Chou 2007 Annual Report Online

Francis Chou's latest annual report and letter to shareholders for his mutual funds is online. You can download his 2007 annual report and previous ones dating back to 2001 here.

Comments

[Philip the Magnificent]

I really look forward to reading his annual reports. He pulls no punches and tells it like it is. Too bad he missed out on the CDS opportunity that Prem Watsa of Fairfax Holdings capitalized on. I've held his Associates fund for almost 2 years now and am down approx. 10 % (primarily because of the rise of the CDN dollar).
I'm pretty excited to see what great finds he will come up with in the market carnage.

[John]

Philip: I agree on all counts. Any long term holder of his funds should prosper mightily.

[Sivaram Velauthapillai]

Quite obvious... The declining US$ is a huge threat to foreign investors. It's somewhat scary to take a position in US stocks. But if one is long-term-oriented and believes the US$ will bounce back--perhaps years from now--then it isn't so bad.

I'm just some guy off the street, who really isn't an expert on derivatives, but I really don't get the infatuation of some value investors over CDS. Prem Watsa and Bill Ackman use it quite a bit but doesn't that get closer to gambling?

I can see CDS being attractive when it is mispriced but how easy would it be to realize profits? Isn't a lot of the CDS market illiquid? I wonder how one prices in counter-party risk.

Finally, one of the core tenets of Benjamin Graham is the notion that you buy a stock to take partial ownership of a firm (and share in the profits--hopefully ;) ). CDS contracts have nothing to do with ownership and you are simply betting based on some event that may or may not occur. I think some people use it as insurance (Prem Watsa may be doing that--not sure) but it still seems like speculation to me. (In an ironic twist, the ones that did not speculate with CDS-type contracts, the bond insurers, got burned badly while the speculators did quite well).

Many so-called value investors don't buy options contracts but they seem comfortable with CDS contracts. Anyone think I'm wrong with my thinking?

[John]

Sivaram: I have zero experience with derivatives, and I can't speak for Watsa (he keeps a very low profile, for one thing). But my hunch is you're right that he sees them as some sort of insurance. He most likely saw them as a very rare opportunity.

I haven't kept up with how many value players are using CDS contracts, but perhaps this is another case of follow the leader.