The Superinvestors of Graham-and-Doddsville (3)

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Table 6 is the record of a fellow who was a pal of Charlie Munger's -- another non-business school type -- who was a math major at USC. He went to work for IBM after graduation and was an IBM salesman for a while. After I got to Charlie, Charlie got to him. This happens to be the record of Rick Guerin. Rick, from 1965 to 1983, against a compounded gain of 316 percent for the S&P, came off with 22,200 percent, which probably because he lacks a business school education, he regards as statistically significant.

Table 6: Pacific Partners, Ltd.
Year	S&P 500 Index [%]	Limited Partnership Results [%]	Overall Partnership Results [%]
1965	12,4	21,2	32,0	Standard & Poor's 19 year compounded gain	316,4%
1966	-10,1	24,5	36,7	Partner 19 year compounded gain	5.530,2%
1967	23,9	120,1	180,1	Partnerschaft 19 year compounded gain	22.200,0%
1968	11,0	114,6	171,9	Standard & Poor's 19 year annual compounded rate	7,8%
1969	-8,4	64,7	97,1	Partner 19 year annual compounded rate	23,6%
1970	3,9	-7,2	-7,2	Partnerschaft 19 year annual compounded rate	32,9%
1971	14,6	10,9	16,4
1972	18,9	12,8	17,1
1973	-14,8	-42,1	-42,1
1974	-26,4	-34,4	34,4
1975	37,2	23,4	31,2
1976	28,6	127,8	127,8
1977	-7,4	20,3	27,1
1978	6,4	28,4	37,9
1979	18,2	36,1	48,2
1980	32,3	18,1	24,1
1981	-5,0	6,0	8,0
1982	21,4	24,0	32,0
1983	22,4	18,6	24,8

One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately to people or it doesn't take at all. It's like an inoculation. If it doesn't grab a person right away, I find that you can talk to him for years and show him records, and it doesn't make any difference. They just don't seem able to grasp the concept, simple as it is. A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he's applying it five minutes later. I've never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn't seem to be a matter of IQ or academic training. It's instant recognition, or it is nothing.


Table 7 is the record of Stan Perlmeter. Stan was a liberal arts major at the University of Michigan who was a partner in the advertising agency of Bozell & Jacobs. We happened to be in the same building in Omaha. In 1965 he figured out I had a better business than he did, so he left advertising. Again, it took five minutes for Stan to embrace the value approach.

Table 7: Perlmeter Investments
Year	PIL Overall [%]	Limited Partner [%]
1.8.-31.12.65	40,6	32,5	Total Partnership Percentage Gain 8/1/65 through 10/31/83	4.277,2%
1966	6,4	5,1	Limited Partners Percentage Gain 8/1/65 through 10/31/83	2.309,5%
1967	73,5	58,8	Annual Compound Rate of Gain Overall Partnership	23,0%
1968	65,0	52,0	Annual Compound Rate of Gain Limited Partner	19,0%
1969	-13,8	-13,8	Dow Jones Industrial Avarages 7/31/65 (Approximate)	882
1970	-6,0	-6,0	Dow Jones Industrial Avarages 10/31/83 (Approximate)	1.225
1971	55,7	49,3	Approximate Compound Rate of Gain of DJI including dividends	7%
1972	23,6	18,9
1973	-28,1	-28,1
1974	-12,0	-12,0
1975	38,5	38,5
1.1.76-31.10.76	38,2	34,5
1.11.76-31.10.77	30,3	25,5
1.11.77-31.10.78	31,8	26,6
1.11.78-31.10.79	34,7	28,9
1.11.79-31.10.80	41,8	34,7
1.11.80-31.10.81	4,0	3,3
1.11.81-31.10.82	29,8	25,4
1.11.82-31.10.83	22,2	18,4

Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth?

Table 8 and Table 9 are the records of two pension funds I've been involved in. They are not selected from dozens of pension funds with which I have had involvement; they are the only two I have influenced. In both cases I have steered them toward value-oriented managers. Very, very few pension funds are managed from a value standpoint. Table 8 is the Washington Post Company's Pension Fund. It was with a large bank some years ago, and I suggested that they would do well to select managers who had a value orientation.

Table 8: Washington Post Company, Master Trust, December 31, 1983
	Current Quarter		Year Ended		2 Years Ended*		3 Years Ended*		5 Years Ended*
	% Ret.	Rank	% Ret.	Rank	% Ret.	Rank	% Ret.	Rank	% Ret.	Rank
All Investments
	4,1	2	22,5	10	20,6	40	18,0	10	20,2	3
	3,2	4	34,1	1	33,0	1	28,2	1	22,6	1
	5,4	1	22,2	11	28,4	3	24,5	1	---	---
Master Trust	3,9	1	28,1	1	28,2	1	24,3	1	21,8	1
Common Stock
	5,2	1	32,1	9	26,1	27	21,2	11	26,5	7
	3,6	5	52,9	1	46,2	1	37,8	1	29,3	3
	6,2	1	29,3	14	30,8	10	29,3	3	---	---
Master Trust	4,7	1	41,2	1	37,0	1	30,4	1	27,6	1
Bonds
	2,7	8	17,0	1	26,6	1	19,0	1	12,2	2
	1,6	46	7,6	48	18,3	53	12,7	84	7,4	86
	3,2	4	10,4	9	24,0	3	18,9	1	---	---
Master Trust	2,2	11	9,7	14	21,1	14	15,2	24	9,3	30
Bonds & Cash Equivalents
	2,5	15	12,0	5	16,1	64	15,5	21	12,9	9
	2,1	28	9,2	29	17,1	47	14,7	41	10,8	44
	3,1	6	10,2	17	22,0	2	21,6	1	---	---
Master Trust	2,4	14	10,2	17	17,8	20	16,2	2	12,5	9

*Annualized
Rank indicates the fund's performance against the A.C. Becker universe;
Rank is stated as a percentile; 1 = best performance, 100 = worst

As you can see, overall they have been in the top percentile ever since they made the change. The Post told the managers to keep at least 25 percent of these funds in bonds, which would not have been necessarily the choice of these managers. So I've included the bond performance simply to illustrate that this group has no particular expertise about bonds. They wouldn't have said they did. Even with this drag of 25 percent of their fund in an area that was not their game, they were in the top percentile of fund management. The Washington Post experience does not cover a terribly long period but it does represent many investment decisions by three managers who were not identified retroactively.

Table 9 is the record of the FMC Corporation fund. I don't manage a dime of it myself but I did, in 1974, influence their decision to select value-oriented managers. Prior to that time they had selected managers much the same way as most larger companies. They now rank number one in the Becker survey of pension funds for their size over the period of time subsequent to this "conversion" to the value approach. Last year they had eight equity managers of any duration beyond a year. Seven of them had a cumulative record better than the S&P. The net difference now between a median performance and the actual performance of the FMC fund over this period is $243 million. FMC attributes this to the mindset given to them about the selection of managers. Those managers are not the managers I would necessarily select but they have the common denominators of selecting securities based on value.

Table 9: FMC Corporation Pension Fund, Annual Rate Of Return (Percent)
Period Ended	1 Year	2 Years	3 Years	4 Years	5 Years	6 Years	7 Years	8 Years	9 Years
FMC
1983	23,0								17,1*
1982	22,8	13,6	16,0	16,6	15,5	12,3	13,9	16,3
1981	5,4	13,0	15,3	13,8	10,5	12,6	15,4
1980	21,0	19,7	16,8	11,7	14,0	17,3
1979	18,4	14,7	8,7	12,3	16,5
1978	11,2	4,2	10,4	16,1
1977	-2,3	9,8	17,8
1976	23,8	29,3
1975	35,0						*18,5 from equities only
Becker large plan median
1983	15,6								12,6
1982	21,4	11,2	13,9	13,9	12,5	9,7	10,9	12,3
1981	1,2	10,8	11,9	10,3	7,7	8,9	10,9
1980	20,9	NA	NA	NA	10,8	NA
1979	13,7	NA	NA	NA	11,1
1978	6,5	NA	NA	NA
1977	-3,3	NA	NA
1976	17,0	NA
1975	24,1
S&P 500
1983	22,8								15,6
1982	21,5	7,3	15,1	16,0	14,0	10,2	12,0	14,9
1981	-5,0	12,0	14,2	12,2	8,1	10,5	14,0
1980	32,5	25,3	18,7	11,7	14,0	17,5
1979	18,6	12,4	5,5	9,8	14,8
1978	6,6	-0,8	6,8	13,7
1977	-7,7	6,9	16,1
1976	23,7	30,3
1975	37,2