tech bubble in 2000 and the credit bubble in 2007. The question is not whether astute observes can spot bubbles; clearly, they can.
  • According to the article, Rodriguez has not bought one stock since the March 2009 lows, which somewhat mirrors my lackluster activity levels this year. One could surmise he thinks the markets are not cheap.
  • FPA Capital currently has over 40% of holdings concentrated in the energy sector. I do not know if my own allocations are quite that skewed (gold holdings are a large part of my portfolio as well). Apparently, the volatility in the sector does not bother Rodriguez as it should not bother true long-term investors. Volatility is like a roller-coaster — it can be scary and rough but in the end, you get off safe and in the case of value investing, with more money than when you got on. Risk, on the other hand, is like jumping off a hotel hoping to land in the pool. How much risk you take depends on how high the building is!

The most pertinent lesson of the Rodriguez article was embedded in the headline: FPA’s Rodriguez Flouts ‘Small Mind’ Investor Rules to Top Funds. Apparently, Rodriguez once attended a Charlie Munger lecture in which Munger belittled diversification as “the hobgoblin of small minds with little confidence.”

The poignant realization has little to do with diversifying your portfolio (after all, Walter Schloss has done quite well with diversification) but rather, the “small-mindedness” that accompanies all of human endeavor, including investing. People lack confidence to trust their own decisions, especially with such high stakes on the line, and therefore, seek the safety of the herd. Even among budding value investors, many seek to replicate the moves of the masters and risk missing the broader lessons.

Rodriguez is obviously a fan of Buffett and Munger but he knows that true success lies in finding his own path, not aping his heroes. While Berkshire pursues the strategy of buying great business at fair prices (see Burlington Northern), Rodriguez has found great value in a volatile commodity industry with few if any moats.

Other examples prove the point. Seth Klarman obviously respects and admires Buffett but whereas Buffett is always preaching simplicity, Klarman actively seeks out complexity. While Buffett famously does all his own research, Klarman leads a team of analysts who bring ideas to him. Despite sharing the same philosophical approach to investing, their strategies are stark in constrast.

Of course, the ultimate example is Warren Buffett himself. Buffett idolized his mentor, Benjamin Graham, and even offered to work for Graham pro bono. Yet over the years, Buffett’s approach to value investing diverged widely from Graham’s method of picking cheap “cigar-butt” stocks. While much of this was due to necessity as Buffett accumulated more capital, Buffett internalized all of his influences (Graham, Fisher, Munger, etc) and defined his own approach.

The moral of the story: don’t let a “small mind” box you in. Go beyond the words to grasp the broader lesson embedded in them. Then take that lesson and bend it to your own situation or even discard it, if it does not fit.

There’s a saying that goes something like this: “On the path to enlightment, if you come across the Buddha, you must kill the Buddha. Only then can you become your own Buddha.”

More on this topic (What's this?) Read more on Warren Buffett at Wikinvest

2 Responses to “The Unsung Guru”

  1. Jason Says:

    Thanks for posting this. Much of investing is about waiting for the right pitch, yet a fund manager is paid to invest, not to sit on the sidelines, so it’s a tough call for a manager to keep a big % of a portfolio in cash.

    Separately, I’m know you have a few gold stocks, and I’m wondering if you’ve ever given any thought to how to go about earning interest on gold. Interest rates are low, so it wouldn’t be much interest. But Gold is money. And money can be lent. So it seems like there should be someway, somewhere, somehow to lend it. Maybe with a futures contract or a swap.

  2. Davy Bui Says:

    Hi Jason,

    I’m actually going to write about this in-depth w/ the premium subscribers but briefly, there is some gold leasing but that’s impractical for almost all investors.

    If you own gold through GLD or gold stocks, think about writing covered calls against your position, which are actually more lucrative than with non-gold stocks since gold-related stocks are so volatile and thus, the call writer gets paid more. Even 90-day calls that are 20% out-of-the-money can generate 5-10% premiums.

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