These are the notes taken in the talk given by Don Yacktman at
the Value Investor Conference in Omaha on May 3.
Savers wish they could put their money in a mattress and leave it
there. In real world that's not possible. There are two reasons:
inflation dribbles capital away. This year is anniversary of
reserve system. In 1913 dollar compared to what it's worth today
is a nickel. In last 50 years, dollar has declined to 13 cents.
At that pace, a dollar will have to decline to a penny. In a
paper society, inflation is inevitable. At 2% of something in
that area. Insidious thing is to be protected from. Our goal is
to protect clients from dumb decisions and inflation.
Second thing is equity investors and shoot for double digit
return. The other thing is over a 10-year period, one market peak
to peak, want to beat S&P 500.
Overview of managers investment group - this is the performance.
Numbers speak for themselves. There are going to be periods of
time when we look smarter or dumber than we really are. Our goal
is not to beat S&P all the time. We know what we're doing
right to the minute because of the internet. You can see the
numbers are all over the map. In 1999 they think we're pretty
dumb, now they think we're brilliant. Depends on the time.
Toughest comparison is to compare peak to peak is the
. The problem in this business is to find people ahead of when
results show up, and what makes that unique. I've been in the
business over 40 years, I ran Selective American for 9 years
before starting firm. One of the dilemmas is when you look at the
results, in the mutual fund business, when you see those kind of
results peak to peak, the fund manager may move on to a new
category. Fortunately my sons have been in the business 20 years,
and are incredible investors. I'm pretty humble about having a
couple of guys who are so dynamic. I talked to manager when we
made this deal with AIG, I feel like Mosses with his arms being
held up. They're really great.
We are managing about 24 billion. Had a lot of growth in last
intrinsic value and all these other things. Focus on three parts
of investing we see: pricing model. Almost always about the
price. Second is business model. Third is management model.
We do it a little different than most value investors. Most have
market price and want to buy at a discount. That works, it's not
wrong. We just feel we can add additional objectivity by flipping
equation and looking at adjusted compounded rates of return and
including risk. So when I think of an investment as if it were a
bond portfolio, so no matter what I'm buying, it all looks the
same whether bond or building or stock. I do have a problem
looking at art of violins or gold, I have a hard time valuing
things like that. Doesn't mean you can't buy them, but I'm just
telling you how I look at it. Ultimately when you buy a stock the
cash flows tend to be divided into two components: dividend.
Second piece is dividend is reinvested, historical experience on
reinvesting. So wild card in investing is looking at future cash
flows being reinvested for you by management. That is why it
becomes more difficult in analyzing individual equities than
bonds. Because nobody can predict the future with certainty, one
needs to create a range of outcomes. Depending on the business
model, range of outcomes can be narrow or wide. After that, you
may have to normalize those cash flows on cyclicality or
leverage. And then assign probabilities to various outcomes. And
try to come up with objective way to value company.
Now don't assume we're sitting there churning out data every day.
That's not how we do it. In reality we can do this simply. But
being objective. Really getting key variables in process correct.
In other words, I'd rater be generally right than wrong to the
fourth decimal. Very hard to predict in the future many years. I
can't tell you what kind of phone I'll have in my pocket 10 years
from now. But I bet you high percentage of detergent will be made
by Procter & Gamble (
). So think about those types of things.
So that's the pricing model. We're trying to find the best risk
adjusted rates of return and put our portfolio in line. The
market will in general go in line. As an example, today you've
got this kind of an experience where the bell curve of outcome
because the market tends to be less jittery, whereas in 08 or 09,
tend to have a long tail, which creates opportunity. So our
turnover rate will be higher in that kind of a period. I think it
was around 70 pct. Which now I think it was less than index fund.
Business model we look at - years ago - I tend to think in
pictures, and came up with this idea - if you put up a grid and
on one side have economic sensitivity, some may be more
complicated and have to centralize it because they're
diversified. Some are diworsified. We have one, called Dell (
). But anyway, this gives you an idea of where you can plot a
business. What we're looking for is conceptualize and understand
business. Btw, Jason, Steve and I were all on the board of
1-800-contacts, so we've seen a co on inside and outside as well.
Can see the pressures that go on inside the company.
Going to be difficult for companies to get good directors and
What we're looking for is high returns on tangible assets.
Reminds me of story of guy went to Harvard business school and
came back 25 years later and they said where have you been, and
he said I barely got in here and barely graduated, and I went
back to little co in Illinois and we used a little product, we
make it for a dollar and sell for four, you'd be amazed how that
three percent adds up [laughter].
Central tendency is to have businesses with low cyclicality, Coke
) and Pepsi (
) and PG fit that to it. Most people can understand that to a
certain degree. But the gamble is to get it at a decent enough
Coke had its all time high at 44 and a half, still hasn't reached
that. Was a good business then and is today. But it was just
overpriced. Fast forward and you start to see it at a much better
letter. By 2007 had over 10 pct of the fund in Coca Cola, much
less now as price went up.
We rarely spend a lot of capital in businesses that have enormous
amounts of cyclicality.
Most CEOs grow up in business, and come up to the top, but they
aren't capital allocators. They have to go through learning
curve, but most wouldn't learn well.
They start to generate excess cash, and the key is what to do
with it. They have five options. First is most fruitful,
reinvest. Marginal rate of return on incremental units is
phenomenal. But they tend to run out of that option. Then
acquisitions. But look at companies like Pepsi, they bought Frito
Lay, then Tropicana, and Quaker oats, then along the way when FCC
was hard on people, they made deworsification acquisitions. But
now they have a much better, purer business model. So it can work
but need to be synergistic - make sense - and not overpay. Coke
overpaid for Russian milk business. I can give you example after
Next one is buying back stock. At least then you know the
business you're buying. At Harvard they said bankers tend to
reach for yield then get caught and nailed with those assets when
the market reverses itself. They end up with a lot of business so
buy when others are but if they're objective the return can be
Henry Singleton's Intelidyne bought something like 90% of its
stock back. Masterful job running.
Paying a dividend. Frictional cost to tax-paying shareholders,
but a lot of times better than if they do 2 and 3.
Last is letting it build or reduce debt.
Our two funds - in the mutual fund biz is hard to get
shareholders to vote on anything. We love the Focus Fund and
created an institutional class for large shareholders to reduce
expense ratio when we did the deal with aig. For full disclosure,
the four of us, have over 100 million in the Yacktman
Institutional Focused Fund. Eating our own cooking.
The stocks we have in those funds [slide].
Wants to answer questions.
Question: you were talking about capital allocation and
CEOs having a tendency to want to make acquisitions, and there's
a lot of talk about slow growth environment. Do you think CEOs
have learned maybe the best thing is you should be buying back
your stock. Seeing how Apple has taken a beating here, next six
months as a poster child for why aren't you allocating capital
better, why letting it pile up. Do you sense CEOs are kind of
getting that math in what they should be doing?
Answer: I wish that were the case. It's hard to change people.
Either you get it or you don't. The problem again is so many CEOs
just don't think in those terms. Don't think enough in capital
allocation terms. They think about their basic business and how
to make it bigger. Part of it is management teams. If you get
more you get a bigger salary. We just think that doesn't do a
good job of lining up management with shareholders.
Let me address Apple. Here's my concern with Apple (
): Apple has hit like four home runs in a row. Made tremendous
investments under Steve Jobs. How many more can they hit, I don't
know. But if you take the strategy they have of high profit
margins and not reducing price, you create enormous umbrella
where people can come. This happens over and over again in
technology. Eventually someone can say I can get an Android or
Blackberry and start coming in at half the price and 90% of the
same capabilities. Why would I continue to objectively keep
buying the other one. My kids love Apple. But that's a problem.
To answer your question specifically, I wish that were the case.
I'd like to see more objectivity. What I was concerned is that
tax on dividends were going to go up and 40% taxes on dividends.
I pushed managements and would you be willing to stop giving
dividends and issue shares instead. Got a lot of resistant.
Historic bent going on there.
Question: if you have this big fund, don't they want to
hear what you think?
Years ago the brokerage firms just voted with management and now
they can't do it anymore, so management has to go out and get the
vote. We don't want to see politics enter the equation. That
drives me up the wall if I see it. Management listens and does
what they want to do most of the time.
Notice sometimes you use options. Can you talk about when
you exit using options and when sell them outright?
Options is a zero sum game as you know. I have another son who
has his own mutual fund, and they use options and going to do it
a lot more heavily than we will. When you're this big it limits
it somewhat. Try to use objectivity. When BP had that problem,
and we said if US biz got wiped out at $20 per share we would be
willing to buy the stock at $17, that was like free money to us.
So we said we'll take that.
Think of it - either you want to be on the house side of the
option, or the speculator. We'd rather be the house side.
Questions on diversification: 1) in your portfolio, when
do you say I would like to have and will not exceed this number
2) if managing by yourself, how many would you be comfortable
is still pretty concentrated, if you add cash, rarely have under
50% in top ten holdings and cash. Focus Fund is more like 70%. We
can put more in particularly ones that go beyond 1, 2 and three
and concentrate more. We've had I think 15 stocks in last 15 or
16 stocks that we've had over 10% investments in, knock on wood,
we've made money on all of them. But we don't treat that lightly.
Won't go much over that, but we would. We try to be as objective
as we can. Events occur that are unpredictable and one needs to
be able to adapt. We've bought REITs, junk bonds... when I
started I didn't think well we're probably not going to do those
things, but as time goes on you find if you give yourself
latitude it really helps. We'll have ten others but they're
I think you're better off to have 10 or 15 but do the homework.
One of the problems in this biz is people like to look at a lot
of things, but quantity won't override quality. Better to have
few and really know what you're investing in. than to have a lot
of them and speculate.
Question: consumer staples stocks you own a lot. Comment
on valuation of Coca Cola and PG, they're trading 12 months
forward earnings. Why do you buy into them?
Again, our primary goal is preserving and number two growing
capital of clients. So tend to have tendency to want to protect
client's money. Certain times it works to buy these companies, on
a relative basis we think valuations are still pretty good. We're
not going to be perfect. Can you make more money in other things?
Of course you can. But the question is on a risk-adjusted basis
is it worth it? When Dell got below 10, that changes the equation
dramatically than when it's at 20. RIMM - do we love RIMM as a
biz? I wouldn't say that. But when you look at everything and put
it in perspective that was a really good value. But have to take
range of outcomes, but at that value it made sense.
Conceptually, think of it this way: a lot of companies, steel or
auto, they look like moving sidewalks. Valuation builds up very
slow. So you get a one-time revaluation and you move on. We
bought Quest bonds in 92, fifty cents on dollar. But behind every
Quest bond was a telephone line. Objectively we said, that's a
good deal. Almost always about the price. Part of it is the
process and the other part is the execution. Good judgment comes
from experience, and a lot of that comes from bad judgment.
Everyone makes mistakes. If you can come up with a better
process, let me know. I don't mean that arrogantly. I really want
The other thing is time horizon. I see a world in which time
horizon is way too short. Sixty percent of trades made by
computers without any human.
Businesses have slowed. Microsoft was popular in 2000 and today
about 60% of where it was. Cisco is about 25% of where it was. So
had 13 years of building growth and value, and price declined
that much. It shows you how overpriced they were then. Both cases
have equation pieces trying to normalize cash flows in the
future, we feel more comfortable. Microsoft takes on
characteristics of Pfizer (
). PFE you could look out five years, not much beyond that. But
odds of getting money back in that short time was so high, even
with patents coming off, you could do that. Same applies to MSFT,
RIM, Cisco. Reach a point where you've been doing this enough
times that you just say at this price its worth it. There are
times when Steve and Jason get excited about something and I say
yes, I see it - I don't override them - I just believe in
decentralized model of management. But anyway, they'll come and
like a homebuilder or our gypsum, and I say I'll hold my nose on
this one. I'll say I don't like the long-term investment. They're
like slow moving sidewalks, I like the escalators.
Question: recent report from PG, people say they're
losing their way. You're long term. But for Stryker and JNJ,
they're both facing number of suits for hip implants shedding
metal. Is that much of a risk for those? We own both of
The other side of the equation is like - that has been through
the courts for years and about to get a huge settlement with the
patent infringement case. Lawyers are motivated by getting money.
One of the Graham books is on dealing with the honey pots, and
it's a novel so it's not - but takes into account how lawyers
behave. Think of the probabilities and try to be objective about
it. Does that make a difference in valuation? It might. So yeah,
take it into account.
One more story: a fellow had an assistant who gave talks right
after another and after doing it a few times the assistant said,
'I've watched you do this so many times I think I could do this
on my own just as well as you.' So they said that would be fun,
let's do that. So the assistant did presentation just like the
manager. First question out of the box was tough, and manager
said you know, that's such an easy question I'm gong to have my
assistant answer it.
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