Insider Monkey recently shared The Vilas Fund‘s Q1 2019 Investor Letter, in which the fund disclosed 34.3% return for the quarter. You can download a copy of the letter here. Aside from posting information about its performance, the fund also shared a few comments on several stocks in its portfolio, among which was Air Lease Corporation (NYSE:AL).
“Air Lease (AL)
Air Lease Corporation is an aircraft leasing company run by a highly experienced and capable management team. The company has grown earnings over 20% annually over the last 5 years and has a return on equity in the mid to high teens. On a cash earnings basis, adjusted to reflect the fact that they don’t pay cash taxes due to very high depreciation levels, the stock is trading at roughly 5 times forward earnings and 0.8 times book value. A tremendous bargain for long term investors as we believe the proper multiple should be roughly twice these levels. With growth in earnings, we believe the expected return of Air Lease common stock is in the low 20% range.”
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Air Lease Corporations is an aircraft leasing company that was launched nine years ago. Since the beginning of the year, its stock gained 26.42% and on May 10th it had a closing price of $38.90. Its market cap is of $4.32 billion, and P/E ratio is 8.05.
At the end of the fourth quarter, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the previous quarter. On the other hand, there were a total of 25 hedge funds with a bullish position in AL a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Air Lease Corp (NYSE:AL), with a stake worth $92.5 million reported as of the end of September. Trailing Royce & Associates was Basswood Capital, which amassed a stake valued at $39.7 million. Selz Capital, Citadel Investment Group, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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