As soon as I met Ryan O'Connor, I knew I wanted to get him on
my team. He's aninvesting junkie like me, and we clicked
immediately. Turns out it's all in his family... His grandfather
was an old poker buddy ofWarren Buffett 's.
Back in the 1960s, Ryan's grandpa went all in with the future
Oracle of Omaha into the originalpartnership .
The decision was bold. His grandparents -- with six kids -- had
to part with their life savings to invest in the new partnership.
Buffett was an unknown then. He was just a scruffy-looking,
socially awkward 30-something with disheveled hair, fraying shirt
cuffs and wrinkled, ill-fitting clothes. Upon hearing what
Grandpa O'Connor wanted to do, Grandma burst into tears.
You can hardly blame her, but Grandpa was on the right track. "My
grandpa said it was incredible when Buffett would get talking,
the way he would make all kinds of brilliant connections and boil
down abstract financial topics. My grandpa said he never saw
anything like it."
The young Buffett's investing process satisfied Grandpa O'Connor:
the concept of amargin of safety . The miracles ofcompound
interest. The power ofcontrarian thinking. The ability to buy
stakes in businesses for 25 cents when assets were worth $1-plus.
Of course, theinvestment worked out beautifully. "This is not
exact," Ryan said, "and my grandparents aren't anywhere close to
thiswealthy , but an initial $10,000 invested in the original
Buffett LP -- assuming every dollar continued to remain invested
in the LP and rolled into Berkshire -- would be worth something
like $300 million after tax. (Yeah, read that twice.)
"My grandpa's friends tease him about his decision to sell
somestock 25 years ago," Ryan said, "and build a nice deck at our
family's lake house. If you look at what that stock is worth
today, his deck cost him about $10 million. I think that burned
in my brain the concept ofopportunity cost ."
Today, Ryan has racked himself up honors. He managedfunds that
generated returns in the mid-20% range over the last six years,
easily topping themarket . He is also part of a number of fairly
exclusive clubs -- the Value Investors Club, the DistressedDebt
Investors Club and SumZero.
What really brings us two together is our love for
owner-operators. We love to buystocks where the guy in charge
owns a bunch of stock. In today's weird marketplace, the presence
of owner-operators can be a signal of a likely value. Over the
long haul, owner-operators tend to outpace the broad stock market
by a widemargin . Check out some of the research:
-- In 2012, Shulman and Noyes compared historical stock price
performance of companies managed by the world's billionaires.
Such companies outperformed theindex by 700basis points (or 7%
-- In 2009, Fahlenbrach looked at founder-led CEOs, who invest
more in research and development, and focus on building
shareholder value -- not value-destroying acquisitions.
-- In 2005, McVey and Draho learned that companies controlled by
families who avoid quarterlyearnings guidance outperform their
People with their ownwealth at risk make better decisions as a
group than those who are hired guns. The end result is that
shareholders do better in these owner-operated firms. Horizon
Kinetics' neat graphic illustrates the difference.
Bottom line : Stick with owner-operators.
With that, take a look at thismutual fund : the Virtus Wealth
Masters Fund (
), managed by Murray Stahl and Matthew Houk. Its focus?
Owner-operator companies. For a stock to get in thefund ,
management "must maintain a significant vested interest."
Forgetstock option grants , bonuses or salary increases resulting
from meeting short-term financial targets... Those only look good
Colfax Corp. (
, a manufacturingconglomerate . Brothers Steven and Mitchell
Rales own 24% of the stock. They also own 15% of
Danaher Corp. (
, which, over the past 10 years, has rocketed from $17 to $62.
"Colfax," they suggest, "is a reprise of Danaher, but at an
earlier growth phase."
I think Virtus Wealth Masters Fundwill be a winner.
Ryan and I also talked about
Greenlight Re (Nasdaq: GLRE)
(which you read about recently). And then we hit on
AlarmForce Industries (
, which is similar to
, but there is an owner-operator here too. Joel Martin, the
founder, owns 13% of the company. "TheCEO is just awesome," Ryan
said. "Read his annual letters. They tell you all you need to
It trades for only about 5 times steady-statecash flow . Cash
flows are sticky, long-lived, high-margin and recurring -- all of
which are like candy for investors.
Ryan thinks this under-$10 stock gets taken private -- a la Dell
Computer -- at $15 a share. If not, there is an opportunity for a
big return (8 to 10 times cash flow). Either way, you win.
Create your own mini-mutual fund using the owner-operatorfactor
as your guide. Or consider some of the owner-operator gems in
what Icall my "Coffee Can Portfolio" -- an approach that beats
just about every other method of investing -- and is good if
you're a little lazy.
Check out the five stocks here.
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