Donald yacktman investments for dummies

Ultimately, we think this business boils down to what you buy and what you pay for it. Think of it as trying to be a good shopper. This is the rate we would expect if we hold the security indefinitely and the multiple we pay for the business does not change much. We look at the cash being generated and the growth rates of the business, and by adding those components together, you get a forward rate of return.

We are not investing with a goal of mimicking a benchmark. I think that style evolved because managers could protect their personal business risk. We had one back, by the way in the early 70s. We had a bubble period in 72, early I think you have periods like this that people take things to extremes. If you go back even further, all this was before I invested, in the period, the number of the consumer nonverbal stocks which I tend to like a lot, they were really overpriced relative to other things at that time.

You get these bubbles with certain things. And so, what you are trying to do to the best of your ability, is use probability distributions as to possible outcomes. Attach those to basically looking at growth rates, profitability and reinvestment rates and trying to come up with forward greater return. Something that is sustainable for a very long period of time if you bought this stock today, and then try to adjust those like you would a stock, like a bond and then grade the stocks like a bond.

Therefore, you get donald yacktman investments for dummies adjusted forward return. They are a little bit simpler because you have one static coupon rate where stocks will change overtime. The other thing is the reinvestment rate on a bond. It takes a lot longer to change the rate of return on a bond because the coupon is such a small percentage.

Looking at cashflow is really important, but when you put those two pieces together, it is easier to make adjustments with the stocks. I think the classic example of what I am talking about is looking at somebody like Warren Buffett who started out with some pretty trashy businesses. Berkshire Hathaway is his company, but If you look at it what it did originally, it was a pretty crappy business, frankly.

What he did, he re-allocated the cash flows to much better businesses because he bought it so cheap. He bought the cash he was generating so cheaply that it made sense. I remember afterwe looked dumber than we really are up until at the peak of the market. We were up in and Inmost people were up. But then what happened is, we started to lag behind because we started to see more floppiness and more speculation.

And of course in and early inwe did very well in 08 and The reason for that is, we were using this concept that I talked about. What happened is some of the things that we held, held up so well that the rates of return were not nearly as good as some things that really collapsed. So we were shifting not only buying what we had left over but shifting into things that have a higher rate of return.

The market, when it tends to go down, it does down rapidly. So we did very well going down but then we were positioned because of having made these moves, do extremely well in 09 when the market went up like a rocket. I think the real risk is in the bond market more than the stock market.

Donald yacktman investments for dummies: Donald Yacktman's portfolio holdings are currently

You have to have a long term year bond with lower yield on it than you can on some AAA stocks. That should tell you something. James: Your investment philosophy, Don, is really well appreciated. I think there is a couple of things that really resonated with me. One is I think I learned about the triangle. I think you talked about good companies with good prices with good management.

And, another analogy you had is the beach ball. Maybe just talk to our kids about your investment philosophy. How do you look for a stock? Donald: I think the triangle is very valid. First of all, make sure you buy at a good price. We talked a lot about that one already. The business model one is very, very important too. Again, it boils down to what you buy and what you pay for it.

On the business model, I know I sent you some graphs and you can share those. The business model think of it as two axis as being fixed assets and the other one being economic sensitivity or cyclicality.

Donald yacktman investments for dummies: About Donald Yacktman. Mr. Donald Yacktman

One that has made money for virtually a century now has been, Coca Cola. The capital is in the intellectual property, which is the formula that is used to make Coca Cola. Again that concept, one cute story is when this guy went to a 25 year class reunion at Harvard. I barely made it through. I had to work like crazy just to get through. So, I went back to this little town and we developed this little product.

You probably use it everyday. We make it for a dollar and we sell it for four. He got the concept right. A good manager, by the way, better businesses tend to attract better managers so that makes the issue. But good managers and capital allocators. So, how they behave is what you want to donald yacktman investments for dummies because the best predictor of the future behavior is the past behavior.

If you look at history, what you will find is that virtually every economy, some of the money is allocated by free enterprise and some of it allocated by government. Free enterprise, historically has done a better job than the government on average. Not that everything free enterprise does is wonderful and perfect or that everything government does is miserable and bad, but on average.

And so, what you have is free enterprise. The more money that is allocated by free enterprise, the faster the society can grow and the standard of living can rise. Well, the same thing happens with businesses. The better the allocation process, and this is again, if you want to go back to the Granddaddy of this is Warren Buffett, Berkshire Hathaway.

The combination of these three. You want the better businesses. You want to be able to buy them at a decent price. And with a good manager, that means the value will rise so you will own more escalators than moving sidewalks. Therefore, you end up with beach balls pushed under water with the water rising. I think in most cases, you would be a buyer of the product or user of the service.

There are some exceptions to that. The one that stands out to me is the stock that some of my clients have made a lot of money on. Today, the dividend exceeds what they paid for it, the annual dividend. They obviously are not very healthy if you use. You know what I mean by that? But the people that do make a moral judgement, I certainly respect.

The other day, we were talking about this at lunch the other day. I was with a couple of my sons and we were talking about branded product versus a house brand versus generic. During periods of recession, typically what happens is that people will tend to want to retain their standard of living so they may slip down from the branded product and go to house brand or to a generic, temporarily.

There was this house brand. After trying it once, I went right back to using Cascade. But sometime they do. Back inwe went through a little recession. The same thing came up. I did a little test. I put it in the cupboard because my kids like Cheerios. Yours truly. And, I completely understand and I see why you invest in these businesses.

That would be because of technology, the cost to advertise is going down so that the cost to build a brand maybe has declined. Maybe the channels have changed for some of the consumer products. What would you say to the investor that said you know 30 years ago, consumer brands were great businesses than 20 or 10 years ago? But today, you post a Youtube channel and all of a sudden, you have Dollar-a-Day Razors.

Yacktman: Another thing has been that in an environment of a weak economy, these companies have tended not to increase their prices as much, because they want to maintain market share. They just have enormous market shares. Protecting money in our view means avoiding dumb decisions, permanently losing the capital that you have. At some point, things tend to come more into a normal pattern.

And yes, the pricing power is there and will come back as the economy comes back. What are the key investment considerations when it comes to protecting money? Yacktman: Protecting money in our view means avoiding dumb decisions, permanently losing the capital that you have. Because of that historical inflation rate, you get eaten alive if the money is just put under a mattress.

MOI: Could you speak a bit about the role of portfolio management when it comes to these goals and considerations? The more money one can pack into the top ten or fifteen ideas, the better off we feel you are — and ironically taking less risk as a result. Although most people see that as a risky approach, we see this as a less risky approach.

MOI: Are these considerations different when one thinks about the short term versus the long term? Yacktman: The time horizon needs to be very long to use the approach we do. The one thing that comes with that is a requirement for patience. Because of our goals and our process, we will not beat the market every quarter; we will not beat the market every year.

The long term is very important. The danger is that investors can end up churning their wheels if they start to look at short-term phenomena. MOI: I want to go back to the bell curve you mentioned. You stated that in very disruptive periods, typically the tail of that bell curve gets elongated, and there are more opportunities. Am I right in concluding that when the times are not particularly disruptive, you are better off with the high-quality businesses?

When there is a disruptive period, you may be rewarded by looking elsewhere? The key is to be totally objective. There are three different times when opportunities tend to present themselves. Just like the yields go up on bonds when the price comes down, we see the same effect happening in stocks.

Donald yacktman investments for dummies: We had the pleasure

The disruptive periods are — the massive one where you have a market decline like in the period — that creates enormous amounts of opportunity. Then you have a situation where something hits an industry, like a dramatic change in healthcare. MOI: It really does go against this common notion that people throw around, that term of safety and they want to look for safe investments.

What people view as uncertainty may be an uncertainty in the short term but may not be as uncertain in the long term. But yes, people get scared because of short-term events and the market tends to be this manic depressant. It tends to be disruptive. But occasionally, you get these outlier situations whether again for the company, an industry or the market as a whole.

Yacktman: The most difficult aspect is to totally understand decision-making by managements. What we have found is that you like to look at their history and what decision-making process they go through. One [options] is a dangerous one, which is acquisitions, because too often the ego overrides the economics, and this is where it gets scary. But the companies, after their infancy, start to generate excess cash and so they have to examine four other options.

One option is a dangerous one, which is acquisitions, because too often the ego overrides the economics, and this is where it gets scary. Next one is letting the shareholders have it back through a dividend. And the last one is just sitting on it. But one needs to take that into account. As an example, a few years ago we had a much smaller investment in Hewlett-Packard than we would have had just because we were very nervous about their capital allocation process.

And they actually exceeded our worst expectations with the Autonomy acquisition where they, in our opinion, grossly overpaid for it. Those are the kind of things that become surprises in a negative sense that can also be a surprise in the positive sense. In the case of News Corp. And then of course the British parliament got unhappy with them and prevented them from doing that.

And so they had to go to Plan B, which we liked better than Plan A, which was buying back their stock which we thought was a much better use of cash based on the price of stock.