Serial Acquirers, The Art of Not Selling, and Chuck Akre's Masterclass
The TLDR: January 2024
Heading to the US of A
I recently discovered that I will be heading to the United States for the first time in March. Miami, Flordia, will be the city that I visit, so if anyone lives nearby or has visited, don’t hesitate to send me your recommendations or advice.
In my quest to turn over rocks, I recently spent some time looking at a small cap listed in the UK which has a global presence and the resemblance of a compelling network effect. They are a market leader and working to consolidate and vitalise an industry with a history that stretches back thousands of years. I will share my notes on that early next week.
I also want to give a quick thank you to the 130 or so people who signed up for my second newsletter, Notes to Self. It’s proven to be an effective space for me to share shorthand musings on companies I own as well as some portfolio commentary.
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5x Favourite Things
A hand-picked selection of five things I found particularly insightful or valuable.
In 2011, Chuck Akre presented at the 8th Annual Value Investing Conference in Omaha. His discussion was titled ‘The Search for Oustanding Investments’ and offered a concise, yet detailed, glimpse into the mind of a seasoned investor. Topics range from the dynamics of compounding, business model analysis, importance of management, reinvestment runways, valuation discipline, adaptability and how style can change over time. And, of course, it contains a great account of Akre’s Three-Legged Stool analogy which focuses on (1) extraordinary businesses, (2) talented management and, (3) attractive reinvestment opportunities.
“After we’ve identified a business that seems to pass the test in all three legs we refer it as our compounding machine. And as we describe it, our valuation discipline comes into play here and we describe it here as simply we are not willing to pay too much. Volatility is not part of our analysis of risk; rather we view it as an opportunity generator. What we say for our purposes is that risk involved the exposure of permanent loss of capital. Occasionally, we view it more narrowly. And we’re watching for a possible deterioration in the quality of the business, or any of the three legs of our stool”.
The good folks over at REQ Capital recently published a 325+ page case study on the shareholder value creation of acquisition-driven compounders. Or, as they are sometimes referred to, serial acquirers. While dense, this is a slide presentation, so can be consumed in a few sittings and is packed with insights and case studies relating to organic vs inorganic growth, ROIC, management, and capital allocation. A really solid resource for those looking to understand or sharpen their knowledge of M&A and what it takes to be a successful serial acquirer.
“The significance of CEOs with strong capabilities in human and cultural aspects, combined with adept capital allocation skills, cannot be overstated. While many CEOs may ascend the corporate ladder based on their excellence in production, sales, or political acumen, the role of capital allocation becomes a critical responsibility when leading a company. It's essential to recognize that two companies, even if they have similar earnings but different approaches to capital allocation, can yield vastly different long-term results for shareholders”.
I’ll admit I didn’t know a great deal about Todd Combs before this interview with Colossus back in 2023. While known for his role at Berkshire Hathaway (Investment Manager) and GEICO (CEO), Combs has a colourful past; having worked in the financial sector in his early career and graduating to becoming a hedge fund manager. This discussion revisits his past, with particularly interesting and candid insight into how Combs ended up starting his own fund. It later transgresses into life at Berkshire and how a cold call to Charlie Munger landed him there. Fantastic interview.
"I wasn't ready at all. I have never really been ready for anything in my life. That's probably one takeaway everybody should write down. When people see things in you that you don't see in yourself, that's amazing. And that was true with Steve. That was certainly true with Charlie. That was true with Warren, multiple times with Warren for Berkshire. I started as an investor with [ Lou's ] portfolio at $2 billion, $2.5 billion, then it comes down one day, like six months into the job and he says, "Why don't we double it?" And I was like, "Well, well, well." And he's like, "No, you're fine." And I wasn't ready for that. I wasn't ready for Haven. I wasn't ready to then go into looking at 200 acquisitions a year. I assure, I wasn't ready to run a 40,000-person company”.
The Art of Not Selling by Chris Cerrone, a former partner at Akre Capital Management, is a paper that has been passed around countless times since it was published in 2020. However, it was recently removed from their website and I figured it would be a good time to convert it to a PDF in case you wanted to revisit it in the future. The paper touches on the “art” (it’s certainly not a science) of selling in light of Akre’s admission that selling too soon is a common mistake they have made in the past. It discusses the temptations that urge us to sell too soon, and balances with constructive insight on the times when it is appropriate to sell.
“For the investor determined to hold on and compound, tuning out the noise is essential. Quarterly earnings (are slide decks and conference calls really necessary every 90 days?), the financial press (cable news, in particular), and Wall Street analysts contribute to the cacophony. It is important to keep in mind that the financial press and Wall Street live on eyeballs and transactions. They are, by definition, trying to maximize the noise—to convince you to sell what you own and buy what you do not.
In his book “100 to 1 in the Stock Market,” Thomas Phelps advised: “Never forget that people whose self-interest is diametrically opposed to your own are trying to persuade you to act every day”. He wrote that 47 years ago in 1972, and it is probably truer today than it was back then. Wall Street trading desks do not earn commissions when you buy and compound, and the cable news channels do not attract an audience by saying “there nothing new to report today”.
Active Patience means knowing what you are looking for and doing nothing until you find it, says Ian Cassel. This article emphasises the importance of investing and how successful investing often requires a long-term perspective, allowing for the full potential of investments to be realized over time. While it focuses on the challenges and rewards of investing in smaller companies, advocating for a disciplined, patient approach, the lessons apply to everyone and any style of investing.
“The longer I invest the more I realize you get 1-2 great opportunities every few years. The rest of the time is spent wondering if you will ever get another great opportunity again and convincing yourself to own mediocre opportunities while you wait. Mediocrity is the price you pay for impatience”.