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Milk, of All Things, Helped Francis Chou Become One of Canada’s Top Value Investors.

Fund analyst Achilleas Taxildaris interviewed Chou in June. Answers have been edited for length and clarity.

Morningstar, 08/27/2014

This article originally appeared in the August/September 2014 issue of Morningstar magazine. To subscribe, please call 1-800-384-4000.  

Francis Chou is the co-founder of Chou Associates Management, the parent firm of five mutual funds, including Chou Associates, which has returned an annualized 11.5% over the past 27 years. In 2004, Morningstar Canada named him the manager of the decade. Chou has a history of rebating fees to shareholders in years when the funds underperform. 

1. How did you end up becoming a portfolio manager?
I was working at Bell Canada as a technician. I wanted to change that so I was reading a lot, trying to find out what field to go into next. Once I read Security Analysis I knew I wanted to be a portfolio manager.

2. You started your firm with $51,000 from six investors. 
What was harder, convincing those first six to invest or keeping the clients you have now?
It was difficult to get the six investors on board. I was just a technician with no formal education in investing. The initial capital was a lot of money for them. But once they saw how well we did, it was easy to keep them on board.

3. There is a story of you as a child checking milk jugs 
for freshness and price. How do situations like that play a part in your outlook on investing now?
When I grew up in India, shopping was under a bartering system. You would go to market, check the quality, and then haggle about the price. Then, you would go to all the vendors and see how cheap you can get the same quality. Investing is the same. You look at different securities, their quality, and then you try to get the best price. In India if you don’t pay attention, the vendor might dilute your milk with water. In investing, you have to be careful, too. You don’t want companies that
are loosey-goosey with their accounting practices.

4. Given the recent elections in India, what do you 
think is the most pressing problem the new government should tackle first?
Corruption and bureaucracy need to be reduced. They need to adopt a freer enterprise system. To start a company now, you need to go to more than 30 agencies.

5. How do you perceive risk and control for it?

There is no way to fully control risk. Rather, I try to mitigate the potential for risk by following a certain framework and sticking to it and, of course, buying stocks when they’re selling at a deep discount to their intrinsic value.

6. How to you guard yourself against behavioral biases?

You always have to reflect on your mistakes. This way you can guard against your greatest enemy—yourself.

7. Where are you finding value in the United States?

Most sectors are fairly valued at the moment. The best thing you can do when you can’t find any opportunities is to go in cash and not be afraid to stay in cash.

8. You own Russian stocks. How are you dealing with 
the risk of investing there?
As with anything that might face risks from government actions, you need to be careful with the valuation. We did buy one pharmaceutical stock, Pharmstandard, because it was already cheap and there was also an arbitrage opportunity between exchanges with a 20% difference.

9. You don’t make macro calls, but given 
macro concerns, would you ever avoid investing in a certain country?
Yes, because of corruption. You always have to think: What are the chances that a company can be expropriated and how easily management is able to take money out of it.

10. Berkshire Hathaway shareholders put pressure on Warren Buffett to name his successor. Do you think your investors should have the same concerns with you?
I’m so many years younger than him. I’m only 58, so it is a concern, but not as big as Berkshire’s. 

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