While it may be difficult to believe after having won three of the last four NBA championships, in the not so distant past, the Golden State Warriors looked like a value investment. At an estimated current market value of $3.1 billion, they are anything but a value investment today, and are certainly a far cry from the $450 million price tag when they were an unloved and underappreciated team just eight years ago. In this month’s quarterly letter, Dale discusses the importance of imagination, conviction and patience in value investing, especially when value investing is out of favor. Just as Joe Lacob and Peter Guber applied these traits when purchasing the downtrodden Warriors in 2010, we continue to apply them every day in our investment process while sticking to our game plan of seeking market-beating, long-term results for our investors.

“We want to understand the volatility of each underlying business, how much leverage is being deployed, the downside in a recession and the price we are paying relative to the underlying value of the company. We invest in companies for the long run when we see a favorable tradeoff between these risks and expected returns in a normal/mid-cycle time frame. We think a recession is likely sometime in the next few years and we want to be comfortable that we will survive a spill in the financial halfpipe without a trip to the intensive care unit. We believe that judgement, hard work and discipline are keys to our investment survival.” - J. Dale Harvey

“Wildfires and earthquakes shouldn’t really come as a surprise to those of us who live in California, yet, when they occur, it is still a shock. The advice we get is to “expect the unexpected” – to prepare by setting aside drinking water and shelf-stable food that might be needed in an emergency. There are parallels to the idea of planning for the aftermath of a natural disaster and being prepared in advance of an unexpected market downturn. For one, financial strength is a factor that is emphasized in our analysis of investments – I suppose that’s akin to having your home bolted to the foundation, a practice that reduces earthquake damage. At Poplar Forest, we also prefer companies that have sustainable free cash flow, which may be equivalent to those supplies of water and canned food. Finally, we use scenario analysis to examine how our investments will perform, not just in good times, but also in the equivalent of investment wildfire.” - J. Dale Harvey