Warren Buffett has long likened compounding to a snowball of sticky snow, and the longer the runway the snowball has to gather that sticky snow, the better. One manager that started rolling that ball a quarter of a century ago, was David Rolfe of Wedgwood Partners. And thanks to the power of compounding that snowball has grown a lot faster than the S&P500, with annual returns of 13.1%pa gross compared to 9.6%pa for S&P 500. In part, Wedgewood’s market-beating performance stemmed from a preparedness to embrace technology stocks and challenge traditional value investing heuristics. I was fortunate to chat to David recently where we discussed his strategy, portfolio management, Berkshire and all things investing. I hope you enjoy the insights as much as I did.
“The planets aligned for me really early in my career. Wedgewood was founded in 1988 by my current business partner Tony Guerrerio. 1988 was also coincidentally the year that I left the sell-side of the Street. I left PaineWebber in 1987 after being there for about a year and a half out of college. In early 1988, shortly after the crash in 1987, I was very fortunate to get a job as a portfolio manager at a big bank in St. Louis called Centerre Trust, the old First National Bank of St. Louis. Shortly after I joined, they merged with the second largest bank in St. Louis called Boatmen's, and they kept the name Boatmen's. So my CV says Portfolio Manager of Boatmen's Trust.
ValueWalk's Raul Panganiban interviews Dave Murphy, Head of Financial Services, ex-US, at Publicis Sapient, and discuss if banks are doing enough for a digital first future. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with Publicis Sapient's Dave Murphy
What's really key to this time period, is that the combined banks did a huge custody business. And pre-internet, it's kind of funny to think about this, we had annual reports, quarterly reports, mutual fund reports, money manager commentaries from the outside money managers that the clients used from the bank; all of that information came in and it was being filed. So my continuing study of the great investors of the day really launched – particularly the focused managers. There's a file of all the old shareholder letters from Mason Hawkins at Southeastern before he launched the Longleaf fund, mutual fund reports from the original gang at Janus – Bailey, Craig and I think Marsico joined them in 1986. A ton of reports from John Neff’s Windsor fund. The great writings from George Michaelis at Source Capital. A ton of Mario Gabelli. There were annual reports from Berkshire Hathaway going back into the early 1970’s. We even had the internal corporate reports from the old Templeton Investment Counsel before Franklin bought them in 1992. It was a goldmine!
So in 1988, I became a portfolio manager and what was really fortunate for me at a very young age all of the portfolio managers at Boatmen's Trust, were assigned fully discretionary equity accounts that we could do whatever we wanted with. If you beat the S&P, you got a bonus. It was a one, two and three year rolling metric, audited by the old Arthur Andersen. I did pretty good those four years beating the S&P 500 in three of those. So our current focused strategy was born back in early 1988 and I have been on the performance clock ever since going on 33 years.
I did that for almost four years until I heard through the grapevine at a meeting of the CFA Society of St. Louis that this investment firm out in St. Louis County, had a founding CIO who was leaving. And so with track record in hand, at the ripe old age of 30 and I knew all the mysteries of the stock market at the age of 30 [laughs], I met my partner, my then boss, Tony Guerrerio.
My predecessor, God bless him, he passed away recently, what a great guy. He was very nice to me. He was older than Tony, he retired. Wedgewood only had $10 million or so under management. The other side of the business, a discount brokerage like Quick & Reilly or Schwab that kept the lights on. So literally as the new CIO I had a whiteboard to start the investment management side of Wedgewood. And I've been doing the same thing ever since 1992.”
“There’s just four of us on the Team – but if I may brag on the crew, a highly productive crew. Tony Guerrerio, Michael Quigley and Chris Jersan and I make up the team. Tony’s primary role is as portfolio manager for our older private family relationships that go as far back prior to Tony founding Wedgewood Partners in 1988. Michael Quigley has been with Wedgewood since interning in high school. He is an ‘old,’ very experienced forty year-old since he has been on the team since 2006. Chris Jersan joined Wedgewood in 2016. Chris has extensive investment experience as both analyst and portfolio management since entering the business in 1998. Michael, Chris and I wear the CFA hats. We are all analysts and portfolio managers – essentially generalists. Given that our focused portfolio typically contains just 20 stocks I want the entire team to have a ‘career-ownership stake’ in the entire portfolio. As CIO I have veto power. The culture of the team is one of intense collaboration on security analysis and portfolio management. Key too is making fewer but more impactful decisions, plus making sure there aren’t too many cooks in the kitchen.”
“Every successful active manager has a competitive edge. And it must be repeatable. Focus is our edge. We have layered in a synthesis of the classic tenets of both growth company and value investing. Specifically, we want to own a select list of companies that are competitively advantaged earning high returns on capital, but also have the ability to reinvest a healthy portion of retained earnings at continued high rates of capital. We then try to have patience to buy at intelligent valuations. Rinse and repeat. But not too often. Our annual portfolio turnover is typically between 20 to 25%.
We embrace the founding philosophical thoughts and wisdom from the greats like Warren Buffett, Charlie Munger, Benjamin Graham, Charlie Ellis, Sir John Templeton and such, plus the focused greats of our era. Price is what you pay, value is what you get rings true with everything we do here at Wedgewood.”
“Investing in ‘technology’ stocks has evolved over the years. Particularly in the so-called capital ‘V’ value crowd. I think some of these mental frameworks like circle of competence and moats and all these other Buffett, Munger type of attributes of how you should think and act are wonderful, but sometimes I think maybe people take them to extremes.
It wasn't that long ago the value investing mindset was ‘there's no such thing as value in tech, period. Technology stocks don’t have ‘moats.’ You don't know what the business models are going to look like, so how can you even estimate five or ten years out’. Only a rare specialist will possess a ‘circle of competence’ investing in tech.
When you think back to Buffett's early aversion to tech, you've got to go back in time. Buffett made that great call to shut down his partnership in '68 and he has talked often about the conglomerates which all blew up back then. Of course there was the '73, '74 brutal market decline – really a long, slow-motion crash. But before that I think maybe a little bit less known, which I can't help but think had a significant impact on Buffett, was the tech crash of 1968 through 1970. Stocks like NCR, EDS, Control Data, Mohawk Data, that were largely hardware tech, which back in the day wasn't so much personal computing, it was tech for businesses fell 70 to 80%. It was cyclical, it was cutting edge CapEx and as the economy headed into a little bit of a recession the first thing that probably gets cut is this new tech stuff, ‘let's cut the orders for IBM, et cetera’. Even the ‘blue-chip’ tech stocks got smoked. Texas Instruments, IBM, General Instruments, Polaroid, Xerox. Of course the ‘Too Many Fred’ conglomerates like Litton, LTV, Levin-Townsend and Kidde literally vanished.
If you think back to the fact of how much tech was really hardware, enterprise hardware before software. And even with Microsoft in the early days of software, it was kind of boom-bust, you didn't have this subscription stuff. You would buy software and you'd get your floppy disk and then when the company came out with their new improved version a year and a half later, they did everything they could to get you to buy that. So, I get all of the elements of tech is hard to figure out, but maybe in terms of evolution, tech has evolved. Tech is very different these days and tech has vastly more consumer discretionary and non-discretionary attributes.
But for the longest time, too many in the value crowd said, ‘If Buffett can’t figure out tech, then who am I to even try?’ It became a crutch.
Well, fast forward today, and much has changed. ‘Tech’ has become quite common place across the investment style spectrum. Heck, even notable ‘deep value’ guru Seth Klarman at Baupost currently has big positions in both Facebook and Google. Even Buffett took a swing at IBM building a $14 billion position in the stock by 2015. His IBM position was notable still for being, at the time, his largest equity position by cost ever – even eclipsing his $13 billion, 500 million cost stake in Wells Fargo. IBM was a bust for him, but not to be deterred, he immediately started building a mammoth position in Apple. His cost in Apple peaked in 2018 at $36 billion.
Speaking of Apple, we first invested in Apple in '05. It wasn't that long ago obviously that Apple was mainly hardware and some software and people viewed it as classic hardware tech, maybe a bit consumer discretionary tech. It really wasn't doing much enterprise business. Then all of a sudden, the iPod appears and boom, then here comes the iPhone and the evolution of Apple to a consumer staple began in earnest. Heck, the early iPods and iPhones were always at my kid's heads. To my kids, it wasn't even discretion, it was a utility. Sauerkraut and asparagus are discretionary to my children (laughs). So Apple's a great example I think of how tech has morphed, and next thing you know, Buffett has a multi-billion dollar position in Apple, you know, the guy who swore off technology.
I'm 59 now. I'm lucky that I got started at a pretty young age, but someone who's a portfolio manager today at a so-called value fund, if they want to call themselves that, and they're 35 or 40, I’m not sure they have any hesitancy to invest in tech, like my early generation did. It's been interesting to see how tech has evolved. In the very early days automobiles were ‘tech,’ look at say Progressive, what would Progressive’s business model look like today if they didn't whole heartily embrace tech – particularly telematics? Heck, advanced telematics is now table stakes in auto insurance.”
Evolution as an Investor
“Where we have evolved, and I think every investor has had to evolve is the Fed’s growing influence in financial markets, even back to the infamous Greenspan Put back in the late 1980’s. Back in the day the phrase ‘Don’t Fight the Fed’ was stamped on rookies’ foreheads on the first day in investing boot camp. We can thank Marty Zweig for those pearls of wisdom. When one looks back on the DotCom boom/bust and the housing boom/bust and today with QE Infinity, it seems that the Fed has become both the arsonist and the fireman. Prior to say 2012, before central bankers barked ‘do whatever it takes’ to today’s yield control, when interest rates were allowed to find more free-market based levels, if a business was growing at say 12%, then the max P/E one might pay would be a high-teen multiple, certainly no more than say 22X unless it was a truly exceptional company. Fast forward today, 35 to 40X is the new 22X in the zero. It’s not the ‘Powell Put’ any longer, it’s become the ‘Powell Trampoline’.
And so what we've done over the last number of years is we have not been as steadfast to sell a stock outright because of valuations, we've been slower to trim it and conversely pay up a bit and build positions more slowly too. That said, we’ve maintained the discipline to sell even the best of businesses when valuations get absurd. Such was the case of our sale on NVIDIA last September.
When you look at the current valuation of our portfolio, if somebody were to have a crystal ball and they were to show me today the valuation, say, on a trailing or forward basis, if you would show me what the valuation is today, say, 10 years ago, certainly 15 years ago, I would have thought I’d gone mad.
But I think that's been a rational, intelligent adjustment to make. Let's face it, growth companies tend to be longer duration assets. Interest rates get lower, the valuation gets higher. We've learned or adjusted to the environment. Of course, the catch is that we all know if Powell & Company announce on morning, ‘no more QE’ we all know what would happen to the stock market. It would be October 19th, 1987, The Sequel.”
“If you look at a median or weighted average calculation of the debt of the companies that we own, it's never been higher than it is today over the past, since we’ve been doing this since 1992, but it hasn't been excessive. If debt capital is the cheapest capital, use it. If your equity is the cheapest, use it. Look at how successful Apple has been, borrowing super cheap money to buy back cheap enough stock to enhance their earnings per share. But Apple is the exception. Most C-Suites are terrible at capital allocation and dreadful at value-destroying share buybacks.”
Holding Great Business Through Thick And Thin
“I need to have a page in our pitch book on the top 10 worst investment decisions at Wedgewood Partners in our 29-year history. And the one thing they all have in common, it's not necessarily valuation, it's we didn't understand how good and how resilient the business model was. We owned Home Depot for quite a while and we thought there were some problems, and there were for a few quarters or so, but we didn't get back in. Medtronic, same type of thing, Microsoft, Intuitive Surgical and United Healthcare and Amazon and Analog Devices and Apple Materials! I will admit to you, one of the hardest things when you're managing public money is on the one hand you have to take the long- term view, but you've got this quarterly score card, yearly scorecard, and I'd be less than honest if it hasn't affected us from time to time. When I think of the money that we left on the table in some of these stocks, it would have ... well, the numbers would have been even better.”
Banks As Growth Companies
“We've never invested in what I would call really deep cyclical companies like a Caterpillar or a John Deere, but in times past we have invested in more economically sensitive businesses like banks. That said, but only banks that are considerably superior to their peers. Years past we have owned the old Norwest, then Wells Fargo; the old Cherry Hill, New Jersey based Commerce Bancorp, U.S. Bancorp and MTB Bank. We own First Republic right now. If you look at their growth numbers, if you didn't know what they did, and you just looked at their numbers your jaw would be drop once you found out it’s a bank. They are incredible operators. An amazing franchise.”
New Ideas and Studying 13F's
“Myself and our team, we're always digging up new names. Always looking for that emerging diamond in the rough. One of the areas that we are constantly on the lookout for are growing mid cap companies that are doing really well. On their way to becoming a large cap stock. The minimum market cap that we would consider is $10 to $15 billion. So part and parcel of our research bench are those smaller companies that are breaking into the large cap area that we can own.
Another area we're always looking at the competitors of the stocks we currently own. Years ago we owned Intel for a long time, from that we became familiar with Micron Technology. While that didn't work out for us that well, from that experience, we came across Linear Technology, which is probably one the greatest business models I've ever seen, particularly for a semiconductor company. Linear’s voodoo analog design engineers were the 1927 Yankees.
The last area we look at is that we study 13F’s. There's a lot of smart people in this business, very smart people and I keep a watch list of many investment firms that I respect and I'm always curious to see their 13F’s, It keeps you honest and humble. And so ideas can come from a lot of different areas, but those are the big ones.”
“Over the last couple of years we haven’t had much chance to swing large on new portfolio positions. We usually initiate a position at two, two and a half, maybe three percent in the hopes that we can continue to build it. Typically, we're trying to buy companies when maybe the industry's out of favor or maybe the company has hiccuped a little bit and we want to get in at decent valuation and hope to own more. So in a 20 stock portfolio in our minds, a 5% weighting is average, 7%, 8%, 9% is large. We won't own anything over 10%. And then anything under 4% is considered on the smaller side.
Very key as a focus investor all of our stocks in the portfolio have a higher weighting than the weighting in a style benchmark or the S&P 500. It's high conviction focus, high active share so why waste time with tiny positions that are either benchmark weight or too small to move the performance needle. What's challenging for a lot of managers is the likes of Apple, Microsoft and Amazon are so gigantic, unless you run a focused portfolio, even if it's one of your top holdings, chances are it's just a benchmark weight. In the Russell 1000 growth, I think the top six stocks are 40% of the benchmark.”
Focused Investing - Diversify by Business Model
“We contend focused investing doesn't have to be risky if you stick with higher quality companies, however, we think a more intelligent way to diversify is to diversify by business model. So obviously Progressive has nothing to doing with Apple in terms of their business model. We're not going to own four or five semiconductor companies, we're not going to own four or five medical device companies. We've been a long-term investor in Visa. We've never owned MasterCard at the same time, because our thinking is those business models - there are some differences on the debit side of things - but they're alike enough that if something goes wrong with Mastercard it is unlikely that Visa escapes unharmed. So the last thing we want in our portfolio is when we make our inevitable mistakes, we don't want pin action in other parts of the portfolio.”
“I've got plenty of scars too when we haven't gotten it right. I remember one of the early ones, when I joined Wedgewood, I guess it was Spring of 1993. ‘Marlboro Friday’, when Philip Morris came out on a Friday morning and said, ‘We've got to cut prices, we're losing market share to some of our competitors.’ It wasn't really an expensive stock at that time, but the next trade it's down 25%. Wall Street is pretty good of ripping the band-aid off. Rooting for a stock to go down runs against the grain, but some of those opportunities in hindsight have been wonderful. Again, it's going to hurt near term in a 20 stock portfolio, but when we can take a 5% holding that gets banged up someday, now it's a 3.5% weighting, and we can make it a 7% weighting and then we're right after that, when we look back on that difficulty that day or that week, when stocks blow up like that on a hiccup, it's not a fatal hiccup, but the valuation is pricey, the damage gets done pretty quick.”
Now, the ones that really hurt is where the business model has gone terribly wrong and oftentimes it could be fraud. Back in the day, we owned WorldCom, we got out when the cash flow statements started to look a little bit goofy, but we didn’t suspect fraud. Same thing with Lucent Technologies. If management wants to cook the books eventually it comes out. But those are episodes that you have to deal with. Fortunately, we've got scars, but they haven't put that dagger in our heart.
The thing that I probably admire the most are individuals who have been doing this for a long, long time, because without fail, they've all been hit by stock blow-ups and dusted themselves right off. Think of that book by Philip Carret, ‘A Money Mind at 90’, I mean, are you kidding me? I hope they pull me out of my office in a pine box when I'm 90, that's awesome. I don't care what profession you're in, if you can write a book on what you've done when you're at 90 years of age and you're still doing it, well, how cool is that?”
“We sold our Berkshire Hathaway stock in 2019 after owning the stock in size since January 1999. We sold a third of our position in late May 2019 and the rest soon after in early August. All told, Berkshire stock gained about 370% over those +20 years. The gain in the S&P 500 was about 235%. Investing in Berkshire and attending many annual meetings was a further education beyond reading and studying Mr. Buffett and Mr. Munger. A highlight of my career. The stock was terrific for our clients.
On the first trim of Berkshire, we bought shares in Motorola Solutions (MSI). Since then (mid-May), Berkshire stock is slightly ahead of MSI, gaining about 44% versus 41% for MSI. After more buys of MSI, the stock today is our 3rd largest holding. The final sale of Berkshire really moved the needle for us. With those sale proceeds we increased our long-held position in Alphabet (GOOGL) by almost two-thirds to an 8% weighting and initiated a new position in NVIDIA (NVDA). Since then (as of mid-May again) GOOGL has gained about 90%, double that of Berkshire. GOOGL is currently our largest position at 9.6%. NVIDIA would turn out to be a moonshot. Over the course of the NVDA position we added to our original position once, trimmed twice and sold the stock in early September 2020. On the final sale of NVDA, the stock outperformed Berkshire over our holding period 215% versus 4%. Finally, we rolled the last NVDA sale proceeds into a new position in First Republic Bank (FRC). Since that purchase, FRC has gained about 67% and Berkshire Hathaway stock has gained about 39%.
Our sale thesis on Berkshire Hathaway was three-fold. First, too many capital allocation miscues. In a world of Fed-induced zero cost of capital, plus untold billions in private equity, Berkshire has long been at a competitive disadvantage in bagging gazelles and elephants. Compounding this problem, Mr. Buffett refuses to compete in investment banker-led buyout auctions and his disdain for leverage, typically a good thing, has all but rendered Mr. Buffett to, well, play solitaire while deal-making booms around he and Mr. Munger. Quite frankly, the phone rings more for the lonely Maytag repairman than it does in Omaha these days. Relatedly, we had long, long been an advocate for Buffett & Co. to cool the elephant hunting and bag the elephant in their backyard Omaha Zoo – Berkshire shares themselves (laughs).
Capital allocation miscues, well, they've starting to add up - Precision Castparts, Kraft Heinz, Lubrizol, IBM and Wells Fargo. On the equity portfolio let’s give credit where credit is due. Berkshire’s huge position in Apple was a terrific purchase and in elephant size as well. It really moved the needle. However, the lack of omission in the equity portfolio in large holdings of ‘Buffett-esque’ circle of competence stocks like Mastercard, Visa, Alphabet, Costco and Microsoft are head-scratchers. I understand Mr. Buffett’s reasoning on Miscrosoft that he didn’t want to take advantage of his friendship with Bill Gates, but that doesn’t square with his long friendship with Tom Murphy, key in delivering Mr. Buffett’s 1980’s-1990’s ABC/CapCities/Disney/GEICO masterstroke.
The fact that Mr. Buffett looks like he has called off elephant hunting in lieu of buying back Berkshire stocks also reduces another related risk, that of complexity. At what point does a huge conglomerate become too big, too complex for Greg Abel to effectively manage? The supposed good news for shareholders after years of conglomeration are the seven or eight Fortune 500 sized companies within Berkshire. The bad news on this conglomeration is that Greg Abel is ultimately responsible that they are all managed well. Tall order.
I get the idea of ‘management by abdication’ long espoused by Mr. Buffett and Mr. Munger, but perhaps a little less abdication and a little more, what?, usurpation?, may have kept BNSF from underperforming Union Pacific, or GEICO underperforming Progressive. And speaking of GEICO, it’s been a year and a half since portfolio manager Todd Combs was named CEO of GEICO. I may be mistaken, but I thought Combs was to be a temporary CEO.
The second part is the deteriorating quality of too many businesses within the Berkshire conglomerate, particularly in their MSR (Manufacturing, Service and Retailing) division. Outside of the recent addition of Clayton Homes in this segment, it is easy to conjecture that this group barely earns its cost of capital. We would know for sure if Mr. Buffett would provide a balance sheet for this segment. That said, the other key parts of the conglomerate are better than the average business. Again, BNSF is good, but under-performing Union Pacific. GEICO's is good, but underperforming Progressive. Berkshire Energy is fantastic, particularly on the tax credit side and their continued policy of reinvesting all of their earnings – quite unlike other large utilities. But here's the rub, you don't need Berkshire Hathaway or Mr. Buffett to get the ‘best of Berkshire.’ Who doesn’t own Apple these days? Instead of GEICO you can get Progressive on your own. Instead of Burlington Northern you can get Union Pacific on your own. Replacing Berkshire Energy would be difficult because they're reinvesting in all their earnings, they don't pay a dividend and they have all of these tax credits. In a tax-exempt account, you can maybe buy a utility ETF and reinvest the dividends as a replacement proxy of Berkshire Energy.
The third, quite honestly, I think as the years go by now, there's significant management risk, succession risk. Mr. Buffett’s and Mr. Munger’s cognitive abilities and stamina continues to amaze, but unfortunately Father Time won’t be denied.
Maybe one last thought on Mr. Buffett; I've have the greatest respect for Mr. Buffett. I wouldn’t be in this business since 1986 without him as a guiding light. Mr. Buffett chooses his words carefully, both spoken and written. And I've certainly noticed, it's been remarked by many others too, it wasn't long ago, a few years ago, where he stated at annual meetings, essentially, ‘We think we have a collection of businesses that should do better against the S&P 500.’ Those words are gone. More recently the verbiage was ‘Maybe we'll keep pace with the S&P 500.’ Those words seem to be gone too. Even after the strong run of Berkshire stock versus the market since last June, the stock is still considerably behind the S&P 500 over the past three and five years. There's probably less downside in the stock relative to the S&P 500, maybe. But quite frankly, the people who hire us, want us to beat the S&P 500 and I don't think Berkshire, particularly at current valuations and its collection of businesses, will. The S&P 500, it's tough to beat, even for the best of us. I think it's going to be much tougher for an overdiversified conglomerate that isn't growing that much more than GDP. Mr. Buffett warned shareholders long ago the performance deadening perils of size. Shareholders will never again see examples of Mr. Munger’s ‘lollapalooza’ dynamism at Berkshire such as the brilliant transaction path of ABC/CapCities/Disney/GEICO/Coca-Cola.
After an incredible two decades in the stock for our clients, too many of the former competitive advantages of Buffett & Co. at Berkshire later, in our view, became disadvantages. That’s why we sold.”
“I finished school in late 1985 where I’d been fortunate to have a very influential investment professor, who was a stock market junkie. He dispensed with all of the textbook stuff and he just talked about the stock market. He was instrumental in pointing me to outside reading, outside of textbooks. And I was fortunate to get my hands on, in the early '80s, the classic 1980 book by John Train, The Money Masters. That was my first exposure to Buffett, Templeton, Graham, Carret, Rowe Price. It became an obsession literally overnight. I was hooked - hook, line and sinker. I got into the brokerage business in early 1986, that's when Peter Lynch's first book came out, and I didn’t want to be a salesman anymore. I wanted to be a stock picker, I wanted to be a portfolio manager, I wanted to be an analyst.
Today we in the business are blessed with many classic, must read books. We get to sit on the broad shoulders of the greats. The Intelligent Investor; chapter 8 on margin of safety, chapter 20 introduces the concept of Mr. Market, those are must reads – every year too. But some of the early books, all of Train’s books obviously, Buffett's shareholder and his partnership letters. Even today, I'll go back and and I'll pull up say history 1981 shareholder letter, and though it’s a delightful trip down memory lane, it's still refreshing to read. It’s batting practice. Buffett’s such a great writer and it's like that old textbook ... It's like an old friend and you get to have that conversation again with that old friend.
Anything Charlie Ellis wrote. His Loser’s Game and The Paradox are among the pantheon of must reads.
But the one book that I have already mentioned that probably made the biggest impact on my career in those early formidable years back in the day was Peter Lynch's ‘One Up on Wall Street’. My two takeaways was when Peter Lynch went into some detail that even in his best years, his stock ideas, he batted just .500, one of the great investors of all time and he’s admitting that half of his stock picks don’t work out. What an eye opener. It was liberating, it really was.
When I first got into this business, like many, I wanted perfection, I wanted every stock to work. All the best have the proper ego and intelligence to take a loss and move on. So here's one of the greatest of all time saying, "Hey folks, half my ideas didn't work out." And then related to that, when he would say, "The worst thing that can happen is if the stock goes to zero." Now, if you're managing public money and you have too many of those, you're going to have to find another line of work, I get it. But then Lynch said, ‘The best thing that can happen is a stock may double or quadruple,’ his famous ten-bagger.
Here comes some scars. Micron Technology, we bought that stock in March 1996, I think it was March 15, 1996. It never seemed to go up. The big demand for computer memory needed for Windows 95 and the new Pentium cpu was priced in. And DRAM surplus came on like Niagara Falls. Again, on any given day the stock wouldn't go up, and we bought some more, and more. At the same time, I'm looking at this company called Linear Technology, a completely different business model. So about six months later, we sucked it up, and we sold Micron Technology to buy Linear Technology and our clients were like, ‘Wait a minute, you're selling what technology to buy what technology, are you kidding me?’ But in the big scheme of things, I think we lost 40%, 45% on Micron and it stung, no doubt about it, but that 50% loss in one stock, hopefully we learned from it, pales in comparison to the money we made in Linear Technology. And so Peter Lynch's book, among other wonderful anecdotes he had in there, it took the pressure off me. I didn't have to be perfect and I stopped trying to be perfect, and if I stuck with the better businesses, even if I, in hindsight, I found out that I maybe paid a little bit too much for it, a growing, best of breed business often bails you out.”
You can see how Rolfe’s snowball has both first gathered and then continued to gather snow. His success has been earned over long years and it’s clear that his humility in admitting investment mistakes, his openness to the thoughts and opinions of others, and his willingness to challenge those opinions - even some of the greats - have all contributed to that investment success.
I’m incredibly grateful to David for both his time and his incredible insights and look forward to the next time we can speak. In the meantime, I hope some of the insights above can help your snowball grow.
Further Reading: Wedgewood Partners Investor Letters.
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Article by Investment Masters Class