Friday, August 13, 2010

Ira Sohn Investment Conference in San Francisco: Excellence in Investing

The highly regarded hedge fund conference, the Ira Sohn Investment Research Conference, is expanding west. The 1st annual Excellence in Investing Conference will take place in San Francisco on October 6th from 2:30-6pm. This event was inspired by and patterned after the Ira Sohn Investment Research Conference that takes place in New York. A portion of the proceeds goes to the Ira Sohn Foundation to benefit pediatric cancer research. Other proceeds go to Leadership Public Schools (LPS), an organization that aims to provide students from low-income homes an excellent education. You can learn more about the event at Needless to say, this is a great cause.

The speakers list is chalk full of excellent names, including:

John Burbank of Passport Capital
Barry Rosenstein of JANA Partners
Jeffrey Ubben of ValueAct Capital
Thomas Russo of Gardner Russo & Gardner
Mitch Julis of Canyon Partners
Robert Rosner of Buena Vista Fund Management
Arthur Patterson of Accel Partners
Richard Farber of Kayne Anderson
Christopher Chabris, co-author of The Invisible Gorilla
John B. Taylor, Senior Fellow in Economics at the Hoover Institution

The event also will feature the auction of a rare first edition copy of The Intelligent Investor that is signed by Warren Buffett himself. In-depth biographies of the speakers and more information on the event can be found in the Ira Sohn San Francisco's invitation embedded below:

You can download a .pdf of the invitation here.

To attend the event and hear investment ideas from top managers, embedded below is the Excellence in Investing registration form:

You can download a .pdf of the registration form here.

If you're in the nearby San Francisco area, definitely check it out. There are some excellent speakers lined up and the proceeds go to a great cause. We've covered the New York Ira Sohn Conference in-depth and those of you who read our coverage of that know it will be a fantastic event.

You can learn more about the event at

Thursday, August 12, 2010

Passport Capital's John Burbank on 13F's & Following Other Managers

Benzinga has an excellent interview up with the founder of Passport Capital, John Burbank. In it, we get a good look at how he became a hedge fund manager and the investor he is today. Passport was up 219% in 2007 due to his successful bet against subprime securities. While the hedge fund has seen some volatility the past few years, you can't argue with their solid returns of 23.6% annualized. As of late, Passport has been short Japanese government bonds under the notion that if national governments default on their debt, Japan would be one of the first to do so. Keep in mind that Burbank and many other prominent hedge fund managers will be presenting investment ideas at the Value Investing Congress this October in New York (receive a special discount here).

Maybe the most intriguing aspect of Burbank's interview was the fact that he addressed the SEC 13F filing where investment managers are required to disclose their long positions to the public on a quarterly basis. Many hedgies feel that this transparency almost gives away their 'secret sauce' as it reveals the majority of their positions and strategies. Not Burbank though:

"Do you think that 13-F filings are unfair in the way they force hedge fund managers to reveal their strategies?

Yes, but I'm not actually so upset about transparency because I think it's a trend that we should all expect. We typically take positions and tell investors, and the world about them. The question is whether or not the people are going to believe our views. We don't mind if they know what we own or what were short."

We can attest to his assertion that Passport doesn't mind if people know what they own. After all, we've detailed Passport's portfolio via their investor letters. Transparency is often seen as a double-edged sword in the hedge fund industry because everyone knows more of it is needed and assume it will eventually come. But at the same time, some secretly want to hold out as long as possible. It's good to see that Burbank fully expects transparency and takes an open approach.

The Passport Capital hedge fund manager was then also asked about the topic of following other investment managers. Bruce Berkowitz of Fairholme Capital has readily advocated following other managers and checking out their holdings for idea generation and potential investments to do due diligence on. Burbank agrees with this notion and the interesting thing here is that he kind of follows like-minded investors rather than focusing on managers that have different viewpoints:

"Which traders and money managers do you follow?

Probably more the ones that have expressed tremendous skepticism about the current environment. I started 10 years ago and my belief was that the market was extremely expensive, and I have essentially been betting against the US markets since. Now I'm in the position of regarding the government as an enormous risk toward our wealth and sovereignty. Therefore, I pay particular attention to those who have views about that because I want to learn from them and follow their thinking. It's also a means of discounting the positive stories always being heard about the market."

To hear Burbank and Passport's latest investment ideas, be sure to head to the Value Investing Congress (special discount included). The Passport Capital hedge fund manager will also be presenting at the Ira Sohn San Francisco Conference in October as well where the proceeds go to a great cause.

View the rest of Burbank's interview at Benzinga with part one here and part two here.

Market Strategist Jeff Saut Thinks March 2009 Lows Will Hold

The Chief Investment Strategist at Raymond James is out with his latest market commentary and there are a few bold assertions in it. Jeff Saut is of the belief that the market will be in a very wide trading range akin to the period between 1966-1982; a period where swings of more than 20% occurred 13 times with an end result of hardly any progress. He also bluntly calls for the March 2009 lows to hold. In a past commentary, he also advocated buying on weakness. But if you think about it, he's not exactly taking a huge leap of faith here considering that the S&P is currently around 1,082 and the March lows are way down around 666 on the S&P. Even if those levels were to hold, that's still over a 38% drop to get there.

So, how has the market strategist positioned his portfolio? Saut remains ardent in his stance that buying high quality dividend paying stocks is the way to go. Numerous market participants agree. Jeremy Grantham favors high quality and hedge fund T2 Partners is bullish on undervalued large-caps, just to name a few.

Additionally, Saut notes that, "The earnings yield (E/P) on the S&P 500 is currently 6.6%, which is the highest in 15 years, while the spread beween the earnings yield and the 30-year Treasury Bond is the widest in 30 years." As such, he feels that risk adjusted stock selection is the key to portfolio success currently and he tosses out some stocks for your consideration.

The companies on his list have the following attributes: a market cap greater than $5 billion, a return on equity greater than 15%, a dividend yield greater than 2%, a debt-to-assets ratio of less than 35%, and a price-to-earnings ratio of less than 15. Here are the stocks that made the cut:

Exxon Mobil (XOM)
Walmart (WMT)
Johnson & Johnson (JNJ)
Intel (INTC)
Abbott Labs (ABT)
Aflac (AFL)
Chubb (CB)
Diamond Offshore (DO)
Darden (DRI)

Lastly, turning to the inflation versus deflation debate, Saut highlights that except for the 1930s, deflation has been a bad bet. In fact, Saut isn't buying into the current hype surrounding deflation and has actually planted himself in the inflationary camp. He feels that the economic recovery will surely be slow, but a double-dip won't come to fruition. Following this recovery, he believes inflation is the likely scenario given the government's policy of trying to stimulate an economic response. And since Saut has declared himself a staunch inflationista, be sure to check out the best investments for inflation. And if you disagree, conversely head to the best investments during deflation.

Embedded below is Jeff Saut's latest investment strategy from Raymond James:

You can download a .pdf copy here.

For more from the market strategist, you can check out Jeff Saut's businessman's risk portfolio as well as his assertion that it's time to re-balance portfolios.

Tilson's Hedge Fund Positioned Conservatively, Sees Unfavorable Economic Outlook

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners is faring quite well in 2010, up 13.6% net of fees. They've taken a conservative position with their portfolio based on increasing concerns of a weak economy. As we've detailed in their previous presentation, they currently favor undervalued large-cap stocks. Their July letter to investors reveals that they are currently 100% long, 70% short, leaving them 30% net long. This is below the historical average for hedge funds and T2 Partners has taken such a position for two reasons.

Firstly, they're concerned about macro factors and cite Jeremy Grantham's recent letter. Vaguely speaking, they deduce that there are three possible economic scenarios at hand that can take place over the next 2-7 years.

1. A V-shaped recovery: A scenario where the stock market could compound 7-10%.
2. A 'muddle-through' economy: Stock market could compound at 2-5%.
3. A double-dip (or worse): Somewhat similar to what Japan's gone through, stocks could be anywhere from flat to way down.

Tilson and Tongue have built a conservative portfolio as the odds have shifted unfavorably as of late. They are long high quality large-caps such as Berkshire Hathaway (BRK.A), Anheuser-Busch InBev (BUD), and Microsoft (MSFT). They've also been long BP (in-depth analysis of BP here) and Liberty Acquisition Corp. warrants as special situations plays. Additionally, we've detailed T2's new position in Alloy (ALOY). While they like these names, their economic outlook has caused them to reduce longs and add to shorts.

Secondly, they cite numerous opportunities on the short side of the portfolio. When irrationality rears its head, T2 prefers to exploit the inefficiency. As such, they feel they can enhance their returns on this side of the portfolio. Some examples of current irrationality in their view include:

- VistaPrint (VPRT) still at $33 (it's now at $30 after the release of T2's letter). This is a classic 'growth gone bust' story and they are short.

- InterOil (IOC) at $60. We've detailed in the past how T2 feels that InterOil is a public relations hype machine, releasing news tidbit after news tidbit when fundamentally the company doesn't have a whole lot going on. They've been short for a while now.

- MBIA (MBI) at $8.68. They feel that bond insurers are in a precarious position given their struggles. Bill Ackman had previously been short this name and his investment was detailed in the book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff.

- The for-profit education sector. Like many other hedge funds, T2 has joined in on the negativity parade surrounding these stocks. While they don't disclose which specific companies they are short, it most likely includes a basket of these possible candidates: Apollo Group (APOL), ITT Educational (ESI), and Corinthian Colleges (COCO). For the elaborate thesis behind this play, check out Steve Eisman's short sale of for-profit education.

Overall, T2 has been adding to short positions and is increasingly focused on large-cap bluechips on the long side of their portfolio. Embedded below is T2 Partners July letter to investors:

You can download a .pdf copy here.

To hear many other hedge funds' latest investment ideas, Tilson will be presenting at the Value Investing Congress (special discount here) along with Bill Ackman, David Einhorn, Lee Ainslie, Kyle Bass, John Burbank, and many more.

Second Curve Starts New Tennessee Commerce Bancorp (TNCC) Position

Tom Brown's hedge fund Second Curve Capital recently disclosed a stake in Tennessee Commerce Bancorp (TNCC). Per a 13G filed with the SEC, Second Curve shows a 5.1% ownership stake in TNCC with 584,221 shares due to portfolio activity on August 5th, 2010. This is a brand new position for the firm as it did not appear in our previous coverage of Second Curve's portfolio. In terms of other activity from Tom Brown's hedge fund, we detailed their increased stake in Western Alliance (WAL) last month.

Taken from Google Finance, Tennessee Commerce Bancorp is "a bank holding company formed to own the shares of Tennessee Commerce Bank (the Bank). The Bank conducts business from a single location in the Cool Springs commercial area of Franklin. As of December 31, 2009, the Bank had total assets of $1.4 billion. The Bank offers a range of retail and commercial banking services".

To see what else prominent managers are investing in, scroll through our daily coverage of hedge fund portfolios.

What We're Reading ~ 8/12/10

Top Hedge Fund Investors [Cathleen Rittereiser]

10 hedge fund favorites for dividend yield [Ycharts]

Q&A session with James Altucher [The Kirk Report]

On the equity risk premium [Abnormal Returns]

Some great investing sites to check out: leaders of the new school [Reformed Broker]

Income investing: stocks versus bonds [Marketwatch Fundmastery]

A fund manager's take on Microsoft (MSFT) [Bronte Capital]

Great summary of some recent insider buying and selling [Sin Letter]

On the similarities between trading and poker [Chris Perruna]

GGP: a case study on internet activism [Distressed Debt Investing]

Bullish presentation on Exxon Mobil (XOM) [ValuePlays]

AerCap (AER) valuation at 20,000 feet [Harbor Investing]

Harbinger Capital opening Asia Fund [FINalternatives]

Dan Loeb, you're boring me [Institutional Investor]

Hedge funds post July gains [Reuters]

A lesson in how not to value Apple (AAPL) [Fortune]

Tuesday, August 10, 2010

Best Investments During Inflation

So, what is the best investment during inflation? The good news is that there are a multitude of securities and assets that can protect against inflationary pressure. The bad news is if such a scenario comes to fruition, your purchasing power is reduced. The main thing to keep an eye on is the money supply. Throughout the crisis, the monetary base has expanded, but has yet to materialize in the money supply. If/when this comes to fruition, you'll be prepared after learning how to invest for inflation below.

Interestingly enough, deflation has been the top concern amongst investors as of late and yesterday we detailed the best investments during deflation. But investors have quickly forgotten that inflation was the primary concern just a mere few months ago. This revisits a post we originally published in August 2008 examining investment scenarios for inflation versus deflation. Regardless of outcome, investors need to be prepared for either.

Why should you be worried about inflation? Well, how about because one of the greatest investors of this generation is concerned. Yup, Baupost Group's Seth Klarman is worried about inflation. Not to mention, Kyle Bass, the hedge fund manager who predicted the subprime crisis as well as sovereign defaults has voiced concern about inflation and significant currency devaluation around the globe. For every prominent investor worried about deflation, there is another concerned with the converse scenario.

Here are the best investments during inflation:

Avoid Cash/US Dollars: Inflation typically results in domestic currency devaluing. You can fight this by simply not holding it and allocating the capital into other assets and investments. Nowadays, cash is most certainly part of the asset allocation picture. During inflation, you want to have as little of it on hand if possible. Since it devalues during inflation, those of you wishing to press your bets against the US dollar can buy the PowerShares Bearish US dollar index fund (UDN).

Buy Gold & Precious Metals: If you'll think back toward the end of the crisis, gold was all the rage. As the Federal Reserve's printing presses worked overtime to churn out US dollars to resuscitate the economy, many became very worried about inflation. Their number one investment to protect against this? Gold. While precious metals in general are a solid bet, gold in particular is seen as a hedge against uncertainty and a store of value. For an in-depth thesis as to why you should buy gold during inflation, we turn you to out post on successful hedge fund manager John Paulson's gold fund. He launched this vehicle last year as a means of betting against the US dollar. Another option is the stocks of companies that mine the metal. One hedge fund recently opined that gold is good, but gold mining stocks are better.

We've detailed how countless other prominent investment managers favor yellow bricks. John Burbank's Passport Capital outlined the rationale for owning physical gold. David Einhorn's hedge fund Greenlight Capital also owns physical gold. Those of you who don't have access to physical bars can invest via the SPDR Gold Fund (GLD). Practically all of the hedge funds that are not investing in physical gold use this investment vehicle for their gold exposure. If gold doesn't tickle your fancy, legendary investor Jim Rogers sees opportunity in silver and palladium which can provide you with precious metals exposure. PALL is the ticker for playing palladium while SLV is a way to play silver.

Buy Crude Oil: Going long oil ties into the whole 'buy commodities' theme as protection. In a truly inflationary environment, oil is supply inelastic; any increase or decrease in price would not result in a corresponding increase or decrease in supply. In the past we've outlined how to invest in crude oil, as there are many investment vehicles out there, each with pros and cons. These funds include USO, DBO, & USL and are examined in-depth via the link above.

Short Fixed Income: Bonds should be avoided due to a weak domestic monetary system. In particular, avoid US Treasuries as they will underperform. As yields start to rise, bond prices will fall. A plethora of prominent investors have gone this route in order to gain inflationary protection. Seth Klarman has purchased out of the money puts on bonds. He's acquired tail risk insurance against a sharp rise in interest rates that protects him should rates skyrocket to 10%. Legendary hedge fund manager Julian Robertson had previously put on a curve steepener trade and then shifted to a constant maturity swap (CMS) trade. These are more advanced trades and typically are reserved for institutional investors. Retail investors can buy puts on or short the iShares 20+ Year Treasury (TLT).

Buy Emerging Markets: A weak domestic currency (US dollar) implies higher returns can be found abroad in other countries. A monetary system in trouble in the home land means your dollars should be invested abroad (especially consider commodity producing nations such as Australia and Brazil). You can invest in either emerging market currencies, equities abroad, or investment funds denominated in those foreign currencies. For broad emerging market equities exposure, one can purchase iShares Emerging Markets Index (EEM). For the Australian Dollar, consider FXA and for Brazilian exposure, consider EWZ.

Buy Technology: While this was also a suggestion for investing during deflationary times, it applies to inflation under the same rationale. Regardless of environment, technology is in demand and will continue to evolve.

Buy Treasury Inflation Protected Securities: These types of treasuries (known as TIPS for short) provide the safety of a government bond with the bonus of protection against inflation. You can buy these outright, or via the iShares Barclays TIPS fund (TIP).

While inflation was all the talk only a few months ago, it has since taken a back seat to deflationary chatter. Given the back and forth, it only makes sense to examine both scenarios. In the depths of the 2008 crisis we broadly examined investment scenarios for inflation versus deflation. At the time, it was unclear what type of environment we'd be entering. While still not entirely evident to this day, many have postulated that deflation in the near-term will then give way to inflation in the longer-term. A compromise of views, if you will. We've mapped out inflationary defenses above and for a look at the converse scenario, be sure to check out the best investments for deflation. Now you have a loose framework for either environment.

Monday, August 9, 2010

Best Investments During Deflation

Today we're laying a loose framework for the best investments during deflation. Why? Because deflationary signals have reared their ugly head as of late. Not to mention, many prominent investment managers have voiced their concern about the dreaded scenario. While inflation versus deflation has been the great debate over the past two years, the deflationistas have been boasting quite loudly as of late.

We've detailed how David Gerstenhaber's global macro hedge fund Argonaut Capital thinks deflation is the greater risk. Additionally, Broyhill's Affinity hedge fund has been betting on deflation as of late. PIMCO's bond king Bill Gross has been buying treasuries in order to combat these fears. And for more, The Reformed Broker has a quick summary of the New York Times' deflation round-up as well.

While investing during the dreaded 'D' word is not impossible, the options to preserve and grow capital are certainly limited. So, what is the best investment for deflation? Very broadly and in no particular order, here's some potential answers:

Cash/US Dollar: The phrase "cash is king" is often cliche. It's not cliche during deflation, it's rule number one. Assuredly, cash is one of the few 'safe' investments you can make in this scenario. Over the normal course of investing, most investors focus on their return on capital. This time around, the focus is simply on return *of* capital. While many wouldn't consider this an investment, having physical cash notes saved and on hand can be crucial during extreme situations including: bank failures, a collapse in credit, or the government defaulting on its debt. Not to mention, the US dollar has been a strong performer during deflationary times. Holding the physical currency is easy enough, but those wishing to further their wager can play the PowerShares US Dollar Bullish Index (UUP).

Pay Off Debt: Again while 'paying down debt' doesn't sound like an investment, it most definitely is during deflation. In a period where literally every single dollar matters, each dollar of debt can become crippling.

Buy Long-Term Bonds: Alternative to cash, fixed income is also seen as an option for those who seek protection. While fixed income yields decline due to Federal Reserve easing in an effort to combat deflation, the underlying bond should appreciate (or at the very least, depreciate much less than equities). US Treasuries are highly coveted here as they are the safest and most in-demand. If one were to go the corporate bond route, seeking high quality bonds is preferred. The thesis behind this play is laid out by Broyhill's Affinity hedge fund in their presentations: ten reasons to buy bonds as well as their bet on long-term treasuries. The most logical wager here would be the iShares Barclays 20+ year Treasury (TLT).

Short Equities: Traditional investments will start to suffer as underlying companies will see lower margins and losses. Not to mention, highly leveraged companies make ideal short selling targets and certain companies can face the risk of becoming insolvent. If your conviction is strong enough, you could simply short the S&P 500 index (SPY). There is, however, one potential safe haven in equities (keyword being 'potential'), which brings us to the next investment:

Buy High Quality Dividend Paying Stocks: Understand that during deflation, equities in general are one of the major investments to avoid. However, high quality stocks could be a potentially dim light in an otherwise dark scenario. While the majority of companies will lose pricing power and succumb to weak margins, large cap high quality companies that dominate their industries may be able to maintain pricing power. Not to mention, many of these stocks pay dividends which generate valuable cash during deflation. Seek companies with pristine balance sheets.

GMO's Jeremy Grantham recently voiced concern about deflation and one of his few investment recommendations was to buy high quality stocks. For ideas, hedge fund T2 Partners recently issued a presentation on 3 large cap stocks. Sectors to look toward include healthcare, technology, and telecom as those have outperformed in Japan during their deflationary lost decade. Microsoft (MSFT) is one name that has been repeatedly mentioned by strategists and managers. Keep in mind though that despite being high quality blue-chip companies, these are still equities. As such, there is obviously inherent risk in owning them during deflation.

Short Housing/Avoid Real Estate: In deflation, prices fall. As such, rent rather than own. Stand back and let the landlords watch the values of their properties plummet. You can short the iShares Dow Jones US Real Estate (IYR) for some exposure.

Short Leverage: Deleveraging should be a big theme playing out in the future, environment notwithstanding. As mentioned earlier, short the equity of companies that have poor balance sheets and are highly levered. In deflation, leverage begins to unwind and currency plays can be found. A massive leveraged carry trade in the Yen has taken place over the years and as such would be unwound in deflation, thus benefiting the Yen.

Long Technology: Regardless of environment, technology will advance and will be in demand. The technology sector was highlighted as one of the few areas to possible allocate capital in high quality equities. Companies that have strangleholds on their industry should have an advantage. A basket of technology stocks could be purchased via the technology exchange traded fund (XLK). However, that gives you exposure to a lot of companies and it's probably more preferable to single out high quality technology names with pristine balance sheets such as Microsoft (MSFT), Intel (INTC), and Cisco Systems (CSCO).

Gold: Conventional wisdom says to avoid precious metals during deflation. During the Great Depression from 1929-1932, commodities in general crashed. However, in very extreme circumstances (emphasis on extreme), some have argued that gold can make sense when acting as currency. The majority of proponents for owning gold during deflation would cite its store of value or hedge against uncertainty. While gold can be played via the SPDR Gold Fund (GLD), many hedge funds advocate physical gold. That said, those doing so are mainly seeking inflationary protection.

Buy TIPS: Treasury Inflation Protected Securities, or TIPS, serve as long-term protection from inflation. Buying TIPS during deflation? What's the point? This is an option if investors believe that deflation will eventually lead to inflation two or three years later. As policy makers attempt to combat deflation, the natural antidote is inflationary medicine. As such, investors looking further down the road can fend off these inflationary pressures with TIPS. And even if deflation persists for an extended period of time, TIPS still produce income via yield and investors can regain their bond's face value at maturity. This can be played via iShares Barclays TIPS Bond Fund (TIP) for those looking for an easy solution.

That sums up some of the best ways to position a portfolio when confronted with deflation. Recent concern is duly warranted considering that deflation typically rears its ugly head after periods of prolonged globalization and global growth. Such growth leads to increased investment, a massive increase in production, and thus excess capacity all around the world. This excess capacity then brings forth lower prices. In deflation, companies suffer while the consumer is the real winner. The above present theoretical options of how to invest during such a scenario. Make no mistake though, investing during deflation can be quite difficult and painful.

Back in August 2008 when the crisis was heating up, we penned a very broad outline of investment scenarios for inflation versus deflation. During the pinnacle of the crisis, it wasn't quite clear which situation would play out so it made sense to lay a framework for each context. (And arguably, it's still not entirely clear. Many have hypothesized that we'll see a compromise of views: deflation in the near-term and inflation in the long-term). A few months ago, inflation was all the rage. Now, deflation is the primary concern. Investors have been flip-flopping more frequently than politicians as of late.

Regardless of outcome, it makes sense to be prepared for either environment. Check back tomorrow as we'll turn the tables and outline the best investments during inflation in order to present both sides of the argument. In the mean time, be sure to see what hedge funds are investing in these days with our daily coverage.

Hedge Fund AltaRock's Investing Principles: Treating Stocks as Ownership in a Business

Today we're pleased to present you with commentary from Mark Massey's hedge fund AltaRock. Since his money managing inception in 1989, Massey has outperformed the market with a compound annual growth rate of 11.1%. AltaRock is long-term oriented and the results serve as a perfect testament from investors with the same focus.

The main reason we wanted to highlight their mid-year letter to partners is because Massey outlines some very Warren Buffett-esque tenets of investing. And Buffett, of course, inherited many of these ideologies from his mentor Benjamin Graham, the author of investment classics such as The Intelligent Investor and Security Analysis. Just like Graham and Buffett, AltaRock treat their positions not just as pieces of paper, but as actual ownership stakes in a given business. They approach their portfolio as a conglomerate with various subsidiaries and are looking for numerous characteristics in their investments. While the letter delves into these in much more detail (a must-read), we've outlined the criterion broadly below:

- Sustainable Competitive Advantage
- Strong Profitability
- Shareholder Friendly Management
- Sell Necessities
- Global Diversity
- Strong Balance Sheet
- Strong Free Cash Flow
- Good Growth
- Cheap Valuation
- Current Long-Term Expectations
- Historical Context

And while these generalized characteristics are staples of fundamental investing, AltaRock truly drills down the specific traits they are looking for in each category. The key here is that they approach their fund as a conglomerate owning various other businesses. As Benjamin Graham said in our quote of the week, "Investing is most intelligent when it is most businesslike."

In addition to laying the framework above, AltaRock's Massey also touches on the dilemma of holding cash versus investing it. Many investors view cash almost as an asset class of its own as it always has a place in a portfolio. On the topic, Massey writes,

"While cash currently pays us nothing, it does provide us with the potentially valuable option of snapping up bargains that may emerge in the months and years ahead. We find ourselves equally convinced to hold more or less cash as we focus alternatively on the potentially poor macroeconomic environment on the one hand, and the cheap prices of the very high quality companies we currently own on the other hand.

When the market is declining, cash always feels great, but to the extent that we can find excellent long-term investments in superior businesses, we don't want to forgo them. A bargain in a great company is our holy grail; to ignore it in the hopes of even better deals in the future seems foolish to us. After all, we can never really know if a better bargain will appear in the future, but we do know with near certainty that a great business purchased today at a bargain price will compound our wealth at healthy rates over the long term and with very little risk of loss."

These are truly words of a fundamental investor. If you think about, legendary manager Seth Klarman at Baupost Group typically holds an abnormally large amount of cash on hand for a myriad of reasons. While this can serve somewhat as a hedge during down markets, it is more-so a function of having dry powder to invest when compelling prices arise. Massey highlights what a conundrum it can be when balancing bottom-up company fundamentals and a top-down macro assessment.

While the macroeconomic environment is admittedly concerning to them, they are still confident that the underlying tenets above will provide them with safety and wealth generation going forward. A fantastic approach to investing is outlined in AltaRock's hedge fund mid-year letter embedded below:

You can download a .pdf copy here.

To learn the pillars of fundamental investing, there is nowhere else to point you but Warren Buffett's recommended reading list. The approach outlined above is decisively Buffettesque in its focus on owning a business rather than a stock. For more on a value investing framework, head to our fundamentals reading list and for more great market commentary from top managers, check out our latest coverage of hedge fund letters.

Ben Graham ~ Quote of the Week

Given that we touch on value investing topics from time to time, we thought it appropriate today to feature a quotation from the father of value investing, Benjamin Graham. The Market Folly quote of the week is simple and straight to the point:

"Investing is most intelligent when it is most businesslike."

~ Benjamin Graham

Graham's works on investing are of course must-reads and include The Intelligent Investor and Security Analysis. Stay tuned later this morning as we'll post up an in-depth look at treating stocks like business ownership, an inherent principle of value investing outlined by hedge fund AltaRock in their recent investor letter.