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The 400% Man-A Lesson for Aspiring Investors

Pop1498 views  2013-03-21 21:20   TagsAllan  Arlington  Value  Investment  Process 

I recently came across an article from Smart Money that is about a year old. I read it for the first time a few weeks ago, and it was one of those  pieces that you bookmark for reading again later. The piece was called “The 400% Man“, and had the intro tag line:

“How a college dropout at a tiny Utah fund beat Wall Street, and why most managers are scared to copy him.”

The article provides a great background into a guy from a small town in Utah decided to start a tiny investment partnership at age 22, with no MBA (no college education for that matter), no Wall St contacts, and no more than a measly $200,000 bucks. He then went on to increase the value of his partners’ capital by a factor of 5 (400%) over the next 12 years.

His name is Allan Mecham, and he is the founder of his firm called Arlington Value Management. It’s a very motivational piece to read-inspiring for any up and coming fund manager. Mecham’s fund now is significantly larger at $80 million, but still tiny by hedge fund standards. The piece makes it sound like Mecham is perfectly content to focus on investing, foregoing major efforts to market his fund and grow AUM. Mecham prints out articles each day that he wants to read (a man after my own heart…. Side Note: I much prefer paging through hard copies of Value Line and the Wall St Journal over viewing the same info on the web. This is despite the fact I spend most of my time on the web reading blogs, reports, filings, etc… I love the web, but there is just something more peaceful about reading a paper or a hard copy of an annual report as opposed to using the mouse to scroll through page after page…).

Mecham reads from a huge stack on his desk from an armchair next to the window. He reads quietly all day, looking for two or three great investment ideas per year. Yes, 2-3 new ideas per year. Although I haven’t looked into his fund, it sounds like he runs a very high concentrated low turnover value fund in the Buffett tradition- he wants wonderful companies at fair prices and he holds them for a long time. He started his fund in 1999 and in large part through incredible performance, has slowly been building his capital year after year. He even had a positive year in 2008-and it wasn’t due to shorting bank stocks, it was due to going long stocks like Autozone, which was up 11% that year.

While the storyline is inspiring, the second part of the tag line-”why most managers are scared to copy him” is where the real investing lesson is here. Mecham is successful in large part because he is unorthodox. Think about Buffett in the 1950′s and 1960′s while running his partnership-putting 40% into American Express, buying sleepy old banks in Rockford, Illinois, traveling around the Nebraska countryside drinking ice tea on front porches looking for available shares of Sanborn Map… Mecham might not be visiting neighbors in Utah, but the point is this: he is doing things most traditional money managers don’t do, such as:

  • He focuses on simple things (no complex ideas, no jargon, no spreadsheets, just common sense)
  • He concentrates his portfolio
  • He does his own research as opposed to reading analyst reports or secondary research
  • He doesn’t talk to company management
  • He reads SEC filings (the best investors do this, but the majority don’t; even most “pros” don’t)
  • He doesn’t trade much-he makes investments with a long term (5 years plus) view
  • He lives a peaceful (judging by the description in the article), presumably low stress lifestyle that includes reading and thinking.

Most of these are characteristics that are difficult for most professional money managers to follow. Mutual fund, and even many hedge fund managers are driven by keeping assets under management. Everyone wants good performance, but more importantly, everyone wants to keep their job. Doing something out of the ordinary can be career ending if it doesn’t work. But the catch 22 is that to have truly superior performance, you have to do things others aren’t doing. By very definition, superior performance is out of the ordinary, and so the process necessary to achieve that superior performance has to be out of the ordinary as well.

This is just what we try to emulate here at Base Hit Investing. We might be more diversified, but the process is similar: Look for value, often in areas with well known problems, knowing that the market systematically and consistently undervalues stocks in these types of situations. Methodically repeat a process flow over and over, looking for great investment opportunities, and patiently compounding one decision on top of another. Consistently practice this process flow, day after day, using simple value metrics that provide a slight edge-with the idea that collectively, the slight edge combined with many decisions over a long period of time leads to outstanding outperformance.

Mecham invests the way he wants to, using value as his guide, looking for great companies at fair prices, and he methodically has built a solid performance record, one good investment at a time. No MBA, no investment bank contacts, just a small office above a taco shop-and he beats the pants off the well resourced pros. Stories like this are like reading about how a guy like Tom Brady barely got into the NFL, drafted in the sixth round, destined to be a career 2nd or 3rd stringer…

It was a fun read. It’s always good to remember that to achieve extraordinary results, you have to do things that others aren’t doing. Sir John Templeton said it best:

“If you want to have a better performance than the crowd, you must do things differently from the crowd.

More Reading:

Comments Comments (2 )

  • sapporosteve 2013-03-22 01:06

    Thanks for the article. Do you have his turnover rate? Although he looks for 5 years plus, does he "buy and hold" or sell at some predetermined point?

  • John Huber 2013-03-22 17:47
    Hi Steve,
    Since he runs a hedge fund, his turnover numbers aren't public but from what I can tell from the various interviews I've read with Mecham, he is a very low turnover long term investor. His high returns come from successful stock picking plus concentration.

    Last year I read he put 50% of his capital into Berkshire Hathaway around $105K per share (it's now 50% higher). In 2008 he was actually up because of his high concentration in Autozone.

    So one could argue his concentration leaves him vulnerable to higher volatility (and that's true... he was down around 30% I think in 2005), but like Buffett, concentration has worked for him.

    As for selling, I'm not sure exactly what his criteria is, but it sounds like he holds positions for a long time and sells when he finds better alternatives.

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