MALE SPEAKER: Hello.
And welcome, everyone.
Today we have with
us Donald Yacktman.
Mr. Donald Yacktman is a
partner and portfolio manager
of Yacktman Asset Management.
Several milestones in his
long investing journey
have been featured
in prominent media.
Don started Yacktman,
founding the company
as its president,
portfolio manager,
and chief investment officer.
Since the founding
of the company,
Don has been awarded the 1994
Portfolio Manager of the Year
award by Mutual Fund Letter.
Don has also been
nominated by Morningstar
as Fund Manager of
the Decade in 2009
and finalist for
Morningstar's Domestic-Stock
Manager of the
Year award in 2011,
as well as the Portfolio Manager
of the Year award in 1991.
Don holds an MBA with
distinction from Harvard.
In a recent interview about
his investing philosophy,
Don described his process of
buying above-average businesses
at below-average prices.
He compared these
businesses to a beach ball
being pushed under the water.
Eventually the key is to wait
long enough for this process
to occur where they
rise to the top.
In speaking with Don-- we met
just shortly before the talk--
and learning about
his experiences,
I think there's a lot to Don,
more than just investing,
and to learn from
his rich experiences.
So we are very delighted to
have Don in person with us
today to share more
about his investing
and personal philosophy.
So without any further
ado, ladies and gentlemen,
please join me in
welcoming Donald Yacktman.
[APPLAUSE]
DONALD YACKTMAN: Thank you.
Thanks.
It's good to be with you today.
I think about the only
thing that wasn't included
is that I'm a Cubs fan.
[LAUGHTER]
As you know, the
Cubs haven't won
the World Series since 1908.
So we have a phrase,
and that is that anybody
can have a bad century.
[LAUGHTER]
That reminds me, some
of my kids probably
think I was at that
World Series in 1908.
I really wasn't.
I just want to make that clear.
In fact, I wasn't even at the
last time they went there,
which was 1945.
But I am reminded of these
two elderly gentleman who
were chatting with each other.
And one of them said
to the other one,
he said, my memory
is starting to go.
And the other one said, he
said, I had that problem too.
He said, but I went to the
doc and he gave me some meds.
And he says they really
seem to be working.
He said, I just can't
remember the name of the meds.
Thorns, flowers, bushes, red
and yellow and white and pink.
And the other guy looked
at him and he said, rose.
He said, [SNAPPING FINGERS]
that's it.
Rose, what's the name
of that medicine?
[LAUGHTER]
So I haven't quite
hit that point yet.
Today I thought I'd talk
a little bit about some
of my background and how
I got into the investment
field and a little
bit about my history
before we go through
the process and so on.
I haven't done
that before, but I
thought it might be
kind of interesting.
And I know there was
some interest in that.
Both of my parents came
out of poverty situations.
And my father's
side, my grandfather
left the scene
before he was five.
He ended up going back to
Poland for a couple of years,
about five years lived in
dirt floors, straw bed.
So he came pretty poverished.
My mother's father
passed away with a stroke
or cerebral hemorrhage
when she was nine.
And so she also didn't
have a father in the home.
By the time I was born, my
father was an entrepreneur
and had been pretty successful
even though neither my mother
nor my father went to post high
school really, very little.
My mother managed the office.
And so they were
both hard chargers,
if you will, and worked hard
and I think set a good example
in a lot of ways.
They divorced, unfortunately,
when I was eight.
I moved out to Salt Lake
City and grew up there.
And I know this is probably
not politically correct,
but when I was 15, I
joined the Mormon church.
And in my mind, that was the
best decision I've ever made.
And a lot of people say,
well, how can that be?
What about your wife
and your decision?
And I said, well,
you got to remember
that wouldn't have had happened
had the first one not happened.
By the way, my wife and I just
celebrated our 50th anniversary
last month.
She and I were born in the
same hospital in Chicago
nine days apart.
And in those days women
were in for 10 days.
So I kid her about the wink
she gave me in the nursery.
But anyway--
[LAUGHTER]
One of the other things
that becomes important
and why that comment
of mine is relevant
is when I was 19
I'd just finished
my first year of college.
And in that period of
time-- that was 1960--
the Russians had
sent up Sputnik.
And so anybody who was
good in math and science
was really encouraged
to go into engineering.
And that's what I thought
would be my field.
But that summer-- in
our church, young men
are given the opportunity to
serve missions for two years,
go out and do missionary work.
And they changed the
age from 20 to 19,
which meant that I could go.
And so I did right away.
And after two years of
being on that mission,
I really came back with a
totally different feeling
about what I wanted
to do career-wise
and really felt I wanted
to work more with people.
Not that engineers don't.
I mean, I realize a lot of
you probably are engineers
and work with
people all the time.
But it just-- in other words,
it was a different look
that I had of the
world, if you will.
And I went back and I
looked at an interest exam
that I'd had when I
finished high school.
And in that interest
exam I found out
that I was only about a 32
percentile in engineering,
but I was like a 92
percentile in business.
And I thought, maybe
there's a message here.
So I remember I thought,
well, this MBA sounds
like I ought to get that MBA.
That sounds like a good idea.
And so I went to some of the
counselors and they said,
well, don't get a business
undergraduate degree.
They want you to have more
rounded career education.
So I thought, well, I'll go
to the nearest thing, which
was economics, I thought.
And so I majored in economics
in my undergraduate work
and then went on and got an MBA.
By the way, I don't
know if any of you
know what the definition
of an economist is.
You know what that is?
That's an accountant
without a personality.
[LAUGHTER]
Anyway, so I got
my MBA, and then
had been basically
pretty much working
in this business throughout
my career and over the years
have kind of developed a
style that I feel very, very
comfortable with.
We've been very fortunate,
not only on the business side,
but on the personal side.
We have seven children.
We have 22 grandchildren.
And that's quite a brood.
And we like to have them over on
Sundays a couple times a month
and have dinner together.
And it gets a little
hectic and a little noisy,
but it's enjoyable.
Anyway, that's a little
bit of the personal side.
So one of the things
that I thought I'd do
is go through the
process with you.
As was already mentioned,
this is one of the quotes
that people-- my kids tease
me, by the way, on what they
call my dad-isms,
or my little quips.
And this is one of them.
We like to buy beach balls
being pushed underwater
with the water level rising.
I think to me-- I'm
a conceptual thinker.
I like to create
mental pictures.
And I think that tends to
help us understand the process
of investing a lot easier.
The next thing I
want to do is talk
a little bit about
investment goals, which
leads up to the process.
I wish I could tell you that
over the last roughly almost
50 years now investing
that I did everything
in a great orderly fashion.
It just doesn't work that way.
We tend to meander our way,
I think, a lot of times
through life.
I've told the younger
guys, hopefully, I've
saved you 10 or 15 years of
wandering in the wilderness,
if you will.
But, again, this is where I've
ended up with in the process.
And let's talk a little
bit about these goals.
The first goal is to
protect client's money.
We feel that's really,
really important.
And there are two things,
though, that are important,
and they kind of counterbalance
each other a little bit.
One is protect against
making dumb decisions.
In other words, losing
the money permanently.
Any time you're
investing in securities,
there's a degree of fluctuation.
Most big companies,
by the way, if you
look at their 52-week ranges,
fluctuate as much as 50%
from low to high over
a 12-month period.
You'd be surprised.
So what we don't want to do is
permanently lose the capital.
The second thing, though, and
that's-- you could, in effect,
say, well, I could stick it
under a mattress and do that.
But you really can't in a world
where you have paper money.
And that means inflation.
If you look at the
last roughly 100 years,
it's averaged about 3% a year.
Now just to give
you an idea, that
will take $1 to a nickel
over 100-year period.
Over other periods of
time, it'll be different.
We've had as much as
4% over long periods
of time in inflation.
So I don't know what
it'll be in the future,
but I know it's inevitable.
That's the bottom line.
It is inevitable.
And so in order to
protect capital,
we need to be proactive
and invest it.
And if you look at
the numbers, they're
pretty clear that equity
investing provides
the higher rates of return.
Now you could say backdoor
equities, like junk bonds
or something like that,
but they're really
equities in disguise.
So equities, bonds, cash,
you've seen the numbers
over the years, I'm
sure, and they're there.
So the other side is
to grow the money.
And growing the money, we
want to get equity returns,
so we want double digit returns.
But the other
thing we want to do
is measure ourselves
over a period of time
that's appropriate.
And we feel a real
way to measure
yourself is over a
very long time frame,
or from one market peak
to the next market peak.
That's the toughest time period,
I think, to evaluate managers.
And the problem is is sometimes
you have these very long time
frames in order to do that.
But when you do that, I think
you really get a better look.
Unfortunately, they don't work
out at a nice calendar year
type events.
But I still think that's
the best way to look at it.
So with that in mind,
how do you invest money?
And we're going to talk about
each one of these three things
in the investment strategy.
First one we'll take
is good business.
And several years ago
I thought about this
and thought that there was
really a way to look at maybe
create a grid and then
position every company
on this grid or the components
that make up a company so
that one could really get
an idea of what the business
model was all about.
Because, ultimately,
this business
boils down to what you buy
and what you pay for it.
So the business model
is very, very important.
And in analyzing
the business model,
you'll notice that there are
certain things that make sense
to us.
And what we're looking for--
businesses that have what
I call high ROTAs--
return on tangible assets.
And as an example,
we put in here--
or I put in here-- four
different categories.
And that category, the one that
hits the jackpot, if you will,
are the consumer staples.
If you think about
it, these kind
of businesses,
where they can have
a product or a service that's
relatively disposable and low
price so it's used
up on a regular basis
has an edge because they can
manage their capital much more
efficiently.
They can keep it
working all the time.
And so when you can keep the
capital working all the time,
and particularly if you
have a high market share,
you can make a lot of money.
A company that has a
40% share of the market
doesn't make twice what a
company has a 20% share of,
they'll make four times as much.
So having a big market share
is also important as well as
having a low-cost position.
But they all start to come
together if you think about.
All those things start
to work together.
Years ago-- before the meeting,
I was talking a little bit.
And I started talking about
comparing two businesses that
were basically no growth
businesses for decades--
the automobile business
and the cigarette business.
And Phillip Morris
and General Motors--
But if you look at
the business models,
they're night and
day different even
though they're both in
virtually no growth business.
And so as a result of
that, Philip Morris
has been a spectacular
investment.
General Motors went bankrupt.
So over a long
period of time, you
start to see the impact of this.
I guess the ultimate
is the fellow who
went to his 25th class reunion
for the Harvard Business
School.
And he walked in
and he said, Joe, we
haven't seen you for 25 years.
Where have you been?
And he said, well, he
said, I barely got in here.
He said, I had to work and
work and work just to graduate.
And he said, so
I knew I couldn't
compete with you guys and
your fancy jobs in consulting
and finance in
Boston and New York.
He said, I went back to
a little town in Illinois
that I came from.
He says, but we did
develop this little product
and we did patent it.
And he said, you guys
probably use it every day.
He said, we make it for
$1 and we sell it for $4.
I said you'd be amazed
how that 3% adds up.
Now he may not have
got the math right,
but he got the concept right.
[LAUGHTER]
That's a good business when
you can have that situation.
Contrast that to businesses that
are over here in the capital
goods area.
Not that there aren't some
businesses that have done well.
But I was thinking the other
day, John Deere, for instance,
is an example.
Many years ago when I was
looking at the tractor
business, I think the life
cycle is 17 years for tractors.
How would you like
to be in a business
where somebody bought your
product every 17 years?
OK.
Think about that versus
somebody who makes toothpaste.
OK.
It's a lot different situation.
The airline business,
a lot of people
have talked about how bad
the airline business is
and how it hasn't made any
money since the Kitty Hawk.
I think at one time
the airline business,
it took $1 of capital to
generate $0.40 of revenue.
That's just not a good business.
OK.
But, again, it's a
matter of looking
at the total composition
of the business in my mind.
In other words, one really needs
to understand what they own.
What kind of business?
Is this the kind of
business that makes sense?
Is it a good
business ultimately?
So some of the characteristics
are listed there.
But, again, we've
talked about them.
Now sometimes you
can go in between,
where you have something more ad
driven, like a media business,
where there's more economic
sensitivity but low capital
requirements.
There also may be more ease
of entry in the business.
Because of that,
service businesses
tend to have that
characteristic.
Or the other way where
you have more capital
required, like a
utility type model.
And some of those will work.
But remember, like
in the utility model,
the only way to
get your ROE up--
because you have a low
ROA-- is to leverage it.
You have steady cash
flows hopefully.
But if you have a real
downturn, like a period
like the Depression
was, there were
a lot of utilities that ended
up going bankrupt in the '30s.
So that's an example.
Now the second-- whoops.
We talked about-- well, we can
talk about winners and losers.
We've talked a little bit about
that with GM and the Philip
Morris part.
By the way, I remember
after I left and started
my own company, as
I was leaving I'd
been at Selected Financial
for a little over nine years,
and eight and a half years I had
run the Selected American fund.
And it was the fifth best
performing fund in the country.
And then I'd gotten
the Morningstar Manager
of the Year award and stuff.
But anyway to help me
remember to be modest,
I remember the people
in the office--
it was tied in with
a brokerage firm.
And they gave me two T-shirts.
And one of them had
winners and the other one
had losers on the back.
And there were about 10 of each.
So it helps us keep humble.
The one thing about
this business,
by the way-- if you're in
the investment business--
to remember and that
is basically you're
almost always wrong
to some degree.
Nobody buys everything
at the bottom
and sells everything at the top.
It just doesn't work that way.
So it's a business
to stay humble in.
Next one is the
investment process
of the shareholder-- or,
I mean, of the management
of the company.
And conceptually, if
you think about what
you're doing when
you buy an equity is
you're buying two
cash flows generally.
One is the cash flow
that is given out
as a form of a
dividend and the other
is the cash flow that is
retained by the management
and reinvested on your behalf.
That's the wild card.
And as the longer term
your investment horizon
is, the more important that
part of the investment equation
becomes because it can
affect rates of return
over long periods of time.
And in a way, think
of it just like you'd
think of a stock as a bond.
And that's the way
we think of it.
And we'll come to the
valuation and talk
about that in a minute.
But here let's talk about
the reinvestment process
because that's what's left over
after the dividend is paid.
And the management team
really has five basic options
with the money that management--
or with the management retained
money.
The first one is to put
it back in the business--
R&D, marketing, cost reductions,
distributions, on and on an on.
And trust me, if you
have a great business
and you can grow units in
that business, it's wonderful.
The marginal rate of return
on new incremental growth
is really, really excellent.
And so it's a very
important part
and I would never minimize that.
The problem is as
companies start
to get past their infancy, they
start to generate excess cash
and usually they can't
absorb all the cash
that they are generating
in their existing business,
so they have to start
examining four other options.
We talked about one of
them, which was a dividend.
And obviously one of them
is just sitting on it.
But there are two others that
they tend to look at too.
And the next one is the
one that's so difficult,
and that is making acquisitions.
And too many times,
unfortunately, the egos
override the economics
when acquisitions are made.
And I think the
classic on this one
is if you go and look
at a company that's
now part of Pepsi, but before
that it was Quaker Oats.
Bill Smithburg was the
CEO of Quaker Oats.
And he actually showed
both extremes, if you will.
The first one is he went and
he bought Stokely-Van Camp.
Now Stokely-Van Camp was in
the canned vegetable business.
They had some food
chemical business
and they also had one little
product called Gatorade.
Well, what he really
wanted was the Gatorade.
And eventually
after he bought it,
he liquidated the
other pieces and he
was left with
Gatorade, which was
worth billions of
dollars by the time Pepsi
purchased the company,
and has continued
to be a very valuable
product line for PepsiCo.
Then in the '90s, he went
out and he bought Snapple.
He had attempted to buy it once
before and hadn't gotten it.
So he paid up this time.
Paid like a billion
and a half for it
and then realized the
distribution was not
tied in with the other
pieces of the company.
It didn't work out very well.
And they ended up selling it
and losing a billion dollars
in the process.
And so it was a disaster.
It cost him his job.
So that gives you the
extremes-- the winner
and loser aspects of that.
The third one is
buying back stock.
And here at least you
know what you have.
You're just buying a bigger
piece of the pie, so to speak,
so that the
shareholder who's left
has a bigger share of the
earnings as a shareholder.
So those are the
five basic options.
Again, put money back in
the business, acquisitions,
purchase their own
stock, pay a dividend,
or sit on it through reducing
debt or raising cash.
Those are the things that
are important to analyze.
And we've talked about
the winner and loser here.
Now let's talk
about the investment
strategy of purchasing price.
The way we look at
it is think of it
in terms of a forward
risk-adjusted rate of return.
In other words,
take into account
the best you possibly
can-- when you're looking
at a business-- the pieces.
In most cases, you
have a dividend
and you should know
what the dividend is
when you buy it
and you should have
a pretty good handle on your
historical reinvestment rate.
So the wild card in investing
is what the management
does with the money.
We've talked about
those options.
And that's the one that
requires some effort.
Now in effect what
you'll end up with
is starting to look
at ranges of outcomes
because nobody can predict the
future with absolute certainty.
And the more predictable the
business, the narrower the
ranges.
The less predictable,
the wider the ranges.
And that has implications
also on sizing
because as your
probability goes up
and you feel more comfortable
with the investment,
both from a valuation and from
a business model standpoint,
the more money one
should focus in on.
And so the biggest holdings
should be in the companies
where you have the
most confidence in.
So I tell anybody if they
look at our portfolio, well,
what do you like the best?
We'll just start with the one
we have the biggest holding in.
And when you have less
confidence, you should have--
and you have a wider range
of outcomes, in effect,
it's sort of like being
a wildcat oil driller.
You want to spread your risk,
and so you put a smaller
percentage into those holdings.
But the element is to find
as many as you possibly
can of great businesses
at a low purchase
price or a reasonable
purchase price
and hold them for a long period
of time and have patience.
And just to give you
an idea of sometimes
how long that patience
can be-- back in 2000,
we bought a company called
Lancaster Co Colony.
And Lancaster Colony,
about 90% of their earnings
eventually became in specialty
foods-- half grocery store
and half through restaurants.
Things like Sister
Schubert's rolls.
My kids love those rolls.
They're frozen rolls.
Marzetti's dips and
salad dressings.
Those are the biggest part.
But they're heavily
dependent on soybean oil.
And so we have been so
brilliant as a country
as to tie in the cost of
food with the cost of energy
because 40% of the corn crop
is used to make ethanol.
How dumb is that, right?
So, anyway, as a result of that,
the price of soybean and corn
tend to line up with the
price of oil to some degree.
And so this company,
for instance,
was getting squeezed
as the price of oil
went up after that period of
time into the mid-2000 period.
But as oil peaked out
and started to decline
and the market declined in '08,
this company by this time had
been squeezed enough they
started to raise prices
and their costs went down
and their earnings exploded.
And this stock actually went
up while the market went down.
Just to give you an idea.
So sometimes it
takes a long period
of time for the final
things to work out
the way you'd like
them to work out.
But the key point
is have patience.
Have a very long horizon
time and have patience.
Well, I think we're kind
of at this point in time--
my time is about right actually.
Before I open it up
for Q&A, though, I
want to tell you a little
story about the money manager
that went around
with his assistant.
And he went around
and they would talk.
And the assistant kept hearing
him talk and give his spiel.
And finally, after
many, many times,
the assistant looked at him
and he said, you know what?
He said, I have
heard you deliver
that message so many times now.
He says, I think I could
do it as well as you do.
So they said, well, let's
try it the next place.
So they reversed roles.
And the assistant went up there
and he delivered the message
just brilliantly just
like the money manager.
At which point he
opened it up for Q&A.
And the first question
right out of the box
was Mr. Money Manager, what do
you attest your positive alpha
to?
Is it your low beta or your
low standard deviation?
At which point he looked at
his money manager and he said,
you know what?
He said, that question
is so easy I'm going
to have my assistant answer it.
[LAUGHTER]
So with that in mind, I'll
open it up for some questions
that you may have.
AUDIENCE: One thing I wanted
you to touch upon if you can is
you mentioned the
importance of patience.
But there's a little
bit of contrarianism
in going on your own.
And when those beach balls have
not really risen to the top
and everybody else is
looking at you with doubt--
have you been in
such a situation?
How has that felt like?
I just wanted you
to talk a little bit
about the psychology of things
because you mentioned this
in your previous interviews.
DONALD YACKTMAN: Yeah.
That's sort of the
fat pitch right
over the heart of the plate.
There's a baseball analogy.
Yeah, that certainly happened
to us going into '99 and 2000.
And maybe that's another thing
I-- my personal life, I think,
helps strengthen that whole
situation because I view us
on this earth as to
having more than just
to be out here to make money.
And I think to provide service
and do other things for people
and to be involved in a family.
And so I think that really
helped in that period of time.
But I think it's really
important to stay focused
and to be patient.
My kids, again, they tease
me about my dad-isms.
One of them is there's a
narrow difference between being
determined and stubborn.
If at the end of the day you're
right, you're determined.
[LAUGHTER]
OK.
So And I think that
long horizon time really
does make a difference and
it really does separate us
from so many people out there.
And I think that's something
that value managers, I think,
really do have more.
But there's tremendous
pressure in this business--
tremendous pressure
for short-term results.
I remember when I
was traveling once
and I looked at "USA Today" and
it talked about horizon time.
And virtually nobody has more
than a three-year horizon time.
And yet I will
tell you that there
are periods of time where
we can go three years
and underperform the market.
It's not that difficult
really if you're
using this kind of a strategy
to have a period like that.
And that's why that peak to
peak really makes a difference.
I'll tell you what's critical
is to think of it in terms
of you're a CFO of a company.
And if you can buy things
above your cost of capital,
then you should be buying.
And so when '08 and '09 hit,
a lot of people said, well,
how could you do well
in both periods of time?
Well, if you can
find opportunities,
it's sort of like playing chess
or playing war, if you will.
You always want to move forward.
OK.
And in '08 we were fully
invested before the market
bottomed.
And then the market
went down another 20%.
I remember telling people
at Christmas, I said,
if you're a value
investor and you
can't find things to buy today,
there's a disconnect, OK?
And then it went down 20% more.
So you cannot call it.
But what you can do is
feel very comfortable
and think of it in terms
of using your cash reserves
and then having the things
that are very high quality--
your AAA bonds, if you
will, of your portfolio,
the highest quality
stocks-- that
will tend to hold up
better in that environment.
You can start to
let some of those go
and then [INAUDIBLE]
that money into things
that have been crushed that are
really excellent businesses.
But they may be a
AA or a single A,
but they have a lot
more upside potential.
And be willing to shift those
where you can dramatically
increase your rate of return
in the investment you have.
So I hope-- does that
answer your question?
AUDIENCE: Yeah.
You mentioned in
1999-2000, could you
maybe describe the situation?
What was the setting?
What were you alluding to?
DONALD YACKTMAN: Well,
I mean, I even wrote
in a report-- a
couple of reports
actually-- to shareholders.
One was that anybody-- because
this was the dot-com period
and a lot of people
were selling things
over the internet for $0.75
that cost them a dollar.
Well, I mean, I can
go out on the street
and give away dollar
bills for $0.75.
I wouldn't have any trouble
getting rid of them.
That's possible, but it
doesn't make any sense.
The whole thing
didn't make any sense.
By the way, I remember
I used Neutrogena soap.
No ad intended here.
And I bought about $100
worth of Neutrogena soap
from one of those guys, one of
those websites, a several year
supply because it
was such a bargain.
[LAUGHTER]
Again, my kids tease me
about my bargain hunting too.
That's another thing I will
tell you in this business.
If you go into a value manager's
office and it's opulent,
there's probably a
disconnect there too.
[LAUGHTER]
Because most value managers
do not have opulent offices.
MALE SPEAKER: Don, what were
you buying in '99 and 2000?
DONALD YACKTMAN:
Well, it's interesting
because in that
period of time there
were some things
that were crushed
and one of those we mentioned
was Philip Morris that
had had its suit in Florida.
I don't use the product, but
one of the things that struck me
about this is that
there is a fellow who's
on the board--
you may have heard
of him-- named Carlos Slim.
And Carlos Slim was one of the
wealthiest men in the world.
And Carlos Slim actually
bought some Philip Morris right
near the bottom at that period
of time with his own money.
Now there's a lot of reasons
why people will sell stock
if they're insiders, but
there's only one reason
they'll use their own
money to buy stock.
Only one reason.
But the other
thing that happened
is a lot of the really big
companies-- good businesses--
were very overpriced.
I mean, like Coca Cola, it
basically-- even today it's
only barely passed-- recently it
passed the high it hit in 1998.
Five years or seven years
later when we were buying it,
it was less than half that.
So these companies go through
these really odd valuation
periods.
But we ended up buying a lot
of middle-sized and smaller
companies because those
were where the bargains were
in that period of time.
One of them, I remember
being on a phone call in 1998
with a famous money manager
that I won't reveal his name.
He's more of a momentum
driven growth kind of guy.
To me, growth and value
are joined at the hip.
I mean, to me it's just like
looking at risk adjusted
forward returns and bonds.
But anyway, so, he picked Pfizer
and we had just sold Pfizer.
And that was when the
little blue pill came out.
And the stock went
way ahead of itself.
And we bought a company
called First Data, which
eventually went private.
But we later bought
Pfizer back about five,
seven years later
at a lower price
than what we had sold it at.
And in the meantime, I
think First Data tripled.
It's a matter of also
being flexible and being
willing to look at the
world in an objective way.
AUDIENCE: Thank you, Mr. Don.
Can you compare Amazon and
Apple with the strategry
you are talking about?
I think both companies are
very good company in terms
of the business you
are talking about,
but they have very different
investment strategy.
And Apple will hold tons of cash
and Amazon just barely earned
in the last quarter.
DONALD YACKTMAN: OK.
I know Apple.
What's the other one?
AUDIENCE: Audience.
DONALD YACKTMAN: Amazon.
Oh, OK.
Yeah.
They're very different.
They're very different
companies, totally different.
My worry with Apple,
frankly-- and we actually
talked about this a little
before the meeting too.
And I've been wrong
in the short-term,
but Clayton Christensen, who's
at Harvard Business School-- I
remember after having commented
about Apple's strategy,
he lined up right with me.
Here's the problem I see.
I think their strategy is
designed for a niche type
market.
And I think in the long term,
the company that has the bigger
market share and the lower cost
position has a much more stable
situation.
Now it's tough in
technology because you
have a lot of shooting
stars and everything.
But I think they have
unsustainable margins.
I really do.
And, I mean, I think if you
can get something that has 70--
maybe 50 even-- but 70%-80% of
the same features for much less
money, for half the
price or 2/3 or whatever,
it's just going to work more.
And I think the open
architecture is a better way
to go because it allows more
spread of costs ultimately.
So that's my dilemma that way.
Amazon's strategy
is very unique.
And it has kind of this halo.
Retailing's a tough business.
At some point, they're going
to have to make some money.
What their strategy is--
and it's a clever strategy--
is to just have
virtually no margin
and make no money to
expand market share.
But, again, to some degree, it's
a little bit like those dotcom
companies, so to speak.
At some point you got
to make some money
to develop the
capital to feed it.
Now some of the
way they've done it
is because they're trying to
move a little bit where you're
laying off more of the capital
and in effect the inventory
onto other people.
And so they're going to become
more of a middle man for that.
I think it's a
tremendous strategy,
but I think it's
tough to justify
the price that it's at to me.
But, again, it's still early.
I think their market cap
now is bigger than Walmart,
as an example.
AUDIENCE: Yes.
DONALD YACKTMAN: So the dilemma
in the growth stock strategy,
if you so speak go that way, is
that there's a lot more attempt
to evaluate the future and it
becomes much more difficult.
That's the problem.
I feel a lot more comfortable
with more stability
after things have
shaken out somewhat
where things are clear.
But then I tend to lean more
toward the AAA bond type model.
To me these are not
AAA bonds, so to speak.
They're a lot more risky.
And you're making
judgments that may not
last-- companies just don't
grow at high rates indefinitely.
I mean, think
about-- anybody who's
in statistics or
mathematics-- and most of you
are obviously very
good in those areas
or you wouldn't
be working here--
you can just see-- otherwise
you'd own the world, right?
I mean, if you grew fast enough.
So it just mathematically
doesn't work I think.
And that's what
makes it a dilemma.
But in the short term,
remember as I think
it was-- as Ben Graham said.
He said, in the short term,
it's a voting machine.
In the long term, it's
a weighing machine.
So I think the popularity--
probably 70% of people
are momentum investors.
They're rear view
mirror investors.
They buy what has been
good with the idea
that it's going it's
going to be better.
There's one company
that made a career out
of saying we'll buy
things when they
make an all-time high because
they tend to run after that.
Very dangerous kind
of strategy I think.
And let me give--
a lot of credit
should go to Steve,
my son, on that one
because he did a lot
of work on AmeriCredit.
And what was unique about
AmeriCredit-- financial stocks,
by their very nature, are low
return on asset businesses
because they make their
money through leverage.
And that makes them
very vulnerable.
Now what made AmeriCredit
unique in more than one way
from a business
model standpoint--
First of all, about
40% of their money,
they got back in the first year.
Number two is they
had collateral.
Now the collateral
tended to be about 40%
if they had to repo the car.
Third is, people
in today's world,
they tend to be not
as many homeowners,
so that you didn't have the
same overlap with people
who are overleveraged in
their home investment.
These lot of people were
apartment dwellers and so on.
Their problem wasn't the
basic business model.
Their problem was the freezing
up of the capital markets.
Because what they ended
up having to do is they
would collateralize
these mortgages
or package these
mortgages and sell them
as a collateralized debt piece.
And so when the markets
tended to freeze,
they had to basically
wait for the payments
to come in before they
could relend the money.
So at the worst case
scenario, they were basically
running it close to break-even.
And the stock had a book.
And so the book was about $15 a
share, $16, somewhere in there.
And it's hard to say
in any financial stock
that the book is solid.
But as much as you could
say, that was there.
The other thing is
psychologically,
you told somebody you're
buying a used car subprime auto
lender, it sent
up all the flashes
that you can imagine of
negative characteristics
to people in that environment.
And so the stock
went down to $3.
It was down to 20%
of book at one time.
GM actually bought the thing out
because they had sold off GMAC
and they bought it at like
$23 within a couple of years
after that.
But, again, it was a
unique business model.
I'm not enamored
with big city money
centered banking institutions.
I mean, to me, the
other side is look
at how tough it
was for Jamie Dimon
to run Morgan Stanley when
you have the whales show up.
I mean, and here's a guy
who's a brilliant operating
man still has something
like that happen to him.
It tells you how difficult it is
to deal with a bank like that.
So be careful on
financial stocks.
Yes?
AUDIENCE: I've heard
some fund managers talk
about they only have
two good ideas a year
and they'll go big on those.
And you talked about increasing
your investment size when you
have that kind of conviction.
I wonder, how do you
come up with good ideas?
DONALD YACKTMAN: How
do I come up with--
AUDIENCE: How do you come up
with good investment ideas?
How do you find them?
Where does it come from for you?
DONALD YACKTMAN: Oh, I think
they can come from any place.
I think over the
years to some degree
maybe it's a little
bit like Potter Stewart
the Supreme Court Justice
when he was asked about how
he knows pornography
and he says, well,
I know it when I see it.
[LAUGHTER]
So I think after you
do this so many years,
within a matter of minutes
you can look at something
and say, yeah, that
one looks really good.
But based on the place you
are in the market cycle
and, I mean, valuation levels
and so on and so forth.
So there's a lot of variables
to take into account.
But I think one of
the best ways is
to look at things that
have short-term problems.
There are really three opportune
times to make purchases.
One of them is when
the market goes down.
And when the market goes down--
think of these as like wind
coming through an orchard
and some fruit then
drops to the ground.
It's very easy to look at it.
So it can be like a situation
where the whole marketplace
collapses, like it
did it '08 and '09.
I mean, that was
a dream come true
where you have an
opportunity like that.
I remember walking into the
board of directors of our funds
in late October.
And one of the fellows who
was a classmate of mine
at Harvard Business School.
And he said, man, it must
be really tough out there.
And we're kind of
dancing in the streets.
I mean, literally.
Kind of like, oh
no, this is great.
So some part of that's
a mentality thing.
And it's just getting
used to looking
at things in an objective way.
So the market going down is one.
The second one is an
industry shortfall.
And the classic
of this one would
have been 1993 when there
was a concern at that point
about changing the health
care industry dramatically
when the Clintons first
came-- or [INAUDIBLE] Clinton
came into office.
[LAUGHTER]
Let me not go there.
[LAUGHTER]
So anyway I think we
ended up with a third
of the portfolio in either drug
or hospital supply companies.
They were just beaten up.
And just one after
another after another.
The difference was between then
and a closer period, like now,
is the drug companies had
a much bigger pipeline.
And so there were a
lot more companies
that were more interesting.
The third one is where you
have an individual stock that's
not down, but it's
temporarily out of favor.
I referred back in '98
to the First Data thing.
First Data had made a
purchase of another company.
They process the payments
for credit card companies
and merchants.
And they had made a purchase.
And as a result of that, they
were assimilating this company.
And you had a temporary
flattening out, I think,
it was more than
anything, of the earnings.
So whereas the marketplace
had been used to this,
and they had this,
they all of a sudden
said, uh-oh, big problem.
It wasn't a big problem.
It was just an
assimilation problem.
And so it created a
great buying opportunity.
So those are the three
kind of things to look at.
I remember many, many years
ago, a guy coming to my home.
And we were talking
about investing.
And he said that-- he was
just in contracting business.
And he says, I do mine by
looking at the new Lowe's list
in the newspaper.
I thought, well, that
guy has got some savvy.
Not that I would choose
that as the only source.
But, in other words, you
look for opportunity,
and that's when a lot of
times you're going to get it
is under one of those
three conditions.
AUDIENCE: Thank you.
DONALD YACKTMAN: Question?
AUDIENCE: Hey.
Thank you for
sharing your stories.
So you just spoke about
you look for opportunity.
What happens when you don't
find enough opportunities?
How comfortable are
you holding cash?
Or would you just
double down on what
you have let's say in the
more, as Graham calls it,
the unpopular large
companies and just
waiting out for the dividends.
How do you think
about that problem?
DONALD YACKTMAN: Yeah.
Cash is a residual.
But, again, one needs to
take into account when
you think about having
cash, it shouldn't
be because you're trying
to predict the market.
In other words, if
you can find things
above your cost of
capital, regardless
of what the market level
is, one should do it.
Think of it this way.
If I'm in need of a
new shirt and I go out
and I see one that I
like on sale, I buy one.
But then I go into the store
again a week or two later
and it's marked
down another 20%.
Should I dispose
of the one I have?
No.
OK?
If it's the kind of
shirt I'm going to wear
and I'm going to wear for a
long time and I enjoy wearing,
I should buy another one.
So I think the use of
cash becomes important
when you have the
opportunities there.
But if you don't have
opportunity, then
sometimes you're better off
just to sit on it and let it be.
Just wait for those
opportunities.
Because, again, you have enough
fluctuation in the marketplace
that you're going to
get opportunities.
It may be varied opportunities.
It may be just a little addition
to what you already have.
Or it may be a new addition.
It could be either.
But that's the way
I would view it.
Again, I would be as
aggressive as you can.
Now the other thing to take
into account-- and today
we have a very unique
situation because when
I look at the marketplace
and I look at the categories,
the one that seems to be even
more overvalued than stocks--
if you're looking at
overall valuations--
are the long-term bonds.
I mean, you can
get dividend deals
on some of the high quality
companies that's higher
than 10- or 30-year treasuries.
Well, why on earth would
I want to own something
that has no increase in
the dividend, so to speak,
like that?
Relative to the other.
But it's a relative thing.
At least in '07 you had some
decent interest from cash.
Today you get no money on cash.
So it pressures people to
lower their cost of capital
to some degree to take
that variance into account
because there's such an enormous
spread in the rates of return
on a forward risk
adjusted basis.
AUDIENCE: For those
of us who might
be personal
individual investors,
what general advice
do you have in terms
of protecting your wealth
and maybe growing it?
DONALD YACKTMAN:
Well, again, patience.
I would highly
emphasize patience.
I think the other thing is
find a strategy that you can
live with and stick with it.
Just from a personal standpoint,
I started out in 1968.
And for every year
thereafter, basically,
when I would get money, I'd put
it into whatever firm that was.
I'd put it in effect into the
market because I was getting it
on a continual basis, looking
at it as a very long-term thing.
But think of it as a very
long-term investment.
The magic of compound
interest is so important.
Be both protective, but also
be aggressive at the same time.
MALE SPEAKER: With
that, thank you so much.
It was such a pleasure to
have you here for this.
DONALD YACKTMAN: Well, thanks.
Thanks for having me.
[APPLAUSE]
