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Ask Wedgewood Partners' David Rolfe Your Investing Question for GuruFocus Reader Q&A
Posted by: Holly LaFon (IP Logged)
Date: November 12, 2012 03:38PM

David Rolfe, chief investment officer of the $1.3 billion investment management firm Wedgewood Partners Inc., is joining GuruFocus for a reader Q&A. Rolfe has also been a Premium Member of GuruFocus since 2007. Readers are welcome to submit their questions – regarding Wedgewood’s process, their personal investing or the economy at large – by entering them in the comments box below.

Over the past 15 years – Wedgewood’s preferred measurement range – it has beat the S&P 500 316.1% to 124.3%, cumulatively. A patient, focused and disciplined value approach has driven the superior performance.

As Wedgewood Partners’ managers explain in their third-quarter letter, they think so like business owners that they virtually ignore short-term market price fluctuations of their holdings and instead concentrate on “the long-term appreciation of equity, relative to the underlying growth of the business.” This inevitably results in an increase in equity value that reduces the risk of permanent loss of capital. In short, they “believe the philosophy of the business owner repeatedly trumps the whimsy of the easily influenced speculator.”

To find the right companies, they look for five fundamental factors in each prospect: 1) sustainably superior competitive advantage 2) compelling valuation 3) double-digit growth 4) exceptional financial strength and 5) limited overlap with existing portfolio holdings.

They are so selective about what they include in the portfolio that they don’t mind waiting, sometimes years, for companies they find attractive to finally exhibit all of these criteria before they invest.

Their overall investing strategy is summarized below:



Over the past 12 months, only two new stocks merited inclusion in the Wedgewood portfolio: Charles Schwab (SCHW) and Coach (COH).

Their largest holdings as of the end of the second quarter are Apple (AAPL), Berkshire Hathaway (BRK.A)(BRK.B), Google (GOOG), Express Scripts (ESRX) and Qualcomm (QCOM).

To learn more about David and Wedgewood Partners, read their recently released third quarter shareholder letter and outlook or visit their portfolio.

Don’t forget to ask David your question in the comments section below. Answers will appear shortly.

Sign up for a GuruFocus Premium Membership here.



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 3.3/5 (14 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: cirros (IP Logged)
Date: November 12, 2012 06:22PM

Hi David

Do you use any macro global views in your sector allocation mix and if so where do you see the global economy going in the next 3 to 5 years and what do you think is the best way to postion a portfolio to benefit from it?

Thanks



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: drolfe (IP Logged)
Date: November 12, 2012 07:55PM

Hi Cirros,

Thanks for your question.

We rarely use macro global views as a significant factor in our stock selection process. Admittedly, we do not have an edge in such analysis. That said, by "investment philosophic" design, given that we only invest in twenty companies we largely eliminate such macro considerations in our investment process. By focusing on what we consider to be best-in-breed businesses we are in sense abdicating navigating the complex macro scene to the managements of the companies we invest in. They no doubt know their end markets better than we can ever hope to. Now, that said, all of our invested companies are either a beneficiary or driver of a key "macro-industry" factors and themes. A few global examples... Apple: global mobile internet. Cummins: global fuel standards. Visa: global payment processing. Schlumberger and National Oilwell: global oil drilling services and well technology. Varian Medical: global cancer radiotherapy.



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: valueradar (IP Logged)
Date: November 12, 2012 08:41PM

A few questions:

1. Where do you generate your ideas?
2. You have Apple as your largest holding. How confident are you about the durable competitive advantage of Apple? are you not worried that what happened to Research-In-Month will happen to Apple?
3. Berkshire is certainly undervalued. You mentioned in your recent Barron's interview that Berkshire is worth $180K a share. How did you come up with the number?
4. Why do you like Google? How much do you think it worth?




Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: drolfe (IP Logged)
Date: November 13, 2012 11:33AM

Dear Valueradar,

Thx for your questions.

1. New ideas come from a myriad of sources...independent and street research, 13F filings of managers we respect, financial publications, etc. Our new idea generation process is not designed to generate a systematic flow of constant new ideas. Actionable ideas - those that include both a terrific company AND a terrific valuation are, by definition, rare -- except in extreme market environments like late 2008-early 2009. Indeed, over the past 20 years we have owned little more than 90 stocks. That's why are focused investors. We believe we can repeatedly invest 20 compelling ideas in nearly every market environment; if we were trying to the same with a 40-60-80 stock portfolio we believe that our task would be geometrically more difficult. The stock market is quite efficient...but not perfectly efficient. Stay focused!

2. We are always worried! Investing is a worrying thing!! Apple has a very rare competitive position. They have built a terrific moat. In the global mobile internet world, Apple has built a vertically-integrated business model based on both hardware and software. This moat has been significantly enhanced with their global Apple store footprint. Their moat is their best-in-class ecosystem. We have not seen the likes of such a vertically-intergrated ecosystem, profit-generating business since the heyday of John D. Rockefeller's Standard Oil Trust.

3. We consider the investments per share plus a conservative valuation of the non-insurance subsidiaries (Buffett's Two-Column Intrinsic Value Method). We check this valuation against a sum-of-the-parts valuation which includes comparing BNSF to Union Pacific and GEICO to Progressive, etc. BRK shares will no doubt suffer from a "Buffett Discount" and the "Conglomerate Discount."

4. We believe that Google is worth considerably more than current prices. We like Google's dominant competitive position in paid search, as well as their Android mobile strategy. The trials and tribulations of mobile search and their Motorola purchases have, in our view, been more than discounted in the current share price.



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: drolfe (IP Logged)
Date: November 13, 2012 01:48PM

Hi Lbrian.flores,

Thanks for your questions too.

1. We do very little regular screening. Apropos my earlier related answer, if we did screen say, every week and/or month for the high hurdle rates of profitability we require, then the resultant screen would likely not change much. That said, gurufocus has terrific screeners.

2. Our fave is free-cash flow as a % of enterprise value, but all of the metrics you mentioned are all part of the valuation mosiac we employ at Wedgewood.

3. Not much. Low turnover is a key tenet of our investment philosophy. Our turnover averages 25-30% per year. The fiscal cliff is very real and very dangerous. Given the fact that U.S. GDP growth is barely above historical stall speed, the risk of recession in 2013 is very real too.

4. Sell your losers and let your winners run! Losers take you out of the game (Buffett). Mulityear bagger-winners move the needle (Lynch). Tend your mistakes first...the winners will take care of themselves.



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: strei (IP Logged)
Date: November 14, 2012 10:38AM

Hi David,

Has your opinion of Express Scripts changed considering their latest earnings report and their reservations about new year?

Thanks



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: gurufocus (IP Logged)
Date: November 14, 2012 02:24PM

David,

could you please comment on Coach? It seems that you bought into Coach?



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: Bartvp (IP Logged)
Date: November 16, 2012 07:30AM

Dear Mr Rolfe,

First and foremost thanks for offering to take our questions.

I believe investing is more about being a business analyst than being a financial analyst. Your "invest as owners process" picture seems to share that believe; the hardest part in the process probably is evaluating whether the business fits your "quest for future excellence". So what would you advise to a finance student hoping to once work for such a focused value fund as yours; get into finance and get more expertise in financial markets, or get into strategic management consulting to learn more about how businesses operate and learn about their strategies?

Thanks for your time.



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
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Rating: 0.0/5 (0 votes)



Re Ask Wedgewood Partners David Rolfe Your Investing Question for GuruFocus Reader Q A
Posted by: drolfe (IP Logged)
Date: November 16, 2012 11:29AM

Hi Strel,

Thanks for your question.

We have certainly recognize that the profitability structure on ESRX has changed materially over the past 5 years. Where once ESRX generated an incredible ROIC of +30%, they now generate a significantly lower amount. The culprit is the huge capital outlay for the NextRx and Medco acquisitions. ESRX has matured and this once fantastic business is simply not as great as it once was. The market will always worry about competitive pricing issues and punk enrollment growth. The current economic environment is no doubt challenging on this score. The stock is quickly discounting such worries, in our view.



Guru Discussed: David Rolfe: Current Portfolio, Stock Picks
Stocks Discussed: COH, GOOG, AAPL, BRK.A, BRK.B, ESRX, QCOM, SCHW,
Rate this post:

Rating: 0.0/5 (0 votes)



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