September 26, 2008 - "David Winters letter to shareholders"
Summary: I think one of the best ways to learn about investing is to read the stock picks and opinions of great investors and try to adopt their mindset and how to think like them. Here is the latest letter to shareholders from one of my favorite portfolio managers, David Winters.
Dear Fellow Wintergreen Fund Shareholder,The last six months have been filled with volatile worldwide financial markets that have kept all investors on their toes. The apparent freefall of some securities is providing huge buying opportunities for value investors, but at the same time the daily market fluctuations are somewhat bewildering to investors as we navigate turbulent market conditions. Wintergreen Fund has been affected by this volatile market: the Fund’s performance for the first six months of 2008 was (11.86%) only slightly better than the Standard & Poor’s 500 Composite Index at (11.91%). The market has not discriminated between high-quality and low-quality companies; virtually every stock has declined. Generally, markets reward solid, stable companies, but this year even the best companies have suffered. The movement from easy credit to little or no available credit has restricted normal business operations and slowed down speculation. We believe companies with the following three characteristics are great long-term destinations for investor capital, even though the short-term quotations are less than favorable: solid businesses that generate cash; businesses with pricing power; and businesses with rational management who create value for their shareholders.
A favorite story of mine as a child was “The Little Engine That Could” by Watty Piper. In this story, a long train needed help to get over a large mountain. Various railroad engines that had the capacity to move the train refused to help. They said the job was too big and difficult for them, and the mountain was too steep. The engines that were designed to haul heavy freight would not attempt to move the huge train. Eventually a small engine that didn’t appear to have the necessary get-up-and-go was asked for assistance and that small engine agreed to try to help the large train. Using all of its power and repeating ‘I think I can, I think I can’, the small engine got the freight train up to the top of the mountain. As the train went down the tracks on the far side of the mountain to deliver toys and treats to the children who had been waiting, the little engine repeated the
phrase, ‘I thought I could, I thought I could’.
In this global market that looks too big for anyone or anything to bring it back to a more stable environment, I think that solid analysis of companies and careful accumulation of underpriced stocks has the potential to yield great rewards. Like the little engine that put its head down and worked at its assignment, the pursuit of fundamental research coupled with an appreciation of the consistency of human behavior should identify the securities that I believe will survive and thrive in the future. Now is the time when some of these companies are on sale. Although no one knows precisely when, it is inevitable that these wild bargain prices will at some point in time come to a close. When that happens, and with the benefit of 20-20 hindsight, many investors will wish they had accumulated a bigger stake in these bargain companies.
Berkshire Hathaway is an example of a portfolio holding that we believe has suffered more stock price reduction than the fact pattern would suggest. We believe Berkshire continues to be a wonderful company. It is a conglomerate headed by two outstanding men with numerous diverse subsidiary businesses run by capable people. The insurance portion of their holdings is characterized not only by the clever television advertising of GEICO, but more importantly by high levels of capital strength and diversification in their lines of business. In addition, there are several successful businesses in the Berkshire lineup of companies that run the gamut from apparel to building supplies to candy to dairy desserts to energy to furniture. There is an added asset in Berkshire, which is a huge and growing pile of cash ready to acquire additional well-respected businesses, securities, and/or brand names at prices that make sense. With all of these items factored in, one wouldn’t think that the stock
would have been so beaten up, yet in the first six months of this year Berkshire Hathaway fell 15.3%.
Investment performance for the vast majority of equity portfolios was simply sad during the first half of this year. It was a time when virtually all security prices fell. The good companies with solid assets, good management, little or no leverage, growing cash flows, and the ability to raise product prices suffered security price reductions just like the less than solid companies that were over-leveraged, poorly managed and had shrinking cash flows that by all rights deserved to have their price fall.
Wynn Resorts is another security holding that we like. We believe it is a great way to invest in the overall expansion of wealth and economic development in China. The top drawer casino in Macau is the Wynn, and as you may know Macau is the sole gambling destination in China. Wynn has full participation in the growing wealth in China without the uncertainties of Chinese legal and accounting differences from American standards we all know. This company also has the poshest casino in Las Vegas. Like the rest of the United States, Las Vegas is having some challenges but Wynn is building for the long-term. If the past offers any guidance for the future, quality casinos and hotels very well may operate at healthy profits for many years. Some years will no doubt be better than others, but there is a long-term expectation of profitability. During the first half of this year the stock was down 28%. So what does a good business do when the stock price is down and the company has cash? Of course the company buys back its own stock.What did Wynn do when it had the opportunity? It bought back approximately six percent of its stock at prices well below recent quotes.
Like the “The Little Engine That Could”, I believe the markets will eventually get to the other side of this mountain of bad news. When we get to the other side of this market with its nasty tone of inflation and recession, I hope you will join me in the chant ‘we thought we could, we thought we could’.
Thank you for your continued investment in Wintergreen Fund.
Sincerely
David J. Winters, CFA
Portfolio Manager
