2009 Morningstar Investment Conference – 3

Another breakout session – Two Sides of the Coin – included a discussion between Chuck Bath of Diamond Hill Investments and Steve Romick of First Pacific Advisors.  For true Graham investors like us, this was a little bit of a waste of time.  Both funds are long-short mutual funds so their strategy often includes a lot of macro analysis, projections, and short sales.

Specifically, Bath mentioned that his fund focuses on a target of 50% long.  That means that they may go long $100 and short $50, for a net of $50.  They target that as a way of meeting the middle of this type of fund.  Some other funds may go 130/30 with a net of 100% long.  Others go for a net of 0% long and a market-neutral position.

Romick spoke for a moment about how the fund chooses to value companies.  He said that they look at the company’s specific probable earnings over the next few years, based on normal market conditions, and projects a value on that.  We think that includes too much potential for error in forecasting and would recommend that anyone who follows this method provide a significant margin of safety.

Bath then talked about the current market conditions and said he thinks the changes in the credit market will cause permanent changes to the amount of credit available to consumers.  As a result of the decrease in available credit, he expects a permanent reduction in consumer spending. 

Finally, Romick said that considering macro conditions should be imperative to prevent downside loss – a position in stark contrast to the speakers in the session that focused on value investing.  The value investors believe that macro conditions should not be considered because they are impossible to predict accurately.  Instead, the rational investor would focus on bottom-up analysis and find good companies regardless of the market conditions.

More of our coverage of the 2009 Morningstar Investment Conference:
Thursday opening session
Three Takes on Value breakout session
Thursday lunch general session
Thursday general session with John Bogle


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