Sequoia: We're Still Very Comfortable with Berkshire

Mike Breen: Greetings, this is Mike Breen from Morningstar.

I am here with Bob Goldfarb and David Poppe of the Sequoia Fund, and they are Morningstar's domestic equity fund managers of the year for 2010. Welcome.

Robert Goldfarb: Thank you.

Breen: Congratulations, gentlemen. Your fund is a very low turnover fund, very prudent value-tinged approach, so your performance last year was very impressive--20% or so you gained for the year with a very large cash stake.

I know you have low turnover, so a lot of what drove that performance, you probably laid the groundwork years prior. Maybe you can run through what drove your performance last year?

Goldfarb: I think all of the largest holdings did quite well. We currently have five holdings that are over 5%.

Breen: Berkshire Hathaway is still one of them.

Goldfarb: The largest position would be Berkshire, which is just north of 10%. And actually it was 30%, I think, as recently as five years ago, and we reduced the Berkshire position at two different times. One was when it entered the S&P 500 and there was some artificial demand created by the index funds and such. And then the second time was when it entered the Russell. Again, there was some artificial demand. And our goal was to reduce it to 12%, and then subsequently Berkshire has kind of lagged--or just held its own--while the other stocks have appreciated quite a bit. So it's down to a little north of 10% right now.

We are very comfortable with it. It's selling at a very modest multiple of earnings for 2011, and I think it's selling below the value of the underlying businesses. So you're ... getting Warren ... for a discount. When you think about how much value he has created in the last five years, I think betting that he is going to create value in the next five is a pretty darn sure thing.

Breen: You guys share a lot with Buffet and Munger in that you like firms with moats and defensible businesses and sustainable competitive advantages, but you also put a pretty big emphasis on management.

So you have a firm, Fastenal, that we've talked about before, which you've owned for a very long time, and it's not your typical growth stock; it's actually an industrial fastener company. Maybe you can just talk about the attraction there. That's not something we see a typical value manager own, but you've done very well in it, and it continues to be solid company.

Goldfarb: It's just a magnificent company, and it's a real tribute to Bob Kierlin who is the founder. They just build a better way of distributing industrial products, beginning with fasteners. I think their model is superior to their competitors'. It's branch-based, whereas most of their competitors--none of their competitors have the number of branches that Fastenal has. They add to that, they sell out of the branches. So, unlike Grainger, where my understanding is that, I think, Grainger has experimented with a few larger stores, seeing how successful Fastenal has been and in fact, has increased its line of fasteners.

But Fastenal, they are out hustling from branches, they have a big salesforce that's out making calls and stocking bins etc. Industrial distribution is a huge industry. They have maybe a 2% share, so they've got a long way to go, and Will Oberton, who is Bob Kierlin's choice to succeed him as CEO--Will is just wonderful, and you couldn't ask for a more stockholder-friendly company.