In a recently published letter to shareholders, the managers of Oak Value Fund explain their investment strategy, results for 2009, as well as the investment case for several current holdings. In addition, the managers comment on Berkshire Hathaway’s proposed acquisition of Burlington Northern Santa Fe. Oak Value has a solid long term track record despite a relatively high expense ratio demonstrating the benefits of a rigorous value-oriented approach. Two brief excerpts from the letter appear below.
In our work we are neither interested in the value nor the price of “everything.” We focus our efforts on understanding a collection of growing, advantaged businesses and having an informed opinion of what we believe they are worth. For this group of companies, we are very interested in price, but only in relation to our estimate of their value. Determining price requires a buyer and a seller. Assessing value requires knowledge, insight and judgment. Price is a reaction to the present. Value is a function of the future – growth, predictability and quality. As another great investor once said, “price is what you pay, value is what you get.”
Berkshire Hathaway and Burlington Northern
Berkshire Hathaway made headlines during the quarter with the announcement that it would acquire the remaining 77% of the Burlington Northern Santa Fe railroad company. This is a large acquisition, even for Berkshire, but we believe it is consistent with Mr. Buffett’s longstanding position that it is better to pay a fair price for a good business than a good price for a fair business. The long-term economics of the railroad industry should remain quite attractive, and Burlington’s geographic footprint in the West, where long-term growth prospects appear to be above average, could make it especially compelling. The Burlington network is positioned to benefit from increased volume of imports from China, increased intra-country transport of coal out of the Rockies, and increased movement of grain out of America’s heartland. After a quarter century of consolidation and reorganization, the railroad industry today operates much more efficiently and rationally. As one of the industry’s largest players, Burlington should benefit from structural and competitive advantages for years, if not decades.
Meanwhile, shares of Berkshire Hathaway remained little changed during the quarter as the investment community seemed preoccupied with the task of interpreting some “hidden message” in the timing and/or structure of the Burlington transaction. In our opinion, the most important message for observers to glean from this transaction is the sheer economic power of the Berkshire Hathaway business model to accomplish such a transaction at this point in time.
Disclosure: No position in Oak Value Fund. Long Berkshire Hathaway.