10-year

10-Year Anniversary Promotion (20% off)

Join GuruFocus Premium Membership Now for Only $279/Year

Once a decade discount

Save up to $500 on Global Membership.

Don't Miss It !

Free 7-day Trial
All Articles and Columns »

Thoughts on Ted Weschler's Largest Holding and Excellent Long-Term Results

March 14, 2014 | About:

"I found that the entire fund industry worked a certain way, and that their results reflected the mediocre way in which they operated."

- Mohnish Pabrai (Trades, Portfolio), recalling an important discovery he made at the outset of his investment career

I've mentioned before that I keep a list of investors who I've studied that have achieved long term returns (over a decade or preferably longer) of 20% ro 30% annual returns. It's a relatively small list, but it is larger than you might think. My logic here is simple: Try to seek out the ideas and commentary from those who have achieve results that I would like to achieve over the course of my career, and try to ignore all of the other things that might be traditional and accepted, but haven't proven to add value.

I mention this often, but the big outperformers in the investment field truly think differently than the majority of fund managers. Mohnish Pabrai gave a talk at Columbia last year where he mentioned that his goal from the beginning of his career (when he was admittedly quite naive) was to "do what Buffett did," which was double money every three years. Doubling money every three years is exactly 26.0% per year. A feat most fund managers would (accurately) say is improbable, if not impossible. Laughable, in fact, for someone like a 30-year-old Pabrai with no experience and no track record even to suggest such a feat.

Of course, 18 years later, Pabrai (according to his presentation at Columbia) has made 25.7% per year over the last 18 years, just a few basis points off of his goal, and over half the way through his "30 year game."

Results like these beg the question: How does one compound at 26% annually? Pabrai provides a few answers in that presentation that can be summed up by saying:

  • Don't try to beat the market (focus on absolute returns).
  • Don't buy something unless you feel it is worth 2-3x in tw to three years.

This last point is one that I believe gets largely ignored by most fund managers. It's too difficult to sit by with excess cash and wait for opportunities that clearly present 2x to 3x potential. It's much easier to fill the portfolio with decent-looking ideas that appear to be cheap based on standard metrics. These "average ideas at 10x earnings" are what Charlie479 said filled the pages at Value Investors Club. Ideas that might work out okay, but when many of them fill a portfolio, they are almost certain to dilute returns down to the averages.

I have some related thoughts on this topic, which I'll save for another time. But one thing I think is important is the necessity to think differently. And it's one thing I've noticed with every one of the investors on my list who have achieved these types of returns over long periods of time. I notice this either through the public interviews they've given, or sometimes simply by just studying their investments and their overall portfolios over the years.

Ted Weschler is on this list.

Ted Weschler and DaVita

Weschler has achieved outstanding results (mid-20s) in the decade or more that he ran his own fund. And he rarely appears in public, which is why I was very interested to see him, along with Todd Combs and Tracy Britt Cool (Buffett's "3 Ts") on CNBC last week.

I thought I'd put up a quick post with the video clip of Weschler talking about his largest (I believe) holding: DaVita Healthcare Partners (DVA). DaVita is a very interesting business, and one that I've begun studying in more detail. At some point, I might post on DaVita itself. I don't own it currently, but I'm learning more about it. They are one of the nation's largest operators of dialysis centers, and the business has some very interesting competitive advantages, which deserve more commentary. They also have a manager, Ken Thiry, who is worth studying. I highly recommend watching this video lecture with Thiry to get an idea of what I mean.

Thiry took over the nearly bankrupt business in the fall of 1999 (then called Total Renal Care Holdings). He completely changed the culture of the business, set new goals and has transformed DaVita into an incredible operation. The results:

DaVita Thiry

Interestingly, DaVita's stock has compounded at 25.7% per year since the time Thiry took over.

Why Does Weschler Like It?

Again, that might be the topic of another post. But we know that DaVita has scale, they have customer captivity, and they have a few other large operational advantages worth discussing. And the business produces a lot of free cash flow, much larger than the GAAP earnings imply.

The clip of Weschler answering this question is short, but he did provide this interesting checklist: He said he's studied this industry for a long time, and uses these broad filters for health care stocks:

  1. Does the company deliver better quality care than someone can get anywhere else?
  2. Does the company deliver a net savings to the overall health care system?
  3. Does the business produce high returns on capital, have growth potential, and have shareholder friendly management?

Weschler says DaVita passes all of these filters. The last thing he says is often stated, but I think rarely believed by the talking head who is saying it: Basically Weschler said he doesn't know (and probably doesn't care) what the stock price will do over the next couple years, but he believes very strongly that in five years or so it will be a more valuable franchise than it is today.

DVA Is a Large Holding for Weschler

Weschler seems convicted. Not only is it his biggest position in the Berkshire (BRK.A)(BRK.B) funds he manages (we can roughly estimate that DVA makes up around 30% of Weschler's portfolio at Berkshire), but he has been gobbling up shares for himself and his family members in his personal accounts, now owning in excess of $150 million worth of DVA personally.

So this post is not necessarily to endorse the stock, although I think it's an interesting company. I really wanted to point out that there is a big advantage to thinking differently. Weschler does this, and his results have shown it over time.

As I've mentioned before, as I scan down the list of investors that have achieved these types of outstanding long-term returns, I noticed two general ways that they've achieved this performance:

  • Focus Investing (Concentrating on five to 15 quality ideas that are significantly undervalued).
  • Extreme Cheap (Buying a more diversified basket of stocks that are hated, forgotten, or just plain cheap).

Weschler, Pabrai, and most of the others on the list fall into the first category. They are very patient, and they will not allocate capital to ideas just to fill a portfolio. They truly are looking for the most undervalued ideas, and they tend to focus more on quality. These investors focus on partnering with compounders, or businesses that can create enormous wealth for shareholders over time through the internal results of the business. The returns to shareholders come not through multiple expansion, but through internal compounding.

I've had a few questions lately on the investment philosophy itself, and I'll share some thoughts on compounders, specifically how to value them and how to think about them in the context of the overall portfolio and how they compare to other ideas such as special situations, cheap/hidden assets, etc., I also have some thoughts on pricing power, which is a topic I've been spending time thinking about lately.

For now, check out the short clip of Weschler talking about DaVita.

Have a great weekend!

About the author:

John Huber
I am the Portfolio Manager at Saber Capital Management, LLC. Saber manages an investment partnership as well as separately managed accounts for clients interested in a focused value investing strategy. My investment style has been most influenced by Ben Graham, Walter Schloss, Warren Buffett, and Joel Greenblatt. I am also the author of www.BaseHitInvesting.com, a value investing blog.

Visit John Huber's Website


Rating: 4.0/5 (9 votes)

Voters:

Comments

asawhneyy
Asawhneyy - 9 months ago

problem is we all want to believe in other people--listen Buffet or Parabai is not going to rich--ist rule is save 2nd rule is invest,what you can understand,third pay carefully and fourh don't list business anchors.

READ -READ-READ

asawhneyy
Asawhneyy - 9 months ago

problem is we all want to believe in other people--listen Buffet or Parabai is not going to get you rich--ist rule is save 2nd rule is invest,what you can understand,third pay carefully and fourh don't list business anchors.

READ -READ-READ

AlbertaSunwapta
AlbertaSunwapta - 9 months ago

^ DaVita is a fairly easy business to understand. However there are regulatory risks as well as huge obsolescence risk. Both of which are likely very limited in the short term.

batbeer2
Batbeer2 premium member - 9 months ago

@AlbertaSunwapta

Huge obsolescence risk?

snowballbuilder
Snowballbuilder - 9 months ago

When someone that is already rich puts around 30% of his family money in a single investment is usually worth listening

vgm
Vgm - 9 months ago

John -- thanks. Yes everyone and his brother are getting onto the DaVita bandwagon after Weschler's commentary on CNBC. It's an outstanding company with unique characteristics and exceptional management - and has been for some considerable time. It's worth remembering that the contributor named 'noideahow' wrote an excellent piece on DVA here on GF a few months ago discussing reasons why Weschler was attracted to it including Thiry's attributes. I think we should get into the habit of cross-referencing others' articles. Knowledge is cummulative:

http://www.gurufocus.com/news/238498/why-warren-buffetts-successor-likes-davita-so-much

(DVA is one of my largest holdings)

vgm
Vgm - 9 months ago

Fully agree with Snowballbuilder. Not only is Weschler rich, he's rich by being one of the absolutely best investors on the planet currently. With investors of his caliber, we should always be asking: What does he see that I don't? - as a way to improve our game. The suggestion that he has overlooked something obvious which is material to the investing case around DVA is naive (to put it mildly).

Tannor
Tannor premium member - 9 months ago

Excellent article, thanks.

Read it twice now, looking forward to your write up on pricing power.

Cheers!

buynhold
Buynhold - 9 months ago
http://www.nanowerk.com/nanotechnology_news/newsid=34628.php

@batbeer: Why would an alternative like this not affect Davita's business?
batbeer2
Batbeer2 premium member - 9 months ago

>> Why would an alternative like this not affect Davita's business?

Short answer:

Since you can walk around for days without it, the size of the device is not a game-changer.

Long answer:

You also have developments in growth of new tissue (I remember a lab rat with an ear on its back) not to mention the option of peritoneal dialysis which has been around for many decades.

I think the actual dialysis is just the beginning of the services provided by DVA. You can walk around with your own artificial kidney... which is great. But you will need regular check-ups to monitor your EPO levels and other blood-related issues. Your kidneys do more than just filtering blood.

Since you need to go see a nephrologist anyway, you may as well have your blood fltered then and there by a big/fast/superior/quality/expensive machine. This is lifeblood we're talking about so if the big machine can do a better job than a portable one, people may want to hook themselves up to the big machine despite the inconvenience.

At the end of the day, artificial kidneys are just filters. With any filter, you need to strike a balance.

At one extreme, I could easily create a filter that will remove every last nanogram of toxin from your blood within minutes. That filter would also remove all sorts of other things that you do not want to have removed. After the procedure, you would be free of toxins. You would also be dead.

At the other extreme, I could create a filter that is very selective. This filter would require many cycles to remove the toxins. The procedure would require weeks and you might not want to live that way.

So unless someone comes up with something that is smaller and cheaper and better and doesn't require monitoring by a nephrologist, people will have reason to visit a renal care facility on a regular basis.

Another way to think of this is that the machines DVA uses are already small enough to have at home. You could have one by your bedside. Very few people can afford this. Those than can probably also have a personal nephrologist/physician to visit them on a regular basis. In any case, the best machines are by definition expensive. They are only economical by spreading the cost across multiple patients. That is why they are in the renal care center and not in peoples homes.

The growing of replacement kidneys from the tissue of patients is the risk I'm most interested in. FWIW, I think kidneys are much more dificult to grow than ears but I would sure like to discuss this with an expert.

Just some thoughts from an admirer of Willem Kolff. A great man in many ways.

AlbertaSunwapta
AlbertaSunwapta - 9 months ago

So it's a pretty predictable business going out 5 to 10 years. Add demographicly driven growth and it's a great business. (Kidney disease hitting people over 60 yrs...)

However, with gene research, diagnostics and other technological developments, issues of avoidance and cures start to crop up. (However, this has probably been the case for decades.). Still there's a risk of technological or other obsolescence - but likely with a huge heads up for regulatory approval and likely significant runoff potential. I think near term demographics guarantee significant growth to offset the longer term risks.

buynhold
Buynhold - 9 months ago
Thanks for the detailed response, batbeer.

>>So unless someone comes up with something that is smaller and cheaper and better and doesn't >>require monitoring by a nephrologist, people will have reason to visit a renal care facility on a regular >>basis.

Precisely. Couldn't a new wearable smart-filter be good enough not to require monitoring by a nephrologist? It need not be as good as the in-clinic machine, but it would reduce the need to visit the clinic from, say, a daily basis, to every three-four days or even a week, thus cutting down on cost for the patient (and revenue for the provider). PD, while an option currently, is intrusive, and not all that convenient/low-cost. And today's machines are small, but neither wearable (makes a huge difference in user acceptance) nor affordable. An external, wearable, low-cost option that cuts down the need (frequency) to use the dialysis provider's service could become really popular, especially in developing markets where current options are unaffordable for most people. Thoughts?

batbeer2
Batbeer2 premium member - 9 months ago

>> It need not be as good as the in-clinic machine, but it would reduce the need to visit the clinic from, say, a daily basis, to every three-four days or even a week,

Yes. But people don't go to DVA on a daily basis now either. I can imagine that advances in thechnology could reduce the frequency from thrice weekly to maybe thrice monthly with maybe some small sensors/test kits at home that will let you know when you need to report for a check-up.

If this happens, I expect the change to be gradual. It will take many years to get there. The risk can me monitored if you know what you're looking for. It is the kind of risk I can live with. I can also imagine scenarios where these developments would make DVA more profitable (not less).

So while I can't predict where this will go, I'm pretty sure it won't happen overnight.

But since you won't give up, you leave me no choice but to introduce you to the other side of my brain. You can call him Batnerd2 ;o)

While the filter itself can be made smaller (in fact, over the years it has been), there is a lot of fluid that needs to be pumped around at the opposite side of the filter. On one side of the membrane, you have blood and on the other side you have a solution (dialysate) that "soaks up" the toxins. For fundamental reasons, the volume of dialysate has to be many multiples of the volume of your blood. The size of the filter does not change this.

On another level, you can understand this by thinking of the volume of water you consume in relation to the size of your kidneys. Bear in mind that with (artificial) dialysis this ratio is much greater.

If you want to understand this better, you can google "dialysate volume" and read up on the fundamental drivers of the dialysis proces. People can and have built such machines in thier back yard.

In short, making the membrane (filter) itself smaller doesn't reduce the bulk of the whole system.

@ Albertasunwapta

Yes.

buynhold
Buynhold - 9 months ago

deleted (duplicate)

buynhold
Buynhold - 9 months ago
@batbeer2, Yes I agree it won't happen overnight.

@batnerd2, You don't need dialysate with the new technique, so it does reduce the bulk of the system (to the size of a pack of cards); it is based on adsorption of the toxins by the nanofiber mesh (as opposed to diffusion through a semi-permeable membrane in dialysis). It's a different technique, not simply a better filter.

This is in the "too hard pile" for me.
batbeer2
Batbeer2 premium member - 9 months ago

>> You don't need dialysate with the new technique

@ˆ&mn, I missed that. I'll have to read ul a bit.

I learned something today, thanks!

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK