Commentary

Charlie Dreifus

Preservation Society

Just as the world of smaller stocks has evolved considerably over the last two decades, value investing approaches have also undergone certain changes. For example, technology stocks were once regarded as forbidden fruit for value investors. Today, we manage a more-than-six-year-old sector fund that invests in little else (Royce Technology Value Fund) and have substantial investments in technology businesses in many of our other portfolios. So while we recognize the modifications that have affected value investing in these years, we also happily accept that ample room remains for an approach that might be described as Old School. Charlie Dreifus uses precisely such an approach in managing Royce Special Equity Fund.

Although the seminal work of Ben Graham is a typical starting point for many value investors, Charlie's approach first began to take shape under the tutelage of Abraham Briloff. Charlie studied accounting under Abe Briloff and first learned the finer points of reading and interpreting financial reports, though by the time he began to study with Abe, Charlie was already something of an amateur investor, having bought his first shares with his Bar-Mitzvah money.

Charlie recalls some of the important lessons he learned from his mentor. "My work with Abe was vital because it taught me the importance of close scrutiny when poring over financial reports. I found that I could learn a great deal about the culture of a firm from the way it presents its information. I also discovered that strict attention to footnotes often provides singular insights into a company's operations as well as a way to evaluate the conservatism or aggressiveness of its financials."

"Later in the '60s I discovered the work of Ben Graham by reading of Graham and David Dodd's 1940 classic book, Security Analysis." What he derived from this classic of value investing was the idea that a company's "margin of safety" was "the central concept in investing." Charlie says, "The book really solidified my developing notion that losing less during down or flat markets was a worthy investment goal, even if it entailed giving up some performance during dynamic upswings, which, by the way, is an accurate description of the Fund's historical performance patterns."

Capital preservation has thus been one of Charlie's central aims since he first began to manage assets in the '70s. He's fond of paraphrasing Will Rogers, with just a slight adjustment "I'm as interested in the return of my money as the return on my money." This point of view tends to gain popularity when share prices are tumbling and investors are uncertain—in other words, times such as the present. Indeed, we have seldom thought that the timing was as opportune to present one of our portfolios as we do now about Royce Special Equity Fund.

"Living through the severe bear market of 1973-4, which was precipitated by the fall of the large-cap 'Nifty Fifty'—one that I think bears a strong resemblance to the current market—showed me just how important it is to hold on to what one has," Charlie contends. So while he regards it as a perennial truth, he is especially committed in the current market to the idea that avoiding risk while embracing quality is crucial. He goes on to say, "Losing less (or, even better, nothing) while equity prices fall keeps principal intact that can grow later when the market recovers. After all, the mathematics of loss are always unfavorable. Consider, for example, that a 30%  loss requires a nearly 43% rebound just to be even again. That is why I manage Royce Special Equity Fund with the goal of growing capital as much by not losing value as by increasing it."

Charlie Dreifus and Royce Special Equity Fund celebrate their 10-year anniversary this year.