Wednesday, March 11, 2009

The Ken Heebner Way

Given that he's one of the investors followed here, The Guru 5's respect for Ken Heebner should be obvious. It's not short-lived. Almost a year ago, we made a post on GuruFocus that looked at Heebner's methodology (which is far more important than knowing what he's invested in right now). A cut and paste of it follows, with more to come later.

Given that Heebner was the value investor of the year [2007]--and has an exceptional, multi-decade track record--it's a shame that we only got started talking about his method of investing due to a post which (to put it nicely) attempted to forecast the manager's future returns by looking at factors which are probably not the most important to focus on. In that thread, I wrote the following:

With regards to Heebner, I think it's important to point out that he gets a view of the "big picture" from the bottom up, just as fundamental investors do about any big company.

His macro call on oil was a result of years of work talking with people in the field, looking at supply and demand--and not just on a removed basis (using statistics from sources that include various assumptions). He studied Ghawar, was talking with the experts on it, and so on.

I think Heebner's method of getting to the big picture is especially important for anyone wanting to improve. There's a false dichotomy in many people's minds now that you have to be bottoms up or top down. Some will argue that it pays to be both, but very few point out that any "big picture" analysis of value uses the same inductive method as is used by the greats in individual companies.

Heebner has made excellent macro calls because he approaches such questions with the same rigourous logic and voracious fact-gathering that he brings to the analysis of individual companies. He has excellent returns because his method and his work ethic are so good.

I highlighted the word inductive because I think this is the key to Heebner's many brilliant calls--which many would refer to as top-down. In all actuality, though, I think we can say that his calls were proven correct so many times because they were made from the ground up, using a host of different, though very relevant facts.

Later on in that thread, someone--I think DaveinHackensack--mentioned that Heebner's call on steel prices was due to him in part reading the China Metals Weekly. I can add to this since I remember an article years ago when Heebner became bullish on copper. The reason was partly supply and demand of course, but he noted that he became so bullish after talking with many people on the phone in Chile (the equivalent of Ghawar for copper) and noting that they had a real water problem down there which is only getting worse.

These sort of macro calls, from the ground up, are again more correct than not because they're made from the ground up, and with many of years of experience--which allows him to know what is relevant and what is not.

Buffett's circle of competence applies in every area one wants to invest. The calls should be differentiated from the person who looks at a past chart for a commodity (even one's that precede 1980!), or starts with an assumption about global growth and comes up with or deduces a conclusion from that. There's a very big difference in thinking, and as Heebner has shown, in results....

1 comment:

  1. As mentioned, more is coming. Including updated comments in light of recent performance...