Value Investing

Francis Chou – Chou Associates Management

Just read some information about Francis Chou, a famous value investor in Canada who set up Chou Associates Management Inc.

Path to Success

  • Born in India, immigrated to Canada in 1976 with $200 and a high school diploma.
  • Worked at Bell Canada for 7 years as a telephone repair man.
  • Discovered Graham and Buffett in late-1970s. In Jul 1981, he set up an investment club with 7 co-workers with $51,000. By 1986, club had grown to $1.7M and was converted to the Chou Associates Fund.
  • 1984, became a retail analyst at Gardiner Watson Asset Management. Met Prem Watsa.
  • Joined Hamblin Watsa Investment Counsel / Fairfax Financial after 18 months. He is a Vice-President at Fairfax Financial managing their investment portfolio with $0 salary to prevent conflict of interest while he manages the Chou Funds in his spare time.


  • CAGR of 16% over 24 years with 3 losing years

 Investment Approach

  • Screens about 2,000 stocks and looks at financial metrics, e.g. P/E, P/B, then finds 20-30 that are worth looking into.
  • Buy stocks at 40-50% discount to his estimate of true value.
  • Goal is to come to an assessment of what the company might be sold for.

 Hunting Grounds

  • Undervalued – Companies facing short-term problems that result in temporary mispricings under unusual circumstances.
  • Cigar butts – CRAP (Cannot Realize A Profit) failing companies that are irrationally valued for less than they would be worth if they liquidated their assets. Buy baskets of such companies, knowing that he may lose money on 3 out of 10, but more than make up for those losses with profits on the other 7.
  • Buffett-style – Well-run companies with growth potential that, for some reason, are trading for much less than they’re worth. Such companies are extremely rare and often only found among those with short-term problems, but they offer excellent long-term prospects. Lucky to find 1-2 in a year. Will bet 5% or more of his portfolio on that single stock.

 What He Looks for in a Company

  • Sustainable long-term Returns on Equity of more than 15%
  • Good free cash flow multiples
  • Excellent management control over receivables, inventory and fixed assets. Look at quality of management’s capital allocation decisions over many years, not just one year.
  • Low debt-equity ratios


  • Looks at pre-tax return on net operating assets. Normal companies have 15-20%. Anything less than 15%, the company should return the money to shareholders.
  • Use rule of thumbs, e.g. need to know that retail companies in this area will sell for 0.75 P/S.

 On Allocation

  • If you find bargains in troubled industries you diversify by buying a basket. E.g. the pharmaceutical industry is beaten down due to expiring patents, there is sure to be new drugs from R&D but he doesn’t know which company will find one, so he buys a basket of pharmaceutical companies to hold for upwards of 5 years until there are significant events to drive the sector higher.
  • If you find bargains in good companies you concentrate.



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