Generals -- Excellent Businesses Purchased At Attractive Prices

When we speak of a General, we are speaking of an excellent business in which we were able to aquire at an attractive price. By excellent business we mean those businesses that are growing their per share economic values, have high returns on capital, and have managements with a history of intelligent capital allocation and acting in the best interests of shareholders. When we speak of attractive prices we mean prices that are cheap relative to there assets or free cash flows.

With Generals we intend to invest for the long term (3-5yr time horizon), and have no particular catalyst or time table as to exactly when the undervaluation will correct itself. Sometimes the discount to intrinsic value will narrow very quickly; many times the discount may take years to do so. Essentially we expect these businesses to grow at their own reasonably predictable pace over time, ultimately driven by the economics of the businesses underlying their stocks.

We expect generals to behave market-wise very much in sympathy with the S&P 500. Just because something is cheap does not mean it will not go down. We believe that during periods of abrupt downward movements in the market, this segment may very well be down % wise just as much as the S&P. But over a period of years, we believe these generals are very likely to outperform the S&P as a whole, and during years of significant market advancements, it is this portion of our partnership we believe will do the best.

It is worth mentioning, that due to the large declines in the general market over the past year, we have begun to meaningfully change the character of our security holdings recently. The percentage held in our special situation basket (arbitrage, spinoff's, liquidations, restructurings, etc.) has been slightly reduced, while our "general" commitments have correspondingly increased. As a rule of thumb, we tend to ratchet up our purchase of General's when general market sentiment is pessimistic and prices are generally low, and to sell them out in periods of optimism and high prices.

Current opportunity within the general segment of our portfolio operations is considerable. Thankfully, we have been able to build meaningful positions in three high quality companies at prices we believe to be truly ludicrous (i.e. rub our eyes cheap) relative to their respective long term earnings power. Recently purchased generals include sizable position's in Greenlight Capital (GLRE) and Brookfield Asset Management (BAM), with a smaller, starter position in Sears Holdings Corporation (SHLD).

Notably, at or around today’s quotes, we believe our generals possess some of the widest gaps between price and value that we have ever seen (unsurprisingly, that's why we bought them).
Consider for a moment that for the most part (SHLD being a partial exception) these businesses are not textile produces or heavy machinery makers, but well managed, competitively entrenched, high return businesses with above average growth prospects. Yet they are priced as if the opposite was true (at meaningful discounts to BV/NAV). This is not supposed to happen. Luckily for us, it has! Like Buffet said during the '73-'74 bear market, "This is the first time I can remember that you could buy Phil Fisher (growth) stocks at Ben Graham (Cigar-Butt) prices." Indeed! Our next few posts will drill down deeper on our newly aquired generals, and why it is exactly we feel they represent such incredible values for the long term investor.