Allan Mecham celebrates the 15-year anniversary of Arlington Value Capital and talks about taking a businesslike approach toward investing like Ben Graham.
Also see Part I: Allan Mecham’s Arlington Value Capital 2014 Annual Letter
Part II: Allan Mecham On The Bullish Case For Sony And Alleghany
Investment is most intelligent when it’s most businesslike ~ Benjamin Graham
2014 marked the 15-year anniversary of Arlington Value, and what a 15-year period it was! One dot-com bubble of historical proportions, two bear markets, and an economic wild-fire that brought bankruptcies and bail-outs aplenty. Through it all, Arlington adhered to Ben Graham’s dictum above, applying a simple businesslike approach that, for the most part, kept us fully invested through thick and thin. Underpinning our process during this period was a mentality of buying businesses, not renting stocks.
A businesslike approach toward investing is rare among managers beholden to quarterly measurements and hot money. The pervading culture affords little room to act on longterm thinking and intrinsic value. Pundits and pros alike seem convinced that buried treasure lies in forecasting near-term earnings and projecting P/E multiples as a proxy for value. In our opinion, this approach is long on speculation and short on wisdom. We think short-term earnings should be treated like appetizers at dinner: avoid overindulging or you’ll miss the main course.
Allan Mecham: Arlington Value follows the crowd
Wisdom is one thing, self-interest is another. This is where Arlington often meets a fork in the road: stick to our principles, or follow the crowd. The crowd promises large assets under management (AUM) but is tethered to a transient culture would threaten returns. The decision is easy, really. Ben and I gain satisfaction from trying to be among the best, not the biggest.
Don’t get the wrong idea: our motivations are self-serving, driven by a mixture of personal and professional considerations. We think prioritizing returns will prove both financially rewarding and emotionally satisfying, whereas being exposed to monthly measurements, frequent meetings & calls (to explain the unexplainable), and sour returns sounds like a grind. As Ben is fond of saying: let’s build a house we want to live in. We’re delighted to associate with LPs that like the house we’re building. Our group is like the dream-team of hedge fund LPs; through 15 years and historic shocks of volatility we’ve hardly heard a peep. To succeed going forward we’ll need to preserve this culture that breeds patience and prudence to stick to Graham’s businesslike approach.
Despite our somewhat restrictive policies, our group continues to swell. We currently hold around $650 million in assets under management. To date, our asset size hasn’t caused noticeable ill effects, but if assets keep growing, eventually it will. Ben and I will be candid with our assessment of size and prospects going forward, and will remain invested right alongside you.
Before wrapping up, Ben deserves special mention for doing a tremendous amount of work behind the scenes. Arlington reminds me of a pro cycling team: our success wouldn’t be possible without people sacrificing to make my job easier. I get far more credit than I deserve, and returns would suffer without Ben’s efforts.
Both Ben and I are honored and grateful for your investment and trust, and are energized to keep earning it.
Sincerely,
Allan Mecham
