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GuruFocus Interview: Jeff Auxier of Auxier Asset Management

Aug 7, 2015

At 11 years old, Jeff Auxier (Trades, Portfolio) began mowing the lawn of Georgia Pacific’s then-CEO Bob Pamplin, Sr., who led the company to be one Jeff Auxier suit headshotof the top-performing NYSE stocks of the time. After graduating college with his degree in finance and starting his career in 1982, Auxier decided to cold call Warren Buffett (Trades, Portfolio) — and got an answer.

Whether by luck or simply taking a chance, Auxier was influenced by value investors from an early age, and this is reflected in his firm, Auxier Asset Management. The firm is based far from Wall Street on the opposite coast in Portland, Oregon, where Auxier lives on a 108-acre hazelnut farm.

Since its inception in 1999, the fund had average annual total returns of 7.29%, compared with the S&P 500’s 4.39% over the same time period. The fund’s cumulative return since inception was 207.60%, compared with only 98.80% for the S&P 500.

Three years after GuruFocus first spoke with Auxier, he joined us again to answer questions from readers about topics as varied as the Greek debt crisis, to his notable investing missteps.

GuruFocus: When you spoke with us back in 2012, you mentioned that Warren Buffett (Trades, Portfolio) and former Georgia Pacific CEO Bob Pamplin both had an influence on you when you were younger. Are there any other investors who have influenced your investing philosophy?

Jeff Auxier (Trades, Portfolio): Other than Warren Buffett (Trades, Portfolio), I would say Lou Simpson (Trades, Portfolio), who was really generous with his time with me back in the mid-80s, as well as Henry Berghoef who used to work with Lou at GEICO. Henry went on to become the head of research at Oakmark. Don Yacktman, of course, was also an important influence. I’ve been attracted to investors who like high return businesses because we’re interested in buying outstanding franchises at bargain prices. For instance, Lou Simpson (Trades, Portfolio) is more of a high return business type of investor. They were all very helpful as I was starting my career.

Over time, would you say your strategy has evolved in order to fit your strengths or your weaknesses?

It’s evolved to having more of a respect for thorough day-to-day research effort. Warren Buffett (Trades, Portfolio) talks about reading 500 pages a day — but that’s aspirational. We can’t do that every day. From a risk management stand point, I think the evolution involves the humility to do that original research every day. If you have a good year or a good period, it’s possible to become complacent. You have to look back at the history for your mistakes and omissions you’ve made of great companies. We had some Costco (NASDAQ:COST) at about 17 cents and Precision Castparts (NYSE:PCP) for 60 cents or a dollar, and we just think “Why weren’t we buying more of these really great businesses?” The evolution is you have to have the humility to know that in the markets, anything can happen. We also have to remember that stocks are businesses; there’s always a business behind it, and you have to focus on the operating realities of the business and not get too caught up in watching the stock or the economy. We want to look at those operating fundamentals every day and make sure we’re doing that day-to-day intense research.

Following up on all of that research, what are some of your top criteria in determining whether a company is high value?

I’ve learned over time that you need to look at the entire company. You can’t just look at a PE ratio or price over sales. We’re looking for something that can endure through thick and thin; our focus really is on high compounded rates of return, and to do that, you’re looking for enduring businesses that have a lot of strong recurring demand. We’ve tended over the years to be a little more concentrated in industries like beverages and other lower ticket items, because to endure through depression and high inflation, you want businesses that are somewhat capital light. In other words, they don’t have huge mandatory capital spending. Those tend to do better in high inflation times but also have the financial flexibility to get through depressions as well.

So, we look back over 200 years and see which types of businesses and balance sheets are necessary to endure. But, again, that’s constantly changing and we’re running into problems of abundance. We’re getting so good at producing that we can immediately oversupply any kind of product. We’re looking for businesses with inspired management in the uninspiring industry, so they’re not magnets for huge supply. That’s why technology has been so dangerous, because it can change and become obsolete very quickly. You’re also competing with the smartest brains in the world on that stage.

We tend to look for exceptional businesses that are not in the limelight. You look and see what’s going on in today’s economy: the sharing economy with Airbnb and the destruction with Uber; there’s a lot of destructive technology. We’d rather have the business that can benefit from lower technology. For example, personal computer prices since 1980 are down over 99%, and there were over 30 IPOs in 1983 involving personal computers. They’re virtually all gone. The enduring nature of that transfer is not as easy as you would think, because the nature of this exponential world we’re living in in terms of exponential data can create huge issues of supply, which can really destroy pricing.

As you mentioned, beverages is one of the industries you’re concentrated in. As a long-time PepsiCo (NYSE:PEP) investor, what are your thoughts on the breakup of the snacks and beverage businesses that some investors are pushing for? Do you see a rationale for breaking up the businesses?

We like breakups and split-ups, and we’ve done very well with them over the years. We had Dr. Pepper (DPS), and when they spun off Cadbury, they became highly energetic, even though they were in the soda market which was flat at the time. But we like smaller names that are re-energized. With big conglomerates, the heart and soul of the business can be dimmed down. We’ve been in Pepsi since 1983, even when they had the Mexican accounting scandal. Then they spun out Yum! (NYSE:YUM), which has been a tremendous investment out of Pepsi. So yes, we’re all for the split-up, because when you’re energizing and people own something, there’s just a different mentality.

Years ago, Dun & Bradstreet (NYSE:DNB) stock was stuck flat for maybe 10 years, and they spun out Cognizant and Moody’s. If you bought it on the spin, you made over 200% over the next six years on that group. We’re a big advocate of a really well-nurtured business that’s taken care of over the long haul. The smaller spin-offs are where you get your bigger gains.

Discovery Communications (NASDAQ:DISCA) was your new holding during the first quarter; what’s your investment thesis here?

We’ve been investing with (director of Discovery Communications) John Malone for many, many years. There’s a plethora of great content which Discovery owns, and they are global. They’re in 20 countries and 40 languages, and they have over 2.5 billion viewers. They’re down right now because many millennials are just watching on their mobile devices and getting away from television. With the ad model, that’s a problem. But what we’re doing there is looking for the content cheap or cheaper. And we think John Malone will consolidate that industry just like he consolidated the cable industry. In the mean time, you have enormous free cash, and it’s one of those businesses that can replay content over and over.

Another one of your large holdings is Kroger (KR). What sets Kroger apart from other grocery store chains in the market?

We’ve been in Kroger for over 30 years. More recently, our cost is around $18-21, and the issue was they were going to go up against Walmart (NYSE:WMT). People thought they’d never be able to compete against Walmart. Well, they went up against Walmart, they kept their prices to match Walmart, and they really pushed private label products and added more in organics. The concept of one-stop shopping is if you get your prices low enough, people will want to shop in one location instead of going to Trader Joe’s or Aldi. It’s been a story of great execution and very shareholder friendly. If people are going to the grocery store a couple of times a week, there will be high inventory turnovers, and that’s the quality of a really good business. They compete not only on price, but tremendous value and selection, and have a management that’s extremely focused on the business.

This question is from one of our readers about the situation in Greece. Do you think the fear in the markets is justified considering Greece makes up such as small percentage of Europe’s GDP? Should investors consider rebalancing their portfolio, and is this currently affecting your holdings, if at all?

When you dig down into the fundamentals, Greece is only 11 million in population and is $320-350 billion in debt. It’s about the size of maybe Alabama or Wisconsin’s economy. They got into the European Union through creative derivatives, so they never had the balance sheet to enter. To me, Greece is an excisable problem that creates opportunity to buy quality in Europe. But you want to focus on China, India, and the U.S. — those are the markets that materially move fundamental demand.

You do seem to look at the macro environment much more than other value investors. Why do you think this is important?

When people entrust you with their life savings, you want to make sure you can compound their returns through thick and thin. That just comes from the humility of studying markets. There are different kinds of decline, like balance sheet decline or inflation-driven PE compression. You want to identify what kind of market environment we’re in, and what that looks like over the last 200 years. It’s funny when you look at periods where we’ve had deflation. I think from the late 1860s to 1900, we had tremendous deflation and yet our economy grew 4 to 5% a year. Human nature tends to repeat, but with the way things are changing with technology, we’ve never had this kind of exponential growth in data, which is deflationary.

The macro environment is important because you’re looking at supply and demand. There are stocks that look like bargains, like the banks did back in 2008. But if you dug deeper, they were borrowing heavily. Washington Mutual was borrowing to pay their dividends. Look at what’s happened now to commodities; we were calling for that. We warned about this 118-month boom up through 2011 in commodities, which was preceded by a 113-month boom in housing and a 114-month boom in telecom media. It really helps to pay attention to big supply and demand, so when prices are high, inputs come in. Copper was sitting at three times the cost of production, and we said most commodities can only trade barely above the cost of production. Sure enough, you’re seeing that now, and it’s kind of the opposite of 2011. Freeport-McMoRan has dropped from 60-12.

Our mandate is to compound clients’ money and to do that, you follow two of Buffett’s rules: First rule is don’t lose your capital, second rule is don’t forget the first rule. Those two rules have been the savior for my career since 1982. But doing that requires a very dedicated research effort to not only look at each entity in its entirety, but also to look at supply and demand. That still doesn’t mean we’re focusing on predicting markets or predicting interest rates. We’re looking at areas where we can get hurt, and that means going back to examine history. Albert Einstein once said that compounding was man’s greatest invention. We don’t want to violate that, and that means through this research effort, we can mitigate risk by looking at all the variables and inputs.

That makes sense. Another reader asks how do you stay on top of your 130-plus stock positions?

This stems from Warren Buffett (Trades, Portfolio); he will buy 100 shares of a lot of businesses. It has more to do with tracking. You want to track a lot of businesses, because if you see a good business, you may want to watch it. We tend to track businesses for many years, and in a lot of cases we’ll track companies for years before we buy them. We want to track them and audit them because there’s a business behind that stock quote. It can take sometimes years to get up to speed on a business, especially if it’s international.

For example, we’ve been with Carlos Slim since the 1980s, so we buy his businesses and watch him. But the price may not be right or the knowledge level may not be high enough. We know ahead of time what we want and we’re just waiting for the price to come in.

A lot of people wonder why we don’t concentrate more heavily in our best ideas. We did that in the 1980s. However, if you concentrate in a high market, there’s about an 85-90% correlation on the downside, or at least there has been in the last two major market declines. If you are concentrated, clients just cannot deal with the pain of 50% drops. They should be able to, but it’s rare that they can. For us to compound, we have to make sure we can protect, and that means our position sizes tend to go down in higher markets and they get more concentrated in lower markets. Peter Lynch used to have about 1,000-3,000 companies, so 130 is workable..

The next question is from a reader who has eight mutual funds and about 30 stocks he follows. He asks if you recommend setting a stop loss order for all the stocks. Is there a rule of thumb for long-term investors?

The problem is when you put in a stop loss and the market closes, and if it reopens 20% less, you’re going to fall 20% lower. You don’t want to get distracted from the underlying reality of the business. You just need to know what you own, and then if it goes down, you can buy more. The problem is most people don’t have a clue what they own. If something is fully valued and the fundamentals have deteriorated, it’s better to focus on the underlying fundamentals of the investments because you can see those problems far in advance if you’re doing the homework. Stop losses or any kind of option is a short cut that takes you away from the basic job of knowing your investments.

We typically see a 10% correction every two years; that’s just normal. A far better approach is to find superior businesses and be ready to buy more when the markets decline. The top 25 businesses over 25 years typically have appreciated between 18,000-63,000%. You don’t want to miss out on that by either doing options or stop losses. Those can be distractions. You need to be prepared daily because those big crashes can happen without notice and are where you make the big returns. , You need to have the homework done ahead of time. Some of my biggest gains over the past 30 years came after the 1987 crash and the 1989 thrift crisis. Wells Fargo dropped from 245 to 45 during the thrift crisis.

This next question is from a reader who asks “My husband and I are 55 and 54 and currently employed with decent incomes. We lost everything we had accumulated over 30 years including our homes and two businesses. We used all of our IRA savings to try to keep our businesses afloat, but ended up having to file bankruptcy. We’re starting over with no savings and we’re buying a house this month. Is there an aggressive way to save money and rebuild a portfolio for retirement?”

The whole idea of retirement has to be rethought; now is the time to reflect and say “Are we doing what we really want to do?” Are we engaged in our passion? You don’t need much money if you’re really absorbed in mastering something you like doing.

Bob Pamplin was a tremendous mentor and one of the early CEOs of Georgia Pacific. He turned $100 into $3000 in Georgia Pacific stock from 1958-1976. There was a mandatory retirement age of 65 at Georgia Pacific, so I asked him “Are you going to just play golf?” And he said, “No, now is the time to get started on my career.” He preached the importance of developing your talents to help others, until you die. After 65 he started buying entire textile companies on his way to becoming the world’s largest denim producer.

In capitalism, you need the capital to compete. You need an aggressive savings program, but also a passion for what you’re doing. If you’re mastering a new game, you don’t have time to spend any money. I think our nation has to rethink the idea of retirement as you make a bunch of money and retire at 65 — that’s going to change. You’re going to have to be retrained throughout your life to find a new passion and follow it.

A good way to save more is to follow John D. Rockefeller’s advice to go off a ledger. Keep track of everything you spend and save in order to make sure you achieve your savings goal.

One reader asks if you’re familiar with stocks trading below the company’s liquidation value, and do you invest in them?

Yes, but we’ll typically invest via the debt markets. In other words, if we’re not buying a real high grade quality business, we’ll tend to buy the debt. If it’s a liquidation scenario, we would rather go in as the first lien holder on that kind of situation. Again, those take a lot of time, and they’re not something we usually do. We’re looking for something we can make 10-20 times our money over 10 or 20 years. We will buy distressed, but typically we’ll be buying the debt.

The next question is from a reader who wants to become a professional stock picker. With the benefit of hindsight, what would be your advice for him to work his way up in this field?

When I called up Mr. Buffett on a Saturday back in 1982, his advice was to get far away from Wall Street, start researching companies from A to Z, and out-research everyone. No meetings. Your truth and facts need to come from data and mastering accounting. He recommended reading Ben Graham’s “The Intelligent Investor” and “Security Analysis,” Phil Fisher’s “Common Stocks and Uncommon Profits” and “Conservative Investors Sleep Well.” But the big thing is having a passion — for daily dedicated research. That’s what you have to have; you can’t do it for the money. You’ve got to do it because you love learning, studying great operators and just studying business in general.

The field is extremely crowded, and there are more funds than stocks. But there’s opportunity for the independent thinking business analyst who has cumulative knowledge. Right now, everyone’s kind of trained to be passive. If you’re in a passive fund for 10 years, you won’t learn anything. I was always taught they can take all your money away, but they can’t take your knowledge. You’re trying to build a database of knowledge so you can critically examine anything presented to you. It’s also important to know accounting because that’s the language of business.

Your exposure to the industrial sector was about 10% a few years ago and has declined recently. What are your thoughts on this sector?

We’ve been a bit shy because of the Chinese credit boom, which drove the boom in commodities. China added $15 trillion in bank borrowings from 2008-2013 which exceeded the size of the entire US banking system. The hangover from that boom could be painful for a long time. We try to get the portfolio more into businesses that are independent of these boom-bust cycles. We would love to have Fastenal (NASDAQ:FAST), but at 25x earnings, it is a little too rich.

So Fastenal is on your watch list for now?

Yeah, in the past we were watching them. We were trying to get a double or triple play, but that comes with low valuation and that doesn’t work in bubble environments very well. But Fastenal’s business is great, they make nuts and bolts, and the business is boring. Their returns are really exceptional.

Could you tell us about an investment mistake you’ve made and what you learned from the experience?

Where do you start? It’s just that fundamentals change. I have learned the importance of critical independent thinking and a voracious daily research effort. If long term earnings fundamentals change, it is better to cut quick instead of riding deteriorating earnings trends down. Most of the time, it’s because the fundamentals change to the down side. But fortunately, we haven’t had anything that has hurt clients permanently over the years, because we mitigate those with smaller positions. If we were concentrated and made a wrong move, it can be devastating to the compounding process. One mistake was in 2008 when we didn’t sell all of our bank shares. We scaled back on banks in 2007, but we didn’t take them totally out. Mistakes come from not reacting to deteriorated fundamentals, not doing enough research and not digging deep enough.

Tesco (TSCDY) was a mistake — we thought they would refocus quicker and they didn’t. They wanted a huge global expansion, and we expected they would refocus back on U.K. grocers. But they are definitely a company that can be fixed. Generally, turnarounds take a lot longer than you think, so believing they will turn around quickly is often a bad idea. The problem is you can follow the price and buy when prices are down, but that doesn’t mean they can’t continue to go lower if the fundamentals haven’t turned. Again, that goes back to the importance of being thorough in the research.

In the current market, are there any specific industries or sectors where you’re seeing more bargains than others?

We like to buy companies that have a very specific problem. For example, Precision Castparts has great management, tremendous leadership, and it’s down because of the energy portion of their business, which is getting all of the attention. We see great opportunities that are managerial-event driven. E.g.,Spinoffs, split offs, workouts. Edwards Lifesciences (NYSE:EW) was spun out of Baxter (NYSE:BAX) in 2000 so they could focus on just heart valves. It is up over 11 fold in a period where the overall market was flat. You want to look hard at those businesses as they come out on the spin offs.

As market levels get higher, we’re looking at the more managerial-driven companies where you have a catalyst, similar to eBay (NASDAQ:EBAY) and PayPal (PYPL) splitting up. Or “event driven” workouts. These are a little more market agnostic and less correlated in a declining market. It is too early to buy energy stocks after the crash. The good thing about declining energy prices is historically when you’ve had this kind of drop, there usually is a corresponding pick-up in the general economy in 18-20 months, as the US economy is mostly service and consumption-oriented. The pain you see in the commodities and energy space will translate into gains in the overall economy. I think it’s good for businesses when you have an energy collapse like 1998, when Russia defaulted and emerging markets had a hard time. The dollar strengthened, but the money flowed into the high quality businesses. And I think that’s what we’re starting to see in the narrowing of markets right now.

What books would you recommend to a beginning value investor?

“The Outsiders” by William Thorndike is a good one about CEOs who are great capital allocators. “The Warren Buffett CEO” by Bob Miles. “The Intelligent Investor” and “Security Analysis” by Ben Graham. “The Humble Approach” by John Templeton. Roger Lowenstein’s book about Buffett, “The Making of an American Capitalist” is great, too. It’s also useful to study the greats like John D. Rockefeller for anyone starting out in business, which teaches the importance of ledgers, accounting, and using ledgers to keep your emotions out of the decision-making process. “Titan: The Life of John D Rockefeller, Sr.”

This interview was edited for length and clarity.


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