If you had invested $10,000 in the S&P 500 five years ago, you’d have roughly $14,091 as of the end of the second quarter. If you’d invested that same $10,000 with Donald Yacktman’s Yacktman Fund (YACKX), you would have ended up with a cool $21,313, or more than 50% more.
To quote that guy from the AT&T commercials: “More is better, right?”
The outperformance is no fluke. Pull the analysis out to 10 years, and Yacktman’s $11.5 billion fund is still beating the market. By a considerable margin.
If you’re curious about how he does it, the three quotes below — all three of which came from his presentation at ninth annual Value Investing Congress in New York — give some insight.
“This business ultimately boils down to what you buy and what you pay for it.”
The VIC is a value investing conference, so it makes sense that there are a lot of investors keying in on buying their stocks at discounted prices. And Yacktman is on the same page there. But notice the pairing in this quote and notice the order of the pairing.
Price does matter. In fact, anyone that doesn’t invest as a value investor — trying to pay less for a company than its true worth — is either missing the point or hates money.
But price is far from the only thing that matters. Buy a mediocre company at a healthy discount and it’s possible that you’ll end up with a decent gain. Buy a great company at a discount and you may end up with the real jackpot: a business worth owning for the long term that will compound your capital for decades to come.
“When it comes to management, don’t listen to what they say, look at what they’ve done.”
It’s not a bad idea to tune into what company management teams have to say. There’s often good color that’s shared on quarterly conference calls, and in many cases you can get a good overview of company strategy by reading the annual letter to shareholders.
But when it comes to promises that management makes in terms of capital allocation and strategic priorities, it’s a good idea to keep them honest by checking the tapes. Sure, they may say they’re going to eschew acquisitions and focus on buybacks and other more profitable uses of shareholder capital. But have they delivered on that in the past?
Management teams can change their ways, but betting on that is rarely a slam dunk.
“We’re not oblivious to the macro, but it doesn’t change our decision-making.”
Focusing on the macroeconomic environment has been all the rage following the 2008-09 meltdown. You’re a dupe, the thinking goes, if you ignore the macro because you’re bound to be caught unawares and watch your portfolio get sucked into the next swirling vortex of macroeconomic maelstrom.
Yet for decades, value investors (including a guy named Warren Buffett) have said time and again that they don’t focus on the macro environment when making investment decisions. Does that make them dupes? Hardly.
It’s not that investors like Yacktman and Buffett think the macro is meaningless. Instead, it’s that they realize that accurately predicting the macro picture is essentially impossible. So rather than banging their heads against the wall, they focus on evaluating company-specific factors that are comparatively stable and predictable.
Yacktman: What he’s buying, what he’s not
If you’re curious where all of this has led Yacktman to stock up his portfolio, look no further than large, high-quality companies. At the end of the second quarter, the Yacktman Fund’s top three holdings were News Corp (NASDAQ:NWSA), The Procter & Gamble Company (NYSE:PG), and PepsiCo, Inc. (NYSE:PEP).
According to Yacktman at VIC, he’s sticking with large quality because right now, “you’re not getting paid much for buying lower quality.”
Meanwhile, what’s Yacktman not buying? Apple Inc. (NASDAQ:AAPL), that’s what. Though Apple Inc. (NASDAQ:AAPL)’s been lauded by many as a quality, cheap company, Yacktman isn’t exactly on board. He’s afraid that the company’s fat margins will attract hungry competition — specifically, he said that Samsung “will eat their lunch.” And if (when?) that happens, Apple Inc. (NASDAQ:AAPL) suddenly won’t look quite as cheap.