“I found that the entire fund industry worked a certain way, and that their results reflected the mediocre way in which they operated.”
– Mohnish Pabrai, recalling an important discovery he made at the outset of his investment career
I’ve mentioned before that I keep a list of investors who I’ve studied that have achieved long term returns (over a decade or preferably longer) of 20-30%+ annual returns. It’s a relatively small list, but it is larger than you might think. My logic here is simple: Try to seek out the ideas and commentary from those who have achieve results that I would like to achieve over the course of my career, and try to ignore all of the other things that might be traditional and accepted, but haven’t proven to add value.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
I mention this often, but the big outperformers in the investment field truly think differently than the majority of fund managers. Mohnish Pabrai gave a talk at Columbia last year where he mentioned that his goal from the beginning of his career (when he was admittedly quite naive) was to “do what Buffett did”, which was double money every three years. Doubling money every three years is exactly 26.0% per year. A feat most fund managers would (accurately) say is improbable, if not impossible. Laughable, in fact, for someone like a 30 year old Pabrai with no experience and no track record to even suggest such a feat.
Of course, 18 years later, Pabrai (according to his presentation at Columbia) has made 25.7% per year over the last 18 years, just a few basis points off of his goal, and over half the way through his “30 year game”.
Results like these beg the question: How does one compound at 26% annually? Pabrai provides a few answers in that presentation that can be summed up by saying:
- Don’t try to beat the market (focus on absolute returns)
- Don’t buy something unless you feel it is worth 2-3x in 2-3 years
This last point is one that I believe gets largely ignored by most fund managers. It’s too difficult to sit by with excess cash and wait for opportunities that clearly present 2-3x potential. It’s much easier to fill the portfolio with decent looking ideas that appear to be cheap based on standard metrics. These “average ideas at 10x earnings” are what Charlie479 said filled the pages at Value Investors Club: Ideas that might work out okay, but when many of them fill a portfolio, they are almost certain to dilute returns down to the averages.
I have some related thoughts on this topic, which I’ll save for another time. But one thing I think is important is the necessity to think differently. And it’s one thing I’ve noticed with every one of the investors on my list who have achieved these types of returns over long periods of time. I notice this either through the public interviews they’ve given, or sometimes simply by just studying their investments and their overall portfolios over the years.
Ted Weschler is on this list.
Ted Weschler and DaVita
Weschler has achieved outstanding results (mid-20?s) in the decade+ that he ran his own fund. And he rarely appears in public, which is why I was very interested to see him, along with Todd Combs and Tracy Britt Cool (Buffett’s “3 T’s”) on CNBC last week.
I thought I’d put up a quick post with the video clip of Weschler talking about his largest (I believe) holding: DaVita Healthcare Partners (DVA). DaVita is a very interesting business, and one that I’ve begun studying in more detail. At some point, I might post on DaVita itself. I don’t own it currently, but I’m learning more about it. They are one of the nation’s largest operators of dialysis centers, and the business has some very interesting competitive advantages, which deserve more commentary. They also have a manager, Ken Thiry, who is worth studying. I highly recommend watching this video lecture with Thiry to get an idea of what I mean.
Thiry took over the nearly bankrupt business in the fall of 1999 (then called Total Renal Care Holdings). He completely changed the culture of the business, set new goals, and has transformed DaVita into an incredible operation. The results:
Interestingly, DaVita’s stock has compounded at 25.7% per year since the time Thiry took over.
Why Does Weschler Like It?
Again, that might be the topic of another post. But we know that DaVita has scale, they have customer captivity, and they have a few other large operational advantages worth discussing. And the business produces a lot of free cash flow, much larger than the GAAP earnings imply.
The clip of Weschler answering this question is short, but he did provide this interesting checklist… basically, he said he’s studied this industry for a long time, and said he uses these broad filters for health care stocks:
- Does the company deliver better quality care than someone can get anywhere else?
- Does the company deliver a net savings to the overall health care system?
- Does the business produce high returns on capital, have growth potential, and have shareholder friendly management?
Weschler says DaVita passes all of these filters. The last thing he says is often stated, but I think rarely believed by the talking head who is saying it: Basically Weschler said he doesn’t know (and probably doesn’t care) what the stock price will do over the next couple years, but he believes very strongly that in 5 years or so it will be a more valuable franchise than it is today.
DVA is a Large Holding for Weschler
Weschler seems convicted. Not only is it his biggest position in the Berkshire funds he manages (we can roughly estimate that DVA makes up around 30% of Weschler’s portfolio at Berkshire), but he has been gobbling up shares for himself and his family members in his personal accounts, now owning in excess of $150 million worth of DVA personally.
So this post is not necessarily to endorse the stock, although I think it’s an interesting company. I really wanted to point out that there is a big advantage to thinking differently. Weschler does this, and his results have shown it over time.
As I’ve mentioned before, as I scan down the list of investors that have achieved these types of outstanding long term returns, I noticed two general ways that they’ve achieved this performance:
- Focus Investing (Concentrating on 5-15 quality ideas that are significantly undervalued)
- Extreme Cheap (Buying a more diversified basket of stocks that are hated, forgotten, or just plain cheap)
Weschler, Pabrai, and most of the others on the list fall into the first category. They are very patient, and they will not allocate capital to ideas just to fill a portfolio. They truly are looking for the most undervalued ideas, and they tend to focus more on quality. These investors focus on partnering with compounders, or businesses that can create enormous wealth for shareholders over time through the internal results of the business. The returns to shareholders come not through multiple expansion, but through internal compounding.
I’ve had a few questions lately on the investment philosophy itself, and I’ll share some thoughts on compounders, specifically how to value them and how to think about them in the context of the overall portfolio and how they compare to other ideas such as special situations, cheap/hidden assets, etc… I also have some thoughts on pricing power, which is a topic I’ve been spending time thinking about lately.
For now, check out the short clip of Weschler talking about DaVita.
Have a Great Weekend!