5 Lessons From Chuck Akre, a Modern-Day Investing Great
Chuck Akre is fast-becoming one of the investing greats of this generation.
His Akre Focus Fund (the retail class) has achieved an annualised return of 16.72% since its inception in August 2009.
The fund’s return easily outpaces the 14.14% annual gain of the S&P 500 over the same time frame.
As its name suggests, the Akre Focus Fund focuses its investments on only a small number of high-quality businesses (as of the fourth quarter of 2019, the fund only had 19 holdings).
These are companies that meet Chuck Akre’s high standards related to (1) the quality of their businesses, (2) the people who manage them, and (3) their ability to reinvest capital at high returns.
The Akre Focus Fund holds these companies for the long-term, allowing them to compound over time. Based on his fund’s results, this relatively straightforward strategy has worked tremendously well for Akre and his investors.
With that in mind, I want to highlight five things I learnt from Chuck Akre’s interviews and writings.
1. He Doesn’t Predict Where the Market Is Going
Unlike other investors, Akre does not scrutinise or make predictions about where the stock market is going.
Instead, he focuses his efforts on finding great companies that trade at reasonable prices.
In a Wall Street Journal interview in 2018, Akre explained:
“It’s not that we don’t care what the market is going to do. It’s that there is nothing in our record that suggests we have any skill in making those predictions, so we don’t bother. We just focus on what it is that we do well. That has been successful for a long period, and we do that because we think it is logical, repeatable, simple and straightforward.”
2. Owning Good Businesses Is More Important Than Simply Buying and Holding
It is no secret that buy-and-hold investors have outperformed those that trade frequently. However, this is only one piece of the jigsaw.
The difficult part is actually finding stocks that are worth buying and holding. From my personal experience, buying and holding a mediocre business will, as you may have guessed, produce only mediocre returns. Akre says:
“Buy and hold is not our philosophy. What we want to do is own businesses that are exceptional until they are no longer exceptional. It’s a nuance on the notion of buy and hold.”
He also emphasises the point that investors should not hold a stock simply because they prescribe in the buy and hold strategy. If an investment thesis is flawed or the company has lost its competitive edge, it may be time to let go. He explains:
“We’re not afraid to sell, but we want to know that the company really isn’t exceptional anymore, because it has often taken me a long time to understand just how good the really good ones are. And once you own them, you shouldn’t get rid of them easily, or just because something has changed right now.”
3. He Believes Indexing Is a Perfectly Good Strategy for Average Investors
Despite running an actively managed fund, Akre still believes owning an index fund is a decent strategy for the retail investor.
Not only has indexing produced a decent return over the long term, but it is also difficult to find good active managers who can outperform the index over time.
“I think it is very difficult to understand who the good managers are and what makes them good. I think about this a lot as it relates to my partners and people in other firms. It’s hard, and people need help, and the idea of using index funds is perfectly reasonable for getting an experience that is the market experience.”
4. He Doesn’t Focus on the Short-Term Fluctuations in His Portfolio
Akre’s core investing principle is to focus on long-term returns.
The stock market may fluctuate wildly in the short-term.
Although this can create near-term upsized returns or steep drawdowns, we should not read too much into it. Instead, we need to focus on the long-term potential of our investments.
In his semi-annual shareholder letter in March 2019, Akre and his two other portfolio managers wrote:
“You might say, ‘No one can predict stock returns even on a single day. So how can you possibly focus on long-term returns?’ The answer is we do not focus on stocks. We focus on businesses. We earn a majority of returns as portfolio businesses improve and grow, year by year. Is it so crazy to think that if we find a thriving business with strong competitive advantages and buy it at a reasonable price, it might provide us with better-than-average long-term returns?”
5. He Believes the Market’s Focus on Short-Term Goals Creates Investing Opportunities
It is well-documented that stocks tend to be the most volatile around earnings season. An earnings miss or earnings surprise can cause a stock price to rise or fall disproportionately to its true long-term value.
This is where Akre believes long-term investors can gain the upper hand.
Simply by using this price-value mismatch to pick up shares at a discount, long-term investors stand to gain above-average long-term returns.
In his discussion on his investing philosophy, Akre says:
“Wall Street’s obsession with what we describe as the “beat by a penny, miss by a penny” syndrome frequently gives us opportunities to make investments at attractive valuations. We keep our focus squarely on growth in the underlying economic value per share – often defined as book value per share – over the course of time. Our timetable is five and ten years ahead, and quarterly “misses” often create opportunities for the capital we manage.”
Image credit on cover artwork: Investment Masters Class
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