Interview With Fund Manager David Winters SmartMoney Magazine by Russell Pearlman (Author Archive)

SM: In early 2008 you sensed something was amiss in the market, but you were still down big after that. What happened?
SMARTMONEY: So what's it like to see your fund cut in half in 14 months?

DAVID WINTERS: It's not wonderful, that's for sure. Some of the drops in some securities were just stunning. It was one of these times where you had to clench your teeth and recheck the facts. And when you looked around, you saw that everyone you respect was in the same boat. It's not like they were immune to what was going on.

SM: So did you form a support group?

DW: We'd see one another at a couple of industry events, like the 75th anniversary of the publication of the book Security Analysis. A lot of the serious value players were there, and everyone was basically, "Oh, my God, what's going on?"

SM: In early 2008 you sensed something was amiss in the market, but you were still down big after that. What happened?



DW: About a year and a half ago, we sold almost all of our financials. Then by summer we let cash build and weren't a buyer. That was something we thought was pretty darn conservative going into a tough period. By June you already had Bear Stearns fail. Could I have predicted in June, when we were down 10 or 12 percent, that in the last six months of the year the world would fall off a cliff? No.

SM: You were buying stocks on the way down, too?

DW: In October, when things looked the bleakest, we became a buyer. In retrospect, you didn't want to buy anything. There was such a demand for liquidity that often the best-quality securities went down. The only thing to have done was to have sold everything. It's been like nothing I've ever seen, and if you weren't an adult in 1937 or 1932, you've never seen anything like this.


SM: You were a "vulture" investor during the last market mess, investing in really distressed, sometimes bankrupt businesses. Do you have the same strategy this time?

DW: No. The 2002 vulture period was different because there was a lot of distress, but the world was essentially functioning. And there were actually some really quite good businesses then that were just under distress. If you look at the list of what's troubled now, a lot of these aren't great businesses. By the fourth quarter of 2008, you could buy a triple-A company at a really cheap price. We own a series of securities whose qualities are the highest I have ever seen. We're going from cigar butts to Cartier because you can buy Cartier at cigar-butt prices. These are "loaded spring" businesses. That doesn't mean they won't compress some more. But it will be great if you have a longer time frame -- three to five, maybe 10 years.

SM: So what are some Cartier companies?

DW: We've certainly been a buyer of Berkshire Hathaway (BRK.B: 2564.00, -118.00, -4.39%). It has a great balance sheet. You can do a sum of Berkshire's parts and see the stock trades at a discount to the parts. They were big buyers of securities and whole businesses in this worst period of time, and they held up no better than anyone else did. As it fell we added, because we think the sun will eventually come up. We think we can make a very handsome return on Berkshire Hathaway over the next two to three years, without a lot of risk.

SM: You're big on food companies too?

DW: We like Nestle (NSRGY), a pretty amazing company. You're paying eight or nine times earnings for its food business, and it's growing about 6 to 8 percent organically. People are going to be hungry, and Nestlé has some pricing power. They also have investments in [cosmetics giant] L'Oreal (LRLCY) and [eye medical products firm] Alcon. They sold roughly 25 percent of their Alcon (ACL: 82.36, -3.22, -3.76%) stake to Novartis (NVS: 36.25, -0.06, -0.16%) and have this option arrangement to sell the balance of the stake in 2010. Meanwhile, Nestlé is buying back its own stock -- an average of a million shares a day, consistently.

SM: And you are dipping back into the investment banks?

DW: If we can be a partner at Goldman Sachs (GS: 91.08, -1.07, -1.16%) and pay roughly book value or below, that's pretty neat. The issues of liquidity, we figure they'll get through it. When this crisis lifts, there is just going to be tremendous amounts of business -- an M&A boom and lots of advisory businesses. Goldman Sachs also is a big asset manager. We began to view Goldman Sachs as a loaded spring on a recovery. We've been buying and buying as it's gone down.

SM: You're not worried that there are any big losses or other financial bombshells with Goldman?

DW: I don't know exactly. They seem to have been able to sail through. Yes, everyone who has been a realistic participant in the world over the last 12 months has been through a wild storm. They seem to be a survivor, and we think we can make a ton of money with them.

SM: You've liked tobacco stocks for a long time. Do you still?

DW: We've added. We do not advocate cigarette smoking, but in a scenario when we don't know what's going to happen, tobacco companies have tremendous pricing power over time. And most of the cigarette companies are oriented toward maximizing their value for shareholders. We like the international companies. We like British American Tobacco (BTI: 51.04, +1.15, +2.30%) very much. It's very shareholder-oriented. They buy back stock. They raise their dividend.
They're global. We like Japan Tobacco, too. They are so undervalued, it's wild. Their results have been great, yet the Japanese market has been a very tough place to be.

SM: What worries you in 2009 or beyond?

DW: For everyone, the worry is if there really is a depression and the world stops buying everything for some protracted period of time. I think we'll do okay because we own a bunch of businesses that sell chocolate bars and cigarettes and booze. The world will be a lot happier place if we go on with life. But the longer-term issue is inflation. No one wants to talk about it.

The governments of all the world will do everything they can to restart the economy. But all this money printed has got to be inflationary. So that's why we're oriented to owning businesses that can generate cash and raise prices.