On Allan Mecham Of Arlington Value, “The 400% Man

Last week I wrote a post summarizing some of my thoughts on a Smart Money piece called “The 400% Man” that came out about a year ago. The piece dramatically increased the popularity of a small town, small-time (small meaning assets under management, not returns) hedge fund manager named Allan Mecham of Arlington Value Management. I think Mecham now manages a few hundred million in his fund, but before last year he was managing around $80 million. He started his fund in 1999 with just $200,000.

Read my last post for more of my thoughts on Mecham and his ideas, but I thought I’d follow it up with a quick summary of an interview I read with Mecham at ManualofIdeas.com. Here are some things I took away from the interview:

Mecham’s returns are outstanding, around 18% annually over the past decade, trouncing the S&P. These numbers are net to his investors, so his gross returns of course are even better than that.
Mecham is a Buffett disciple. He looks for franchise businesses, and researches them thoroughly, often for years. He maintains a list of 80-140 of these companies, and then waits for an opportunity to invest in them.
He sticks to what he understands:

“Over the past 13+ years, I’ve built up a base of companies that I understand well and would like to own at the right price. We tend to stay within this small circle of companies, owning the same names multiple times. It’s rare for us to buy a company we haven’t researched and followed for a number of years — we like to stick to what we know.”

He runs a concentrated portfolio (I read in another piece recently that he put half of his capital into Berkshire stock when it was selling just above book value around $105,000 around a year ago… a nice 45% gain at today’s prices. According to his recent 13-F filing, he still holds a large BRK-B position).
How does he find investment ideas?

“Mainly by reading a lot. I don’t have a scientific model to generate ideas. I’m weary of most screens. The one screen I’ve done in the past was by market cap, then I started alphabetically.”

On the Importance of Long Term Thinking

One of the most important things I took away from this interview is the emphasis he places on mindset and patience. He stresses the importance of a patient investor base that allows him to take a long term view. He says that most professionals can’t afford to take long term views because of the way institutional investing is structured (too focused on short term results which forces managers to become fearful of losing their job or their investors, and in turn causing them to act in ways that are counterproductive to long term results).
He says individual investors have a huge advantage because they can afford to be patient and wait for the market to give them opportunities to buy great stocks at cheap prices. I think this quote is extremely important:

“That’s the beauty of the public markets: If you can be patient, there’s a good chance the volatility of the marketplace will give you the chance to own companies on your watch list. The average stock price fluctuates by roughly 80% annually (when comparing 52-week high to 52-week low). Certainly, the underlying value of a business doesn’t fluctuate that much on an annual basis, so the public markets are a fantastic arena to buy businesses if you can sit still without growing tired of sitting still.”

The interview has many more details into how he thinks about investments. It appears to me that he is not a Graham type deep value guy… he prefers quality businesses (preferably at good prices of course), with large moats, and high barriers to entry. He is willing to take big positions when he finds these opportunities, and he’s willing to sit and wait for a long time with little to no activity if necessary.

I think the conceptual aspect of his thinking is what I found most beneficial for me personally. My positions are not quite as concentrated, and at this point in my career I’m much more of a quantitative value investor using Walter Schloss’ principles as my guide, but there is a lot to learn from Mecham and his methods as well.

Here are some other links to articles on Mecham. He’s a great investor to read about and learn from: