Weitz & Nygren on commodity & investing strategy

**shu_wd** Thu Oct 13, 2005 1:01 am

Weitz & Nygren on commodity & investing strategy
hi, Blast,

I just read on two resources, one is interview with Wally Weitz
http://www.weitzfunds.com/FundProfiles/ValueInvestorInsight0805.pdf

and the other is Bill Nygren's Oakmark's Q3 2005 letter
http://www.oakmark.com/opencommentary.asp?commentary_id=363&news_from=c&fund_id=1

Both of the two are great value fund managers. However, they both mentioned to not to bet on comodity business. While I can understand that's the reason why their funds did not perform well recently, but is this any kind of caveat that the so called "next 5-10 years of commodity boom" is not sustainable? Like Bill Nygren said "Typically, an extreme (commodity) price spike sows the seeds for its own reversal."

Another thing I want to make sure I understand is that we don't have a "reserve problem" for Nature Gas and Coal, like what we have for Oil, right? So the price spike mainly comes from the limited supply capacity, just like the spike of gasoline price reaching $3 is really due to the refinery capacity, right? Does this imply that the high price of N Gas and Coal will be short-term compared to Oil?

Thanks,

**blast_investor** Thu Oct 13, 2005 11:04 am

Hi shu_wd:

This is not BlastInvest Question, it is more of value investing in general issue. I moved your topic from Blog to here.

Well, the 2 managers are very respectable successful value investing managers, and their mutual fund's performance has been pretty solid compared to mutual fund average.

My view on value investing in commodities certainly disagrees with the 2 managers in your post. You can see the different view came from difference of assumptions. They assume long term low energy price, I have been predicting long term high energy price.

In my opinion, long term value investing does not automatically exclude commodities stock investment. Value investing is all about value and cheapness of a stock, whether a commodity or not does not matter. I can give you one case to back up my view: the best value investor in the world Warren Buffet has been investing in commodity stock for long time: PTR, Petro China, a Chinese oil stock.

**blast_investor** Thu Oct 13, 2005 11:14 am

Hi shu_wd:

It is all about supply and demand. N Gas and Coal in USA is also an issue of demand surpassing supply, which I believe that will last for quite long time.

I believe they and oil are all linked together because they can replace each other in some degree.

On the reserve issue, oil does not have "reserve" issue either. There is plenty of oil in the ground that have amount to support world for decades. However, right now there is not enough oil production or capacity to dig them out economically.

**blast_investor** Thu Oct 13, 2005 12:04 pm

Hi shu_wd:

Bill Nygren's article mentioned 2 themes, one is commodity and oil, which I already put out my comments above.

The second theme he mentioned is the "relative high quality stocks". BlastInvest BIRTP newsletter does not operate in same way. BlastInvest investment philosophy is to look for maximum or absolute value rather than relative high quality, not-so-cheap stocks.

One reason is that I believe the market in general is not in good shape and we are in bear market in long term. In bear market, all high quality stocks will drop to average PE around 10, no safe haven. Therefore, the absolute deep value seekers like BlastInvest would out-perform others by looking for PE significantly below 10 or net asset significantly below stock price.

By the way, if we read carefully about the Benjamin Graham's "Intelligent Investor" book, his original belief is in absolute value, not a relative high price for high quality stocks. That is why BlastInvest will stick with absolute value and will not pay high price for "high quality" stocks.

In truly bear market, relative high quality stock would have to wait for investors to bid up price to make profit. Absolute value stocks are not subject to this. For example, if a "low quality" value stock has true owner's PE of 3, regardless of bear market or bull market, if the company can continue to make same profit for 3 more years, the profit the company generated would be enough to buy out all the shares in stock market, or pay dividend as large as 30% per year. For 3 years, the dividend would be large enough to cover the stock price. So, the stock price can only go up if that is the case even if in bear market environment.

**lzhang** Thu Oct 13, 2005 12:31 pm

blast_investor wrote: Hi shu_wd:

Bill Nygren's article mentioned 2 themes, one is commodity and oil, which I already put out my comments above.

Those so-called `high quality' stock should deserve high pe ratio is not new and that is the reason for bubble bust of the `nifty 50' stocks of 70's. I do not think that should be the base of value investment.

**grus2003** Thu Oct 13, 2005 1:14 pm

I agree with Blast & prefer absolute value stocks.

Buffet's philosphy is very different from that of Graham's although he inherited Graham's "The Margin of Safety". He mostly bought high-quality growth stocks with reasonable price, a mixture of Graham & Fisher. Read Graham's book & you will find Graham does NOT believe in or care about growth stories very much. Current assets & sustainable earning power (not necessarily growing) are essentials in Graham's philosphy.

**shu_wd** Thu Oct 13, 2005 3:33 pm

hi, Blast,

Thanks for clarifying the difference between your investment philosophy and those big fund managers. I guess that's why many of them are touting to buy WMT, TYC, DELL now...

As a small investor and a loyal subscriber of BIRTP, I'll believe in you. :-)

It is true that if we can get in stocks like WLL , CHK, and USG with a entry point as low as BIRTP, even a big correction as what's happening now is still safe.

**shu_wd** Thu Oct 13, 2005 4:11 pm

I think they are not talking about overpaying for "high quality" stocks, but more about "buying hight quality stock at a reasonable price", as grus2003 put in his post.

I think this still is a valid base of value investing. It is just Blast's style is different from it.

lzhang wrote: blast_investor wrote: Hi shu_wd:

Bill Nygren's article mentioned 2 themes, one is commodity and oil, which I already put out my comments above.

Those so-called `high quality' stock should deserve high pe ratio is not new and that is the reason for bubble bust of the `nifty 50' stocks of 70's. I do not think that should be the base of value investment.

**lzhang** Thu Oct 13, 2005 4:23 pm

shu_wd wrote: I think they are not talking about overpaying for "high quality" stocks, but more about "buying hight quality stock at a reasonable price", as grus2003 put in his post.

I think this still is a valid base of value investing. It is just Blast's style is different from it.

That is fine. But the question is what if the market does not appreciate that? What if the gap is narrowing, instead of widening. They are betting on the market sentiment, waiting for somebody to bid up the price.

**zdplus** Sat Oct 15, 2005 7:20 pm

Hi, Blast:

Do you think PTR at 72 is more preferable than
WLL at 40 with no fundamental changing?
which one has lower true "P/E", I think very similar...

I like PTR b/c it has RMB appreciation advantage
against US oil stocks.

/zdplus

**blast_investor** Sun Oct 16, 2005 12:08 am

I am turning negative on PTR because of recent news rumors of its intension entering real estate.

I would still prefer US based oil stocks.

**Guest** Mon Oct 17, 2005 11:57 am

Interesting, so you think real estate is risky in china at this time
or you think there may be some negative factors that forced
PTR to go into real estate business?

My personal opinion on chinese real estate at this time is
pretty negative, even it may still has a jump, the risk of downside
is much larger than the up side.

**blast_investor** Mon Oct 17, 2005 1:05 pm

My comment was not on real estate. An oil company should not spend money on real estate business even if real estate business is good business.

Of course, regular real estate needs to support oil business is not issue. The reported news or rumor indicates that PTR wants to spend raised money into real estate business in large scale. That is diworsification.