Dear Friend,
If you ask the average person what it takes to be a successful investor, I am sure these two traits would be among the most frequent responses: hard work and intelligence.
I, too, have had the image in my mind of a successful investor – someone who wakes up at the crack of dawn to check the overseas markets…and who juggles a desk filled with computer screens tracking every wiggle in the markets.
But over the past several years, that image has changed. I have read about and have met many successful value investors, and they are a far cry from the image most people have in their heads.
Sure, hard work and intelligence are very important to becoming a success. But there are several other traits that one needs to possess as well, the most important of which is the discipline to stay the course no matter how bad things look over the short term.
Discipline Rewarded – The Rise…Fall…
and then Rise Again of Don Yacktman
I don’t think any value manager was more out of favor than Don Yacktman, president and CIO of Yacktman Asset Management Co. and co-manager of the Yacktman Fund (YACKX), in 1999. Don was named Morningstar Inc.’s Portfolio Manager of the Year in 1991, but a few years later, in 1999, his fund was one of the worst performers in its category, falling close to 17 percent while the S&P was up 19.5 percent – a difference of more than 36%!
His board of directors disagreed with his value strategy so strongly that new directors were installed in the fourth quarter of 1998.
Don is a very disciplined man. Even though he saw assets in his funds plummet – and was mocked in the media for holding onto stocks that kept going lower – he did not stray from a philosophy of buying stocks trading at a discount to their underlying value.
His discipline was rewarded as the dot-com bubble burst and the stocks in his portfolio began to soar. In fact, all of the fund’s 10-year rolling performance has exceeded the S&P 500 index.
And just last month, Don was recognized for his great work once again as he was nominated by Morningstar as one of the finalists for their Fund Manager of the Decade award.
As Don’s discipline has shown, value investors are truly a breed apart.
A few months ago, I had the opportunity to interview Don Yacktman – and in light of his nomination for the Fund Manager of the Decade award, I wanted to share with you some of his valuable insight…and some examples of his most successful long-term holdings.
Enjoy…
What Don Yacktman Looks For in His Long-Term Holdings
Charles Mizrahi: One of the types of companies you like to invest in are businesses that are high quality and annuity like, that continue to generate huge amounts of cash flow and rack up earnings year after year. Could you give us a few examples of some of your long-term holdings?
Donald Yacktman: Sure. Coca-Cola (NYSE:KO) would be a classic because it’s one of our top holdings. And here’s a company where our purchase cost is less than half of where it once sold. It sold as high as $89 a share back in 1998 and almost every year they have had rising earnings and raising their dividends. Our average cost on Coke in the Yacktman Fund is about $41 and about $42 in the Yacktman Focus Fund (YAFFX).
The stock is currently trading at our purchase price now (Editor’s Note: This interview was conducted in March 2009…since then Coca-Cola shares have risen to more than $56 per share as of 12/18/09), but when you look at where it’s been and what this company is capable of over a long period of time, it’s almost like a press that prints out money simply because they have very high margins. 80% of their earnings are outside of the United States and they continue to have unit growth. Ther are really a very attractive business.
Charles Mizrahi: So on one hand you have high quality businesses like Coca-Cola and on the other hand, looking at your portfolio, you have a nice position in AmeriCredit (NYSE: ACF)…
Donald Yacktman: Yes. AmeriCredit’s a totally different concept. It’s similar but you get there a lot differently. In the case of AmeriCredit, it’s a financial and rarely do we put a lot of money in financials because they tend to be black boxes –we don’t know what’s in them. In other words you don’t know what the quality of the assets are, and you don’t know what kind of problems they have. While Americredit sounds incredibly risky because they make subprime auto loans on used cars, is not nearly as risky as first perceived. There are several reasons for that.
For one thing the average loan amount is probably $15,000. And keep in mind they are lending to people that tend to live in apartments, so they don’t have houses and huge mortgage obligations. In today’s market you really need a car to get around and you can’t very well drive your house to work. They changed the bankruptcy laws making it much more difficult to default on an auto loan. Plus about 40% of the loan is paid back in the first year, which reduces principal and pays off interest.
It’s much better than a credit card company for instance. In a credit card company when the credit card holder gets into financial trouble they tend to run up their balance. In the case of AmeriCredit they doing the opposite — they’re running down their balance. Also the company has the car as collateral and typically they’ll get back 40% to 45% when an automobile is repossessed.
So it’s a lot different than most financial companies. In addition, AmeriCredit is giving enormous amounts of data [to shareholders]. But the other thing, from a valuation standpoint, is this company has something in the neighborhood of a $15 book value. What’s happening now is because they can’t securitize loans, they’re really in a kind of a runoff position. But even at a worst case scenario the company is at least worth their book value.
In addition to that, you’ve got two major holders who own 50% of the company–Leucadia National Corp. (NYSE:LUK) and Fairholme Funds (FAIRX). Leucadia has been in the business before – their cost basis on Americredit when they bought the stock last year is around $12 to $13 a share. We’ve actually owned AmeriCredit for a period of time over the years when we bought it low and sold it high. Back in ‘03 we bought it at about $2 a share and sold out a lot of it when it got into the $30s. Our average cost now when we repurchased it is about $7 per share.
(Editor’s Note: Since this interview was conducted back in March, shares of AmeriCredit have soared to more than $18!)
Charles Mizrahi: One of your long-term holdings is Proctor & Gamble (NYSE:PG)…
Donald Yacktman: P&G, again is very much like Coke or PepsiCo (NYSE:PEP). You get a great business that has high market share, high return on assets, and is still growing units while selling more products internationally. Again it’s another one of those “printing press” type of businesses. If the Fed isn’t able to reverse gears fast enough on all the money that’s coming into the system, the economy could be facing a lot of inflation. And it will be the Coke, Pepsi, and P&Gs of the world that will benefit by having the ability to raise prices and do very well in almost any type of economic environment.
Where Don Yacktman Has His Money Right Now
I’ll have more of my interview with Don Yacktman in next week’s issue – including how he’s used Benjamin Graham’s approach to achieve success…and how he rebounded from his 1999 performance to again be recognized as one of the top fund managers in the business.
It’s important for all value investors to learn as much as possible from the true “masters” of the industry…and Don Yacktman is certainly a master, as Morningstar’s recent accolade has confirmed.
But as a final value lesson for this week, I’ll leave you with The Yacktman Fund’s Top 10 Holdings as of 9/30/09.
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Sincerely,
Charles Mizrahi, Editor
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