SEARCH PROCESS: Wedgewood Partners

WEDGEWOOD PROCESS

The investment management business is unlike most businesses in that the “average” product (in this case, investment returns) is unsatisfactory from the consumers point of view. Managers who even outperform their respective peer groups could well be an unsatisfactory experience as well for the client if returns are less than the market index.

Our respect for index investing and investing as business owners has led us to two aspects of our approach that are quite different than our competitors. To outperform an index, we believe that our portfolios must be constructed as different from an index as possible. Thinking and acting like business owners reduces our interest to those few businesses which are superior. Both of these views lead to our focused (concentrated) approach.

To outperform our peers, we believe that we must emulate the most powerful attributes of index investing. By definition, index investing is “buy and hold” investing. This leads us to our history of minimum turnover of our portfolios. As a corollary, this also affects our stock selection. If we expect to invest in companies for many years, we must then focus on those select companies with the brightest multi-year prospects for growth. In addition, our view on risk is contrary to the typical manager as well. We do not view risk via individual security price volatility (beta), rather all of our risk analysis is centered on the individual business.

Wedgewood’s underlying equity investment philosophy is predicated on a strong belief that significant long-term wealth will be created by investing as “owners” in companies. In our “Invest as Business Owners” approach, we seek companies that the following characteristics:

  1. A dominant product or service that is practically irreplaceable or lacks substitutes.
  2. A sustainable and consistent level of growing revenues, earnings and dividends.
  3. A high level of profitability, measured by return on equity without the use of excessive debt.
  4. A strong management team that is shareholder oriented.

Once we have validated company performance against this set of criteria, we then analyze prospective companies with an eye toward those organizations who have reasonable, if not cheap, valuations.

With a plus 15 year history of outperforming index investing and most active managers our results are testament to the viability of our investment philosophy. It is this approach that sets us apart from our competition… we think and act unlike the vast majority of active managers.

Below are the firm’s top Ten Holdings……..

AAPL

638,033

$ 282,431,690

9.68%

AXP

1,499,469

$ 101,154,177

3.47%

BRK-B

1,946,211

$ 202,795,180

6.95%

CMI

1,193,801

$ 138,254,091

4.74%

COH

2,280,812

$ 114,017,796

3.91%

CTSH

1,854,397

$ 142,083,903

4.87%

EMC

4,907,434

$ 117,238,595

4.02%

ESRX

2,909,120

$ 167,623,491

5.74%

EXPD

2,849,284

$ 101,804,916

3.49%

GILD

2,251,933

$ 110,209,598

3.78%

GOOG

226,535

$ 179,911,832

6.16%

To see all their holdings go here: Wedgewood Partners Case StudyWEDGEWOOD HOLDINGS

So, the question I ask my readers, “Why don’t more money managers follow their strategy?” Invest in franchise companies at a good price for the long-term? If you click on their site:

http://www.wedgewoodpartners.com/

you can read an interview and see their track record–it is excellent.Wedgewood Partners 2013 Interview and Wedgewood performance WEDGEwood PERFORMANCE

Contrast this with:Southeastern_2013 Annual Meeting – Transcript

8 responses to “SEARCH PROCESS: Wedgewood Partners

  1. “All of man’s misfortune comes from one thing, which is not knowing how to sit quietly in a room.” I think it comes down to opportunity costs. I would bet many money managers believe the capital is better off in their hands than in a franchise’s. Seth Klarman has spoken of the battle between arrogance and humility that is inherent in stock picking. For some, I believe arrogance wins out and when it does, the arrogant analyst thinks he can generate better returns than management of certain businesses. The numbers tell us this isn’t true. Why would someone pull money out of a franchise that has a record producing returns on equity in excess of what you could get elsewhere? Especially if that company reinvests most of its earnings.

    • You have captured the essense of why this method of investing is so simple yet powerful. Buy the best (only about 100 to 200 world wide) at the best price so a focused fund of 20 to 25 companies held for years.

      So simple but NO ONE does it–or at least a tiny fraction of the money managers out there. Thankis for the excewllent insight!

  2. Question to readers: Does anyone have any experience with online modeling courses or suggestions as to the best way to learn/build one’s own financial model? I have been looking at “Breaking Into Wall Street” and “Wall Street Prep”, but am having a hard time finding unbiased reviews.

    Thanks in advance.

    • Are you trying to build an investment banker type financial model, or more of a “quant” financial model? Also, what are your goals with learning how to build these models? I can ask around but you’ll likely need to provide a bit more context.

  3. Investment bank/PE type model. Goal is to switch careers (currently not in finance) and believe that the ability to show some proficiency in modeling is a prerequisite. Have been able to download some pretty complex models, but find these hard to adapt and not sure I know all aspects of their workings.

    Hope this clarifies.

    • I recommend Financial Statement Analysis and Security Valuation by Stephan Penman. He shows you how to build your own model from the ground up. Don’t use a canned approach. Go to book’s website:

      http://highered.mcgraw-hill.com/sites/0073379662/information_center_view0/

      or try http://www.mhhe.com/penman4e

      As one vetran said, spend a year thinking about what goes into the model for every minute you spend putting together your model.

    • A bit swamped at work and just popped in over lunch. I’ve have friends in the IB world and can ask what they recommend. I remember when I was a student not too long ago I used Wall Street Oasis. I’m sure if you search their forums or posts you’ll find several useful examples that people looking to break into IB/PE have provided. I’ll try to get back to you sometime soon with more info once I get in touch with my friends.

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