20 Questions With David Rolfe Part I

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May 08, 2015
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Founder and CEO of GuruFocus, Charlie Tian, had the pleasure of interviewing David Rolfe (Trades, Portfolio) at this year’s Berkshire Hathaway (BRK.A)(BRK.B, Financial) shareholder meeting at Omaha. Rolfe discussed his current holdings, his most heavily weighted positions and even gave advice to young investors or those who are thinking about becoming investors but have not yet taken the leap.

Rolfe is the CIO of Wedgewood Partners,, Inc. The top three sectors in his portfolio are technology (28.5%), financial services (17.2%) and healthcare (14.6%). His top three most heavily weighted stocks are: Qualcomm Inc (QCOM, Financial), Berkshire Hathaway Inc (BRK.B, Financial) and Express Scripts Holdings Co (ESRX, Financial).

Over the last three years, Wedgewood’s performance was 17.89% compared to the Russell 1000, which was 16.26%. The firm outperformed the Russell 1000 over the past five years as well at 20.22%, compared to Russell’s 19.24%. Over a 15-year period, the firm almost doubled the Russell’s performance, at 7.41%, whereas Russell’s was 3.07%.

1. What is your background and how did you get into investing?

I kind of came through the back door, if you will. It wasn’t a grand plan. In college, I started engineering and I didn’t do well. I was a very poor student, so I changed my major to economics and finance, and to be quite honest, I just wanted to get done with school. But as luck would have it, my first investment professor was a stock market junkie and for most of the class time, he only talked about the stock market.

And then I got the bug. Myself, another student and this professor started the investment trust paper portfolio. This was at the University of Missouri, St. Louis and the University of Missouri, Columbia.

And that now was a real money portfolio, It's still going, and so this was back in 1983/1984, but I fell in love with the stock market, so when I finished school in 1985, the easiest way for me to get into business was to be a stockbroker. So I was an incredibly unsuccessful stockbroker from ‘86 until early 1988 and then I was very fortunate to get a job in one of the old trust companies in St. Louis, Missouri. And that’s when I finally had a chance to put into practice this focused growth value, simplified strategy that I had been envisioning and reading about and wanting to emulate.

I did that for four years and then in early 1992, I joined Wedgewood Partners as the CIO.

I brought that four-year strategy with me, so that’s what we’ve been doing ever since. We’re up to about $11 billion now. This strategy has been on the investment clock now for a little bit more than 27 years.

2. How would you describe your strategy?

Well, it’s kind of joined at the hip, but in our heart of hearts, we are growth company investors and we want to own them for many, many years, but we have a strong contrarian streak, so when we’re buying these growth companies, we want to buy them at value prices. And so our strategy synthesis in our minds, it’s that tenets of growth company investing, joined at the hip with we believe the best tenets of value stock pipe. We amplify that through focus. We only own about 20 companies, that’s it.

3. It’s kind of like what Warren Buffett (Trades, Portfolio) was saying about good companies at fair prices, isn’t it?

Absolutely. I sit on his very broad shoulders and we certainly haven’t reinvented the wheel on that front, but I think maybe something we’ve done a little bit different than other institutional investors when Buffett talks about, for an individual investor, that they should have no more than, you know, a little punch part--20 punches.

I’ve tried to take that idea and tried to institutionalize that thought. What I mean by that is we manage money for a lot of different institutions and individuals, but instead of just 20 decisions over a lifetime, we only own 20 stocks in the portfolio. That’s how we focus and some managers say, “Well, we own 45 stocks and we’re focused.” We’re very focused.

4. As you said, most of your stocks are growth stocks. How did you get into that sort of strategy? What books and other investors influenced you?

When I caught the bug, in say ‘84, it wasn’t like it was work. It wasn’t like it was studying. It was something that fascinated me and I tried to read everything I could and this investment professor was also critical, I should say, in pointing me in the right direction of outside reading. So that was my first exposure to Warren Buffett (Trades, Portfolio), Munger, George Templeton, and T. Rowe Price, almost without exception. These were value investors, usually with growth companies, but for the most part they’ve been focused.

And so once they got me into the business, I was reading anything I could get my hands on of the focused investors of the day that were actually doing it live. I became enamored with focused investing in just trying to put my slant on it, my biases, my prejudices, but that’s how it all started. I was very, very fortunate and not only to get hooked on investing but to get hooked on a pretty specific idea that long, long time ago. And it’s just grown from there. I just think our application is a little bit different because it’s so focused.

5. You have been practicing for 27 years. For these 27 years, were there any changes or adjustments made?

You know, not really, but I will say some of the key attributes get reinforced depending on the market environment. So as you can imagine, if we’re only owning 20 stocks in bear markets, we feel like a kid in a candy store. We love it. But in this current environment, we have under-performed pretty significantly over the last 12 and 18 months.

From our clients’ perspective, that’s something that they have to know about before they pull the trigger and give us money and hopefully they know that. But the other point that gets amplified is when the market is up for six years in a row, 10, 11, 12, 13 quarters in a row depending on what industry you look at. There comes a time where you have to have the courage of your convictions, not only to chase the dollars of the day, but sometimes relatedly to do nothing. You’ve got your portfolio, you’ve got a pretty good position in cash, which we do, and clients, you know, don’t like that when you aren’t performing, as Buffett has said.

When your clients are telling you, “swing, you bum,” and they’re booing you, you have to have thick skin. So this whole investing thing is tough enough on your own or when you’re managing other people’s money, you better understand what you’re getting into because you can’t let their disappointment or happiness sway you.

6. You mentioned that over time you had a summit of your own slant through the strategies. What is that?

We really stick with what we consider to be growth companies. However, if you want to buy these companies at really good prices, you don’t get them at good prices when everything is going great.

You have to buy them and have some hair on them. So as an example, we were buying more of Apple (AAPL, Financial) in the spring and summer of 2013 when much of Wall Street had written them off. What we’ve done lately in the portfolio is we’ve really increased our weightings, almost tripled our weightings in oil service holdings, oil service companies when oil prices are plummeting. And so our slant is high conviction, just 20 stocks and we have a very thick skin contrarian element on our actions. So growth companies, contrarian investment -- sounds simple, but day in and day out it can be a challenge.

7. There must be something you think differently. Maybe you think longer term, you think this will be over at some time?

Yes, great question. You are exactly right and how you predicted the question. I think far too many individual investors and in particular those on Wall Street think in terms of months and quarters, and we think in terms of years. We’re not necessarily upset if one of our companies goes through a rough two or three month quarter. As long as we think that their competitive advantages are intact, we may buy more stock. We tend to be very patient investors, but the corollary of that is often times you’re rolling, you’re just being stubborn. That’s where this art and science of what we’re doing becomes a craft. I think that we’re trying to learn as we do this, year in and year out, is become better craftsmen of investing and that’s the part and parcel of it.

8. How do you generate your ideas?

From everywhere. Company transcripts, company annual reports, company presentations, financial magazines and websites like yourself, where we follow terrific investors and 13F filings. We are not too proud to steal a good idea from somebody else.

9. There is so much information and so many stock ideas from all kinds of sources. Do you run a screener?

Not too much. We keep a pretty short list, and I think another element of being a focused manager is you really need to try to filter out all of the noise. Let’s say I read an interesting article on your website. I want to put it in a portfolio and then maybe do some more work. Well, if that particular stock is my 76th stock in the portfolio, even if it’s a good one, it’s not going to make a difference and if it’s a bad one it’s not going to, but everything that we have in the portfolio by definition has a meaningfully higher weighting typically than its weighting in the benchmark.

Not only is focused investing a high conviction activity, when you only own 20 stocks, everything is above the benchmark--that amplifies things. And so we’re looking for fresh, new ideas. We think that’s kind of chasing your tail.

Read part II here.