Chou Funds: 2011 Annual Report

Found via The Corner of Berkshire & Fairfax.

In equities, we believe the financial, retail and pharmaceutical sectors are undervalued. Thus, as the prices of financial and retail sector equities fell during 2011, we added to our positions. We favour a basket approach versus concentrating on one or two stocks in any sector.

Investing in U.S. Financial Institutions

We continue to believe that most financial institutions are undervalued and present excellent, long-term investment opportunities.

Since 2010, we have invested in the common stocks of banks and in their TARP warrants. The latter are stock warrants that were issued to the U.S. Treasury by the banks when they received funds under TARP. These stock warrants give the holder the right to buy the bank's stock at a specific price. When the banks repaid TARP funds to the U.S. Treasury, the U.S. Treasury either sold the stock warrants back to the banks or auctioned them to the public.

In 2011, stock prices and their associated TARP warrants declined further, giving us the opportunity to buy more of them. In a letter I wrote two years ago, I explained our rationale for buying them. Those reasons are still valid and I’d like to revisit them.