A Response to James

James,

Awww, forget the macro guys! It’s always obvious in hindsight. Macro guys weren’t buying in ‘74 or ’99 – they were in the bunkers, crying for their mamas and looking for a gold coin to suck on.

It took stones to a make big bet on oil companies – Rodriguez upped his ante to 8% of his portfolio. It was not obvious from a macro view at all; NO ONE predicts the price of oil with anything approaching bankable accuracy. I would say few macro guys loved energy then. Let’s be real…

In some ways this is a “chicken or egg” argument.

For example, in April ’05, I recommended Imperial Sugar for micro reasons – trading less than book, no debt, lots of cash, long history of operations, etc. But it triples. Why? The price of sugar skyrocketed. I was right – but for the wrong reasons, you might say. I didn’t predict a bull market in sugar. I just bought a cheap stock.

Good things tend to happen to shareholders of cheap stocks. That’s the beauty of the discipline. I don’t have to see a sugar boom or predict it.

It’s about margin of safety. Macro investing has no margin of safety. It can’t. It’s beyond the capabilities of that discipline. That’s why they have to use stuff like stop losses, because they don’t know the value of what they own.

So…

I would argue that these stocks (manufactured homes and RVs) may be really cheap, and though you can’t see it now – you can’t see how the value is unlocked today and you’re scared about macro factors impinging on the housing situation. Well, of course you won’t like it.

The whole value-growth spread is such institutional crap, in my mind. There are stocks in my portfolio I consider value stocks that would not make any value index, because they have a high price-earnings ratio or high price to book… and vice versa.

I have a friend who writes institutional crap for a living, and when he asks how . portfolio is doing and I tell him it’s doing well, he invariably attributes it to “Well, value has done real well…blah blah.”

It’s just a wrong perspective for a stock picker. It’s how a macro guy thinks. Everything fits in a box somehow and they miss the nuance of individual situations. They don’t see trees. They see forests.

As a stock picker, that chart is pure noise. It doesn’t and shouldn’t change what you do as a stock picker.

Now to your story/issue…

I love the FPA / Rodriguez story. I wish I wrote it first. In fact, I had it in my notebook as a story to write, but you beat me to it. Nice job. Great idea. I always like these kinds of things. I learned something reading it.

FLE is very interesting. As I was reading it, I kept thinking, “Hmm…maybe

James should take a shot at this and recommend it…” This is NOT a company headed for bankruptcy. It has a fairly favorable net debt position. It doesn’t owe very much. If they bang out a couple of good quarters, this stock will run. You won’t have another chance.

However, I can see why you would hesitate. It seems risky. I don’t really know enough about it to make an intelligent judgment, but it smells like it could be a big winner. And anyway, I liked the way you couched it – you weren’t recommending it and you gave some clear reasons for it. Readers should respect that.

Disservice? NO WAY! This is a good story and this is the perfect kind of thing to write when you decide to not recommend something, because you are still giving your readers something good to chew on. I bet you will have people take shots at FLE.

And, don’t sneeze at a 6% portfolio allocation. That’s a good-sized bet for someone like Rodriguez. It will hurt if he is wrong.

I read your issue once through and couldn’t stop until I finished. I have no suggested changes or edits. I like it a lot.

And one other note, I seem to remember reading somewhere how FLE might split into two companies, separating the RV and the manufactured homes. Part of the problem is that a company like this is neither fish nor fowl and analysts are going to struggle with it. Splitting the two and creating a couple of pure plays, may be in the cards…