My Passion

Bear Country

By: Jeff Auxier
Apr 20, 2008 - 5:24:51 PM

A fund manager who "eats his own cooking," as brokers like to say, tells you how he thrives during Wall Street's lean times

Managing a mutual fund that's worth $118 million is an enormous responsibility, especially when 2 percent of the fund is my retirement money and my children's college fund. I started the Auxier Focus Fund in 1999 with about $1 million, which was my savings from brokering at Smith Barney. The S&P is up 9 percent since then, but my first 30 investors have nearly doubled their initial investments. I aim to do the same for the 4,000 people who have since entrusted me with their savings.

The returns come from a lifetime of analyzing companies. My training began as an 11-year-old earning $2.50 an hour mowing lawns in Dunthorpe, Oregon. My three most brutal, hill-laden acres belonged to Robert Pamplin Sr., the CEO who transformed Georgia Pacific from a lumber company into an international paper-and-pulp conglomerate. Soon he was mentoring me on the importance of accounting, what he called the language of business. By the time I was a teenager, he had me keeping a ledger at Ross Island Sand & Gravel, one of the companies he owned. I made thousands of entries there, each one helping me better understand the business. I have analyzed ledgers to evaluate companies ever since.  

My wife, four children, and I live on a profitable, 108-acre farm where I crunch data rather than let Wall Street hype distract me--another piece of Pamplin's advice. My goal has always been to be a great investor, which isn't necessarily reflected in how much money I manage. I spend 10 to 12 hours a day reading newspapers, company reports, academic studies, and even The Progressive Farmer to isolate companies with strong franchises, consistent earnings growth, and tons of cash. And then I wait--an investing rule I picked up from conversations I had with Warren Buffett. The analysis is only one part of the investment process. The other is temperament. Most people chase speculative bubbles, but it's better to shop for investments when the mood is dour. Then the day-to-day research allows an investor to appraise an asset -better than the rest of the market and have the -conviction to buy when everyone else is screaming "sell." My fund won't always be a top performer--it tends to lag bull runs--but it should outperform in bear markets.

Here's a look at my portfolio and some investment lessons you can apply to your own savings.  

Top 10 Holdings
Coca-Cola 2.7 percent
Altria Group 2.4 percent
Travelers Companies 2.4 percent
Wal-Mart 2.3 percent
Marsh & McLennan 2.1 percent
Zimmer Holdings 2.0 percent
Telefonos de Mexico 1.9 percent
Western Union Co. 1.8 percent
Unum Group 1.7 percent
Berkshire Hathaway 1.7 percent
Fund performance, holdings, and stock prices accurate as of February 29, 2008.

1. Study, don't trade. "I trade less than 22 percent of the Auxier Focus Fund each year, compared with the average domestic stock fund's 98 percent. Rather than watch the daily price ticks on CNBC, I read and study trends, businesses, and past prices before I invest. Food inflation has interested me lately, but rather than just buying corn futures, I consulted resources such as the farm daily Capital Press, commodity reports, and even scuttlebutt from local bulldozer mechanics. And then I turned to the stock charts to see which companies flourished when food prices last soared in the 1970s: supermarkets. I bought British grocer Tesco (TSCDY, $23), the best-run supermarket in the world, when it fell to the mid-$20s last summer. I started with a farm report and ended up with a supermarket."

2. The one constant in the market is change. "I've liked Citigroup (C, $23) since the 1980s, but I lost a lot of money on the holding last year because of the blockbuster losses in subprime mortgages. In hindsight, I should have sold in 2003 when former CEO Sandy Weill handed over the reins to Chuck Prince, who resigned in last year's fallout. Weill wasn't infallible, but he was the heart and soul of the company. Lesson learned: Once Costco's CEO Jim Sinegal leaves, I'll probably sell my stake."

3. Follow scandal. "Bausch & Lomb has dominated lens care for years, but it was never cheap enough for me to buy. Disaster struck in 2006 when its products were tied to eye infections. The market overacted. In two months, the price went from $70 to $45, where I bought it. I got $65 when it went private last year. Scandals create fear…and ideal times to buy."

4. Look for cash. "Carlos Slim's main business at Telefonos de Mexico (TMX, $33) is landline telephones, and it's dying, but it still generates tons of cash--some $2.6 billion last year by my estimates. Slim is using that cash to consolidate communications throughout Latin America. He has assembled cable and broadband operations outside of Mexico that he will spin off into a separate company in 2008. I'll buy more shares as long as it's in the low $30s."

5. Buy franchises. "Guinness, Air Jordans, Gold Cards--when a company has a solid franchise, it's tough for competitors to take their sales. The cost of replicating the brand or distribution network of Diageo (DEO, $82), Nike (NKE, $60), or American Express (AXP, $42) also keeps newcomers out. Another good franchise is Quest Diagnostics (DGX, $47), which has a chunk of the lucrative lab-testing services."

6. Sustainable growth trumps fast growth. "As cliché as it sounds, a slow and steady company wins the race. Looking forward, I know that the baby boomers' bodies are wearing down. As they do, they will create a predictable and sustainable demand for orthopedic joints. That's why I like Zimmer (ZMH, $75), a company that makes artificial knees, hips, shoulders, and elbows. I estimate 12 to 13 percent earnings growth in the next few years. It's a wise investment when it trades in the mid-$60s."

7. A dull company can be an exciting stock. "I know that it's difficult to get excited about roads, highways, tunnels, and bridges, but the demand for all of them continues to grow. Granite Construction (GVA, $29), a civil contractor, will eventually get a chunk of the anticipated spending to upgrade our infrastructure. It's a buy when it's below $33. I estimate they're probably worth more like $56 based on their future business potential."

8. Beware the torpedo stock. "An exciting story that stokes high expectations and attracts tons of money is toxic. The interest creates bubbles: Stock prices reach levels that far surpass the actual value of the company's assets and its business. Those bubbles then create torpedoes. The classic case is Cisco Systems (CSCO, $24) circa spring 2000. Shares dropped from $80 to $38 by the end of the year and eventually slipped below $10 in 2002. I never bought it, and I tend to avoid technology companies because they're too difficult to predict. From 2000 to 2002, when the stock market dropped an average of 14 percent a year because of the tech washout, my fund kept its losses to 4 percent."

9. Be greedy when others are fearful. "I learned to zig when the market zags by watching Warren Buffett. It's zagged a lot lately and I'm using that to my advantage. Payroll processors like Paychex (PAYX, $31) and Automatic Data Processing (ADP, $40) are rarely cheap enough to buy. They are highly predictive--processors earn off the 'float' while holding customers cash checks--and have outstanding customer retention rates. You just about need a recession to get a reasonable entry point. Rising unemployment hurts revenue while falling interest rates eat into earnings…temporarily. I'm a buyer of Paychex under $32 and ADP at $38."

10. Know the P/E ratio. "Buying a great company at the wrong price can be a terrible investment. For instance, I wouldn't buy Costco (COST, $63) right now. CEO Jim Sinegal is probably the best manager in retail, but I'll buy more shares only if they drop to the low $40s. I ask myself, How much did a share cost the last time the market was really bad? A price of $40 is in line with the lowest price-to-earnings multiple for Costco. Buying at that level would give me what's known as a margin of safety and limits how much I could potentially lose."

In addition to managing the $118 million Auxier Focus Fund, Jeff Auxier, 49, grows timber, hazelnuts, and nursery stock on his Oregon farm.


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