First Eagle Fund’s Arnhold on Loving Japan and Hating Alpha

Q: How does this history influence First Eagle’s investment philosophy?  

A: It’s actually a result of what happened almost 100 years ago. When Germany went through a period of hyper-inflation in the 1920s, the family had substantial industrial interests in a number of different industries, including brewing and ceramics. It was by owning the actual companies that we managed to preserve capital and purchasing power during that time. So our philosophy has always been that the best way to preserve long-term purchasing power is to own good businesses, but at prices that reflect a margin of safety. The future is uncertain; we can’t predict macro events nor can we predict with accuracy cash flows going out a year, five years and 10 years. But we try to determine what we think a business is worth today. If we can buy that business at a substantial discount from intrinsic value, we believe we have a margin of safety which will protect us to some extent if things don’t turn out as we hoped or anticipated.

Q:  Fantastic. So where are you finding alpha as a firm?

A: Not to be particularly controversial, but we don’t look for alpha. As far as I can tell, alpha is a Greek letter. It really means relative performance. So we’re not looking at relative performance. What we’re trying to find are great businesses that we can own at prices that afford us a margin of safety. If you look at our portfolio, we have a large presence in the United States and a particularly large presence in Japan. In the United States in the last two years, there have been pockets where multiples and prices have become more reasonable. And we’ve been able to add some excellent names, particularly in technology, which we would have loved to have owned in 2000, had they been trading at multiples which afforded us a margin of safety.

Q: What is attractive about Japan after the earthquake, Tsunami and resulting nuclear mess?

A: If you look at Japan, it’s a market and economy that has been a relatively uninteresting place to be an investor. But because the macro picture is less than desirable there has been very little money flowing into Japanese equities. But there are world-class businesses in Japan that actually operate around the world and have traded at very reasonable prices. We’re taking advantage of those opportunities.