Post of the Day
January 25, 2000

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Eyes on the Wise

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Subject:  The 1999 Maplemark Fund Annual Report
Author:  fferrara

I used to invest solely through mutual funds, an experience that has left me with little respect for the professional investment community as my post 1700 will attest. I was the mutual fund maven, with short cap this and aggressive that and the results were usually horrid.

But the worst, the absolute worst, were the value funds. These are run by geniuses that don't want to buy strong companies because they're too "expensive" so they focus on second tier companies or outdated industries because they're "cheap." To be fair there was a time when this concept had considerable merit, but not recently and not likely anytime soon given the revolution going on in the American economy. Many people still don't grasp these developments but value fund managers seem to be the proverbial deer in the headlights.

Don't ask me why but one of the last funds I sold was a value fund, the Oakmark Fund, based in Chicago and run by Mr. Robert Sanborn. I invested $10,000 in this fund on 9 May 1996 and as of 31 December 1999, a period of better than 3 1/2 years, my investment had grown to the incredible sum of $10,200. (Actually it was $10,199.71, but I don't want to be too harsh) This in the hottest bull market in human history, where my 7 year old gives me successful investment ideas. (Think I'm kidding? What about KIDE?)

My favorite part about being a mutual fund investor is the pretty quarterly reports they mail to you, explaining how they underperformed the market and why you should be glad they did. The best ones are those from the value funds, because they are so wedded to a rigid style of investing you actually get to know their reflex reactions. You don't need to read the reports because you could write them yourself.

Well I have at last liberated myself from the folks at Oakmark and as anyone familiar with me knows I just have to let off some steam, and I normally do that by pounding on my poor keyboard. Here then is my take on the typical annual value fund report to investors, replete with an interview of the fund manager.

By the way, any reference to people living or that you wish were dead is purely coincidental.

The 1999 Maplemark Fund Annual Report

Dear Shareholders,

Your fund lost 10% of its value in 1999, a difficult year for investors that insist on fundamentals, which means the right to buy a dollar of earnings for three cents and a stick of gum.

However, this compares favorably to the Bookie 500 Index, which measures the performance of returns at gaming tables in Las Vegas.

We appreciate those shareholders that have stayed the course during this difficult time. We believe that our holdings are significantly undervalued and that at some point they will rise to fair value when the rest of the market comes to appreciate our hubris.

At the same time we regret the "herd" mentality of many investors that chase the hottest funds. Accordingly we have to keep an inordinate amount of your fund in cash in order to meet redemptions. Indeed, we feel we could have lost more than 10% of your money if we were not restrained by the need for short term holdings.

Thank you again for your support. It is only a matter of time before the market crashes and all of those people invested in tech stocks are working in soup kitchens. During the ensuing depression we will likely only lose 5% of your money annually while all others will no doubt be wiped out.

The management

As a service to our investors we present a year end interview with the manager of the Maplemark Fund, Mr. Chase Andsanborn:

Q.) Chase, the fund lost 10% this year. What happened?

A.) What happened is that we protected our shareholders' assets by investing in safe blue chip companies that made America great but are out of favor right now. But we're still buying! We pick up stock in these companies cheaper every day. Our gains will only be greater when the market comes to its senses.

Q.) But your three and a half year return is less than 1% annualized.

A.) Exactly right. And don't think we are not cognizant of the fact that we have a positive annualized return. It's our duty to our shareholders.

Q.) Let's take a look at the companies that contributed to your performance. Your biggest holding is in Phillip Morris, a company under legal attack from sick smokers. Many analysts believe it will be bankrupted sooner than later by the success of litigants.

A.) These fears are unwarranted. In fact our only regret is that we could have purchased Big Mo even cheaper if we had waited. The stock falls every day. But ultimately Big Mo will win out and shareholders will be rewarded for their unwavering support.

Q.) How can you be so sanguine when litigants are meeting with unprecedented success?

A.) One word: genomics. We believe the genomics boom will eliminate diseases such as emphysema and cancer. This in turn will remove the basis for the lawsuits. After all, when you go to a Cubs day game at Wrigley Field and you don't wear a hat and get sunburn you don't sue the ball club, do you? Of course not. You rub some Noxzema on it and it gets better.

And I'll give you an additional silver lining in this cloud. How does the prospect of smokers living longer lives and thus smoking for more years strike you?

Q.) And when this comes to pass you will ride Big Mo, as you call it, to new highs and record valuations?

A.) Oh, no. We'll sell long before that. When a company makes a new high it's getting into overvalued territory. We don't want to put our shareholders' money at risk carelessly. Remember, we're a value fund.

Q.) You mentioned the genomics boom and seem to be a believer. Have you invested in this sector at all?

A.) Absolutely not! This area may reshape the human condition but these companies are unprofitable. Our investors don't pay us to buy tulip bulbs.

If you look at great advances throughout the 20th century they've all proved out to be poor individual company investments in the end. What happened to the TV makers that were so hot in the 50's, the electronics pioneers from the 60's and the early PC makers in the 80's? No, we're going about it the smart way.

Q.) The smart way?

A.) Indeed. We look for plays on the genomic boom. Companies that are peripheral to the industry and thus realize solid gains without the risk.

Q.) Such as?

A.) Our investment in United Garbage. Our research indicated that genomic companies generate double and triple the amount of waste than non-genomic companies do and United Garbage has the lion's share of the genomic garbage market. We purchased shares in this company that had a PE of 3 two years ago before the market realized the effect of this tremendous opportunity. Today UG has a PE of 3.25 and this acceleration is likely to continue.

Q.) In the past you avoided technology completely. Is that still the case?

A.) No. We have seen the light here. But our investments are strictly ones that have value.

Q.) Can you give us an example?

A.) Let's discuss Precambrian Electronics.

Q.) I don't think I know them.

A.) That's because they trade on the NASDAQ Pink Sheets and are in receivership. But they are a great value. They purchased from Applied Materials state of the art, never been used chipmaking fabs for a product they call the "8086" chip. AMAT was actually going to scrap the equipment as unsold inventory and Precambrian stole it from them! They've licensed the technology from Intel for less than a hamburger dinner at McDonald's and will be churning out the chips shortly.

Q.) In this day of larger capacity chips with faster clock speeds isn't this a bit outdated?

A.) You obviously haven't heard of stackable chips. Precambrian will produce these chips very inexpensively, stack 100 of them together and get unbeatable performance.

Q.) Oh.

You spoke before about investing in companies that made America great but have been beaten down by the market. Can we discuss one?

A.) My personal favorite is Bethlehem Steel. They have 19th century management, similar steel making technology, union contracts that suffocate them and a generally gloomy future.

Q.) What attracted you then?

A.) Their shares are priced in the single digits and regularly make new 52 week lows. This leaves a lot of room on the upside.

Q.) But if you're going to invest in steel shouldn't you focus on a company like Nucor with state of the art technology and no union restraints?

A.) Well they are the gold standard in steel. But they're so expensive. No, we'd rather pick a second tier player. The government is certain to protect them especially in an election year because of the unions and the political influence of Big Steel's management. Besides it's only a matter of time before Microsoft and Intel are bankrupted by the coming technology crash. Then the Dow will have to look for new members and isn't there a certain comfort in the past? How long do you think it would be before the Dow came to its senses and allowed old BS back into the Industrial Average? Now what do you think that will do for the price of the stock?

Q.) Sounds like solid reasons for an investment, Chase.

In closing, do you hope to do better in the year ahead?

A.) Hey, I had a pretty good year! We've got $4 Billion under management and our fee generated $40 Million in revenue. Not bad, eh?

Q.) But what about the company as a whole, with its substandard returns that seem to get worse year over year? Would you invest your money in it?

A.) Absolutely! It's a value play.

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