Graham and Doddsville Newsletter - Fall 2010

………………..

Excerpts:

G&D: In your first letter in 1993, you wrote that you often found niche companies with excellent track records that Wall Street has yet to discover. Is it worth your time looking for these opportunities now that you have $4 billion under management?

SR: I think that I was naïve. What is really undiscovered? I think it‘s morphed from undiscovered to unloved or misunderstood. There aren‘t that many undiscovered names out there.

G&D: How do you go about looking for ideas where there is a gap between perception and reality?

SR: Fortunately, people are emotional and they make visceral decisions. Such decisions end up manifesting themselves in volatility, where things are oversold and overbought. Being a really good investment manager is equal parts being a financial analyst, business analyst, and psychologist with conviction to act when others are panicking.

When we screen, we‘re looking for companies with strong cash flow characteristics and returns on capital, but most of companies don‘t come from screens. What‘s more prominent in our process are monitor lists. There are other areas, like spin-offs, that we monitor because we think there are more natural sellers than natural buyers. We don‘t think spin-offs are terribly inefficient anymore, but there are other things like that that we follow.

…

G&D: What do you think the impact of that potentially substantive liquidity response might be on the US dollar?

SR: The government is doing its best to destroy the value of the US dollar. We have made efforts to de-dollarize our portfolio, taking advantage of other parts of the world that have better growth opportunities than the US with more exposure to currencies other than our own. We are seeking those companies that are more protected should inflation be more than expected in the future. Now, we are not calling for hyperinflation, but we will not tell you that it cannot come – that is something we view as a real possibility. We are looking for companies where we feel the pricing power would offset the potential rise in input costs. That leads us to a whole universe of companies, while keeping us away from others.