Good Judgment and Compounding Machines, Chuck Akre, Akre Capital Management – GARP Investor
Judgment = Experience which comes from bad past decisions. Not planning to share any ideas with you.
Neural network created from your experience. Pattern recognition is important. Success of investment is measured by the increase in the real value of assets per unit of ownership. It is the measurement of growth in book value per share. Phelps book. Predictors? Small, relatively unkown, unique product or service and a strong progressive research minded management. Patience. Never take an investment decision for a non-investment reason. Good return on capital, understandable, cash generators, franchise, earnings predictable, easy to run, owner focused management and royalty stream.
Good investor: Animated by controlled greed, passionate about investment, self confident but not head strong, flexible in businesses you would buy and never pay more than it is worth. FCF return on an owner’s capital. Focused on high ROIC or ROE. Once a guy puts his hand in your pocket he is likely to do it again. Need good management. Capital allocation is most important job of a CEO. Enduring high return business, management has skill and integrity and the company has many good investment opportunities. We are not willing to pay too much.
COMPOUND RETURNS! We overly believe in marginal information. Simplicity! Over confidence often happens in highly educated experts.
Idea: Mastercard Inc (NYSE:MA) – 1) Payment network (global GDP is the summation of payment transactions), Royalty business (growth of consumer spending world wide), Good returns on capital (45% FCF return over the last 5 years), Pricing power keeping up with inflation, 2) CEO is new and strong and 3) Reinvestment (e-commerce and mobile payment – global war on cash). Share repurchase over dividends. We bought in early 2010 on bad news (quarterly results and Durbin) buying at 15x 2010 FCF and 11 x 2011 FCF. Risk? Is there another technology that could displace MA’s moat? ACH “rail” is owned by the banks.