Fortune: Anything that has surprised you upon your return to the investing world?
Thestock market in the U.S. and outside the U.S. has been going up forfour years, which usually does not present investors with a great manynew opportunities. To paraphrase [value investing pioneer] Ben Graham,the markets seem high, they are high, and they are as high as theyseem.
Fortune: But you don't buy markets.
No, we don't buy markets. We buy specific securities. But I see that lack of opportunity from the bottom up as well.
Someof the stocks we own have gone up to the point that they're very close,if not above, what we consider their intrinsic value. And when we lookat new names, new ideas, we seldom end up buying.
Contrary to many mutual fund managers, we do not believe we have to be fully invested 100% of the time.
Fortune: Morningstar puts your cash position at about 18%. Is that still accurate?
Yeah,although we don't decide to be 5%, 10%, or 25% in cash. If we findenough investment opportunities, the cash will go down.
Fortune: You pay a lot of attention to companies' tax rates. Why?
Particularlyin the U.S., I don't like companies with very low tax rates, becauseit's a sign either that the Internal Revenue Service will catch up withthem someday or that the profits they report are overstated.
The average corporate tax rate is 35%. Any company that has a tax rate of 15% or 20% looks suspicious to me.
Fortune: I keep waiting for a brave contrarian fund manager to dive into homebuilder stocks. Any interest?
BeforeI came back, Charles [de Vaulx] had one of the analysts look at it, butwe didn't buy anything. I've always thought it was very hard to valuehomebuilding stocks. In normal times, the price/earnings ratio looks solow, but it's because it includes a lot of gains on land.
Sono, we're not looking at homebuilding stocks. I think there was ahousing bubble, and as a consequence of the subprime meltdown, I thinkthat housing is not about to recover anytime soon.
Fortune: I'm guessing then that you aren't rushing to buy bank stocks either.
No.We're at the tail end of a global credit boom. Financial stocks nowaccount for 25% or 30% of the S&P, and the financial world hasbecome almost as important as the real world of industry and commerce.
Some excesses have appeared, subprime housing being the last though not the least. Private equity too.
Fortune: Do you think the current buyout boom is going to end badly for all these private-equity firms?
Ofcourse. I think there are some private-equity firms that are fullyaware of that, but, hey, they've got money to spend. I think the nextquestion for private equity and hedge funds is going to be, "Where arethe customers' yachts?"
Fortune: The last time I interviewedyou, four years ago, you were very bullish on gold. Since then goldprices have doubled, and yet you're still bullish, with 5% of yourportfolio in gold bullion or mining stocks. Hasn't the run-up in goldprices tempered your enthusiasm?
We look at it as insurance. The fact that the price is up means that the insurance premium has become more expensive.
Twothings that struck me when I came back several weeks ago - one, many ofthe stocks we owned are not particularly undervalued, at least outsideJapan and South Korea.
Second, there has been a terrific credit boom, and man, what happens when the credit cycle turns?
Thebasic idea with gold is that under most circumstances in which thestock market goes down, it would be good for gold. Gold would provide apartial offset to the hit we would take in the equity portfolio.
Fortune:Some gold fans are buying on the premise that rising demand for goldjewelry in the developing world will be good for commodity prices. Doyou subscribe to that idea?
When we started our gold fundin 1993 - which proved to be six or seven years too soon - I mistakenlythought that my downside was protected by the fact that jewelry demandwas fairly vibrant. But I was wrong. I think gold moves up and downbased on investment demand mostly.
Fortune: What's so special about Japan and South Korea?
We have less trouble finding stocks in those markets.
ForKorea, I think it's a result of the well-known "Korean discount," whichI think is no longer justified. After the Asian crisis in 1997, what wefound very interesting is that the Koreans changed their waysconsiderably.
They were much better able to adapt than theJapanese - the government, the corporations, the people. They changedtheir ways for the better. [Korean stocks that Eveillard owns includeSamsung, SK Telecom, and Lotte Confectionery Co.]
Fortune: And Japan?
Ithink there are opportunities, because before 2003 Japan went through a13-year bear market. And in a 13-year bear market every stock - and Imean every one - gets buried. They were resurrected in 2003, 2004, and2005, but I think that many opportunities remain.
