Chuck Akre’s presentation to the 8th Annual Value Investor Conference: ‘An Investor’s Odyssey: The Search for Outstanding Investments’
8th Annual Value Investor Conference, University of Nebraska at Omaha
This is the transcript of Chuck Akre's presentation to the 8th Annual Value Investor Conference in April 2011, Omaha, right before the annual shareholder meeting of Berkshire Hathaway. The upcoming 9th Annual Value Investor Conference will be held May 3 – 4, 2012, again in Omaha. Thank you Bob, and it’s great to be here. My chat today is called “An Investor’s Odyssey: The Search for Outstanding Investments.” It’s a loose summary of my experience in the investing business. I won’t tell you how many years I’ve been in it, Bob just did. I didn’t, obviously, start yesterday. I want to thank Bob for both asking me to come and for his comments. Some years ago Bob asked me to do a presentation in an earlier conference he was hosting, and I turned him down. I said then that I just don’t do that. Of course, I didn’t recognize what an honor it is to be included in this group, so you should treat my remarks with appropriate suspicion. I might also add that paybacks are hell. You notice that he scheduled me today opposite what’s called the wedding of the century.
I’ve gained enough weight and lost enough hair over the years to be able to allow me to write up some thoughts about investing, so today I’m going to share with you some of these thoughts, which collectively have added value in my career. Many years ago when I started my investing career in Washington D.C., I was puzzling with several questions about investing, and mind you that as Bob suggested I came into this with a BA degree in English Literature, having also been in a pre-med program, so I actually had a great many questions. Among the questions are, “What makes a good investor?” and more to the point, “What makes a good investment?” Today we tell all of the clients in our firm that our primary goal is to compound their capital at an above-average rate while incurring a below-average level of risk. So I usually ask my friends this question: Which would you rather have, $750,000 today or the outcome of doubling a penny a day for 30 days. What do I hear? Penny. So that’s the question. Compounding our capital is what we’re after, that’s what makes it a great investment for us. What’s the value of compounding? Well the answer in this case is simply astounding. Doubling a penny a day for 30 days gets you, who knows, $10 million, $737,000 change.
The reason why we use the notion of compounding our capital at above average rates is that we can think of no better method of measuring the success of any business. Think for a moment about that, if you will. How else is someone able to judge the success of a business enterprise than through some measurement of the growth in real economic value. Granted, we all know about the importance of customers and employees and community, and obviously they’re important, but throughout my odyssey I’ve been trying to identify and measure financial success in a manner other than whether the share price rises or falls. In fact, in a private business one is not afforded the luxury of share price discovery, so that some other method of measuring success must be present. I’ve heard... send the check to Omaha. This of course, is what happens when one is unable to compound their own capital. As an aside, Albert Einstein has often been credited with the following quote: “Compound interest is the eighth wonder of the world. He who understands it earns it, and he who doesn’t pays it.” Likewise, I read over the years that the eighth wonder line is attributed to Will Rogers. My own research cannot connect Will Rogers to any such quote. Finally, an authority called Miller’s Philmore Bathtub, honest, a website which holds itself out as a prodigious checker of facts, in which was entirely unknown to me as recently as two weeks ago, says, with confidence, that “Albert Einstein never wrote or said anything about compound interest.” So not only is compound interest/compound return poorly understood, we can’t even say with confidence who we should credit with these pithy statements. It remains an enigma.
In 1972, I read a book that was reviewed in Barron’s and this book was called “101 to 1 in the Stock Market” by Thomas Phelps. He represented an analysis of investments gaining 101 times one’s starting price. Phelps was a Boston investment manager of no particular reputation, as far as I know, but he certainly was on to something which he outlined in this book. Reading the book really helped me focus on the issue of compounding capital. Also, from Boston, you all know Peter Lynch, who often spoke about ten-baggers. Here was Phelps talking about 100-baggers, so what’s the deal? Well Phelps laid out a series of examples where an investor would in fact have made 100 times his money. Further he laid out some of the characteristics which would compound these investments. So in addition to absorbing Phelps’ thesis, I’ve been reading the Berkshire Hathaway (BRK.A)(BRK.B) annual reports since I’ve made my first purchase in 1977, so this collective experience moved me along to a point where I’ve developed my own list of critical insights and ingredients for successful investment.
Again, compound return really is the center point, and ultimately we spend much of our time trying to identify those businesses which are most likely to compound the shareholder’s capital at an above-average rate. Were we simply a pure value investor, we would be regularly looking to unload those securities, which appreciated to some predetermined notion of present value, and we would lose out, in our minds, on the opportunity to compound our capital because of these sales. Further, we have our operational costs and tax costs for those accounts, which bear tax liability. Continuing this quest, I found the data, this is EBIDTA data, relating to returns in different asset classes, across nearly all of the 20th century. You all know the figures; common stocks outperformed all other asset classes on leverage across most of this time period. You notice that Robert and his last talk had a slide that went back to the 19th century, ended up producing the same type of data. The annual compound return number falls in the neighborhood of 10%.
So I’d like to have you examine these numbers, which are in ten-year intervals. And the obvious conclusion is that both an annual return as well as a ten-year number is unknowable. So my takeaway as it remains today is that while the number is the in vicinity of 10%, 10% itself is not precisely the point. Might be 9 or 11, generally in the neighborhood of ten, and by the way I just tell you that as an aside I feel exactly the same way about earnings estimates and outcomes, and that for us, the precise number is never the point.
My next question then is, “So what’s important about 10%?”