Chou 2006 Annual Report

Francis Chou's 2006 Annual Report for his Chou series of funds is available. His flagship Chou Associates Fund gained 18.8% for the year (measured in either US or Canadian Dollars). The fund averaged holding 37% of its assets in cash, which restrained overall performance. In his letter to shareholders, Chou reports the fund held 43% cash as of March 2, 2007.

I encourage any investor who practices, or appreciates, value investing to read Chou's letter. He makes the point that "preservation of capital is being given almost zero consideration" in today's market. Which is sort of like saying the market is priced for perfection. Either way you prefer it being said, it rings true to my ears.

Chou remarks "the number of companies that are underpriced is at an all time low." I don't know if that's absolutely true -- but the thrust of it is. You've read me say, and doubtless read many more value investors say, that bargains aren't widespread. Maybe we're all wrong and we'll look back years from now and kick ourselves for not seeing the sea of cheap stocks around us.

But I don't think so.

One more caution from Chou: "We would caution all investors that their chances of a large permanent loss of capital are high if they invest in today's market leaders at current prices."

I tend to not be invested in market favorites. But that doesn't make my portfolio immune to market meltdowns. So I take Chou's words to heart.

Francis Chou, in addition to running his own mutual funds, is an officer with Fairfax Financial Holdings (FFH/NYSE). Chou doesn't hold Fairfax stock in his funds, but my understanding is that Fairfax has money invested with him.