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Dr. Zen
Dr. Zen
Articles (29)  | Author's Website |

Ruane Cunniff’s Success Formula

October 10, 2011 | About:

In my last article, we dissected Bill Ruane's “meek-lamb mentality” for investment success. Here we’ll explore his secrets of building a successful money management firm.

“Start your own business. It’s a hell of a lot of fun.”

On Dec. 4, 1990, Bill Ruane gave a presentation at New York Society of Security Analysts about “How to Start and Build an Advisory Firm.” Ruane told a story about a Harvard survey: “I got out of the Harvard Business School in 1949. We had our 25th reunion in 1974, a fateful year. Gail Sheehy took a survey of our class. We had about 600 or 700 fellows. I don’t know how many answered the survey — probably 200–300. One of the interesting things she thought she found was — that the people who then (all of us were in our mid-40s) had started their own little candy stores were happier in general than those that went into the corporate world and climbed the corporate ladder. Even those that had done very well — let’s say they became senior vice presidents, vice presidents — unless they had that CEO job — there was something that just didn’t quite make things as fun as the fellow that went out and started his own business.”

It takes a leap of faith to start on your own. The idea to be on your own bothers some people. And 15 years later, when Bill Ruane went back to Harvard for their 40th reunion, they found that all the people who went into business for themselves, all 65 and over now and mostly retired, are happier than a clam. So just get started on your own, and don’t let it bother you, advised Ruane.

First, you need people.

“The first thing is people. I mean getting together with them. You can do it on your own, I suppose, but it isn’t as much fun, but if you are going to create something of any size, you have to do it with people,” said Ruane. Ruane was fortunate enough to do it with Rick Cunniff. They both started at Kidder Peabody after having been sort of weaned on the case system at Harvard Business School. One of their professors said: We don’t use college textbooks up here. But you have to read Graham and Dodd. So they did, and both Ruane and Cunniff liked the whole thing.

Ruane and Cunniff became very close friends at Kidder. They actually went up and took a seminar that Ben Graham conducted at Columbia at the time, and they remained close friends even though Rick moved on to a variety of positions in the investment business.

People and connections are crucial for an investment advisory firm. A big part of Ruane’s success came from a carefully-cultivated relationship with one man, a classmate at Columbia and a colleague at Graham Newman — his name is Warren Buffett. Warren closed his partnership in 1969. And that’s the year Bill Ruane opened his investment advisory firm to help those departing clients. In 1969, Warren had about $104 million under management. Perhaps one fifth of that, about $20 million, came to Bill Ruane to kick start his business. And that’s a good start that can only come to those who have the people skill to nurture important connections.

Don’t wonder for the rest of your life if you should’ve started your own business.

While working in the corporate world, Ruane and Cunniff always thought, at some point, that they wanted to have their own business. You can’t imagine how many times they talked about it and almost started it. Ruane recounted his moment of faith: “After many starts, one day Rick and I were having lunch, and really it was kind of a go-or-no point, and I said, ‘Rick, what are we going to do?’ He said, ‘Bill, if we don’t do it now, we’re going to wonder for the rest of our lives if we should have done it, so let’s go.’ And honestly, I said, ‘That’s it, Rick.’” With that idea, they both quit and started on their own.

You have to pick good people. “In terms of people, I couldn’t have picked a greater guy (in Rick Cunniff),” said Ruane.

A long and intelligent conversation is the key at picking people. Ruane started off with Rick and Sid Steiner. Later on, he thought that really one of the most fortunate things to ever happen to him was having Bob Goldfarb walk in the office one day and say that he was interested in our business. Bob and Ruane talked with Rick for a very long time, Ruane didn’t let Bob get out the door without hiring him. Ruane said: “I want to say that Bob is a major owner of the firm along with me and Rick, and I don’t know of anybody that could be a finer partner, and he’s on my list of the top five people in the world in terms of knowing the securities business. Again, it’s people. I’m lucky. We’re lucky.” The ability to recognize intellectual sparkle during an intelligent dialog is important.

Secondly, you need to share a common philosophy.

Ruane and Cunniff clearly had a common philosophy. They believe that the philosophy you use is important. There are a lot of ways to make money in the stock market, and the philosophy ought to be consistent and the people you work with ought to share that philosophy.

Third, you should have some capital, either personally or in the firm.

It is important that you have staying power, in terms of capital, because these markets are unpredictable. Markets always have been and they always will be unpredictable. “If you could see the little memo we sent out to people looking for money, it was a joke,” recalled Ruane. They started off in 1969 and had about $20 to $25 million under fee on a discretionary basis. They saw the firm running a billion dollars in about three or four years. By 1974, while still dreaming of a billion dollars under management, they were hanging in there with $20-25 million of assets under management.

They did raise money. They put up whatever they had personally as well as the backing of some other people. That capital was important to enable them to get through some pretty tough times in the beginning. They all have wives and children. There were times when capital is needed to keep going. You ought to have what you think you’re going to need for three or four years, in some form or another, to back you up, depending upon the size of the business.

Ruane picked the worst time possible to start a firm. They started in 1969. The Nifty Fifty came along, and they didn’t participate in that — and underperformed. Then 1973–74 came along, and the market fell apart. During the seminar, Ruane asked everyone in the room to take one second to imagine that everyone in the room right now suddenly saw all the stocks in their portfolio sink to 3½ times earnings. And they paid ten times earnings for them. Imagine how they felt in their bones. 1974 was hell. And those were Ruane’s first five years in business. Thank goodness that the next five years were terrific. In 1975–1976 they were up 62%–72%. They were number one or two in the country and got some nice publicity, together with a boost in business.

Having somebody that really can pay attention to the business details is vital.

You need somebody who's going to pay attention to the details of running a business, taking care of all of the operating details that have nothing to do with picking stocks. Sid Steiner was Ruane’s operations manager at the time. He had been at Kidder Peabody running the regular investment advisory department. Ruane recalled: “We basically did the research, but we were lousy administrators. Our interest was in studying the companies. We were basically security analysts. When people say, are you an asset manager or money manager, I don’t know what that is. We’re security analysts.”

Have total control over the operational process.

The other decision Ruane made was to have total control over everything — not only the analytical process, which is crucial, but also the operational process. They also decided to control the buying and the selling by themselves.

Ruane’s investment policy was often to buy a stock or sell a stock for maybe a period of six months. There had been times when they went for a year just nibbling away at something. They had to try to keep a secret because eventually the other side of the trade figured out what they were doing. So it was important to have brokers you can trust. Ruane had a customer’s man (or a broker) on Wall Street. He understood that one of the problems was that the fellow only got paid when he made a trade. Ruane didn’t want to be pushed to make a trade. He wanted the buying and selling to be handled in a way that is the most careful for the client.

By the time Ruane met Dennis Callaher from Ireland, the smell of peat moss or peat bog was pretty much off his Ireland shoes. Dennis became the assistant to the head of Neuberger Berman, and Ruane heard about Dennis, and approached him to run the back office, the whole operations department. Ruane asked him how much he was making, and he said $25,000, and he had these kids, and if Ruane could match that, it would be great. Ruane said, “Let’s make it $30,000.” Dennis got so excited, he ran to a phone booth and called his mother in Ireland and told her that he was in business. And then, Dennis made money before anybody else did in Ruane Cunniff because he promptly went back and told his boss at Neuberger that he was leaving to join Ruane Cunniff, and Neuberger raised his salary to $100,000 a year and made him a partner. Dennis said, “No, I’ve made a commitment and I’m going.” “This really tells you what kind of a guy Dennis is,” recalled Ruane.

Ruane carefully picked upright operational people to preserve secrecy and to keep everybody honest because they were buying and selling stocks for their fund, for their managed account, for their clients, as well as anybody out there.

How to grow an investment advisory business?

You make money for your clients. It comes from referrals and marketing. Ruane thought they had just never been able to market anything, but fortunately over a long period of time, they have been fortunate enough to have referrals come up. The ’70s were hell. The '80s turned out to be much better than they thought, and they were ready for the '90s with all the people they had got there. “All I can tell you is that it’s been a hell of a lot of fun, and give it a try if you think you should,” concluded Ruane.

In summary, here is Bill Ruane’s success formula for building a successful investment advisory firm:

1. Form bonding partnerships with able and upright people.

2. Stick to an investment philosophy that everyone shares.

3. Prepare enough capital to get through the hard times.

4. Do your own investment research.

5. Ensure operational integrity and secrecy.

6. Make money for your clients.

7. Figure out ways to garner referrals.

8. Optional lucky icings on the cake: Getting big name endorsements (Warren helps). and becoming the top fund in 1976.

About the author:

Dr. Zen
Brian Zen, CFA, PhD, author of "Superinvestor Lecture Notes", serves as Chief Investment Strategist at Zenway Group, a New York-based registered investment advisory firm providing asset management services, training Certified Securities Appraisers (CSA), and teaching Graham-Buffett Value Investing. Previously, Brian served as vice president at JPMorgan Chase and portfolio manager at Prudential-Bache Securities and Janney Montgomery Scott, while teaching graduate-level investment analysis at St. John's University. Brian was a Bernard Baruch Fellow and graduated summa cum laude from Bernard M. Baruch College. He is also a graduate of Columbia University's executive program in value investing. Brian appreciates your feedback at: bzen@zenway.com

Visit Dr. Zen's Website

Rating: 4.3/5 (22 votes)


Dealraker - 6 years ago    Report SPAM
A better description of Sequoia's phenomenal success formulal- nothing like clearing the air with the accurate picture:

Buy and hold an outsized position in Berkshire Hathaway. Stumble around aimlessly with other "picks" and get a great result/reputation.

Rgosalia - 6 years ago    Report SPAM

I disagree with your comment on Sequoia's ability to pick individual stocks. Let me site two examples of their other large long-term holdings:


- 7,893,000 shares purchases reported on Dec 2000 at avg cost of 24

- 2-1 split in May 2002, so avg cost of original shares is 12 after adjusting for split. 15,787,000 shares in Jun 2002

- Last reported holds 4,934,100 shares which today are at 58. Opportunistically sold the rest through the decade. They have unrealized gains of 4.8x or 17% CAGR on this holding


- Acquired 1,963,000 shares reported on Dec 2001 at avg cost of 60

- 2-1 split in 2002. Original avg cost is adjusted down to 30

- 2-1 split in 2005. Original avg cost is adjusted down to 15

- 2-1 split in 2011. Original avg cost is adjusted down to 7.5

- Currently holds 6,950,768. Very few shares were sold over the decade. Currently shares trade at 35. Unrealized gains of 4x or 15% CAGR

Both of these companies have done very well as businesses. I can site other longer term examples - Auto part retailer picks, Costco, Idexx Labs, and MasterCard.

Would you elaborate your comment on "aimless other picks".



Rommel Acosta
Rommel Acosta - 6 years ago    Report SPAM
Rishi, Dealraker probably looked at the portfolio, saw the outsized position in BRK, and assumed that was all they had going for them. Kudos for looking up the real numbers.

Dealraker - 6 years ago    Report SPAM
Sorry guys for my comment. Well, maybe not.

Maybe it is you that haven't done your research. There are publications on the Sequoia Fund that you may want to investigate- as to their performance without Berkshire.

All funds have winners like TJX and FAST- and losers too.

Kudos for looking up the real numbers on FAST and TJX.

Sivaram - 6 years ago    Report SPAM

Without doing a lot of work and disassembling the portfolio, it's difficult to argue against or in favour of Dealraker's point. If you look at the chart of Berkshire Hathaway vs Sequoia,it does appear as if Berkshire has significantly outperformed Sequoia (but do note that the chart linked does not include dividends so the fund probably did slightly better than it seems). Since BRK has significantly outperformed the overall fund, by mathematical definition of average, the rest of the picks of the fund are probably much worse off than the BRK performance.

Based on a quick look, I would side in favour of Dealraker and think that most of Sequoia's picks weren't that great compared to Berkshire Hathaway. If they didn't overweight BRK, then their return would have been significantly lower -- at least in the last two decades, based on that Yahoo chart I linked.
Rgosalia - 6 years ago    Report SPAM
Here is data from Morningstar, which I believe is very reliable:

Total Return % % Rank in Category
15 Year 9.02% 3 8.73% 5.62%
10 Year 5.41% 7 4.31% 3.15%
5 Year 2.85% 5 2.65% -0.04%
3 Year 10.08% 21 -1.89% 9.48%
1 Year 9.36% 4 -10.60% 6.47%
YTD 5.00% 1 -6.69% -1.05%

Looking back beyond 15 years is of no relevance today, because the current manager, Robert Goldfarb, started managing the fund in 1998, about 13 years ago.

The data above shows SEQUX outperformed owning BRK.B in all periods by some margin (although not considerable). This alpha occurred because of other picks other than BRK in those periods. This is what I have been trying to say - they are not just ridding on BRK's success. This is more evident in the 1 and 3 year period (although it is not long enough to conclude anything), as SEQUX did dial down its BRK holding over this period.

Going beyond the data, I recommend that you read SEQUX annual meeting transcripts (link), if you haven't already. You'll see that these guys really dig deep down into the companies they hold. I have never read shareholder letters that throw so much insight into specific holdings in as much depth as them. I have learnt so much about analyzing a business simply by reading their letters. Do you know of other value fund managers that do as good a job as them on talking about the thesis of their holdings?

Thoughts / comments / disagreements?

- Rishi

AlbertaSunwapta - 5 years ago    Report SPAM
Munger said in a recent interview (last year maybe) that most of BRKs success was from few good picks and the rest of their investing was 'crap'.

The point is, Sequoia is a mutual fund! They were smart to buy and hold BRK whereas most other funds either didn't buy it or they traded it off. BRK had float to work with, they didn't. Outperformance generally comes from concentrated positions and diversification leads to mediocre performance. Lastly, holding size and liquidity requirements are anchors for funds... so you really need to compare Sequoia to their contemporaries and not to BRK.

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