Diamond Hill Investment Group: A Wounded Wildebeest?

Let’s take a look at the investment prowess of Ric Dillon, Chris Bingaman, Bill Dierker and the remaining “portfolio managers” at Diamond Hill Investment Group (DHIL).

Long-Short Financials, net of fees (see here):

• YTD 2008: -31.85%
• One Year: -44.01%

That’s not a typo with the negative sign, either.

DHIL’s earnings per share:

• 2Q2008: $.73/share, DOWN 31% y/y and DOWN 11% sequentially.
• 1Q2008: $.82/share, DOWN 9.9% y/y and DOWN 26% sequentially.

And this is generated using a much larger base-of-assets managed. A very, very bad sign.

In contrast, including 13 years running a multi-strategy hedge fund (1957-1969) and subsequent years at Berkshire Hathaway (BRK.A) (BRK.B) (1970-2007), Warren Buffett lost money, net of fees, only once. ONCE in FIFTY years. The year was 2001; he generated -6.9%, whereas the S&P (including dividends) generated -11.9%.

As I’ve stated previously in different venues, DHIL assertively markets itself as following the methodologies of Buffett, but when one investigates its positions, turnover, valuation practices (excel models, quarter-to-quarter assessments), etc., it becomes clear that it is the antithesis of Buffett’s methodologies.

Can a true disciple of Graham and an adherent to Buffett’s methodologies fail so miserably?

A resounding NO is in order.

However, DHIL is simply marketing itself as something it’s not, not unlike many boiler-room shops (incidentally, DHIL’s genesis is as a penny-stock, Florida-based shop).

That said, DHIL is like a wounded wildebeest on the open plains of Africa; it can only try to blend in with the healthy for so long until a lion spots it and targets it as prey. The wounds, in the case, are DHIL’s startling poor performance and methodologies. The predators are in the midst (7% short already), waiting for a timely outright dinner...

Disclosure: none

Comments

[Tim Eriksen:]

Diamond Hill manages over $5.5 billion and you pick a tiny $50 million of their AUM (assets under management), in a sector that everyone knows has gotten creamed in the last year, and then based on its performance you draw generalized conclusions about the company as a whole.

Then you brilliantly look at YoY comparisons in EPS and find it falling despite rising AUM. Well if you were smarter you would have also seen how operating income rose YoY and that the lower EPS results were solely due to investment income incurring a loss, which is understandable based on how the market has performed so far this year. It is quite obvious that earnings power is continuing to grow at Diamond Hill.

Then you compare current performance to Buffett's historical performance. So you are using different timeframes in your comparison and in addition most of the time period for Buffett tracks changes in book value not investment performance (meaning it includes operating companies Berkshire owned). If that isn't comparing apples to oranges, I don't know what is.

Keep up the crappy work. I guess it just goes to show that anyone can get their thoughts published on the web these days.

2008 Aug 14 03:53 AM

[Gilgamesh:]

Testing.

2008 Oct 10 02:46 PM

[Gilgamesh:]

Tim Eriksen,

I’m sorry you have a different perspective regarding methodologies, assessment of management, and near term direction of DHIL’s market valuation. Unfortunately, it is difficult to elaborate on certain assumptions and details in this forum, as you might agree.

Nevertheless, after detailed research, my opinion that DHIL was grossly overvalued at $90-$100 was firm. I will reassess its situation, since DHIL has dropped by 45%. Some questions I’ll ask may include the following: Has Ric Dillon and friends resigned?; is DHIL still handing out stock grants like it is candy?; etc.

Nonetheless, good luck with your position; I trust you didn’t “bet the house” on DHIL at $100 per share. And, as always, best of success with raising cash and running your hedge fund.

Truly,
Gilgamesh

2008 Oct 10 02:58 PM

[Gilgamesh:]

Here is some comic relief:

This character, Tim Eriksen, is now crying to the board at DHIL because the stock price dropped. Go figure.

This guy cannot win for losing.

Here is his Yahoo bulletin board post, late April 2009:

"I [Tim Eriksen] am writing to you [DHIL board] to express my strong disappointment in the fourth quarter operating results of the company. Operating margins, which have been trending lower over the last two years, in spite of increasing revenues,...[blah, blah, blah]..."

tinyurl.com/Crying-Eri...

Onwards and upwards,
Gilgamesh

On Aug 14 03:53 AM Tim Eriksen wrote:

> Diamond Hill manages over $5.5 billion and you pick a tiny $50 million
> of their AUM (assets under management), in a sector that everyone
> knows has gotten creamed in the last year, and then based on its
> performance you draw generalized conclusions about the company as
> a whole.
>
> Then you brilliantly look at YoY comparisons in EPS and find it falling
> despite rising AUM. Well if you were smarter you would have also
> seen how operating income rose YoY and that the lower EPS results
> were solely due to investment income incurring a loss, which is understandable
> based on how the market has performed so far this year. It is quite
> obvious that earnings power is continuing to grow at Diamond Hill.
>
>
> Then you compare current performance to Buffett's historical performance.
> So you are using different timeframes in your comparison and in addition
> most of the time period for Buffett tracks changes in book value
> not investment performance (meaning it includes operating companies
> Berkshire owned). If that isn't comparing apples to oranges, I don't
> know what is.
>
> Keep up the crappy work. I guess it just goes to show that anyone
> can get their thoughts published on the web these days.

May 18 04:13 PM