Charles Akre – The Oracle Of Middleburg, Virginia
“In life as well as in business, which is every day, I am lucky if I have learned something new, and I am doubly lucky if it didn’t cost too much!” – Charles Akre
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On Tuesday, I met with a great investor who has a couple of stocks that have gone up more than 100x in his portfolio. A lifetime of investing has taught him what to look for. It really boils down to one important thing. I’ll share this with you below…
His office is far away from the frenetic pace of Wall Street. I drove down along the western edge of the Washington beltway. (I live in Gaithersburg, Maryland.) Then I headed west, deeper into Virginia. The urban landscape gave way to green fields and woods. I drove past wineries and horse farms and fieldstone fences, and past little towns with antique shops and historic mills and churches.
Eventually, I came to Middleburg, a picturesque little town of about 600 people. Then, down a quiet side street, I found a nicely refurbished building that used to be a tavern but is now an office.
Here is where Charles T. Akre Jr. (“Chuck”) makes his HQ. It had a calm and comfortable feel to it, with bookshelves full of books and horse-themed art on the wall. I felt as if I was in someone’s home.
Charles Akre, 72, has been in the securities business since 1968. He’s one of the great investors of our time. I have a bound volume of his letters to partners from 1993-2013, titled The Power of Compounding.
It was a speech Charles Akre gave in 2011 that introduced me to Thomas Phelps and his book 100 to 1 in the Stock Market. And that’s what originally got this whole quest for 100-baggers started.
So I was glad to spend some time with him and members of his team — Tom Saberhagen, Chris Cerrone and Ben Fox. We went to lunch at the Red Fox Inn & Tavern, which has been around since 1728 and is only about 400 feet from his office.
Charles Akre personally bought Berkshire Hathaway back in 1977, paying $120 per share. That share is now worth an astonishing 1,750 times what he paid. Funny story about this. On my way out, Tom, who is a
portfolio manager and partner of the firm, gave me that bound copy of Akre’s letters. This is unputdownable reading for me. I love this kind of stuff and read these things like other people read novels.
In a 1995 letter, Charles Akre tells the story of how when he was a young broker, he bought that share of Berkshire. He went on to accumulate about 40 shares. Then he decided in 1981 to get into real estate. He had a condo conversion project and needed the money. So he sold all his shares save one for $500 per share.
Of course, that turned out to be one super-expensive project. Those 39 shares — worth $19,500 back then — would be worth $8.1 million today.
Another long term Charles Akre holding is American Tower, a spinoff from American Radio back in 1998. Akre paid about 80 cents for his first shares, and they are now worth $93 per share. This stock he still has, and it is his largest position according to filings.
Charles Akre’s approach is simple and easy to understand. He calls it his three-legged stool. He looks for:
• Businesses that have historically compounded value per share at very high rates
• Highly skilled managers who have a history of treating shareholders as though they are partners
- Businesses that can reinvest their free cash flow in a manner that continues to earn above-average returns.
As he told me, though, the older he gets, the more he whittles things down to the essentials. And the most essential thing is that third item.
In one of his letters, he puts it this way:
“Over a period of years, our thinking has focused more and more on the issue of reinvestment as the single most critical ingredient in a successful investment idea, once you have already identified an outstanding business.”
What does that mean?
Consider a business with $100 invested in it. Say it earns a 20% return on its capital. That is a high return and would get Charles Akre interested. A 20% return implies $20 in earnings. But the key to a really great idea would be a business that could then take that $20 and reinvest it along with the original $100 and earn a 20% return again and again and again. As an aside, you’ll note the absence of dividends. When a company pays a dividend, it has that much less capital to reinvest. Instead, you have it in your pocket — after paying taxes. Ideally, you want to find a company that can reinvest those dollars at a high rate. You wind up with a bigger pile at the end of the day and pay less in taxes.
To get back to the example, at the end of that first year, you would have $120. Soon after, the magic starts to happen:
At the end of the fourth year, you’ve doubled your money. At the end of 10 years, you’ve got a six-bagger. And in about 25 years, you’ll have 100x your money. Of course, you don’t have to hold for the whole time. And there is no guarantee a business can keep up such a pace. I’m just showing you the power of compounding.
Compounding is what lies at the heart of Charles Akre’s approach. He wants to find that great business and just sit tight. I’d also add that Akre runs a focused fund. His top five-seven ideas often make up half of his portfolio. This is something we’ve talked about many times before. The great investors concentrate on their best ideas.
At lunch, we just talked about businesses and stocks the whole time. Charles Akre was cheerful and relaxed — he never checked his phone. He was full of wise words on investing, and funny, too. He talked about Phelps and about 100-baggers. He talked about books read and lessons learned.
This is the way great investors talk. Believe me, I’ve met with a bunch of them from Ackman to Wanger. (Bill Ackman of Pershing Square fame you probably know. Ralph Wanger you may not. He ran the top-performing Acorn fund for a lot of years and wrote a fine book about investing titled A Zebra in Lion Country.)
You might find it instructive what we didn’t talk about:
- We didn’t talk about the Fed
- We didn’t talk about the overall market
- We didn’t talk about the dollar.
Not that those things are unimportant. They are important. But they are unknowable and unpredictable things. And great investors don’t spend a lot of time on them. They focus on trying to find those great opportunities — like Berkshire Hathaway and American Tower were for Akre. These stocks just overpowered all those big-picture concerns. The purpose of the 100x Club is to find more just like them.
People ask me for good mutual funds, and I would certainly add the Akre Focus Fund to the list, ticker AKREX.
Launched on Aug. 31, 2009, the fund has returned nearly 18% annually since inception. You can learn more about the fund here.