Here's the top 10 holdings of the Yacktman Fund (YACKX), according to Morningstar.com:
Yacktman Fund Top 10 Positions (as of 12/31/12)
News Corp. (NWSA)
Procter & Gamble (PG)
Pepsi (PEP)
Cisco (CSCO)
Sysco (SYY)
Viacom (VIAB)
Microsoft (MSFT)
Coca-Cola (KO)
C. R. Bard (BCR)
Stryker (SYK)
Yacktman Focused Fund (YAFFX) is very similar to the Yacktman Fund, though their are certainly some minor variations. Considering the name, it's not exactly surprisingly that the fund is somewhat more concentrated.
Yacktman Focused Fund Top 10 Positions (as of 12/31/12)
Procter & Gamble
News Corp.
Pepsi, Inc.
Cisco
Sysco
Microsoft
C.R. Bard
Stryker
Clorox Company (CLX)
Johnson & Johnson (JNJ)
In fact, both portfolios are rather concentrated with the top ten making up 51% in the Yacktman Fund and 59% in the Yacktman Focused Fund.
Both funds have very low turnover by almost any standard. If nothing else that means what is owned now is likely to be in the portfolio for quite a while. Consumer stocks -- both "defensive and "cyclical" -- make up more than half of these two portfolios (with a strong tilt toward so-called "defensive"...35-40%).
The performance of these funds can be found here and at Morningstar.com.
Yacktman Fund Update
The biggest recent addition (and an entirely new position) in the fund is Dell (DELL) but is no where near a top 10 position. The stock still makes up less than 1% of the fund based upon available information. Considering where Dell was selling during the fourth quarter, that likely means -- unless the current attempts to take Dell private fail -- it will end up resulting in a nice gain but not a long-term investment.
Increases to the size of positions that were already held by Yacktman include: Stryker, Coca-Cola, and Avon Products (AVP).
Reduced positions include: H&R Block (HRB) and Research in Motion (RIMM)
Positions that were sold entirely: Liberty Ventures (LVNTA)
With Dell being the biggest change, clearly none of these moves had a huge impact on the portfolio.
Here's a new interview with Donald Yacktman in Barron's.
In the interview, Yacktman says their focus is to first protect client money, then make them money, and ultimately beat the S&P 500 over the long haul.
He also explains why Dell was to the portfolio and why they don't see Apple (AAPL) as an attractive investment (basically...the phone biz is too unpredictable). One key difference in their approach compared to many other funds these days seems to come down to time horizon. In the interview, Yacktman points out that volatility does encourage and lead to more short-term trading but...
"...short-term traders tend not to do very well over time. Most people think in terms of 10 minutes, 10 hours, 10 days, 10 weeks,10 months, but not 10 years. Most people just don't have the patience."
The difference in time horizon shows up in their 2-3% portfolio turnover. It's an approach clearly focused on long run risk-adjusted forward returns instead of chasing near-term price action.
(As the Barron's article points out, Yacktman doesn't mind at all being the "tortoise" among the many active "hares" in the market.)
The merits of their style seems unlikely to be obvious up in a bullish environment, even if extended. That's partly what inevitably tempts too many participants to trade. Yet, if their long run results are any indication, Yacktman and his team is doing something right.
Adam
Long positions in PG, PEP, CSCO, MSFT, KO, DELL, and AAPL established below recent prices and, in some cases, at much lower prices.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
Showing posts with label Mutual Funds and ETFs. Show all posts
Showing posts with label Mutual Funds and ETFs. Show all posts
Tuesday, January 29, 2013
Friday, November 30, 2012
High Quality Global Businesses Selling Lower-Ticket Consumer Products
Jeff Auxier, manager of the Auxier Focus Fund (AUXFX), was interviewed a few months back by GuruFocus.
From the interview:
"I like products that people buy frequently that are lower ticket, especially in tough economic times. The global population recently surpassed 7 billion. Most people just want to get through their day with a little pleasure. They want a cup of coffee, a bite of chocolate, a cigarette, a beer, a Coke, whatever, a little boost to get them through. So we like the fact that people are going to buy that product every day, by their choice."
Some of the best businesses in the world sell the stuff that's consumed everyday by the global middle class (according to Auxier the global middle class is ~1.8 billion and growing by ~150 million/year). Things like snacks, beverages, tobacco, and other lower ticket branded consumer products (or FMCG). Compared to just about anything else, many of the great global franchises have very significant and durable competitive advantages. As a result, the best among them tend to have relatively predictable, attractive long-term business economics and prospects. More from the interview:
"Recently throughout Asia and China, there is a movement away from the cheap knockoffs and a push for higher quality, especially with regard to food. They want the real thing. People want to buy quality Western brands. The disclosure provided by the internet is driving envy. People want to live better. I look at what people are using by their choice, what they like to do every day, and that source of demand. We have $400 billion a year in housing subsidies. How do you figure out the real supply demand there? Russians are going crazy over Doritos because they love the taste."
And big scale matters...
"If you look at the demographics related to food in Asia – the rapid urbanization – the thing is you need scale to hit that market. You can't do it as a small company."
Basically, the producers of things like snacks, beverages, and cigarettes with some scale are the exact opposite of technology businesses.
The difficulty with most tech companies isn't understanding what their business economics look like now.
The problem is understanding what those economics will look like in 10 or 20 years.
Not an easy thing to do. Tech businesses reside in environments that are fast changing and unpredictable. There is a wide range of possible outcomes and, as a result, they require a much larger margin of safety.
Mostly, they are not worth the trouble unless extremely cheap to protect against the worst possible outcomes. With technology businesses, too often the storm clouds don't emerge with enough warning. Cheap is often not cheap enough. I realize some are very good at identifying the next big winner in technology, but that's a tough thing to do consistently well. Besides, potential big winners often reside in the same neighborhood as potential big losers and sometimes they're difficult to tell apart.
Avoid the big losses and the returns usually follow.
As I explained here and on other occasions, there's just no technology business that I'm comfortable with as a long-term investment. Most are involved in exciting, dynamic, and highly competitive industries.
That's precisely what makes them unattractive long-term investments.
No matter how good business looks today (or how high the expectations are), it's just not that easy to predict their economic prospects many years from now.
With the best businesses that's not the case. Occasionally, certain tech stocks have sold at enough of a discount that it made me willing to own some shares. Even then I'm only willing to slowly accumulate very limited amounts. They've always been and always will be, at most, very small positions. To be worth the bother, the shares must sell at an extremely low multiple of free cash flow and, even if lacking growth prospects, have cash generating capabilities unlikely to fall off a cliff.*
In other words, I'm not exactly trying to anticipate the next big thing in tech. I'll let others try to figure that sort of thing out. It's buying inexpensive cash flow and, in some cases, lots of net cash on the balance sheet. Cash that, even if not put to brilliant use, just needs to not be allocated in very dumb ways. (Though it's better to assume that some poor capital allocation will happen then end up pleasantly surprised. The price paid should reflect that assumption.) The margin of safety must be large enough that nothing great has to happen to get, over several years, a good investment result. It must also be substantial enough to protect against all but the very worst unforeseeable rather bad tech business outcomes.
Tech businesses, in general, are involved in exciting, dynamic, and highly competitive businesses. That's precisely what makes them unattractive long-term investments.
I'd buy more shares of my favorite businesses (some are in Stocks to Watch and the Six Stock Portfolio), with the intent to hold them indefinitely, if they were selling at just a nice (but not extreme) discount to intrinsic value. In contrast, even if bought extremely cheap, most tech stocks are just not for the long haul in my view.**
So, if there's a very large margin of safety, I'll consider some limited technology exposure but that's it. Well, at least until that margin of safety shrinks a bit. In general, they'll always play a small supporting role.
Jeff Auxier later added this in the interview:
"If the food dynamics are growing 2 to 3 times faster than the economy, who's going to do it? It's going to be like a Tesco, and a Pepsi and a Wal-Mart."
The portfolio he manages is certainly consistent with his thinking.
Here's the top ten positions in the Auxier Focus Fund:
PepsiCo (PEP)
Molson Coors (TAP)
Tesco PLC (TSCDY)
Philip Morris International (PM)
Merck (MRK)
Microsoft (MSFT)
Procter & Gamble (PG)
Wal-Mart (WMT)
Medtronic (MDT)
Hospira (HSP)
According to Morningstar the annual portfolio turnover is 8%. So what's in the portfolio is generally held for quite a while. The top 10 make up roughly 21% of the portfolio.
The problem is getting shares of the great franchises when they're truly cheap. Unfortunately, it happens too rarely and most are not at all inexpensive right now.
In fact, the financial crisis provided the first window in quite a while to buy shares of the best businesses at big discounts to intrinsic value (conservatively estimated). These days, most of them are much tougher to buy. They remain fine businesses but there's, by definition, lower returns at more risk if bought at these higher prices.
Unfortunately, the window that opened -- as a result of the financial crisis -- to buy shares of higher quality businesses at very attractive valuations has mostly closed.
Check out part I and part II of the interview.
Adam
Long positions in PEP, PM, TSCDY, MSFT, PG, and WMT
* Though I actually do prefer that the share price falls even further in the short-to-medium term. That way the cash generating abilities can be used to buyback shares at an increasingly large discount to value. I'm perfectly happy to see a stock I've already bought temporarily go down further if I think management will use the opportunity buyback in a smart way.
** I rarely invest in anything -- and that includes tech stocks -- unless I'm willing to own the shares for several years or even longer. Frequent traders might consider several years to be long-term, but I consider that time frame really the bare minimum for almost any investment. The difficulties that have caused a security to be cheap and mispriced are unlikely to be sorted out in less time than that (though I realize several years is hardly a trade). To me, a long-term investment is something that can be owned indefinitely and deliver good results. (Indefinitely, unless there's damage to the economic moat, valuation become extreme on the high side, or opportunity costs are high.)
Generally speaking, that's just not possible with tech stocks.
So investing in tech stocks is a much different investing model than what I traditionally favor but worth the trouble if the mispricing is substantial. My preferred investing model is to own shares of good businesses indefinitely. Even when bought at just a fair price, the high quality enterprises tend to produce very satisfactory long-term returns with much less risk of permanent loss of capital.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
From the interview:
"I like products that people buy frequently that are lower ticket, especially in tough economic times. The global population recently surpassed 7 billion. Most people just want to get through their day with a little pleasure. They want a cup of coffee, a bite of chocolate, a cigarette, a beer, a Coke, whatever, a little boost to get them through. So we like the fact that people are going to buy that product every day, by their choice."
Some of the best businesses in the world sell the stuff that's consumed everyday by the global middle class (according to Auxier the global middle class is ~1.8 billion and growing by ~150 million/year). Things like snacks, beverages, tobacco, and other lower ticket branded consumer products (or FMCG). Compared to just about anything else, many of the great global franchises have very significant and durable competitive advantages. As a result, the best among them tend to have relatively predictable, attractive long-term business economics and prospects. More from the interview:
"Recently throughout Asia and China, there is a movement away from the cheap knockoffs and a push for higher quality, especially with regard to food. They want the real thing. People want to buy quality Western brands. The disclosure provided by the internet is driving envy. People want to live better. I look at what people are using by their choice, what they like to do every day, and that source of demand. We have $400 billion a year in housing subsidies. How do you figure out the real supply demand there? Russians are going crazy over Doritos because they love the taste."
And big scale matters...
"If you look at the demographics related to food in Asia – the rapid urbanization – the thing is you need scale to hit that market. You can't do it as a small company."
Basically, the producers of things like snacks, beverages, and cigarettes with some scale are the exact opposite of technology businesses.
The difficulty with most tech companies isn't understanding what their business economics look like now.
The problem is understanding what those economics will look like in 10 or 20 years.
Not an easy thing to do. Tech businesses reside in environments that are fast changing and unpredictable. There is a wide range of possible outcomes and, as a result, they require a much larger margin of safety.
Mostly, they are not worth the trouble unless extremely cheap to protect against the worst possible outcomes. With technology businesses, too often the storm clouds don't emerge with enough warning. Cheap is often not cheap enough. I realize some are very good at identifying the next big winner in technology, but that's a tough thing to do consistently well. Besides, potential big winners often reside in the same neighborhood as potential big losers and sometimes they're difficult to tell apart.
Avoid the big losses and the returns usually follow.
As I explained here and on other occasions, there's just no technology business that I'm comfortable with as a long-term investment. Most are involved in exciting, dynamic, and highly competitive industries.
That's precisely what makes them unattractive long-term investments.
No matter how good business looks today (or how high the expectations are), it's just not that easy to predict their economic prospects many years from now.
With the best businesses that's not the case. Occasionally, certain tech stocks have sold at enough of a discount that it made me willing to own some shares. Even then I'm only willing to slowly accumulate very limited amounts. They've always been and always will be, at most, very small positions. To be worth the bother, the shares must sell at an extremely low multiple of free cash flow and, even if lacking growth prospects, have cash generating capabilities unlikely to fall off a cliff.*
In other words, I'm not exactly trying to anticipate the next big thing in tech. I'll let others try to figure that sort of thing out. It's buying inexpensive cash flow and, in some cases, lots of net cash on the balance sheet. Cash that, even if not put to brilliant use, just needs to not be allocated in very dumb ways. (Though it's better to assume that some poor capital allocation will happen then end up pleasantly surprised. The price paid should reflect that assumption.) The margin of safety must be large enough that nothing great has to happen to get, over several years, a good investment result. It must also be substantial enough to protect against all but the very worst unforeseeable rather bad tech business outcomes.
Tech businesses, in general, are involved in exciting, dynamic, and highly competitive businesses. That's precisely what makes them unattractive long-term investments.
I'd buy more shares of my favorite businesses (some are in Stocks to Watch and the Six Stock Portfolio), with the intent to hold them indefinitely, if they were selling at just a nice (but not extreme) discount to intrinsic value. In contrast, even if bought extremely cheap, most tech stocks are just not for the long haul in my view.**
So, if there's a very large margin of safety, I'll consider some limited technology exposure but that's it. Well, at least until that margin of safety shrinks a bit. In general, they'll always play a small supporting role.
Jeff Auxier later added this in the interview:
"If the food dynamics are growing 2 to 3 times faster than the economy, who's going to do it? It's going to be like a Tesco, and a Pepsi and a Wal-Mart."
The portfolio he manages is certainly consistent with his thinking.
Here's the top ten positions in the Auxier Focus Fund:
PepsiCo (PEP)
Molson Coors (TAP)
Tesco PLC (TSCDY)
Philip Morris International (PM)
Merck (MRK)
Microsoft (MSFT)
Procter & Gamble (PG)
Wal-Mart (WMT)
Medtronic (MDT)
Hospira (HSP)
According to Morningstar the annual portfolio turnover is 8%. So what's in the portfolio is generally held for quite a while. The top 10 make up roughly 21% of the portfolio.
The problem is getting shares of the great franchises when they're truly cheap. Unfortunately, it happens too rarely and most are not at all inexpensive right now.
In fact, the financial crisis provided the first window in quite a while to buy shares of the best businesses at big discounts to intrinsic value (conservatively estimated). These days, most of them are much tougher to buy. They remain fine businesses but there's, by definition, lower returns at more risk if bought at these higher prices.
Unfortunately, the window that opened -- as a result of the financial crisis -- to buy shares of higher quality businesses at very attractive valuations has mostly closed.
Check out part I and part II of the interview.
Adam
Long positions in PEP, PM, TSCDY, MSFT, PG, and WMT
* Though I actually do prefer that the share price falls even further in the short-to-medium term. That way the cash generating abilities can be used to buyback shares at an increasingly large discount to value. I'm perfectly happy to see a stock I've already bought temporarily go down further if I think management will use the opportunity buyback in a smart way.
** I rarely invest in anything -- and that includes tech stocks -- unless I'm willing to own the shares for several years or even longer. Frequent traders might consider several years to be long-term, but I consider that time frame really the bare minimum for almost any investment. The difficulties that have caused a security to be cheap and mispriced are unlikely to be sorted out in less time than that (though I realize several years is hardly a trade). To me, a long-term investment is something that can be owned indefinitely and deliver good results. (Indefinitely, unless there's damage to the economic moat, valuation become extreme on the high side, or opportunity costs are high.)
Generally speaking, that's just not possible with tech stocks.
So investing in tech stocks is a much different investing model than what I traditionally favor but worth the trouble if the mispricing is substantial. My preferred investing model is to own shares of good businesses indefinitely. Even when bought at just a fair price, the high quality enterprises tend to produce very satisfactory long-term returns with much less risk of permanent loss of capital.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, November 23, 2012
John Bogle: "The Silence of the Funds"
John Bogle had the following to say in this Morningstar interview:
"I am appalled by what has happened in our industry."
Here's why. Bogle says that back when he was doing his Princeton thesis in 1951, the mutual fund industry owned a small percentage of stocks. Now, mutual funds are the biggest owner of stocks. In fact, according to Bogle, large institutional money managers of all kinds now own about 66% of stock.
"...a big turnaround over the last half century. And they are silent."
Bogle has a chapter with the title "The Silence of the Funds" in his new book The Clash of the Cultures.
In the interview, he also said this about Benjamin Graham:
"...in his first book, about a third of that book was dedicated to the role of stockholders and corporate governance, and it's hard to find a word about that in any other book, except, of course, the Bogle books.
But we have a responsibility. We have the rights of corporate ownership; we better exercise the responsibilities of corporate ownership. There is a lot at stake here because the corporations have the same agency problem and those managers want to put their interests before those of their shareholders. I mean this is not black and white, I can see that. But they get too much room to run without any oversight, and you always need oversight. And if the shareholders want the best oversight, the government can only do so much, regulatory bodies can only do so much."
Bogle adds that owners could do much more yet, for a variety of reasons, simply do not. The largest institutions are certainly in the best position to do so considering all the stock that they now own.
In the interview, he talks about some of the reasons why they do not but, to me, a good bit of this comes down to the increasingly short-term focus by participants in the capital markets. Fewer long-term shareholders. More interest in near-term price action. When, in general, a large proportion of participants do not intend to own pieces of a business -- shares of stock -- for very long, it's likely they'll expend far less time and energy carefully thinking about long-term effects and outcomes. Unlikely they'll put much into assuring that responsible governance is in place. Certainly less than a true long-term owner.
(Consider how the average person tends to treat a rental car versus a car they own. Well, maybe too many of our corporations are receiving what's equivalent to the "rental car" treatment.)
In this part of the interview, Bogle points out that the average turnover of a mutual fund portfolio is nearly 100 percent.
"...and that means they hold the average stock for one year. That is unequivocally speculation, and it costs money."*
Those frictional costs are very real. Yet the "silence", as Bogle describes it, by large institutional money managers (those who control roughly 66% of the stock) may actually be far more expensive even if in difficult to measure ways.
Adam
* Unlike the expense ratio of a fund, Bogle points out the costs of all that turnover is not disclosed. He estimates these costs at .5% to 1% per year.
Morningstar Bogle Interview on Corporate Governance & Oversight
Morningstar Bogle Interview on Stewardship
"I am appalled by what has happened in our industry."
Here's why. Bogle says that back when he was doing his Princeton thesis in 1951, the mutual fund industry owned a small percentage of stocks. Now, mutual funds are the biggest owner of stocks. In fact, according to Bogle, large institutional money managers of all kinds now own about 66% of stock.
"...a big turnaround over the last half century. And they are silent."
Bogle has a chapter with the title "The Silence of the Funds" in his new book The Clash of the Cultures.
In the interview, he also said this about Benjamin Graham:
"...in his first book, about a third of that book was dedicated to the role of stockholders and corporate governance, and it's hard to find a word about that in any other book, except, of course, the Bogle books.
But we have a responsibility. We have the rights of corporate ownership; we better exercise the responsibilities of corporate ownership. There is a lot at stake here because the corporations have the same agency problem and those managers want to put their interests before those of their shareholders. I mean this is not black and white, I can see that. But they get too much room to run without any oversight, and you always need oversight. And if the shareholders want the best oversight, the government can only do so much, regulatory bodies can only do so much."
Bogle adds that owners could do much more yet, for a variety of reasons, simply do not. The largest institutions are certainly in the best position to do so considering all the stock that they now own.
In the interview, he talks about some of the reasons why they do not but, to me, a good bit of this comes down to the increasingly short-term focus by participants in the capital markets. Fewer long-term shareholders. More interest in near-term price action. When, in general, a large proportion of participants do not intend to own pieces of a business -- shares of stock -- for very long, it's likely they'll expend far less time and energy carefully thinking about long-term effects and outcomes. Unlikely they'll put much into assuring that responsible governance is in place. Certainly less than a true long-term owner.
(Consider how the average person tends to treat a rental car versus a car they own. Well, maybe too many of our corporations are receiving what's equivalent to the "rental car" treatment.)
In this part of the interview, Bogle points out that the average turnover of a mutual fund portfolio is nearly 100 percent.
"...and that means they hold the average stock for one year. That is unequivocally speculation, and it costs money."*
Those frictional costs are very real. Yet the "silence", as Bogle describes it, by large institutional money managers (those who control roughly 66% of the stock) may actually be far more expensive even if in difficult to measure ways.
Adam
* Unlike the expense ratio of a fund, Bogle points out the costs of all that turnover is not disclosed. He estimates these costs at .5% to 1% per year.
Morningstar Bogle Interview on Corporate Governance & Oversight
Morningstar Bogle Interview on Stewardship
Thursday, November 8, 2012
Recency Bias and Investor Returns
"People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them." - Warren Buffett in Fortune, December 2001
David Winters is the portfolio manager of the Wintergreen Fund (WGRNX). He was recently interviewed by Consuelo Mack. In the interview, Winters had this to say:
"...people think it's been such a bad period for 10 years that this is going to be forever...and the only way to have made money was, except certain well-selected securities, has been to own bonds. So people now have their money in...Treasury securities."
Winters also makes the point that purchasing power shrinks over time:
"People lose purchasing power on a daily basis. I think inflation is very real. You have food prices going up, fuel prices going up. You need to get your hair done. Prices go up, and if you have your money not growing over time, you get crushed. So here you've got the public believing and institutions believing equities are dead."
Also, Treasury securities may be perceived as safe but, he added:
"We think what's perceived as a risk-free asset is actually an incredibly risky asset."
And finally...
"...if you own the right businesses with a global footprint that grows free cash flow, has a nice yield, those businesses become more valuable over time, and they have the ability not only to raise prices but to sell more units, and so the well-selected equities, which is what we do at Wintergreen Fund to the best of our ability, it protects you from inflation, the erosion of principal which is really, I think, the biggest risk out there."
There's a reliable tendency for investors to be drawn into what has worked recently. In the late 1990s, investors were buying expensive stocks because that's what had been working. These days, investors are drawn into expensive bonds because that's what has been working.
The rear-view mirror is a useful thing to have in an automobile yet no driver can afford to ignore the windshield for very long.
It's no different for investors but, because of recency bias -- the tendency to project recent experiences as if they'll continue into the future -- the equivalent tends to happen. A particular type of asset may seem not risky because of recent performance. Yet, even the highest quality asset that's relatively low risk at one price becomes quite risky (as measured by the possibility of permanent capital loss) when it sells far above its intrinsic value.*
Many stocks sold for 40 times earnings (and, in the case of many tech stocks, much more) in the late 1990s. That's incredibly expensive by any standard and a tough way to get satisfactory risk-adjusted long-term returns on shares of even good businesses (there are exceptions, of course) never mind subpar businesses.
Today, in contrast, it's not tough to find shares of a good business selling for 15 times earnings and even much lower (and, if it's a higher quality business, that stream of earnings should be increasing for many years to come). 15 times earnings may not be extremely cheap but at least it provides a much more favorable environment to buy. Of course, it's certainly possible for the earnings multiple of even the best business to continue contracting. Yet, that's hardly a problem for an owner that has a long horizon. In fact, it's actually a net benefit since the company can use its cash to buy back shares cheap (the same amount of cash reduces the share count by a larger amount directly benefiting the shareholders who hang in there long-term).
If a business has durable advantages, eventually the underlying business economics determines value and the price should, in the long run, at least mostly, if not completely, reflect it. Price action to the downside may feel unsettling but, at least for shares of a good business, it logically shouldn't be. For the long-term part owners of a good business, it's actually quite advantageous when a stock drops even further below what it is intrinsically worth.
The important thing for investors is that the stock is bought below what the business is intrinsically worth per share in the first place (margin of safety).
Now, unlike common stocks, a Treasury security offers the promise of getting your principal back at maturity. Understandably, that's front of mind for many investors considering recent experience in the capital markets, but it's worth considering how recency bias becomes, at times, very detrimental to investor returns. Even just some awareness of this particular cognitive bias can help an investor avoid the costly misjudgments associated with it.
An investor who accepts a 2% yield from a Treasury security is effectively paying 50 times "earnings" (the annual coupon payments). Importantly, unlike a good business, those earnings can't increase in a way that keeps up with inflation.**
Capital preservation is always important but, in the long run, it's going to be tough to maintain purchasing power (never mind increase purchasing power) when an investor pays 50 times or more for an asset that cannot increase the income it produces over time. Sure bonds prices might continue to rise (and yields fall) but compensation for an investor -- at least those with a longer time horizon -- will be likely be inadequate considering the risks. It's less than ideal when returns are dependent on the willingness of other market participants to pay an extreme price. An investor in a pricey bond has to hope someone else will be around to buy it when an attractive alternative investment opportunity comes along.***
Otherwise, it is either take a capital loss or, "best case", forgo the opportunity and collect that inadequate coupon until maturity as purchasing power is eroded year after year by inflation..
In a recent Morningstar interview, John Bogle talks about the trend toward speculation and gambling over investing. In the interview, he point to the late 1990s...
"...where the price of the stock became more important than the intrinsic value of a company. And when you focus on prices and pretty much disregard intrinsic values, you are just gambling."
In contrast, when an investor pays a fair price to own part of a business long-term, they're interested in what the asset can produce over time (the underlying economics that determine intrinsic value), not whether price action happens to go the right way. Since the intrinsic value grows faster than inflation, purchasing power isn't just maintained, it increases.
John Bogle later added just how much this trend has crowded out investing:
"...if you call investment fulfilling the basic function of the financial system, and that is directing capital to its highest and best uses, you're talking about money [that] gets directed in new ventures, existing companies, innovative companies, whatever it might be. And that has been running about $250 billion a year. How do you measure speculation? [You do so] by the amount of trading that goes on in the market, and that's around $33 trillion a year."
The simple math means that 99.2% of what's happening in the market is speculation and .8% is an investment. Consider that the next time someone argues the market needs sufficient liquidity. Speculation is just fine and even desirable but, as with any system, proportion matters. We've got plenty of liquidity. What we need is more actual investing.
Investing to achieve favorable long-term outcomes is rarely easy and naturally has its fair share of risks. Yet, that it is inherently challenging shouldn't lead an investor logically to either speculate on near term price action or hide in Treasury securities.
For those with a long-term horizon, many far more attractive investing alternatives exist.
Adam
* See Berkshire's Owner's Manual (pages 4-5) for a useful explanation of intrinsic value.
** 10-year Treasury notes are at 1.67% as I write this. So they currently sell for nearly 60 times the interest paid annually.
*** The same is obviously true with a pricey stock but here the option to just hold to maturity in order to get your principal back doesn't exist.
David Winters is the portfolio manager of the Wintergreen Fund (WGRNX). He was recently interviewed by Consuelo Mack. In the interview, Winters had this to say:
"...people think it's been such a bad period for 10 years that this is going to be forever...and the only way to have made money was, except certain well-selected securities, has been to own bonds. So people now have their money in...Treasury securities."
Winters also makes the point that purchasing power shrinks over time:
"People lose purchasing power on a daily basis. I think inflation is very real. You have food prices going up, fuel prices going up. You need to get your hair done. Prices go up, and if you have your money not growing over time, you get crushed. So here you've got the public believing and institutions believing equities are dead."
Also, Treasury securities may be perceived as safe but, he added:
"We think what's perceived as a risk-free asset is actually an incredibly risky asset."
And finally...
"...if you own the right businesses with a global footprint that grows free cash flow, has a nice yield, those businesses become more valuable over time, and they have the ability not only to raise prices but to sell more units, and so the well-selected equities, which is what we do at Wintergreen Fund to the best of our ability, it protects you from inflation, the erosion of principal which is really, I think, the biggest risk out there."
There's a reliable tendency for investors to be drawn into what has worked recently. In the late 1990s, investors were buying expensive stocks because that's what had been working. These days, investors are drawn into expensive bonds because that's what has been working.
The rear-view mirror is a useful thing to have in an automobile yet no driver can afford to ignore the windshield for very long.
It's no different for investors but, because of recency bias -- the tendency to project recent experiences as if they'll continue into the future -- the equivalent tends to happen. A particular type of asset may seem not risky because of recent performance. Yet, even the highest quality asset that's relatively low risk at one price becomes quite risky (as measured by the possibility of permanent capital loss) when it sells far above its intrinsic value.*
Many stocks sold for 40 times earnings (and, in the case of many tech stocks, much more) in the late 1990s. That's incredibly expensive by any standard and a tough way to get satisfactory risk-adjusted long-term returns on shares of even good businesses (there are exceptions, of course) never mind subpar businesses.
Today, in contrast, it's not tough to find shares of a good business selling for 15 times earnings and even much lower (and, if it's a higher quality business, that stream of earnings should be increasing for many years to come). 15 times earnings may not be extremely cheap but at least it provides a much more favorable environment to buy. Of course, it's certainly possible for the earnings multiple of even the best business to continue contracting. Yet, that's hardly a problem for an owner that has a long horizon. In fact, it's actually a net benefit since the company can use its cash to buy back shares cheap (the same amount of cash reduces the share count by a larger amount directly benefiting the shareholders who hang in there long-term).
If a business has durable advantages, eventually the underlying business economics determines value and the price should, in the long run, at least mostly, if not completely, reflect it. Price action to the downside may feel unsettling but, at least for shares of a good business, it logically shouldn't be. For the long-term part owners of a good business, it's actually quite advantageous when a stock drops even further below what it is intrinsically worth.
The important thing for investors is that the stock is bought below what the business is intrinsically worth per share in the first place (margin of safety).
Now, unlike common stocks, a Treasury security offers the promise of getting your principal back at maturity. Understandably, that's front of mind for many investors considering recent experience in the capital markets, but it's worth considering how recency bias becomes, at times, very detrimental to investor returns. Even just some awareness of this particular cognitive bias can help an investor avoid the costly misjudgments associated with it.
An investor who accepts a 2% yield from a Treasury security is effectively paying 50 times "earnings" (the annual coupon payments). Importantly, unlike a good business, those earnings can't increase in a way that keeps up with inflation.**
Capital preservation is always important but, in the long run, it's going to be tough to maintain purchasing power (never mind increase purchasing power) when an investor pays 50 times or more for an asset that cannot increase the income it produces over time. Sure bonds prices might continue to rise (and yields fall) but compensation for an investor -- at least those with a longer time horizon -- will be likely be inadequate considering the risks. It's less than ideal when returns are dependent on the willingness of other market participants to pay an extreme price. An investor in a pricey bond has to hope someone else will be around to buy it when an attractive alternative investment opportunity comes along.***
Otherwise, it is either take a capital loss or, "best case", forgo the opportunity and collect that inadequate coupon until maturity as purchasing power is eroded year after year by inflation..
In a recent Morningstar interview, John Bogle talks about the trend toward speculation and gambling over investing. In the interview, he point to the late 1990s...
"...where the price of the stock became more important than the intrinsic value of a company. And when you focus on prices and pretty much disregard intrinsic values, you are just gambling."
In contrast, when an investor pays a fair price to own part of a business long-term, they're interested in what the asset can produce over time (the underlying economics that determine intrinsic value), not whether price action happens to go the right way. Since the intrinsic value grows faster than inflation, purchasing power isn't just maintained, it increases.
John Bogle later added just how much this trend has crowded out investing:
"...if you call investment fulfilling the basic function of the financial system, and that is directing capital to its highest and best uses, you're talking about money [that] gets directed in new ventures, existing companies, innovative companies, whatever it might be. And that has been running about $250 billion a year. How do you measure speculation? [You do so] by the amount of trading that goes on in the market, and that's around $33 trillion a year."
The simple math means that 99.2% of what's happening in the market is speculation and .8% is an investment. Consider that the next time someone argues the market needs sufficient liquidity. Speculation is just fine and even desirable but, as with any system, proportion matters. We've got plenty of liquidity. What we need is more actual investing.
Investing to achieve favorable long-term outcomes is rarely easy and naturally has its fair share of risks. Yet, that it is inherently challenging shouldn't lead an investor logically to either speculate on near term price action or hide in Treasury securities.
For those with a long-term horizon, many far more attractive investing alternatives exist.
Adam
* See Berkshire's Owner's Manual (pages 4-5) for a useful explanation of intrinsic value.
** 10-year Treasury notes are at 1.67% as I write this. So they currently sell for nearly 60 times the interest paid annually.
*** The same is obviously true with a pricey stock but here the option to just hold to maturity in order to get your principal back doesn't exist.
Monday, October 22, 2012
Chasing "Rearview-Mirror Performance"
In this interview, Bill Nygren, co-manager of the Oakmark Fund, says that investors are "chasing the rearview-mirror performance" of bonds.
Barron's: Why Stocks Beat the Alternatives
He also later added the following:
"...investors are looking at equities saying, 'It's not like they've returned much recently,' and everybody is telling them that the world economic outlook isn't as good as it used to be."
There is, unfortunately, a general tendency for investors to sell or avoid buying what's out of favor (and possibly more attractively valued) and, instead, own what has worked more recently.*
Of course, that leads investors too often to accumulate the asset classes that happen to now be relatively expensive (and maybe sell/avoid what's rather cheap). These days, it's bonds that are in favor. In the late 1990s, it was equities. They seem (or seemed) safe, at least in the near-term but, with a longer term risk-adjusted returns perspective, they are (were) not.
(Price action may even continue to reinforce the actions of the herd for quite some time. Well, at least it tends to do so until it doesn't. Generally speaking, just long enough to cause even more pain. Social proof can be a powerful thing.)
What seems safe is priced in a way that's unlikely to produce anything close to satisfactory enough long-term returns to compensate for the risks.
It happens all too frequently, and even, predictably.
Lou Harvey, president of DALBAR, provided a good explanation of what happens with fund investors back in 2009:
"...investor returns lag what performance reports and prospectuses would lead one to believe is achievable. While those returns are, in fact, theoretically achievable, the reality is that investors are not rational, and make buy and sell decisions at the worst possible moments," he said.
One major reason so many market participants underperform long-term comes down to this reliable pattern of investor behavior. I'm guessing most don't think they are susceptible to it.
Not everyone is susceptible, no doubt, but the evidence suggests more participants are than may be obvious or expected. Chances are that means quite a few who think they immune to the pattern are, in fact, not immune at all.
As a result, the returns of fund investors suffer in a very big way.
More on that subject in just a bit. First, according to Vanguard founder John Bogle, from 1984 to 2002 the average mutual fund delivered a 9.3% annual return compared to the S&P 500's return of 12.2% a year.
So the average mutual fund performance wasn't great compared to the broader index.
Here's what Jack Meyer, who managed the endowment, pension, and other assets as President and CEO of the Harvard Management Company from 1990 to 2005, had to say: **
"Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 percent to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value."
Even worse, during that same period the average fund investor, according to DALBAR, earned just 2.6% a year. This comes down to investor behavior. The reliable tendency to make poor buy/sell decisions. Less action and a focus on longer investing horizons often lead to improved returns.
What's popular isn't necessarily expensive, but chances are pretty good it's not cheap.
Similarly, what's less popular -- and likely faces near-term or longer very real headwinds -- isn't necessarily cheap, but it's not a bad place to start looking for value.
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett
If an investor habitually buys (sells) what's popular (unpopular), and tends to do so during bull (bear) markets, returns are likely to suffer. It certainly not tough to understand why the opposite of this behavior will generally improve long-term results. Yet, the fact is quite a few studies more than just suggest that a whole lot of fund investors, in fact, do their buying/selling at rather unfortunate times. That seems to at least imply this is less an intellectual challenge, more about temperament and discipline.
My own view is that an awareness of the tendency is just one step but an important one. Establishing, proactively, one's own simple policies or rules ("never sell if...", "only buy when...") can at least partially counteract the tendency in certain challenging market environments. In other words, better to think it through beforehand when fewer emotions are involved. Then, the policies and rules can be more routinely applied -- using objective factors to guide actions in the moment -- when the challenging and sometimes quite emotionally charged environment arises (whether a bubble/near bubble or a crash/near crash...either extreme). Even if there's no way to entirely eliminate every costly mistake, developing an effective trained response goes a long way toward reducing the cumulative adverse portfolio impact of poor buy/sell decisions made over many years.
In the long run, returns are driven by price paid and value. No matter what the near-term market environment happens to be, it's the price paid for sound investments relative to their intrinsic worth that matters.***
(Consistently buy shares of businesses with durable advantages at a discount and good things are likely to happen. The same is true for a broad-based index fund even if there are different specific risks involved. Usually the time to buy is when it feels pretty awful and the time to maybe sell some shares is when there seems to be no economic storm clouds whatsoever.)
John Bogle, in The Little Book of Common Sense Investing, also estimated that in the 25 years ending in 2005 the average mutual fund investor earned 7.3% compared to the 12.3% for the benchmark. Once again, investor ill-timed buy/sell behavior accounts for the gap in performance.
A more recent study by DALBAR reached a similar conclusion.
According to DALBAR's Quantitative Analysis of Investor Behavior (QAIB), the S&P 500 returned 8.35% over the 20 years that ended in 2008 while, on average, equity fund investors earned just 1.87% (less than the inflation rate of 2.89%).
Investors in bond funds revealed a similar pattern and, of course, results. The bond fund investors earned 0.77% compared to 7.43% for the index.
So it's not difficult to find evidence that investors can be their own worst enemy. In the long run, an awareness of the damage this pattern of behavior does to portfolio returns is only useful if wise steps are taken to counteract the tendency.
Not seriously considering the implications of this in the context of one's own investing approach seems a bit foolish and certainly, well, expensive.
It's worth keeping the following front of mind:
- Investors have a reliable tendency to buy and avoid/sell at the wrong times; it's an expensive pattern.
- Index funds have a not insignificant likelihood of outperforming a large number of market participants especially if trading is minimized and they're held long-term. It's a relatively simple approach. When a simple approach produces the same or better results than the more complex one, the simpler approach obviously wins. The added complexity needs to be worth the trouble. In other words, there's a cost to complexity and the benefits of a less straightforward approach should be apparent and easy to justify.
- More investors, due to overconfidence in (or overestimation of) their own abilities, seem to believe they can outperform an index than appears to be justified based upon available evidence.
- Investors who buy marketable stocks need to realistically assess their own ability outperform an index long-term and on a risk-adjusted basis. Similarly, investors who buy an actively managed fund need to realistically assess whether they can identify the particular fund (or funds) that will outperform in the future. I mean, knowing who did well after the fact doesn't really help a whole lot. Studies seem to more than suggest too many investors overestimate their own ability to either pick stocks or active managers.
I've used this quote recently but it bears repeating:
"By periodically investing in an index fund...the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." - Warren Buffett in the 1993 Berkshire Hathaway Shareholder Letter
Buffett goes on to say, in effect, the "know-something investor" who's able to identify "five to ten sensibly-priced" enterprises with sound business economics that possess long-term competitive advantages need much less diversification than what is offered by an index fund. As I said in this recent post, there's a big difference between it being not possible and it being not likely to achieve attractive results buying individual stocks. So it's not likely that many equity investors will do better than an index fund. Yet, as I said in this recent post, there's a big difference between not possible and not likely. Attractive results can be achieved buying individual stocks but some seem to think long-term outperformance is easier than it actually is.
Still, if the results of these studies are any indication, a rather daunting number of market participants will end up doing worse by buying individual stocks. It'd be folly to ignore the results from the studies noted above and others.
The added risk and complexity of owning individual stocks works against long-term returns unless the investor: 1) truly knows business economics, 2) is able to identify those with sustainable advantages, 3) judges value well, then 4) buys with an appropriate margin of safety. The right temperament and no small amount of discipline is necessary.
The evidence supporting the idea that index funds are often the way to go is not insignificant. Yet, that doesn't mean no one should invest in individual stocks. Some are really very good at it but, as always, it's about knowing one's own limits.
Check out the full Barron's interview.
Adam
Related posts
- Index Fund Investing: October 2012
- The Halo Effect & Rear-view Mirror Investing: June 2012
- Rear-View Mirror Investing: December 2011
- Recent Study on Investor Returns: July 2009
- Best Performing Mutual Funds - 20 Years: May 2009
* Certain bonds may be generally expensive but that doesn't mean, near current levels, the major equity indexes are at extraordinarily low valuations. Best case, the major indexes seem to be annoyingly neither cheap nor expensive, though certain individual stocks appear rather attractively priced.
(In general, my own approach is to buy shares of businesses with durable economics below what their worth then ideally "never" but, at least, rarely sell once I own part of a quality enterprise at a fair or better price.)
** Index funds don't just outperform the average mutual fund. It's much worse than that: "The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors." - The Motley Fool
John Bogle makes a similar point here. There are some very good actively managed funds. The problem is it's difficult to pick those that will outperform a broad-based market index over a long time frame into the future.
*** And how much intrinsic worth will change, for better or worse, over time. Investing in individual stocks starts and ends with knowing how to judge value and paying an appropriate discount. Those that don't feel they can judge value certainly shouldn't be buying individual stocks (even if you are a buyer of index funds, having a good sense of price versus value is hugely useful). Naturally, a lousy market environment often produces attractively priced assets while a euphoric market produces the opposite. What's more important, at least for those building an equity portfolio with long-term results in mind, is whether shares can be bought (via an index fund or well understood, ideally higher quality individual stocks) at a plain discount to value no matter what the market environment is. For long-term investors, it's first and foremost about consistently buying shares at a discount to value not the near-term (or even somewhat longer term) price action or mood of the equity markets. Very bullish/bearish market environments just usually (though not always) provide a larger number of mispriced assets and more extreme individual mispricings. Understandably, a trader looks at this in an altogether different manner if for no other reason that his/her time horizon is vastly shorter.
Barron's: Why Stocks Beat the Alternatives
He also later added the following:
"...investors are looking at equities saying, 'It's not like they've returned much recently,' and everybody is telling them that the world economic outlook isn't as good as it used to be."
There is, unfortunately, a general tendency for investors to sell or avoid buying what's out of favor (and possibly more attractively valued) and, instead, own what has worked more recently.*
Of course, that leads investors too often to accumulate the asset classes that happen to now be relatively expensive (and maybe sell/avoid what's rather cheap). These days, it's bonds that are in favor. In the late 1990s, it was equities. They seem (or seemed) safe, at least in the near-term but, with a longer term risk-adjusted returns perspective, they are (were) not.
(Price action may even continue to reinforce the actions of the herd for quite some time. Well, at least it tends to do so until it doesn't. Generally speaking, just long enough to cause even more pain. Social proof can be a powerful thing.)
What seems safe is priced in a way that's unlikely to produce anything close to satisfactory enough long-term returns to compensate for the risks.
It happens all too frequently, and even, predictably.
Lou Harvey, president of DALBAR, provided a good explanation of what happens with fund investors back in 2009:
"...investor returns lag what performance reports and prospectuses would lead one to believe is achievable. While those returns are, in fact, theoretically achievable, the reality is that investors are not rational, and make buy and sell decisions at the worst possible moments," he said.
One major reason so many market participants underperform long-term comes down to this reliable pattern of investor behavior. I'm guessing most don't think they are susceptible to it.
Not everyone is susceptible, no doubt, but the evidence suggests more participants are than may be obvious or expected. Chances are that means quite a few who think they immune to the pattern are, in fact, not immune at all.
As a result, the returns of fund investors suffer in a very big way.
More on that subject in just a bit. First, according to Vanguard founder John Bogle, from 1984 to 2002 the average mutual fund delivered a 9.3% annual return compared to the S&P 500's return of 12.2% a year.
So the average mutual fund performance wasn't great compared to the broader index.
Here's what Jack Meyer, who managed the endowment, pension, and other assets as President and CEO of the Harvard Management Company from 1990 to 2005, had to say: **
"Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 percent to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value."
Even worse, during that same period the average fund investor, according to DALBAR, earned just 2.6% a year. This comes down to investor behavior. The reliable tendency to make poor buy/sell decisions. Less action and a focus on longer investing horizons often lead to improved returns.
What's popular isn't necessarily expensive, but chances are pretty good it's not cheap.
Similarly, what's less popular -- and likely faces near-term or longer very real headwinds -- isn't necessarily cheap, but it's not a bad place to start looking for value.
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett
If an investor habitually buys (sells) what's popular (unpopular), and tends to do so during bull (bear) markets, returns are likely to suffer. It certainly not tough to understand why the opposite of this behavior will generally improve long-term results. Yet, the fact is quite a few studies more than just suggest that a whole lot of fund investors, in fact, do their buying/selling at rather unfortunate times. That seems to at least imply this is less an intellectual challenge, more about temperament and discipline.
My own view is that an awareness of the tendency is just one step but an important one. Establishing, proactively, one's own simple policies or rules ("never sell if...", "only buy when...") can at least partially counteract the tendency in certain challenging market environments. In other words, better to think it through beforehand when fewer emotions are involved. Then, the policies and rules can be more routinely applied -- using objective factors to guide actions in the moment -- when the challenging and sometimes quite emotionally charged environment arises (whether a bubble/near bubble or a crash/near crash...either extreme). Even if there's no way to entirely eliminate every costly mistake, developing an effective trained response goes a long way toward reducing the cumulative adverse portfolio impact of poor buy/sell decisions made over many years.
In the long run, returns are driven by price paid and value. No matter what the near-term market environment happens to be, it's the price paid for sound investments relative to their intrinsic worth that matters.***
(Consistently buy shares of businesses with durable advantages at a discount and good things are likely to happen. The same is true for a broad-based index fund even if there are different specific risks involved. Usually the time to buy is when it feels pretty awful and the time to maybe sell some shares is when there seems to be no economic storm clouds whatsoever.)
John Bogle, in The Little Book of Common Sense Investing, also estimated that in the 25 years ending in 2005 the average mutual fund investor earned 7.3% compared to the 12.3% for the benchmark. Once again, investor ill-timed buy/sell behavior accounts for the gap in performance.
A more recent study by DALBAR reached a similar conclusion.
According to DALBAR's Quantitative Analysis of Investor Behavior (QAIB), the S&P 500 returned 8.35% over the 20 years that ended in 2008 while, on average, equity fund investors earned just 1.87% (less than the inflation rate of 2.89%).
Investors in bond funds revealed a similar pattern and, of course, results. The bond fund investors earned 0.77% compared to 7.43% for the index.
So it's not difficult to find evidence that investors can be their own worst enemy. In the long run, an awareness of the damage this pattern of behavior does to portfolio returns is only useful if wise steps are taken to counteract the tendency.
Not seriously considering the implications of this in the context of one's own investing approach seems a bit foolish and certainly, well, expensive.
It's worth keeping the following front of mind:
- Investors have a reliable tendency to buy and avoid/sell at the wrong times; it's an expensive pattern.
- Index funds have a not insignificant likelihood of outperforming a large number of market participants especially if trading is minimized and they're held long-term. It's a relatively simple approach. When a simple approach produces the same or better results than the more complex one, the simpler approach obviously wins. The added complexity needs to be worth the trouble. In other words, there's a cost to complexity and the benefits of a less straightforward approach should be apparent and easy to justify.
- More investors, due to overconfidence in (or overestimation of) their own abilities, seem to believe they can outperform an index than appears to be justified based upon available evidence.
- Investors who buy marketable stocks need to realistically assess their own ability outperform an index long-term and on a risk-adjusted basis. Similarly, investors who buy an actively managed fund need to realistically assess whether they can identify the particular fund (or funds) that will outperform in the future. I mean, knowing who did well after the fact doesn't really help a whole lot. Studies seem to more than suggest too many investors overestimate their own ability to either pick stocks or active managers.
I've used this quote recently but it bears repeating:
"By periodically investing in an index fund...the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." - Warren Buffett in the 1993 Berkshire Hathaway Shareholder Letter
Buffett goes on to say, in effect, the "know-something investor" who's able to identify "five to ten sensibly-priced" enterprises with sound business economics that possess long-term competitive advantages need much less diversification than what is offered by an index fund. As I said in this recent post, there's a big difference between it being not possible and it being not likely to achieve attractive results buying individual stocks. So it's not likely that many equity investors will do better than an index fund. Yet, as I said in this recent post, there's a big difference between not possible and not likely. Attractive results can be achieved buying individual stocks but some seem to think long-term outperformance is easier than it actually is.
Still, if the results of these studies are any indication, a rather daunting number of market participants will end up doing worse by buying individual stocks. It'd be folly to ignore the results from the studies noted above and others.
The added risk and complexity of owning individual stocks works against long-term returns unless the investor: 1) truly knows business economics, 2) is able to identify those with sustainable advantages, 3) judges value well, then 4) buys with an appropriate margin of safety. The right temperament and no small amount of discipline is necessary.
The evidence supporting the idea that index funds are often the way to go is not insignificant. Yet, that doesn't mean no one should invest in individual stocks. Some are really very good at it but, as always, it's about knowing one's own limits.
Check out the full Barron's interview.
Adam
Related posts
- Index Fund Investing: October 2012
- The Halo Effect & Rear-view Mirror Investing: June 2012
- Rear-View Mirror Investing: December 2011
- Recent Study on Investor Returns: July 2009
- Best Performing Mutual Funds - 20 Years: May 2009
* Certain bonds may be generally expensive but that doesn't mean, near current levels, the major equity indexes are at extraordinarily low valuations. Best case, the major indexes seem to be annoyingly neither cheap nor expensive, though certain individual stocks appear rather attractively priced.
(In general, my own approach is to buy shares of businesses with durable economics below what their worth then ideally "never" but, at least, rarely sell once I own part of a quality enterprise at a fair or better price.)
** Index funds don't just outperform the average mutual fund. It's much worse than that: "The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors." - The Motley Fool
John Bogle makes a similar point here. There are some very good actively managed funds. The problem is it's difficult to pick those that will outperform a broad-based market index over a long time frame into the future.
*** And how much intrinsic worth will change, for better or worse, over time. Investing in individual stocks starts and ends with knowing how to judge value and paying an appropriate discount. Those that don't feel they can judge value certainly shouldn't be buying individual stocks (even if you are a buyer of index funds, having a good sense of price versus value is hugely useful). Naturally, a lousy market environment often produces attractively priced assets while a euphoric market produces the opposite. What's more important, at least for those building an equity portfolio with long-term results in mind, is whether shares can be bought (via an index fund or well understood, ideally higher quality individual stocks) at a plain discount to value no matter what the market environment is. For long-term investors, it's first and foremost about consistently buying shares at a discount to value not the near-term (or even somewhat longer term) price action or mood of the equity markets. Very bullish/bearish market environments just usually (though not always) provide a larger number of mispriced assets and more extreme individual mispricings. Understandably, a trader looks at this in an altogether different manner if for no other reason that his/her time horizon is vastly shorter.
Monday, October 15, 2012
Buffett: Buying Businesses "Through The Purchase Of Marketable Stocks"
From The Superinvestors of Graham-and-Doddsville:*
The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market...Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses.
While the influence of Graham and Dodd is significant, these successful investors put the theory to work in very different ways. It's no secret (and it's been covered on this blog more than a few times) that Warren Buffett and Charlie Munger prefer portfolio concentration over diversification.** Well, Walter Schloss, one of the "superinvestors", was known to diversify a whole lot and has an incredible long-term record. So each investor finds what works (or doesn't) for them even if they've built upon ideas that have a common origin.
Buffett contrasted the investing style of Walter Schloss with his own in "Superinvestors":
Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that's all he does...He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do -- and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That's one of his strengths; no one has much influence on him.
Most successful investors are independent thinkers. Buffett further made this point:
[Stan] Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth?
In my view, two of the big benefits of owning shares in fewer businesses ideally for a very long time is: 1) surprises become less likely as familiarity grows, and 2) there's less chance of getting the value very wrong.
Yet there's clearly many other ways that work. Each investor has to find their own independent "recipe" that fits them. That's why I happen to think that no investor in marketable stocks should buy something just because some other investor -- even someone who has a very good track record -- has bought it.
The specific approach put into practice (and the specific stocks bought and sold) matter much less than the common theme here:
Buying shares when they happen to sell at a price comfortably below one's own appraised per share value of a business.
Mason Hawkins, Chairman and Chief Executive Officer Southeastern Asset Management, recently answered questions for readers of GuruFocus. He had this to say:
Because of the short investment time horizons in the markets today, we often get the chance to buy businesses that we have previously owned. Generally, companies and managements that we have lived with successfully in the past come with fewer unknowns and therefore less appraisal risk.
I think jumping in and out of too many stocks can lead to mistakes that wouldn't otherwise get made but, whatever the approach, it all gets back to sound judgment of value and always paying a meaningful discount to it.
Adam
* The "superinvestors" mentioned by Warren Buffett include: Walter Scloss, Tom Knapp (Tweedy Browne), Ed Anderson (Tweedy Browne), Bill Ruane (Sequoia Fund) , Rick Guerin, Stan Perlmeter and, of course, Charlie Munger.
** The Berkshire Hathaway (BRKa) equity portfolio itself is, to this day, very concentrated. Yet as Berskhire has grown in size and complexity it has become impossible for them to concentrate the entire portfolio (i.e. including all the operating businesses they control). Their equity portfolio frequently has 60-70 percent and, at times, even more allocated to just five stocks. It remains roughly constructed that way.
The Superinvestors of Graham-and-Doddsville
The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market...Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses.
While the influence of Graham and Dodd is significant, these successful investors put the theory to work in very different ways. It's no secret (and it's been covered on this blog more than a few times) that Warren Buffett and Charlie Munger prefer portfolio concentration over diversification.** Well, Walter Schloss, one of the "superinvestors", was known to diversify a whole lot and has an incredible long-term record. So each investor finds what works (or doesn't) for them even if they've built upon ideas that have a common origin.
Buffett contrasted the investing style of Walter Schloss with his own in "Superinvestors":
Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that's all he does...He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do -- and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That's one of his strengths; no one has much influence on him.
Most successful investors are independent thinkers. Buffett further made this point:
[Stan] Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth?
In my view, two of the big benefits of owning shares in fewer businesses ideally for a very long time is: 1) surprises become less likely as familiarity grows, and 2) there's less chance of getting the value very wrong.
Yet there's clearly many other ways that work. Each investor has to find their own independent "recipe" that fits them. That's why I happen to think that no investor in marketable stocks should buy something just because some other investor -- even someone who has a very good track record -- has bought it.
The specific approach put into practice (and the specific stocks bought and sold) matter much less than the common theme here:
Buying shares when they happen to sell at a price comfortably below one's own appraised per share value of a business.
Mason Hawkins, Chairman and Chief Executive Officer Southeastern Asset Management, recently answered questions for readers of GuruFocus. He had this to say:
Because of the short investment time horizons in the markets today, we often get the chance to buy businesses that we have previously owned. Generally, companies and managements that we have lived with successfully in the past come with fewer unknowns and therefore less appraisal risk.
I think jumping in and out of too many stocks can lead to mistakes that wouldn't otherwise get made but, whatever the approach, it all gets back to sound judgment of value and always paying a meaningful discount to it.
Adam
* The "superinvestors" mentioned by Warren Buffett include: Walter Scloss, Tom Knapp (Tweedy Browne), Ed Anderson (Tweedy Browne), Bill Ruane (Sequoia Fund) , Rick Guerin, Stan Perlmeter and, of course, Charlie Munger.
** The Berkshire Hathaway (BRKa) equity portfolio itself is, to this day, very concentrated. Yet as Berskhire has grown in size and complexity it has become impossible for them to concentrate the entire portfolio (i.e. including all the operating businesses they control). Their equity portfolio frequently has 60-70 percent and, at times, even more allocated to just five stocks. It remains roughly constructed that way.
The Superinvestors of Graham-and-Doddsville
Thursday, October 11, 2012
Wal-Mart's Share Repurchases
GuruFocus recently interviewed Steve Romick, the Portfolio Manager of FPA Crescent (FPACX):
According to Morningstar, here's how FPACX has performed recently and, more importantly, over the long haul. Also, here's a link to the Top 25 holdings in the fund.
In the interview, Steve Romick points out that Wal-Mart's (WMT) shares were selling for around $ 50/share last fall and, at the time, a multiple of earnings that was roughly 10 and a half. The stock has rallied almost 50% since then.
Romick also said the following about Wal-Mart:
The margins of Walmart don't move very much over time. In fact, of any company I've ever seen, the rate between the high margin and low operating margin is only 50 basis points. We're talking about an earnings growth that should be pretty close to revenue growth.
Then he later added:
...in addition to that we're getting the benefit of share repurchases. In the last decade they bought back more than 20% of the shares outstanding. It's like a creeping buyout for the largest retailer in the world. And we believed that they would continue to use their free cash flow to repurchase their shares at a rate of 2.5% or so per year. That added to our growth in earnings. And then we said they have a dividend on top of that. We added that to what we thought we could earn. By the time we were all done, we had an expected outcome, assuming no change in the P/E – which at the time was a lot lower than it is today – the expected outcome was going to be in a range of returns of anywhere from, call it 7% to 13%. We felt that we'd rather own this than bonds or cash. And we believed that it would be quite likely that we couldn't lose money, over time.
Back in July of 2011, this Michael Santoli article in Barron's pointed out that investors were effectively selling Wal-Mart back to the Walton family.
Related posts:
Selling Wal-Mart Back to the Walton Family: Part 1 - July 2011
Selling Wal-Mart Back to the Walton Family: Part 2 - July 2011
Well, with the shares having rallied so much, each buyback dollar now goes a whole lot less far. So the higher share price makes future buybacks less wealth enhancing for long-term Wal-Mart investors. The fact that the shares having rallied so much also assures that the process of selling of Wal-Mart back to the Walton family has been slowed.
Buying back the shares is now less effective though hardly ineffective. Shareholders, at least those in it for the long haul, benefit as long as shares are bought when selling below per share intrinsic value.*
The shares may no longer be exceptionally cheap, but they're not particularly expensive either at slightly more than 15 times earnings.
Still, the margin of safety that existed last year is no longer there.
Wal-Mart is as good a recent example as any why no long-term investor should cheer when the stock of a great durable franchise, especially those run by capable capital allocators, has rallied.
Adam
Long position in WMT established at much lower than recent market prices
* As long as the company is financially strong, has no other strategic need for corporate cash, and the necessary investments are being made that maintain, or ideally enhance, the size and strength of its economic moat.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
According to Morningstar, here's how FPACX has performed recently and, more importantly, over the long haul. Also, here's a link to the Top 25 holdings in the fund.
In the interview, Steve Romick points out that Wal-Mart's (WMT) shares were selling for around $ 50/share last fall and, at the time, a multiple of earnings that was roughly 10 and a half. The stock has rallied almost 50% since then.
Romick also said the following about Wal-Mart:
The margins of Walmart don't move very much over time. In fact, of any company I've ever seen, the rate between the high margin and low operating margin is only 50 basis points. We're talking about an earnings growth that should be pretty close to revenue growth.
Then he later added:
...in addition to that we're getting the benefit of share repurchases. In the last decade they bought back more than 20% of the shares outstanding. It's like a creeping buyout for the largest retailer in the world. And we believed that they would continue to use their free cash flow to repurchase their shares at a rate of 2.5% or so per year. That added to our growth in earnings. And then we said they have a dividend on top of that. We added that to what we thought we could earn. By the time we were all done, we had an expected outcome, assuming no change in the P/E – which at the time was a lot lower than it is today – the expected outcome was going to be in a range of returns of anywhere from, call it 7% to 13%. We felt that we'd rather own this than bonds or cash. And we believed that it would be quite likely that we couldn't lose money, over time.
Back in July of 2011, this Michael Santoli article in Barron's pointed out that investors were effectively selling Wal-Mart back to the Walton family.
Related posts:
Selling Wal-Mart Back to the Walton Family: Part 1 - July 2011
Selling Wal-Mart Back to the Walton Family: Part 2 - July 2011
Well, with the shares having rallied so much, each buyback dollar now goes a whole lot less far. So the higher share price makes future buybacks less wealth enhancing for long-term Wal-Mart investors. The fact that the shares having rallied so much also assures that the process of selling of Wal-Mart back to the Walton family has been slowed.
Buying back the shares is now less effective though hardly ineffective. Shareholders, at least those in it for the long haul, benefit as long as shares are bought when selling below per share intrinsic value.*
The shares may no longer be exceptionally cheap, but they're not particularly expensive either at slightly more than 15 times earnings.
Still, the margin of safety that existed last year is no longer there.
Wal-Mart is as good a recent example as any why no long-term investor should cheer when the stock of a great durable franchise, especially those run by capable capital allocators, has rallied.
Adam
Long position in WMT established at much lower than recent market prices
* As long as the company is financially strong, has no other strategic need for corporate cash, and the necessary investments are being made that maintain, or ideally enhance, the size and strength of its economic moat.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
Friday, October 5, 2012
Index Fund Investing
"The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors." - The Motley Fool
From The Little Book of Common Sense Investing by John "Jack" Bogle:
"Of the 355 equity funds in 1970, fully 233 of those funds--almost two thirds--have gone out of business. Only 24 outpaced the market by more than one percentage point a year--one out of every 14. Let's face it: These are terrible odds!."
That excerpt, and others from the book, can be found here.
This recent CNBC article, written by Dan Solin, added this view:
"Nothing gets my attention quicker than the perpetuation of what I call 'the big lie.'
It is usually presented like this: Index based investing is fine if you are not too bright, or lazy and don't have the time to do the research, or if you are willing to settle for "average" returns. Otherwise, you should include actively managed mutual funds..."
"There is no reliable way to predict which actively managed funds are likely to outperform their designated benchmarks in the future."
"Don't be misled by statements indicating there is some way you can identify actively managed funds that will outperform their benchmarks prospectively."
John "Jack" Bogle was once asked this question during an "Ask Jack" Q&A:
Mr. Bogle,
"In researching your work I don't understand one point.
If everything you say is true regarding the relationship of fees to investment performance, where did you come up with the statistic that "passive" investing beats 90% of the active managers?
I would think it would beat 99% of the managers!!!!!!!!"
His reponse:
"Thanks for writing. The percentage of managers outperformed by the broad market index is, well, time-dependent. On a given day, it's likely about 55%; over a year maybe 60-65%, over a decade perhaps 75-80%, and over 50 years...well, there's no data (yet!) on that!
But the probability statistics suggest that over a 50-year period, some 98% of managers will lose to the market index."
He also said this on Page 177 of Bogle on Mutual Funds:
"There is one final problem in selecting a winning manager. According to Richard A. Brealey, '...you probably need at least 25 years of fund performance to distinguish at the 95% significance level whether a manager has above average competence.'"
Some are convinced that the market is so efficient that pretty much no one can outperform. From an interview with Eugene Fama:
Question: "When is the market likely to be inefficient or to misprice securities?"
Fama: "When it's closed..."
I'm no fan of the efficient market hypothesis (EMH), but the advantage of index funds does not come down to, as some seem to believe, how efficient markets happen to be. An index fund investor earns the market's return minus expenses whether the market is generally mispriced or not.
Passively managed index funds are just a convenient way for an investor to capture the return of a broad-based index while incurring minimal costs. Well, at least that's true if the investor doesn't attempt to trade in and out of the index. That way mistakes and frictional costs remain minimized.
Of course, there is plenty of evidence that fund investors tend to do their buying and selling at just the wrong time.*
Unfortunately, too many investors buy when stocks are expensive (when the outlook is rosiest and the good times seem likely to continue, indefinitely). They also tend to sell under the opposite conditions. In a remarkably reliable manner that's what many investors do. As a result, real world returns usually suffer materially compared to what the funds themselves deliver on an absolute and relative basis.
To me, the idea that markets are always efficient is more than a little flawed. Markets aren't necessarily efficient but they don't have to be for index based investing to make sense. Index funds do seem the right choice for many investors. The evidence is too strong to ignore or suggest otherwise.
Yet some, especially those who believe that EMH has few or no flaws, seem to take the wisdom of owning index funds to an extreme. They don't just suggest it is very difficult to do better than a market as a whole. They go further and seem to imply or assert outright it's effectively not possible to do so.
Well, those that think this way are conveniently ignoring things like what Buffett wrote in The Superinvestors of Graham-and-Doddsville and his own long-term track record. The list of investors with a long enough track record of outperformance may be a short one, but it's certainly not non-existent.
Buffett himself has expressed support for the wisdom of owning index funds as a way to gain exposure to equities.
"Most investors, both institutional and individual, will find that the best way to own common stocks (shares) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals." - From the 1996 Berkshire Hathaway Shareholder Letter
Peter Lynch has said much the same:
"Most individual investors would be better off in an index mutual fund." - Peter Lynch
Accumulating shares of a very low expense index fund over time makes a ton of sense for many investors. It's an investing approach that does tend to beat most alternatives. Yet, that reality doesn't logically lead to the conclusion no investors would be better off buying individual equities. It's a matter of knowing one's own limits.
"By periodically investing in an index fund...the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.
On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you." - Warren Buffett in the 1993 Berkshire Hathaway Shareholder Letter
It's not likely, over the long haul, that many investors will do better than low cost index funds. Yet there's a big difference between not possible and not likely.
Also, consider that buying individual stocks adds complexity to the investing process. Added complexity ought to offer a clear benefit or else that complexity is not worth the trouble. Those not realistic about whether they gain a real advantage by owning individual equities will see their returns suffer quite a lot. (Adding complexity with not only no clear benefit, but possibly even reduced returns.)
No matter what kind of investment vehicle is used, it's generally best to buy when the headlines are pretty awful. That's, of course, when the largest margin of safety is likely to be available to investors. Too many investors do just the opposite.
Whatever the right long-term investment vehicle(s) might be (it's necessarily different for each individual) the key is always to avoid the temptation to trade excessively.
Based upon trends in recent decades, it seems fair to say not many market participants will be easily convinced they should minimize their trading activities.
Adam
* Unfortunately, the returns investors in mutual funds achieve in the real world ends up being even worse than the funds themselves. That's not the fault of the funds. It's the result of investor behavior. Here's a good explanation by Lou Harvey, president of DALBAR, back in 2009: "...investor returns lag what performance reports and prospectuses would lead one to believe is achievable. While those returns are, in fact, theoretically achievable, the reality is that investors are not rational, and make buy and sell decisions at the worst possible moments," he said. Professional money managers certainly do, on average, underperform the S&P 500 index over the long haul. According to Vanguard founder John Bogle, from 1984 to 2002 the average mutual fund delivered a 9.3% annual return compared to the S&P 500's return of 12.2% a year. Even worse, during that same period the average fund investor, according to DALBAR, earned just 2.6% a year.
(The average fund investor does much worse largely due to ill-timed buy/sell decisions and fund selection. In other words, a timing penalty and a selection penalty. Bogle adds why he thinks the DALBAR study might actually overstate the annual returns. See his explanation under the Is the DALBAR Study Accurate? section for more details.)
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
From The Little Book of Common Sense Investing by John "Jack" Bogle:
"Of the 355 equity funds in 1970, fully 233 of those funds--almost two thirds--have gone out of business. Only 24 outpaced the market by more than one percentage point a year--one out of every 14. Let's face it: These are terrible odds!."
That excerpt, and others from the book, can be found here.
This recent CNBC article, written by Dan Solin, added this view:
"Nothing gets my attention quicker than the perpetuation of what I call 'the big lie.'
It is usually presented like this: Index based investing is fine if you are not too bright, or lazy and don't have the time to do the research, or if you are willing to settle for "average" returns. Otherwise, you should include actively managed mutual funds..."
The evidence more than just suggests that quite the opposite is true. Solin later added:
"There is no reliable way to predict which actively managed funds are likely to outperform their designated benchmarks in the future."
So...
"Don't be misled by statements indicating there is some way you can identify actively managed funds that will outperform their benchmarks prospectively."
John "Jack" Bogle was once asked this question during an "Ask Jack" Q&A:
Mr. Bogle,
"In researching your work I don't understand one point.
If everything you say is true regarding the relationship of fees to investment performance, where did you come up with the statistic that "passive" investing beats 90% of the active managers?
I would think it would beat 99% of the managers!!!!!!!!"
His reponse:
"Thanks for writing. The percentage of managers outperformed by the broad market index is, well, time-dependent. On a given day, it's likely about 55%; over a year maybe 60-65%, over a decade perhaps 75-80%, and over 50 years...well, there's no data (yet!) on that!
But the probability statistics suggest that over a 50-year period, some 98% of managers will lose to the market index."
He also said this on Page 177 of Bogle on Mutual Funds:
"There is one final problem in selecting a winning manager. According to Richard A. Brealey, '...you probably need at least 25 years of fund performance to distinguish at the 95% significance level whether a manager has above average competence.'"
Some are convinced that the market is so efficient that pretty much no one can outperform. From an interview with Eugene Fama:
Question: "When is the market likely to be inefficient or to misprice securities?"
Fama: "When it's closed..."
I'm no fan of the efficient market hypothesis (EMH), but the advantage of index funds does not come down to, as some seem to believe, how efficient markets happen to be. An index fund investor earns the market's return minus expenses whether the market is generally mispriced or not.
Passively managed index funds are just a convenient way for an investor to capture the return of a broad-based index while incurring minimal costs. Well, at least that's true if the investor doesn't attempt to trade in and out of the index. That way mistakes and frictional costs remain minimized.
Of course, there is plenty of evidence that fund investors tend to do their buying and selling at just the wrong time.*
Unfortunately, too many investors buy when stocks are expensive (when the outlook is rosiest and the good times seem likely to continue, indefinitely). They also tend to sell under the opposite conditions. In a remarkably reliable manner that's what many investors do. As a result, real world returns usually suffer materially compared to what the funds themselves deliver on an absolute and relative basis.
To me, the idea that markets are always efficient is more than a little flawed. Markets aren't necessarily efficient but they don't have to be for index based investing to make sense. Index funds do seem the right choice for many investors. The evidence is too strong to ignore or suggest otherwise.
Yet some, especially those who believe that EMH has few or no flaws, seem to take the wisdom of owning index funds to an extreme. They don't just suggest it is very difficult to do better than a market as a whole. They go further and seem to imply or assert outright it's effectively not possible to do so.
Well, those that think this way are conveniently ignoring things like what Buffett wrote in The Superinvestors of Graham-and-Doddsville and his own long-term track record. The list of investors with a long enough track record of outperformance may be a short one, but it's certainly not non-existent.
Buffett himself has expressed support for the wisdom of owning index funds as a way to gain exposure to equities.
"Most investors, both institutional and individual, will find that the best way to own common stocks (shares) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals." - From the 1996 Berkshire Hathaway Shareholder Letter
Peter Lynch has said much the same:
"Most individual investors would be better off in an index mutual fund." - Peter Lynch
Accumulating shares of a very low expense index fund over time makes a ton of sense for many investors. It's an investing approach that does tend to beat most alternatives. Yet, that reality doesn't logically lead to the conclusion no investors would be better off buying individual equities. It's a matter of knowing one's own limits.
"By periodically investing in an index fund...the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.
On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you." - Warren Buffett in the 1993 Berkshire Hathaway Shareholder Letter
It's not likely, over the long haul, that many investors will do better than low cost index funds. Yet there's a big difference between not possible and not likely.
Also, consider that buying individual stocks adds complexity to the investing process. Added complexity ought to offer a clear benefit or else that complexity is not worth the trouble. Those not realistic about whether they gain a real advantage by owning individual equities will see their returns suffer quite a lot. (Adding complexity with not only no clear benefit, but possibly even reduced returns.)
No matter what kind of investment vehicle is used, it's generally best to buy when the headlines are pretty awful. That's, of course, when the largest margin of safety is likely to be available to investors. Too many investors do just the opposite.
Whatever the right long-term investment vehicle(s) might be (it's necessarily different for each individual) the key is always to avoid the temptation to trade excessively.
Based upon trends in recent decades, it seems fair to say not many market participants will be easily convinced they should minimize their trading activities.
Adam
* Unfortunately, the returns investors in mutual funds achieve in the real world ends up being even worse than the funds themselves. That's not the fault of the funds. It's the result of investor behavior. Here's a good explanation by Lou Harvey, president of DALBAR, back in 2009: "...investor returns lag what performance reports and prospectuses would lead one to believe is achievable. While those returns are, in fact, theoretically achievable, the reality is that investors are not rational, and make buy and sell decisions at the worst possible moments," he said. Professional money managers certainly do, on average, underperform the S&P 500 index over the long haul. According to Vanguard founder John Bogle, from 1984 to 2002 the average mutual fund delivered a 9.3% annual return compared to the S&P 500's return of 12.2% a year. Even worse, during that same period the average fund investor, according to DALBAR, earned just 2.6% a year.
(The average fund investor does much worse largely due to ill-timed buy/sell decisions and fund selection. In other words, a timing penalty and a selection penalty. Bogle adds why he thinks the DALBAR study might actually overstate the annual returns. See his explanation under the Is the DALBAR Study Accurate? section for more details.)
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Monday, October 1, 2012
Barron's Talks With David Winters
David Winters, founder of the Wintergreen Fund (WGRNX), was highlighted in a Barron's article this past weekend. From the article:
If you want to know what stocks David J. Winters likes, you can pore over his 13F filings or just look at his miniature train set.
It turns out Winters has a train set that has stops along the way to "honor" some of the positions he owns. For example there is:
...a chocolate factory whose smokestacks spew a sweet smell to reflect his Nestlé stake.
I suppose what makes this easier to do is the relatively low turnover of the fund.
(Otherwise, Winters would constantly be modifying that train set. Then again, all the tearing down/re-building is probably good fun if miniature trains happens to be your hobby.)
Nestlé is highlighted as the kind of stock that "epitomizes" what David Winters likes to own.
Top Ten Positions*
Jardine Matheson
British American Tobacco
Altria
Berkshire Hathaway
Swatch Group AG
Imperial Tobacco
Franklin Resources
Philp Morris Intl
Genting Malaysia
MasterCard
Source: Morningstar
These positions make up roughly 49 percent of the portfolio.
Nearly 20 percent of the portfolio is in shares of tobacco-related businesses. Tobacco businesses, at least those with strong brands and distribution, tend to produce above average returns. Understandably, not everyone likes to invest in an enterprise that has anything to do with selling tobacco products.
The low turnover approach and the many high quality businesses in the portfolio is impressive but it's worth noting that the expense ratio of the fund currently stands at 1.86 percent. Morningstar, not surprisingly, considers the fee level of this fund to be high.
The fees matter but it's good to see someone that primarily emphasizes producing returns via the partial ownership of great businesses (as their intrinsic value increases over time).
An emphasis on long-term effects (and the magic of compounding) not price action.
In my book his style of investing has real advantages. Well, especially when put up against the varied attempts by some market participants to consistently try to jump into and out of the "right" stocks and/or sectors (while somehow not making material mistakes and racking up huge transaction costs) at just the correct time.
Adam
* A number of the international stocks held in this fund have their primary listing on a stock exchange outside the United States. Some of these can be purchased via American Depository Receipts (ADR) on a U.S. exchange or the over-the-counter (OTC) market. The purchase of foreign ordinaries OTC and, of course, directly on a foreign exchange are also options. Some of these options create varying degrees of liquidity, informational, currency exposure, and many other challenges for the investor to say the least.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
If you want to know what stocks David J. Winters likes, you can pore over his 13F filings or just look at his miniature train set.
It turns out Winters has a train set that has stops along the way to "honor" some of the positions he owns. For example there is:
...a chocolate factory whose smokestacks spew a sweet smell to reflect his Nestlé stake.
I suppose what makes this easier to do is the relatively low turnover of the fund.
(Otherwise, Winters would constantly be modifying that train set. Then again, all the tearing down/re-building is probably good fun if miniature trains happens to be your hobby.)
Nestlé is highlighted as the kind of stock that "epitomizes" what David Winters likes to own.
Top Ten Positions*
Jardine Matheson
British American Tobacco
Altria
Berkshire Hathaway
Swatch Group AG
Imperial Tobacco
Franklin Resources
Philp Morris Intl
Genting Malaysia
MasterCard
Source: Morningstar
These positions make up roughly 49 percent of the portfolio.
Nearly 20 percent of the portfolio is in shares of tobacco-related businesses. Tobacco businesses, at least those with strong brands and distribution, tend to produce above average returns. Understandably, not everyone likes to invest in an enterprise that has anything to do with selling tobacco products.
The low turnover approach and the many high quality businesses in the portfolio is impressive but it's worth noting that the expense ratio of the fund currently stands at 1.86 percent. Morningstar, not surprisingly, considers the fee level of this fund to be high.
The fees matter but it's good to see someone that primarily emphasizes producing returns via the partial ownership of great businesses (as their intrinsic value increases over time).
An emphasis on long-term effects (and the magic of compounding) not price action.
In my book his style of investing has real advantages. Well, especially when put up against the varied attempts by some market participants to consistently try to jump into and out of the "right" stocks and/or sectors (while somehow not making material mistakes and racking up huge transaction costs) at just the correct time.
Adam
* A number of the international stocks held in this fund have their primary listing on a stock exchange outside the United States. Some of these can be purchased via American Depository Receipts (ADR) on a U.S. exchange or the over-the-counter (OTC) market. The purchase of foreign ordinaries OTC and, of course, directly on a foreign exchange are also options. Some of these options create varying degrees of liquidity, informational, currency exposure, and many other challenges for the investor to say the least.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
Friday, September 21, 2012
Mason Hawkins: Competitively Advantaged Businesses Selling at a Discount to Value
Mason Hawkins, chairman and CEO of Southeastern Asset Management, the advisor to Longleaf Partner Funds, recently answered questions from GuruFocus readers.
Here is a quick summary of just a few of the noteworthy things he had to say:
- They look for financially strong, competitively entrenched/advantaged businesses selling at a significant discount to intrinsic value.
- They like to limit their portfolio to 20 investments and consider that number of securities adequate diversification. In fact, Mason Hawkins says statistical evidence shows there is little incremental benefit of additional holdings beyond 14 different stocks in different industries.
- They like owning businesses run by management that is competent both operationally and in terms of capital allocation.
Check out the Q&A in its entirety.
An excerpt:
"We view quality through the lens of a business owner. We want to own companies with the following qualitative characteristics. 1) Unique assets having distinct and sustainable competitive advantages that enable pricing power, long-term earnings growth, and stable or increasing profit margins. 2) High returns on capital and on equity as measured by free cash flow rather than earnings. 3) Capable management teams with operating skills, capital allocation prowess, and properly aligned, ownership-based incentives."
Hawkins also said that that their long-term horizon allows them to buy quality businesses at large discounts to value when earnings, for any number of reasons, happen to be reduced short-term. It's not a small advantage to be thinking a number of years out when so many market participants are focused on very near-term price dynamics.
In The Superinvestors of Graham-and-Doddsville, Warren Buffett made the following point about the "intellectual origin" of "superinvestors":*
"In addition to geographical origins, there can be what I call an intellectual origin."
He then adds that, in the world of investing, you'll find that a disproportionate number of successful investors...
"...came from a very small intellectual village that could be called Graham-and-Doddsville."
Buffett considers Ben Graham the "intellectual patriarch" with each successful investor applying or building upon the the theory in his own manner. Yet, while each may put the fundamental ideas of Graham-and-Dodd to work in somewhat different ways, they have a crucial thing in common:
"The patriarch has merely set forth the intellectual theory...but each student has decided on his own manner of applying the theory.
The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market."
Many market participants expend lots of energy figuring out (or attempting to) what direction a stock price might move in the near-term (or even the intermediate-term) and try to profit from it. It's fine and even necessary that some participants are involved in that sort of thing (though I do think the proportion who speculative versus invest longer term has become a bit extreme in favor of speculation).
The emphasis of a speculator is the correct judgment of relatively near-term price action.
The emphasis of an investor is judging value and how compounding effects will impact that value -- generally over a much longer time horizon -- then paying a price now that will produce a good result if that judgment turns out to be sound.
The price paid also must provide a margin of safety for the unforeseen and unforeseeable.
I think it is safe to say that those who primarily focus on making correct judgments about price action, especially those with an average holding period shorter than 3 to 5 years, are probably less influenced by Graham and Dodd and the many investors that have since built upon their theoretical framework.
There are exceptions, of course, but discrepancies between business value and price mostly need to play out over many years. Near-term price action are just votes that, in the near-term, reveal not much about how the price/value discrepancy will be resolved.
The hard work for those heavily influenced by Graham and Dodd is in figuring out what something is worth not trying to figure out what the stock will do. The stock will generally do just fine in the long run if business value was judged well.
Buffett later went on to say...
"Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value."
Well, Mason Hawkins and his team seem also very much focused on the variables of price and value. In one of his answers, Hawkins mentioned that they have...
"...a master list of appraisals for 600+ good businesses that we would like to own at the right price."
That's a rather expansive "master list" yet they still end up with a nicely concentrated portfolio when it's all said and done. In my view, owning shares in fewer businesses for a very long time means that big surprises become less likely over time as familiarity with the business and industry grows. So, as a result, there's less chance of getting the valuation very wrong. So my own preference happens to be owning fewer quality businesses for a very long time.***
While that may work for me it is just one of many ways to go about it.
Searching for discrepancies between price and value is the common theme but the specific approach for each investor is necessarily not one size fits all.
There's a wide range of effective ways to get results. For example, Walter Schloss, one of the 'superinvestors", often had a rather large number of stocks in his portfolio. His style is very much unlike Warren Buffett's and Charlie Munger's strong preference for portfolio concentration. It's not unusual for the Berkshire Hathaway (BRKa) equity portfolio to have 60-70 percent and, at times, even more allocated to just five stocks.
Like anything else, the best approach is consistent with individual limits and capabilities, realistically assessed, instead of wishful thinking or overconfidence.
"The first principle is that you must not fool yourself, and you are the easiest person to fool." - Richard Feynman
Some might prefer more or less diversification.
Others may be a bit more or less active.
Maybe a particular knowledge or expertise lends itself to investing in certain types of businesses or industries.
The list goes on.
There are many variations always come back to the common theme of a focus on two variables: price and value.
Adam
* The "superinvestors" mentioned by Warren Buffett include: Walter Scloss, Tom Knapp (Tweedy Browne), Ed Anderson (Tweedy Browne), Bill Ruane (Sequoia Fund) , Rick Guerin, Stan Perlmeter and, of course, Charlie Munger (plus two funds managed by multiple managers).
** That doesn't mean those participants who may be generally more price action conscious don't, at times, use valuation as part of the justification for their trades. Market participants of all kinds draw from a variety of influences.
*** It's an approach that starts and ends with recognition of my own limits. Lower portfolio turnover, higher portfolio concentration, and generating returns primarily from increases to per share intrinsic value of the businesses themselves over time is what has worked best. Beyond the benefits of lower frictional costs, less moves means fewer mistakes. So, as a result, I buy the shares of a limited number of high quality businesses -- those I find understandable that are run by capable owner-oriented executives -- whenever they sell at a plain discount to my estimate of value. From there it is mostly about waiting as long as necessary for the right price then, when the price is right, buying a meaningful amount with the intent to hold long-term.
The Superinvestors of Graham-and-Doddsville
Here is a quick summary of just a few of the noteworthy things he had to say:
- They look for financially strong, competitively entrenched/advantaged businesses selling at a significant discount to intrinsic value.
- They like to limit their portfolio to 20 investments and consider that number of securities adequate diversification. In fact, Mason Hawkins says statistical evidence shows there is little incremental benefit of additional holdings beyond 14 different stocks in different industries.
- They like owning businesses run by management that is competent both operationally and in terms of capital allocation.
Check out the Q&A in its entirety.
An excerpt:
"We view quality through the lens of a business owner. We want to own companies with the following qualitative characteristics. 1) Unique assets having distinct and sustainable competitive advantages that enable pricing power, long-term earnings growth, and stable or increasing profit margins. 2) High returns on capital and on equity as measured by free cash flow rather than earnings. 3) Capable management teams with operating skills, capital allocation prowess, and properly aligned, ownership-based incentives."
Hawkins also said that that their long-term horizon allows them to buy quality businesses at large discounts to value when earnings, for any number of reasons, happen to be reduced short-term. It's not a small advantage to be thinking a number of years out when so many market participants are focused on very near-term price dynamics.
In The Superinvestors of Graham-and-Doddsville, Warren Buffett made the following point about the "intellectual origin" of "superinvestors":*
"In addition to geographical origins, there can be what I call an intellectual origin."
He then adds that, in the world of investing, you'll find that a disproportionate number of successful investors...
"...came from a very small intellectual village that could be called Graham-and-Doddsville."
Buffett considers Ben Graham the "intellectual patriarch" with each successful investor applying or building upon the the theory in his own manner. Yet, while each may put the fundamental ideas of Graham-and-Dodd to work in somewhat different ways, they have a crucial thing in common:
"The patriarch has merely set forth the intellectual theory...but each student has decided on his own manner of applying the theory.
The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market."
Many market participants expend lots of energy figuring out (or attempting to) what direction a stock price might move in the near-term (or even the intermediate-term) and try to profit from it. It's fine and even necessary that some participants are involved in that sort of thing (though I do think the proportion who speculative versus invest longer term has become a bit extreme in favor of speculation).
The emphasis of a speculator is the correct judgment of relatively near-term price action.
The emphasis of an investor is judging value and how compounding effects will impact that value -- generally over a much longer time horizon -- then paying a price now that will produce a good result if that judgment turns out to be sound.
The price paid also must provide a margin of safety for the unforeseen and unforeseeable.
I think it is safe to say that those who primarily focus on making correct judgments about price action, especially those with an average holding period shorter than 3 to 5 years, are probably less influenced by Graham and Dodd and the many investors that have since built upon their theoretical framework.
There are exceptions, of course, but discrepancies between business value and price mostly need to play out over many years. Near-term price action are just votes that, in the near-term, reveal not much about how the price/value discrepancy will be resolved.
The hard work for those heavily influenced by Graham and Dodd is in figuring out what something is worth not trying to figure out what the stock will do. The stock will generally do just fine in the long run if business value was judged well.
Buffett later went on to say...
"Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value."
Well, Mason Hawkins and his team seem also very much focused on the variables of price and value. In one of his answers, Hawkins mentioned that they have...
"...a master list of appraisals for 600+ good businesses that we would like to own at the right price."
That's a rather expansive "master list" yet they still end up with a nicely concentrated portfolio when it's all said and done. In my view, owning shares in fewer businesses for a very long time means that big surprises become less likely over time as familiarity with the business and industry grows. So, as a result, there's less chance of getting the valuation very wrong. So my own preference happens to be owning fewer quality businesses for a very long time.***
While that may work for me it is just one of many ways to go about it.
Searching for discrepancies between price and value is the common theme but the specific approach for each investor is necessarily not one size fits all.
There's a wide range of effective ways to get results. For example, Walter Schloss, one of the 'superinvestors", often had a rather large number of stocks in his portfolio. His style is very much unlike Warren Buffett's and Charlie Munger's strong preference for portfolio concentration. It's not unusual for the Berkshire Hathaway (BRKa) equity portfolio to have 60-70 percent and, at times, even more allocated to just five stocks.
Like anything else, the best approach is consistent with individual limits and capabilities, realistically assessed, instead of wishful thinking or overconfidence.
"The first principle is that you must not fool yourself, and you are the easiest person to fool." - Richard Feynman
Some might prefer more or less diversification.
Others may be a bit more or less active.
Maybe a particular knowledge or expertise lends itself to investing in certain types of businesses or industries.
The list goes on.
There are many variations always come back to the common theme of a focus on two variables: price and value.
Adam
* The "superinvestors" mentioned by Warren Buffett include: Walter Scloss, Tom Knapp (Tweedy Browne), Ed Anderson (Tweedy Browne), Bill Ruane (Sequoia Fund) , Rick Guerin, Stan Perlmeter and, of course, Charlie Munger (plus two funds managed by multiple managers).
** That doesn't mean those participants who may be generally more price action conscious don't, at times, use valuation as part of the justification for their trades. Market participants of all kinds draw from a variety of influences.
*** It's an approach that starts and ends with recognition of my own limits. Lower portfolio turnover, higher portfolio concentration, and generating returns primarily from increases to per share intrinsic value of the businesses themselves over time is what has worked best. Beyond the benefits of lower frictional costs, less moves means fewer mistakes. So, as a result, I buy the shares of a limited number of high quality businesses -- those I find understandable that are run by capable owner-oriented executives -- whenever they sell at a plain discount to my estimate of value. From there it is mostly about waiting as long as necessary for the right price then, when the price is right, buying a meaningful amount with the intent to hold long-term.
The Superinvestors of Graham-and-Doddsville
Friday, April 27, 2012
Yacktman 1st Quarter 2012 Update
Below is the 10-year performance through 03/31/12 of the funds that Donald Yacktman and his team manage:
The Yacktman Fund (YACKX) had a cumulative 10-year return of 180.24%.*
The Yacktman Focused Fund (YAFFX) did even better returning a cumulative 197.09% over the past 10 years.
For a comparison, the S&P 500 was up 49.72% over the same time frame.
Approximately 41 percent of the Yacktman Focused Fund portfolio is in the top 5 stocks.
Approximately 34 percent of the Yacktman Fund portfolio is in the top 5 stocks.
From their 1st Quarter 2012 Letter:
Consumer Staples
We think the combination of predictability, quality, and valuation of companies like Procter & Gamble, PepsiCo, Clorox, and Coca Cola is especially important in a time when we perceive many significant risks in the world.
Old Tech
Microsoft [was] the top contributor to fund results in the first quarter, appreciating more than 20%, though we believe the stock remains inexpensive at less than 10 times our expectation of 2012 earnings when adjusting for net of the cash on the balance sheet. While HP struggled, we think the shares are remarkably inexpensive and the management team has improved significantly since Meg Whitman became CEO.
In this Barron's interview from a little over a year ago, Donald Yacktman had this to say about the investing business:
This business boils down to what you buy and what you pay for it. The market level is incidental to us.
In the interview, he also talks about how inexpensive high-quality companies are compared to what he's seen over the years.
Unfortunately some (though certainly not all) of the high-quality companies he is referring to are much more expensive now.
I've mentioned this before, but it's worth noting again that the annual turnover of the portfolios managed by Yacktman and his team is typically under 10 percent.
In fact, they are often well under that 10 percent number.
According to Morningstar, lately it has been more like 2 to 3 percent.
Impressively low.
It's always good to see someone producing above average returns by paying the right price for sound businesses that compound over time in value.
I'll take that approach over some special aptitude for trading any day.
Adam
* From the letter: The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost. The current performance may be higher or lower than the performance data quoted.
Established long positions in PG, PEP, KO, and MSFT at much lower prices. Have no intention to buy any of these near current prices. Also, have established a position in HPQ near its recent price.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
The Yacktman Fund (YACKX) had a cumulative 10-year return of 180.24%.*
The Yacktman Focused Fund (YAFFX) did even better returning a cumulative 197.09% over the past 10 years.
For a comparison, the S&P 500 was up 49.72% over the same time frame.
These funds are very similar but the more concentrated of the two funds, as the name suggests, is the Yacktman Focused Fund.
Top 5 Holdings of The Yacktman Focused Fund
1 Procter & Gamble (PG)
4 Microsoft (MSFT)
5 Sysco (SYY)
Approximately 41 percent of the Yacktman Focused Fund portfolio is in the top 5 stocks.
Approximately 34 percent of the Yacktman Fund portfolio is in the top 5 stocks.
From their 1st Quarter 2012 Letter:
Consumer Staples
We think the combination of predictability, quality, and valuation of companies like Procter & Gamble, PepsiCo, Clorox, and Coca Cola is especially important in a time when we perceive many significant risks in the world.
Old Tech
Microsoft [was] the top contributor to fund results in the first quarter, appreciating more than 20%, though we believe the stock remains inexpensive at less than 10 times our expectation of 2012 earnings when adjusting for net of the cash on the balance sheet. While HP struggled, we think the shares are remarkably inexpensive and the management team has improved significantly since Meg Whitman became CEO.
In this Barron's interview from a little over a year ago, Donald Yacktman had this to say about the investing business:
This business boils down to what you buy and what you pay for it. The market level is incidental to us.
In the interview, he also talks about how inexpensive high-quality companies are compared to what he's seen over the years.
Unfortunately some (though certainly not all) of the high-quality companies he is referring to are much more expensive now.
I've mentioned this before, but it's worth noting again that the annual turnover of the portfolios managed by Yacktman and his team is typically under 10 percent.
In fact, they are often well under that 10 percent number.
According to Morningstar, lately it has been more like 2 to 3 percent.
Impressively low.
It's always good to see someone producing above average returns by paying the right price for sound businesses that compound over time in value.
I'll take that approach over some special aptitude for trading any day.
Adam
* From the letter: The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost. The current performance may be higher or lower than the performance data quoted.
Established long positions in PG, PEP, KO, and MSFT at much lower prices. Have no intention to buy any of these near current prices. Also, have established a position in HPQ near its recent price.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
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