One commenter on a recently posted video of Donald Yacktman talking to students at Texas Lutheran University suggested that someone take notes for those people who wouldn’t be able to fit the hour and a half lecture into their schedule; since I was watching the video anyways, I figured I would take some short hand notes – enjoy:
“A lot of our business is a function of really getting the right things and having some patience. I think one of the big things that differs between us and so many people is our horizon time – we just have a very long horizon time, and most people just aren’t very patient.”
“It’s what you buy and what you pay for it – for me, this is ultimately what this business boils down to… by being disciplined and buying at low prices, you’re shifting the odds in your favor.”
Three goals in the Yacktman Funds methodology:
1. Do not lose the client’s money (some exceptions where probabilities are out of whack in a big way, but really focus on avoiding permanent losses of capital).
2. Make equity type (double digit) returns.
3. Beat the index over a full market cycle (ten years as a rough timeframe).
Top Ten Holdings (from the Yacktman Fund Update of 6/30/2012) – News Corp (NWSA), PepsiCo (PEP), Sysco (SYY), Microsoft (MSFT), Cisco Systems (CSCO), C.R. Bard (BCR), Viacom (VIAB), Coca-Cola (KO), Johnson & Johnson (JNJ)
“I’ve been in this business over 40 years, and what’s unique about this period of time to me is that I cannot find another period of time where there are so many of what I would call great businesses, very profitable, large, international businesses, selling at prices this low relative to other things – not absolutely, absolutely during the '08-'09 period they were cheaper – but on a relative basis, to me they’re very, very cheap.”
“This business doesn’t need to be overly complicated; a lot of people I think make it way too complicated.”
“The key variable in buying a stock is the price at which you buy at; that will determine the rate of return.”
“Nobody can predict the future with [100%] accuracy – nobody’s that smart. What I would tell you is when you’re looking at growth rates and all these kinds of things, there has to be a range of outcomes… the volatility of the business model will determine how wide those outcomes are. But ultimately, you’re boiling it down to trying to create what we call a risk-adjusted forward rate of return.”
“What we’ve found is there’s a centralist tendency for the better businesses to earn high returns on tangible assets… and businesses that have a high return on tangible assets usually have a low fixed asset component and very little economic sensitivity… PepsiCo fits that to a tee – we’re willing to own a huge amount of Pepsi, put 10% of our portfolios in it, because it’s quite predictable and at these prices, we’re saying we are going to get those double digit returns and we don’t have to take much of a risk.”
“Dividends are a derivative of cash flow – so cash flow is really the critical variable.”
“If you put money back in the business and you have a dominant position, marginal unit growth will yield enormous rates of return; the marginal rate of return on incremental investment is enormous. Typically a company that has a 40% market share does not make twice as much as a company with 20% market share – they’ll make four times as much.”
“We vote against every option plan – we’ve never voted for one, because they’re bad news for shareholders: they send the wrong signals, it’s a terrible way to compensate – this is a classic case of where politics enters in and overrides economic behavior, and it should have never happened.”
“There’s no substitute for knowledge – it’s important to study and understand what you’re buying.”
“We’ve had 14 investments in 14 years that were over 10% (of AUM): we have not lost money on any of them… we try to be very careful.”
“A lot of these businesses [cheap, not great businesses] have very slow growth [I believe he means in term of intrinsic value growth]: I think of them conceptually as moving sidewalks as opposed to escalators... with the escalator, you are constantly competing against this rising target – and that’s what we like.”
"Volatility is the friend of the value investor... volatility does not bother me at all – in fact, I love it. We're one of the few people probably that likes to see the market go down, even on things we buy, because we'll buy more – what an opportunity. Most people just don't have the mentality to do that."
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.