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Longleaf Partners Legg Mason Value

Source Capital Tweedy Browne American Value

I wanted to see what they were doing in the five boom-and-crash years of 1999-2003 -- to see if, given the enormous pressures to follow the crowd as the market soared, they had stuck to their principles – and of course to see if they had escaped the ensuing debacle.

I have no sense that the managers of these funds talk to each other, except perhaps by reading what each other has been saying or writing to shareholders, as reported in the value investors’ journal, Outstanding Investor Digest. (Usually they zealously protect their good ideas, except as disclosure is mandated.) But their intellectual roots, their common model, are derived from Security Analysis, by Ben Graham and David L. Dodd of Columbia, published just 70 years ago. References to that “bible” are sprinkled everywhere, and some of them openly describe their first encounter with Graham and Dodd as an epiphany.15 “[S]uddenly, investing made much more sense to me,” said Jean Marie Eveillard of First Eagle Global.16 Go to the Oak Value website

(www.oakvalue.com), for example, and the reader is soon greeted by the cover page of Graham’s companion book, The Intelligent Investor.

Typically, they search with exquisite care for a handful of companies whose intrinsic value – that is, the discounted present value of their future

free cash flows – can be calculated with some degree of assurance. They’re looking to buy pieces, i.e., shares, at a substantial discount from the

value an intelligent buyer would pay for the business as a whole. That’s it – price, value, and what Graham and Dodd said time and again, the

“margin of safety” that allows for the inherent risk in estimating future cash flows and the proper discount rate.17 As Charles Munger, the vice-chairman of Berkshire Hathaway, likes to say, if you’re building a bridge intended for 10,000 ton trucks, you build it to carry 30,000 tons.

The Fortune 10 test

The first test was quite simple. I looked to see if the funds had owned in the year 2000, when the market peaked, any of a group of very high profile stocks which the editors of Fortune had selected in an August 2000 article entitled “10 Stocks to Last the Decade.”18 The subhead read “Here’s a buy-and-forget portfolio,” and the list represented the contributions of some “top


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