I’m not sure how I got interested in learning about Donald Yachtman but I’m drawn to his style of investing. His background seems like most (fairly unremarkable) until you see the Harvard MBA on his resume. And the more I understand how he operates his investment strategy it’s become clear we have some aligned views. He’s a long-term investor that likes quality stocks at good values. This sounds like every article I’ve written on this blog.
I listened to a recent interview and he said that you can tell how I feel about valuations by the amount of cash I’m holding. He said if he’s holding 30% cash then you can be sure that he feels things are way too frothy so he’s waiting for prices to come down. At that moment, he was about 15% so he didn’t seem to think things were too crazy. Though I’m no guru, I feel the same way. If I’m having a hard time finding value in the stock market then I build up my cash reserves and wait for a better entry point.
When you look at at their website (yackman.com), it says very clearly on the front page they are long-term value investors. Their firm seeks to achieve superior risk-adjusted returns over a full market cycle by employing an objective, patient, and diligent investment approach. Wow! That sounds very familiar to my approach. No wonder I like the guy.
This Donald Yacktman interview comes via GuruFocus.com in 2012. Though the interview is nearly 10 years ago, I’ve heard him say similar things. His style and approach seem to be very much solidified and it’s working.
The Interview Quotables
“It’s pretty simple. We know our core universe well and look for valuation driven entry points”
This is exactly what I’m doing. My core universe is my Master Stock List. The list continues to evolve as I refine it and move companies up and down grade level (1-3 with 1 being the highest grade). And then I wait patiently (or as patiently as possible) until the stock hits my buy range.
The key here is to know your universe very well. There are thousands of companies to choose from. Most of my companies pay dividends and are fairly large in size. These are my core universe. The small cap flyer I might take a small chance on are not part of my core universe. I’m talking about Johnson & Johnson, Coca-Cola, and Pfizer. These are part of my core universe because they have strong balance sheets and generate good cashflow (amongst other things).
“Our first goal is to protect the clients capital over time.”
This should sound very familiar. If we remember Warren Buffett’s “Rule 1: Never lose money. Rule 2: Never forget Rule 1.” I’ve lost lots of money doing stupid things … taking unnecessary risks on junk companies or trading. Now, I’m focused on the basics of stock picking and they are pretty simple rules:
- I need my stocks to survive – Over time, so many companies go bankrupt or become a shell of themselves. Not in my portfolio, at least that’s the goal I strive to attain.
- I need my dividends to survive – Most of my core universe of stocks pay dividends. One of the reasons I bought the stock is so that it can pay a cash dividend in my retirement. Why would I buy the stock if I don’t think my dividend will survive? So, in my portfolio my dividends need to survive (and not get cut or eliminated).
“The second goal is to obtain equity-type returns, approximately double digit annualized.
As we say in business all the time, what gets measured gets our focus. We must set some sort of goal for our portfolio. For me, I’m trying to generate reliable, growing dividend income and hope to have $15,000 by June 2025. The goals need to be realistic though.
Saying you will achieve 20% returns will set yourself for disappointment. Plus, you’ll have to take extreme risk to achieve those kinds of returns and that brings up a host of other issues. For me, I set very modest total return goals when I forecast my assets. Where I set aggressive goals is with my savings rate or debt reduction (which is why I don’t have anymore debt). These are within my control for the most part. By forecasting modest total return goals (3.5-4.5%), I under promise and over deliver and have lots of potential upside for retirement.
” Our third goal is to beat the S&P 500 index over a full peak-to-peak cycle.”
In the Warren Buffett letter of 2001, we heard him say how important it was to know how your performance is relative to what your trying to achieve. In my case, the equity performance of my taxable stock portfolio should match or beat the Dow 30 since many of my stocks have large capitalizations. Mr. Yachtman is using the S&P 500 index as his relative target to beat.
“The other thing is to really understand the business model. Most of the time the good businesses will make the managers look like stars, rather than the other way around. I remember one of my children said to me once, after dinner when we were talking about investing, “Now let me see if I have this right, Dad. Basically what you’re saying is if you buy above average businesses at below average prices, then on average it’s going to work out?” I said, “Yes, that’s basically it.”
I really like this quote because it keeps it really simple. Look for good business models (or above average) and by them at good prices (below average or fair value) and time will take care of the rest. That’s exactly what we are trying to do with our Master Stock List. By high quality companies at good prices. Some might say this is easier said than done but it’s really not. Pepsi, Coca-Cola, Johnson & Johnson, Nestle, and Procter & Gamble are perfect definitions of above average business models.
For the most part, we know what companies to buy. Honestly, I don’t think that’s the hard part. The hard part is getting them at the right price. And that leads us to his next very important quote. A quote I mention over and over on this blog.
“What we’re doing is attempting to shift the odds more in our favor. I can’t overemphasize the importance of patience. So many people in this business think in terms of 10 minutes, or 10 hours, or 10 days, or 10 weeks, or 10 months, not 10 years. Very few people have the inner strength or patience to wait it out.”
I’ve not counted but if I did I’ve probably said this exact thing 50 times on this blog. To this day, I still believe hard part is not which company to buy but having the patience to buy it at the right price. What makes this so important is we aren’t buying companies that are growing 15% annually …. most of our target companies are mature and have been paying dividends for decades. And this makes the price you pay so important.
Patience is needed not only when you buy but when you sell too. I’ve learned this the hard way. The old me would sell a stock if I achieved 15-25% returns. Now, I’m buying these stocks (and reinvesting dividends until I need the cash) and holding them for long periods of time. In fact, I just told my wife that we’ll likely (which a possible few exceptions) hold these stocks for the rest of our lives. Have the patience to hold stocks and let the business do it’s thing. If a stock stagnates for several years it gives you a chance to buy more and reinvest dividends. Eventually, and it will happen, the market will wise-up and reward the business with a high multiple. The only question is will you still be holding the stock when the market moves the price up?
One final point on this. Warren Buffett (I know I quote him a lot but he’s very quotable) has said “if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.” He’s said often that before you buy a stock you should pretend the market will be shut down for 10 years. Are you comfortable holding that stock for 10 years when the market shuts down? If not, it must not be high enough quality to own it in the first place. Back to Mr. Yachtman’s point … expand your time horizon and be a long-term, buy and hold investor.
“We are focused on a fairly narrow universe of companies we know well. These entities are principally higher quality, U.S. domiciled, larger capitalization companies.”
This quote mentions a concept worth repeating. There are thousands of companies we can buy but you can’t know them all well. You need to narrow your focus. If you are a small cap investor then you don’t want Exxon or Pepsi on your radar because they’ve got little to do with small cap investing. However, if you know Pepsi well then you can take advantage of times when they are struggling or having business challenges. This will create an opportunity where the price might go down on a high quality business. And because you know the business well, Pepsi in this example, then you can identify opportunities quicker than someone that doesn’t follow Pepsi.
That’s the entire purpose of me having a watch list of only 50 companies in my Master Stock List. On an annual basis I’ll add 1-2 and remove 1-2 but that’s because I’m following them well and I know if they meet my criteria. But I know them well enough so that if something happens to them then I can start a position or, better yet, add to a current position. This is exactly how I bought my first starter position of Unilever (UL) the other day. I follow the owner of Vaseline, Ben & Jerry’s and other brands. When the stock reported good earnings but the company made a statement about future inflation and the stock went down 5% in one day. That’s a great time to buy a high quality company at a discount.
“Quality is a combination of characteristics. We like to start with high return-on-asset businesses. We also like predictability. And we prefer businesses that have fairly stable operating results in both good and challenging economic environments.”
Using this brief description of quality you’ll see these types of companies make-up the majority of my Master Stock List. He has other descriptors too but that’s a basic start. Personally, I’m show favor to companies with good balance sheets (low debt and/or high cash) because my most basic need is that my stocks survive. High debt and low cash will crush. company quickly so that get’s my focus. We all need to create a description of what a high quality company looks like so that we know it when we see it. Once we see it we follow it forever and wait for the right price to purchase (this is the patience part).
Summary
What I like about Yachtman is 70% of his holdings are in 20 stocks. This aligns perfectly to my research on the number of stocks to hold. Sure, he has about 66 total stocks for his $10B fund but the bulk is in those 20 stocks. That is his core and as they move so will the portfolio.
What I really like about Mr. Yachtman is how simple he approaches the market. Own above average business and buy them at below average prices. Does it get any simpler than that? So often we try to over complicate the process. Focus on your universe (mine is about 50 potential stocks) and buy when you think you can get good value. You don’t necessarily have to wait until there is “blood in the street” but get them at fair to below average pricing. Doing this will slowly lead to wealth.
Thanks for reading!
Mr. TLR