Investing is a hard business. The key to long term successful
investing is to avoid big loss in tough times. As a matter of
fact, tough times are the best times to pick up great investments
at cheap prices and get prepared for the recoveries that follow.
However, very few investors can do this well. Among the Gurus we
track, Don Yacktman is one of the few that have mastered this and
trounced the market in both up and down years.
Over the years we have observed many investors fall hard after
reaching the peaks of their careers. A few come in mind. Bill
Miller of Legg Mason Value Trust, beating the S&P 500 for 15
consecutive years until 2005, was killed by the market in the
years that followed.
of CGM Focus Fund, who gained 80% in 2007 by shorting mortgage
banks, gave up all his gain in 2008, and then some.
, the hedge fund giant, made a great deal of money and fame
shorting financials in 2008, then lost the money and more in
Why did all of this happen?
The answer is actually very simple: RISK, which made them, then
broke them. These investors took excessive risks with their
investments. They were right initially, then wrong and the bottom
During the interview with Don Yacktman last week, which we will
publish soon, GuruFocus discussed this with him after we talked
how he defines a high quality business
. We asked him how he beat the market going both ways, down and
up. How he made the decision of selling stable companies like
Procter & Gamble (
) and bought into a seemingly risky car loan company,
AmeriCredit. Then we found his secret -
Risk Adjusted Potential Returns
. He said:
"... what happens is in a period this disruptive (in 2008 and
the beginning of 2009), when the other people are like deer in
the headlights, you can be objective and say, wow, I've used up
all my cash and they've all hit my hurdle rates, and there are
really good opportunities out here. But now all of a sudden, I'm
faced with an interesting problem. I'm starting to see things
that potentially can earn me 20, 25, 30% compounded returns.
Should I give up something that has 10 and I'm very comfortable
with? Well yeah, if you can justify the risk. And particularly
when you're not dramatically increasing your risk."
"With Americredit (ACF), News Corp (
), Viacom (
), all of them had some risk to them, but man were they just
breathtaking returns. So we sold of Proctor & Gamble totally,
and just like the military holding some in reserve, we still had
Coke there, we still had some other things held back, that if the
market had continued to go down, we would have been more and more
and more away from the great stuff, into these things that had
more cyclicality to them."
AmeriCredit fell to less than $3 and Yacktman bought a large
chunk of it. It was then bought out by GM at $24 in 2010. The
Yacktman Fund outperformed the S&P 500 by 11% when the market
was down 37%, and outperformed 32.8% when the market was up 26.5%
, great investors achieve their outperformance mostly in down
years. If you are investing your own money, it is not important
at all if you outperform or underperform the market by a
percentage or two in good years. The key is to do well in down
years, grab the great bargains in market fear, and profit
Therefore, when you think about your potential returns, always
think of them in terms of "risk adjusted returns." Is the return
worth the risk? Is the risk you take justified by the potential
return in this investment? What if you are wrong?
Don't bet. Invest!
This was what Don Yacktman did. It has served him well.About
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