Wednesday, February 15, 2012

The 400% man

SmartMoney has a must-read article on Allan Mecham, a man we had never come across before. Mecham, a 34 year old college drop out from Utah, runs a private $80M investment firm called Arlington Value Management that has returned 400% percent over the last 12 years from a concentrated equity portfolio with low turnover (1-2 new ideas a year). He started his firm at the ripe old age of 22, and like Buffett, tries to find businesses with quality management, strong cash flow, and wide moats. His positions include Watsco, a $2B distributor of air-conditioning equipment and supplies, and Heico which makes components for jet engines.

On frequent trading: 
"Activity is the enemy of returns. If I find two new ideas a year, that's phenomenal."
"It's laughable to think that in this competitive world, you're going to find brilliant ideas every day. The world's just not set up that way."

On herd behavior:
Mecham says one of his big advantages over Wall Street managers is that he is free to ignore "noise" -- like the quarterly obsession over short-term earnings... The first question he asks of any investment, he says, is where it will be in 10 years or more: "You have to have a high degree of confidence in the cash flows over the next decade."

Takeaways for investors
Ignore the economy. Where is the economy going next quarter? Where is the S&P headed? Mecham says he ignores those issues; instead, he looks for stable, defensive businesses that can thrive whenever bad times come.

Don't diversify. Most mutual funds own dozens or even hundreds of stocks. Smaller funds and private-investment funds can rely on just six or eight stocks.

Don't sweat the spreadsheets. Many Wall Street analysts build elaborate financial analyses to calculate a company's earnings growth and other patterns. But some say it's more productive to use that time trying to understand a company and its industry -- the management, the competition, the customers and so on.

Think decades, not quarters. Shareholders and managers tend to focus on companies' announcements of quarterly or annual earnings, and whether they beat or miss analysts' estimates, but it's more useful to try to figure out where a company will be in a decade or more.

Don't just do something. Stand there! One of the toughest things for investors to do is to sit still but most of the time inactivity is the right longer-term move.

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