“I put instant coffee in a microwave oven and almost went back in time.” –Steven Wright
A reader who blogs at http://valueprax.wordpress.com/2012/02/15/wall-street-mesmerized-perplexed-by-400-man-but-why-valueinvesting/ sent me this interesting article. The lessons here are simple, you have huge advantages over traditional money managers if you invest independently. You have to be patient and selective. Pedigree does not matter but clear, rational and independent thinking does matter.
Focus on understanding the businesses behind your stocks and understand the businesses from the CUSTOMERS’ perspective.
The 400% Man
How a college dropout at a tiny Utah fund beat Wall Street, and why most managers are scared to copy him.
By BRETT ARENDS (abbreviated)
On a fall day in 2010, half a dozen wealthy investors and portfolio managers converged on an office in midtown Manhattan. These were serious Wall Street moneymen; in aggregate, they handled more than a billion dollars. They had access to the most exclusive hedge funds and investment partnerships and often rubbed shoulders with the elite of New York, Greenwich and Palm Beach.
But on this day, they had turned out to meet an unknown college dropout from Utah — and to find out how he was knocking them all into a cocked hat.
The unknown, Allan Mecham, had been posting mind-bogglingly high returns for a decade at a tiny private-investment fund called Arlington Value Management, and the Wall Streeters were considering jumping on board. For nearly two hours, they peppered him with questions. Where did he get his business background? I read a lot, he replied. Did he have an MBA? No. I dropped out of college. Did he have a clever computer model or algorithm? No, he replied. I don’t use spreadsheets much. Could the group look at some of his investment analyses? I don’t have any of those either, he said. It’s all in my head. The investors were baffled. Well, could he at least tell them where he thought the stock market was headed? “I don’t know,” Mecham replied.
Money pros who know him say none of Allan Mecham’s investing tactics are astonishingly difficult — but for various reasons, most investors don’t use them.
- Ignore the economy..
- Don’t diversify.
- Don’t sweat the spreadsheets.
- Think decades, not quarters.
- Don’t just do something. Stand there!
His investment approach will be familiar to anyone who has been even a casual follower of Buffett. Mecham looks for businesses with great long-term prospects, great management, strong cash flow and big defensive “moats,” or barriers to entry for potential competitors. And he stresses the importance of sitting still and doing nothing. “Activity is the enemy of returns,” says Mecham. “If I find two new ideas a year, that’s phenomenal.” Two ideas a year adds up to a pretty small portfolio — Mecham typically owns between six and 12 stocks. (That’s one thing that sets him apart from mutual fund managers; because of industry regulations on diversification, traditional funds typically have to have at least 15 holdings.)