People talk about value funds, but you really have to look at the manager’s approach and see ff he really is a value investor. Here’s our approach: we try to value what a business is worth today and buy its stock at a 30 to 50 percent discount to that price. Compare this with a growth investor, who has to predict future earnings to determine a stock’s worth. We have no ability to predict the future, but we do have a pretty good ability to value a business today based on its current cash flows and earnings, the cash on its balance sheet and the value of comparable businesses. The odds of getting this valuation right are higher than the odds of predicting 1997 earnings well. The other reason for favoring a value approach is that there’s less downside risk. There are a few great growth companies like Coca-Cola or McDonald’s that never have a bad quarter, but they sell at 20 or 30 times earnings, which is very expensive. If you look at other growth companies that have had a quarter of disappointing earnings, the damage that’s been done to the stock is so severe that I just don’t want to run that risk. If the companies we invest in come out with disappointing earnings, nobody cares–their stock prices don’t come down much because they’re already selling for 40 percent less than they’re worth.

We are finding opportunities, but far fewer than a year ago. Our cash position is at 18 to 20 percent now. That’s historically high, and it’s moving higher. We usually look at the worst-performing industries to find opportunities. As interest rates moved up over the last two years, the banking sector dropped. There were opportunities, and we wound up with a big position in Chase Manhattan and significant positions in Chemical and Mellon. The brokerage business had a tough year in 1994, and we wound up with large stakes in Lehman Brothers, PaineWebber, Merrill Lynch and Alex. Brown. There’s tremendous consolidation going on in the banking industry already, and there will be in the brokerage industry soon. First you’re going to have the big regional banks buying the regional brokerage firms, and you might even have some banks buying the big New York brokerage firms. We want to be in industries where there’s this consolidation, because if you own the stocks that become targets, you make a lot of money.

We hold Sears, Roebuck, which is separating out Allstate, its insurance business, which should demonstrate the value in the stock. Another company we like is US West, which is spinning off its cellular and cable operations. We also own a large position in Service Merchandise, a catalog showroom that does $4 billion a year in sales. It put in a new president who has a whole new view of the business. Its stock is down from $16 to under $5, making it one of the lowest valuations in retailing.

We own up to 300 stocks, and we meet with managements all the time to get a sense of who they are and what they’re like. Only in certain eases will we get a little bit aggressive. Those are the cases where we think management has not done the right thing by its shareholders. Maybe they’re weak, maybe they’re incompetent, maybe they’re dishonest, or maybe they just have the wrong strategy. If management isn’t performing well, we have a choice: we can either work it out, or we sell the stock. And I think selling the stock is a bit of a cop-out. I won’t talk about Chase specifically, but I will say that it’s more of a case where we disagree with their strategy and we are explaining to their management why we disagree.

Our biggest bond position is in Columbia Gas, a company that’s going to emerge from bankruptcy in the next six months. Investing in bankruptcies really fits in with our other two strategies of finding cheap stocks and investing in merger targets–it’s a three-pronged approach. Here’s why: when you trade stocks that are involved in a merger, you get smarter about what companies and parts of companies are worth. This helps us value new securities of companies coming out of bankruptcy. It’s all the same principle, buying corporate assets at a discount to their true value. The market is a very big place and we’re always finding something worth buying.