GuruFocus had the pleasure of hosting a presentation with Brian Yacktman, the president and chief investment officer of YCG LLC, which he founded in 2007 in Austin, Texas.
YCG is an active management firm that has seen assets grow from $1 million to nearly $1 billion as of Sept. 30, while achieving market-beating performance since its inception. YCG offers separate account management and is the adviser to the YCG Enhanced Fund (YCGEX).
Prior to starting YCG, Yacktman was an Associate at Yacktman Asset Management (Trades, Portfolio), the adviser to The Yacktman Fund (Trades, Portfolio)s. He joined them in 2004 from Brigham Young University, where he graduated cum laude with a bachelor of science in economics and an MBA with an emphasis in finance. He has been quoted and highlighted in financial media outlets such as CNBC, Fox, WSJ, Bloomberg, Barron's, MarketWatch, CNN, Reuters, and Forbes. He also has served as a panelist for Institutional Investor and as a guest lecturer at Brigham Young University, University of Texas, Texas Lutheran University, the Gurufocus Value Conference, American Society of Appraisers and at the Googleplex.
YCG seeks to invest in global champions, believing the key to successful investing is to compound capital at high rates of return for long periods of time. Businesses with this capability are extremely rare because competition and innovation drive down real pricing. Therefore, the firm pays particular attention to identifying businesses with enduring pricing power, most often found amongst globally networked businesses with long-term volume growth opportunities that are growing at least as fast as gross domestic product. It also wants these businesses to be conservatively capitalized with owner-minded management teams, trading at prices the firm believes will achieve attractive rates of return.
Watch the full presentation here:
Key takeaways
During his presentation, Yacktman broke down his investment strategy and philosophy into five key sections. These sections clearly illustrated his reasoning for investing in high-quality companies that offer long-term opportunities for solid returns. From these sections, he drew out four conclusions that drive home his keys to success.
The first of these conclusions is to invest in what Yacktman calls "global champions." These global champions have enduring pricing power that is unaffected by competing companies or devaluation over time. Thanks to the global consistency that these companies have developed, they offer up long-term volume growth opportunities that are unmatched for the consistent returns they offer.
The second conclusion was to protect your shareholders' interests. Yacktman explained that he looks for companies that have ownership-minded management teams. These teams take into consideration minority shareholders and operate their business within safe structures. He tied in that an investor should beware a company that employs aggressive capital structures as that will skyrocket risk over time.
The third conclusion is agreeable across all investors and that was "do not overpay." Here Yacktman highlighted some pitfalls that investors can fall into. One in particular was to be wary of market-timing mispricing. Just because a company looks like it could make a good investment now does not mean that it will continue to offer those returns long term.
The fourth and final conclusion came down to a simple premise. Wait on your investments. Once you have done your due diligence and found a good investment, hold it and watch your returns grow. Selling a holding can oftentimes cost more in the long run and taxes are money that is not compounding for you.
Stocks
Yacktman looked at a plethora of holdings that YCG likes and used them to explain different network effects that can be seen on a global level. The first grouping came down to what he described as classic network effects.
This group contained several holdings that Yacktman explained have upwards of billions of users around the world. Mastercard (MA, Financial) and Visa (V, Financial), for example, have billions of users around the world that are connected through millions of merchants. This is a massive network of intermingling businesses that will continue to work together well into the future.
Another interesting group came from what Yacktman titled "belief network effects." Within this group, an investor will find luxury brands from around the world. Companies like Ferrari (RACE, Financial) and Nike (NKE, Financial) have developed a belief system that the products represent a certain status. Due to this belief, people will continue to pay premium prices to make themselves feel like they are part of these status groups.
Questions
There were many questions that prompted in-depth answers from Yacktman at the end of his presentation. One question in particular started off asking about his opinion on Biogen (BIIB, Financial), which led into a discussion about several different industries.
Yacktman explained that health care and biotechnology seem like industries where there should be enormous pricing power. He believes these types of industries have been propped up by a type of collusion with the existing power structures. He explained that if a new regime were to come into power, he is uncertain of the economics of those types of businesses. They could overnight lose all of their value should this type of change happen, and Yacktman believes this is not a risk worth taking.
From there, several questions came in regarding different industries, including gold mining and energy. Gold brought about a simple answer from Yacktman. He explained that gold has traded at essentially the same value for the last seven centuries and is not creating any capital. If the market were to disappear overnight, gold stocks would not make people money.
On energy Yacktman took a similar stance, but with different reasoning. Energy takes high levels of capital to be produced and, generally, companies expand through issuing new debt. This builds up over time and should the demand for energy go south, a company could be placed in a difficult situation. For Yacktman, the risk well outweighs the reward and he tries to steer clear.
Disclosure: Author owns no stocks mentioned.
Read more here:
- Daniel Loeb's Top 5 Trades in the 3rd Quarter
- Seth Klarman's Top 5 Buys of the Third Quarter
- Robert Olstein's Top 3rd-Quarter Trades
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