This interview originally appeared on the Inside Value website in January 2007.
In Part 4 of our interview with Oak Value Capital managers David Carr and Larry Coats, we learned that they stress having a deep understanding of the businesses in their portfolio. Now we'll talk about why having patience is an important part of investing.
David Meier: It takes lots of discipline to really stick to a margin of safety. We try to remind readers that it is there for us -- use it and be disciplined with it.
Speaking of discipline, how tough is it for you, given your experience, to pass when you find a great business -- but you don't find it at an attractive price?
David Carr: That is a great question. It is a lot easier today than it was a long time ago, and part of that is experience. We do have people sometimes approach us and say, "How do we go into this business, and how do we shortcut to get where you are today?"
One of the reasons we always demand the margin of safety is we have been through severe alligator-biting times, and we have seen our rear ends hanging out there, and we have the bite marks to prove it. That experience is valuable, and I am not sure it can ever be passed on without having been experienced.
The good news for us today is I think we have made those mistakes, and they really drive the importance of margin of safety. And because we have seen so many companies and done this so long, we don't believe there is ever anything that is going to get away tomorrow. We have heard so many stories over the years about the "stock of the day." After listening to brokers in the early years, we quickly learned that we had better get on the road and see companies ourselves and talk to management, because the brokers were sellers of stocks and we were buyers of companies.
Remember, whatever can happen will happen. We went through Sept. 11. When we opened in 1986, we had the crash of 1987 shortly thereafter. So we focus on what is knowable, and what is knowable is the business model and what we think it is worth. Understanding how the business model is evolving, because we really do believe competition is tougher today than it has ever been. It has been getting tougher year after year, and so we have to understand how business models are evolving. The media area is a great area today because we have had a lot of experience in media, and many of the things happening today are things that we thought were going to happen.
So I think the benefit of experience allows you to be patient and to stay in the batter's box, like Buffett has talked about, and watch the pitches go by, because at some point in time, you will get a pitch that is good. About five years ago, we started changing some of the ways we processed information so that we would be even better at making sure as much information came through. That way we could follow all the companies that we thought were good businesses, and we could be alerted to price changes and changes that might get our attention. The result of that has been that today, we think we are very effective in monitoring our group of good businesses, and we are effective in watching for any signs of an opportunity.
Larry Coats: It is interesting on the issue of being afraid you are going to miss a great business when it comes cheap and being willing to sacrifice or compromise your margin of safety.
In the South, we have this thing called Krispy Kreme (NYSE:KKD) doughnuts, and they have this "Hot Now" sign. It is always an interesting debate when you see a great business that gets hit and trying to figure out whether that is a "Hot Now" sign that came on or whether that is some other opportunity that is disguised in a different way. It's always hard, so you just have to be very, very careful.
I will also tell you, debate is one of the benefits of having multiple people at the table. Our group of people has a good balance. As we often say, it works out as pretty good decision making, but it is not always pretty in the process.
DC: Patience is important, in that as we are thinking about businesses and we are trying to value them, it puts the importance on what we do as understanding business models. One of the holdings we made a lot of money in years ago was Tiffany (NYSE:TIF). We have actually come back to Tiffany again here recently in a small position. We can't quite get it at the price we want.
We went to see Tiffany in the late '90s because Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) owned Helzberg's Ben Bridges and Borsheim's, of course. We wanted to understand more of the jewelry business, and within a very short period of time being there, we knew that Tiffany was a truly unique franchise. We had gotten to know management well over the years, and it is truly a great company, but it was one that we went into not with the thought that we were going to buy the company, but with the thought that we need to understand the business model and the industry.
For us, we will find our teachers anywhere, and it is unique, we think, that we can actually go to a business that is a superior business and sit down at the feet of somebody, and he will teach us about the business model and tell us how he thinks.
Fortunately for us today, on Wall Street, whether it is hedge funds or analysts or whatever, many people are so focused on different things in the short term that they will actually discount what the management says. Our goal is to find really good, honest management and listen to it.
DM: Listening's not a bad way to learn things. (Laughs.) That's why we're here, listening to you.
DC: It is always mutual.
In Part 6, we'll wrap up the interview by finding out which one is the real cheapskate of the two.
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Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. He's ranked 7,979 out of 30,725 rated investors in CAPS. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.
