06 Jul 2010 Sticking to What Works
Sequoia is being run pretty much the same as it was when Warren Buffett's friend and stockbroker, the late Bill Ruane, launched the fund in 1970. It's still a concentrated portfolio with two or three dozen stocks, all heavily researched and bought with the idea that the market is valuing them at less than their true worth...

04 Mar 2010 Sequoia Fund - 2009 Annual Report
The federal government's massive intervention in the economy staved off
what might well have been another Depression. As financial institutions were
recapitalized, investors grew more confident the banking system would not
collapse and, not incidentally, Wall Street was flooded with cheap capital. Not
surprisingly, the price of stocks soared. Still, we found aspects of the rally
curious. The stocks that performed best in 2009 often seemed to have depressed
earnings, or no earnings, and no prospects of imminent recovery. The Fund owned
its share of cyclical companies with collapsing earnings, including Martin
Marietta Materials, Mohawk, Caterpillar and Cummins. As the rally in cyclical
stocks intensified, we sold a portion or, in some cases, all of these positions.

Meanwhile, the stocks that performed worst in 2009 often had stable,
predictable earnings and strong balance sheets. Wal-Mart's earnings rose during
the year but its stock price declined. Berkshire Hathaway's balance sheet is so
strong that in the depths of the crisis some of the country's best-known
corporations turned to it for financing. Yet investors accorded it little
respect. Berkshire shares declined 31.8% in 2008 and barely rebounded in 2009,
rising 2.7%.

Berkshire has an extremely diverse stream of earnings, with roughly half
tied to economically insensitive businesses like insurance and utilities. The
market generally discounted these kinds of stable earnings last year. But
Berkshire also gets about half its earnings in normal times from a number of
cyclical businesses that should enjoy substantial earnings growth as the economy
recovers. The market bid up all manner of cyclicals last year, but not
Berkshire.

Berkshire's decision to sell equity option puts in 2008 put it at financial risk
if world equity markets suffered severe long-term price declines. This led to
anxiety during the crisis. As stock prices rose in 2009, those equity puts began
to look like winners. Again, this wasn't reflected in Berkshire's share price.
In any event, Berkshire began 2009 as 22.8% of the Fund's portfolio and its weak
performance was a major factor in the Fund's lagging result.

Looking ahead, we believe we have positioned Sequoia to perform well in an
uncertain world. If the U.S. economy turns robust, our reduced exposure to
cyclical stocks, avoidance of leveraged financial companies and large cash
balance could all hurt performance. But most of the positions in the portfolio
today generate high returns on capital even in weak economic environments. They
generate free cash flows sufficient to self-fund growth and then return excess
cash to owners in the form of dividends or repurchase. Most of our companies are
gaining market share in their industries. We continue to believe that we are
with few exceptions invested alongside high quality management teams.

02 Mar 2009 Sequoia Fund - Q4 2008 Report
While we can debate the merits of various economic stimulus proposals and are well aware of the long-term costs, we believe that the U.S. government is the only entity that can increase spending to offset a broad-based contraction in demand.

The personal savings rate, which had been hovering near zero as a percentage of disposable personal income in recent years, began 2008 at 0.2% but rose rapidly during the year, reaching 3.6% by December. Many economists believe this number will rise into the high single-digits in 2009. This reluctance to spend does not augur well for a quick economic turnaround.

As we think about 2009, we are skeptical of anyone who purports to estimate what the S&P 500 might earn. For many companies in our portfolio, the range of possible outcomes for 2009 earnings seems unusually wide. Earnings in the easy credit era were inflated materially by cheap debt, which enabled consumers to overspend and companies to over-earn. For 2009, we feel earnings will be depressed because of very weak demand as the world (except governments) delevers. We are not confident we know how low earnings could go.

The critical question for calculating intrinsic values for companies we follow is what will their earnings be in a more normal but less levered economy? Right now, such calculations are difficult because we are not sure what "normal" is. To steal a phrase from General Electric CEO Jeff Immelt, for most of Corporate America this is not a cycle, it is a reset.

From the S&P 500's peak valuation in October 2007, the index was down 45% as of mid-February, while the Sequoia Fund was down 34%. We do not believe the long-term earnings power of the businesses we own is 34% lower than it was 16 months ago. Unquestionably, earnings power is less in this subdued economic environment than we thought in 2007, but when we assess the aggregate earnings power of the Sequoia portfolio, it is down much less than the stock prices. For example, Berkshire Hathaway's long-term earnings power may be greater today than it seemed in 2007, thanks to its ability to deploy so much cash on favorable terms during this crisis.

At the current price of about $88,000, Berkshire sells at a reasonable valuation for a company whose long term earnings power remains substantial. In these difficult economic times, we believe that Berkshire could generate look-through earnings of about $6,000 per share in 2009. In more normal economic conditions, we think earnings power is over $8,000 per share. Thus, the earnings multiple is in a range of about 11-14 times. Moreover, the stock trades at less than 1.4 times our estimate of current book value...