Musings on the “400% Man”

When I read the following article at SmartMoney, I said to myself. “I have done almost as well, I am more diversified, and I am willing to explain more of what I do.”

Truth is, clever investors, or lucky investors can get an attitude, saying that they don’t have to explain themselves to outsiders.    Not a good place to be. I am not saying that the performance is due to luck but there is a certain amount of respect due to investors for investing with you.

Before I write more, let me state that I respect Allan Mecham.  He manages more money than I do, and has a better track record.  If I were in the shoes of the investors who were analyzing him, I probably would have placed $5 million with him, and would have watched what he did carefully.

Why would I take the risk?  It’s tough to find non-consensus views that make significant money.  I wouldn’t want to make it a huge allocation initially, but I would put a toe in the water to see what he would actually do.  If it didn’t work over 5 years, I would pull the plug.

All that said, when you run a very concentrated portfolio, it is possible for a few decisions to drive a lot of performance.  I would feel more confident regarding someone who had made more correct decisions, because it would indicate a higher likelihood of a repeatable process.

Let me give you an example from my own portfolio.  I own SABESP [SBS], one of the largest water utilities in the world, which provides water and other services for the city of Sao Paulo in Brazil.  I got the idea from Cramer.  It’s the only idea I have ever gotten from Cramer and acted on.  I have held it for eight years, and the stock has quintupled.  Beyond that, I have made trading gains, because it has been somewhat volatile, as most Brazilian stocks have been.  And what proportion has this been in my portfolio?  Around 3%.  The largest position in my portfolio over the last 12 years has been 8%, and it has been rare to have a position larger than 4%.

One strength of what I do in asset management is that I don’t force trades.  I’m patient.  I trade 3-4 times a year, swapping out 2-6 companies each time.  The portfolio turns over once every three years.   But that means that roughly one-third of the portfolio I have held more than three years.  It’s not that those companies are old friends, but they continue to survive the tests that I give the whole portfolio.  That said, when I sell one of those held longer, I do feel a slight sense of loss; it’s like losing a close friend.  I know I contradicted myself here, but that’s because my views are ambiguous here.  My summary would be that I love the companies that I have held for a long time, but they have to pass the test 3-4 times a year.  There are no free passes, and no sentimentality.

I know more about my own processes than I do of Mecham’s.  But I have felt the cold appraisals from institutional managers over the last five years, with the implicit complaint — “you have done well, but you don’t manage enough money, so we are not going to invest with you.”  This is the same response as “we don’t buy anything other than IBM.”

I can talk about my own processes until my face turns blue.    They will still work in most environments.  But the article tells a story of investors that are risk-averse, but without any good sense of what true risk is.

For those that are looking for the next great investor, he does not look like the next great investor, but he looks odd, like Buffett did in the 50s and 60s.  Take the chance, and invest with the odd value investor.  Invest with several of them, diversify.

If I were managing assets for a pension fund, I would assemble a stable of new-ish value managers, and that would be 70% of my portfolio, with 30% investment grade bonds.  Boring and beautiful.

Without reviewing Allan’s trades, I can’t say how certain I am of his abilities.  But I would have a bias in favor of small value managers with good track records, particularly those who have been diversified.

Full disclosure: long SBS