I spent an hour yesterday watching the latest Talks at Google featuring Donald Yatckman (I embedded the video below). Half the video was spent in Q&A, so it was a short talk. Overall, it’s a perfect example of investing being simple but not easy.
Usually, I share some quotes and thoughts around an idea discussed in these talks. This time, I thought I’d share my full notes.
Investment Process
- “We like to buy beach balls being pushed underwater with the water level rising.”
Investment Goals
- Protect clients money from permanent losses and inflation, mainly by avoiding dumb decisions. Equity provides the best option to offset inflation and do #2.
- Grow capital
Investment Strategy
- Buy Good Businesses – have some combination of high market share, high return on assets (what he looks for, other traits seem to exist with high ROA), low capital requirements, short customer repurchase cycle and long product cycle (think Coca-Cola), or franchise characteristics. Most fit into consumer staples with low cost, low cycle products (secular growth preferred). He gives the example of buying toothpaste versus a tractor.
- Shareholder-oriented management – tends to focus on shareholder-friendly, smart capital allocation (via dividends, debt reduction, share buybacks), while reinvesting back into the business for organic growth or smart acquisitions (vs. diworsification). This is a wild card.
- Low Purchase Price
On Price, Valuation, and Sizing
- With investing “you’re almost always wrong to some degree.” Nobody bats 1000, so stay humble.
- With valuation, you must “look at ranges of outcomes because nobody can predict the future with absolute certainty.” More predictable businesses have a narrower range. Less predictable businesses have a wider range.
- Position sizing – your biggest holding should be companies with a narrow range, high probability business model you’re most confident in. Wide range, low probability, less confident businesses should be the smallest holding.
- The ultimate goal is to find many great businesses at a low price, then have patience.
Q&A
- On psychology – important to stay focused and patient. “There’s a narrow difference between being determined and stubborn. If, at the end of the day, you’re right, you’re determined.” A long time horizon usually separates value investing from most other disciplines.
- The pressure for short-term results is constant. It’s easy to underperform in the short term. It’s hard to outperform in the long term because of short-termism.
- On the dot-com craze – People were selling stuff on websites for $0.75 that cost $1.00. “I could go out on the street and give away dollar bills for 75 cents…The whole thing didn’t make any sense.”
- “If you go into a value managers office and it’s opulent, there’s probably a disconnect there too.”
- Insiders sell stock for many reasons but only buy stock for one reason.
- On Apple – concerned about unsustainable margins. It’s not a low cost, high market share company.
- On picking growth stocks – there’s more importance on evaluating the future precisely (or in a narrow range). That makes it much harder to do. High growth rates aren’t sustainable indefinitely.
- “Probably 70% of people are rear view mirror investors. They buy what has been good with the idea that it’s going to get better.”
- On finding good ideas – look at things with short-term problems: either the entire market goes down (like ’08/’09), an industry shortfall (like ’93 concern about healthcare industry overhaul), or an individual stock gets knocked down. More to the point, finding good ideas gets easier with time and experience. Nobody starts out an expert. Being flexible and objective helps too.
- On holding cash – “it shouldn’t be because you’re trying to predict the market.” Be aggressive with existing opportunities. Sit on cash when there are no opportunities.
- On wealth protection and growth – find a strategy you can live with and stick with it. Compound interest is a long-term phenomenon. Be patient and let it work.
Last Call
- Sir John Templeton: Be Humble Enough to Adapt to Change – M. Mobius
- A Musical Lesson for Investors and Advisors – B. Seawright
- Avoiding Process Drift – A Wealth of Common Sense
- Waiting for Normal – Irrelevant Investor
- 5 Things I Learned from Jeff Bezos on Business and Investing – S. Niveshak
- What Rising Rates Won’t Do – Indexology
- Hey, Investment Cranks: The Internet Never Forgets – Washington Post
- 10 Quick Topics to Brighten Your Summer – M. Housel
- Robert Hagstrom on the Art of Value Investing (podcast) – Value Investing Podcast
- The Truth About the Death of Cash – BBC
