Warren Buffett earned the nickname “Oracle of Omaha” because of his good sense in picking stocks. He has long had a sort of sixth sense about the markets. But investors like Buffett don’t come along more than once in a lifetime—or do they? Wall Street has been talking about who will replace the octogenarian when he retires from his firm Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). But what if the next Buffett doesn’t come from Berkshire at all?
Allan Mecham and Warren Buffett
Recently we looked at 30ish value fund manager Allan Mecham’s most recent letter to investors. The rest of his letters going back to the beginning of the hedge fund’s inception were obtained by ValueWalk, and they reveal some remarkable things. For example, the writing style is quite similar to Buffett’s. He uses imagery like Buffett does, and his most recent letter suggests he could move toward a storytelling approach, just like Warren Buffett . And just as Buffett’s annual letters are enjoyable reads, so are Mecham’s. This value investor who has been called the 400% man by MarketWatch and The Next Warren Buffett by Forbes, is certainly one to watch, and he may even have his own Charles Munger too.
In a letter dated Sept. 13, 2013, Allan Mecham collected data regarding his firm’s flagship fund the Arlington Value Management (AVM) Ranger fund. He notes that they funded the fund just 53 days before the collapse of Lehman Brothers and right before a “1-in-100 year economic inferno ensued.” He also highlights their two- and five-year returns, which show that Mecham just might have the sort of sixth sense about stocks that Warren Buffett has.
Allan Mecham’s fund among the top performing
In his September letter, the fund manager said their AVM Ranger fund posted a 41.85% five-year annualized gross return. Compared to other funds, The AVM Ranger fund came in second place in Morningstar’s database of top performing funds. Only the Oceanstone Fund did better.
Allan Mecham notes that there are plenty of other ways to measure their fund’s performance and that they aren’t suggesting that the comparison is “perfect or all encompassing.” He added, “There are certainly exceptional equity funds superior to Arlington not included (we just hope they revel in obscurity).”
Allan Mecham remains humble
One thing that stood out about his September letter was a reminder for investors that their five-year performance probably won’t happen again. He repeated this sentiment in his more recent 2013 annual letter. In fact, this appears to be a recurring theme in his letters, as he states that investors shouldn’t expect their exceptional gains to continue forever.
He also reminded investors that his own money and his partner’s money don’t hold any outside funds or stocks, so their money is entirely invested with their LPs.
Mecham did not return requests to comment for this article.
Wait and see
In Allan Mecham’s 2008 annual letter, we noticed something else interesting. He seems to be taking Warren Buffett’s wait-and-see approach to investing. When questioned about major acquisitions in the past, Warren Buffett has said that they’re always looking for a great deal, but he won’t make an acquisition deal unless it’s a really good price. Allan Mecham seems to use a similar tactic in his investing. He says they are very specific with every aspect of their business.
“We will continue to look for lay-ups, or absolute no-brainer types of investments,” he wrote. “The major advantage one has investing in the stock market is the ability to patiently wait for the slam-dunk opportunity. There is no reason to try anything overly difficult. We’ve spent a good deal of time, and effort, and even turned down large sums of money so as to attract a unique investor base that provides us with the freedom to wait for rare opportunities.”
Allan Mecham “trounced the market”
According to a copy of Arlington Value Management’s 2012 annual letter, which was written by Allan Mecham’s partner Ben Raybould. Interestingly enough, the writing style is again similar, and the investing philosophies again echo those of Warren Buffett. Could Ben Raybould be Allan Mecham’s Charles Munger?
Recently Buffett said the stock market can’t be rigged, a response to a question about investors who feel like they can’t get a fair shake in the market. Raybould’s letter offers a similar sentence, but in 2012. He noted that most firms claim to have some sort of “investment edge,” but he believes this is mostly marketing talk. In fact, he basically says any investor can compete with any big firm even if they don’t have deep pockets to devote to research. He says Mecham did just that.
“Many investors feel they can’t compete with substantial research budgets at the largest investment firms,” Raybould wrote. “I am happy to report that over the course of a decade, Allan has trounced the market by 20%+ per annum operating on a research budget that has never topped $10,000.”
Investing’s like poker, apparently
Raybould even used a quote similar to one Warren Buffett used in his own annual letter back in 1988. Here’s Buffett’s statement:
“Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.'”
And here’s what Raybould wrote in 2012:
“‘Look around the table. If you don’t see a sucker, get up, because you’re the sucker.’ While the returns of our fund have been very satisfactory, we realize that few partners, besides Allan and myself, have all of their investable assets with Arlington. With this in mind, I hope a few observations we’ve made operating as industry insiders for the past 10-15 years can help you navigate an unfriendly investment industry without feeling like you should simply ‘get up from the table.'”
Of course both Allan Mecham and Warren Buffett follow the typical philosophy of value investors. Look for a company that’s undervalued and then buy its stock. Mecham summed up their philosophy in his 2009 annual letter:
“We think successful investing is less complicated, and for us, boils down to taking a few simple tenets seriously: patience, discipline, long-term orientation, valuation, independent thinking, and an ethos of not fooling ourselves,” Allan Mecham wrote. “Such simple investment principles seem obvious and easy to apply, much like the notion of eating healthy: everyone understands the benefits, yet few can resist indulging in the abundance of high calorie eatery options.”
Indeed, Allan Mecham’s and Buffett’s investments seem to align as well. Warren Buffett was Bank of America (NYSE:BAC)’s biggest shareholder at the end of the first quarter. Mecham said in his 2013 annual letter than Bank of America was his second biggest holding—after Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), of course.
Another investment Buffett and Allan Mecham have in common is International Business Machines (NYSE:IBM), which made up more than 7% of Allan Mecham’s Arlington Value Capital hedge fund (a different fund than AVM Ranger). Warren Buffett’s firm assigned more than 12% of the portfolio to IBM. Beyond that, the stocks they hold are different, although both keep a fairly short list of stocks, according to their recent regulatory filings. But then again – Warren Buffett would be investing in far different companies if Buffett was managing less money – which is all the more reason to keep an eye on this budding value investor and his investment moves.