Thursday, May 22, 2008

Francis Chou: Is value dead?

THE cookie-cutter office building stacked amid high-rise condos and streetside retail is not where you'd expect to find the man who oversees $1.2 billion in funds, and who is said to be Canada's top stock-market bargain hunter. Taped to his door is a plain piece of paper that has been run through a printer: "Chou Associates Management Inc.," it reads, implying that nothing of much importance is happening here.

The door is locked, but jiggle the handle of the door and out pops Francis Chou, whom I have come to ask about the strange decline in the once-dominant school of value investing. It's an investing style once described by the late, great value guru Benjamin Graham as the equivalent of rifling through a store's discount bin. In other words, if you are patient enough to search endlessly and smart enough to know the difference between a true bargain and a bad knockoff, then you can make terrific money.

Warren Buffett, a giant of value investing, has achieved an almost impossible compound average annual return of 21.1% from 1965 through 2007 with his holding company, Berkshire Hathaway Inc. (compared to 10.3% for the S&P 500 Index). Other masters, such as John Templeton and Charles Brandes, have also prospered using this approach, as have Canadian names like Irwin Michael, Peter Cundill, Bob Tattersall and Francis Chou. Until recently, that is. At some point in the past year or two, value investing stopped working. Example: For the 12 months to Feb. 29, three of Chou's five funds were down 17% or more, as compared with the previous year. Could this be the death of value?

Chou seems faintly tired of reaffirming his faith that cheap stocks always come back up in price. "This is something that happens every six or seven years," he says. "The stuff that is cheap gets cheaper, and you have no control over it. Eventually, though, the logic prevails if you buy stocks cheap."

His move from the trappings of Bay Street to this nondescript suburban location several months ago was by no means a retreat from the action. For Chou, it was a decision that meant a shorter commute, and one that squares with his complete lack of affectation. An immigrant to Canada from the town of Allahabad, India, Chou arrived in Canada at age 20. He never attended university, be--ginning his career as a tool-belt-wearing technician stringing wire for Bell Canada. His career as a money manager unofficially be--gan in 1981 when he formed an investment club with six Bell co-workers and $51,000 in seed money. "I was more ambitious than just being a technician and I was reading a lot, trying to see what I could do," he recalls. "One day I came across an article in the paper on Benjamin Graham, and then suddenly the light clicked. I felt that was my line." Chou thinks this may have had something to do with his life as a child in India. "In India, you haggle. And in the stock market, you do the same thing. You're looking at what something is worth and trying to buy it cheaper."

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