- He typically wants to own a company that’s trading at a 40% discount to what it’s really worth.
- Most of the companies Chou owns have seen their values drop for some reason – maybe the sector has fallen out of favour, as we saw with oil and gas last year, or a company has missed an earnings target, or there’s a funding or liquidity issue.
- Whatever challenge the business is facing, though, it should only be temporary. “We want companies that can overcome those problems in time,” he says.
- Of course, it’s impossible to foresee if a business will indeed rise from the ashes, which is why Chou does plenty of due diligence before buying.
- First and foremost, he wants his companies to have positive cash flow and the ability to grow earnings.
- Chou also thinks about all the things that could impair intrinsic value—maybe something will prevent earnings from growing, for instance. “We always look at what could go wrong,” he says.
- “You need to have that cushion, that margin of safety, against a mistake in your judgment,” he says.
- At the moment, no sector stands out in terms of valuation—it’s all expensive, he says—but he’s being patient.