21 May 2010 FPA Capital - Q1 2010 Commentary
Being a loyal value investor is generally a lonely endeavor. That is, liquidity typically rises as bullish sentiments prevail and valuations become rich. On the other hand, when investors' fear levels rise and valuations plummet, those with liquidity and a keen eye toward great values are in a position to purchase attractive securities at bargain-basement prices. This has been our modus operandi for decades and partially explains the excess returns we have produced over the years. We do not intend to change our stripes and cast away our strategy just because we lag behind the market in the short run, whether it be one quarter, one year, or even a couple of years.

In the short run, say over a few quarters or a couple of years, the stock market tends to move with the predominant sentiment of that time. A little over a year ago the market was consumed with the scary prospect of a total financial collapse of our capital markets, and many stocks declined 60-80% from the prior highs. Today, the market is moving higher as if that dreadful event was not possible and a brighter economic future is preordained. These two extremes are both unlikely.

The stock market has a much rosier outlook than we do at this time, and is discounting a significant recovery in earnings. We think such a recovery is unlikely with banks pulling back on their lending, the consumer still stretched, and the government providing a temporary, but not permanent, boost to demand via its stimulus spending and abnormally low interest rates. The government spending is financed with record budget deficits, which is leading to an explosion in fiscal debt that is clearly not sustainable.

For 2010, the consensus is for the S&P 500 to earn $78. To achieve this estimate, sales will have to grow 6% and the after-tax margin hit 8.1%. The sales growth seems plausible, but the margin appears very optimistic to us, since the highest net margin we've achieved in the last twenty-five years excluding financials was 7.7% in 2007. In fact, the average net margin the last two and a half decades has been 5.3% according to a Morgan Stanley study. Thus, the 8.1% margin in the forecast implies a 50% improvement over the long-term average. We do not think this is very probable, and if it does happen, it is not likely a sustainable long-term margin.

03 Dec 2009 FPA’s Rodriguez Flouts ‘Small Mind’ Investor Rules to Top Funds
Robert Rodriguez ignores most rules of the mutual-fund industry, an approach that’s helped him beat all rival managers over the past 25 years.

Rodriguez, who runs the $1.1 billion FPA Capital Fund, puts most of his money into two or three industries at a time, has stopped taking new investors for 12 of the past 14 years and has held as much as 46 percent of assets in cash...

31 May 2009 Robert Rodriguez of FPA Capital speaking at Morningstar Investment conference
During the 1998-2000 performance derby races, a head long rush into speculation took place when growth stock “investment” managers chased Monopoly money-like stocks called “dot com” and other types of technology stocks. The fear of being left behind by not owning them was quite evident and I was utterly shocked and dismayed by their capricious actions. Where was their discipline? What were they thinking and did they ever consider how they might destroy their client’s capital? At the time, I referred to dot com company valuations as, “not only discounting the future but also the hereafter...

While technology stock and growth stock investing hysteria were running wild, we did not participate in this madness. Instead, we sold most of our technology stocks. Our “reward” for this discipline was to watch FPA Capital Fund’s assets decline from over $700 million to just above $300 million, through net redemptions, while not losing any money for this period...

We are again running contrary to the consensus, shifting course in our equity investment strategy in a way many would consider to be high risk. We deployed more capital than at any other period in the last 25 years...

I believe superior long-term performance is a function of a manager’s willingness to accept periods of short-term underperformance. This requires the fortitude and willingness to allow one’s business to shrink while deploying an unpopular strategy...