Donald Yacktman, one of my favorite investors once you get past the list of usual suspects that everyone knows, conducted an interview with Consuelo Mack a month or two ago that explained the rationale for his old-fashioned investing style (his portfolio typically owns large chunks of Procter & Gamble, Coca-Cola, and PepsiCo). My favorite quote from the episode is when he recalls a dinner conversation with his son in which his son explained the Yacktman investing style: “Basically, what you are saying is, if you buy above average businesses at below average prices, then on average, it is going to work” (That quote starts a little after the 14:30 mark).
The largest holdings in the Yacktman Fund currently are: Twenty-First Century Fox, PepsiCo, Procter & Gamble, Coca-Cola, Cisco, Microsoft, C.R. Bard, Sysco, Viacom, and Johnson & Johnson. Yacktman has spent most of his career owning these types of blueblooded companies, shifting the holdings as their valuation changed.
At the 20:00 minute mark, Yacktman talks about how Coca-Cola has gradually taken up a larger and larger portion of the Yacktman Fund. That’s something I can relate to—at a price of $40 per share, it is going to be very difficult for Coca-Cola investors now to do poorly over the next ten to fifteen years. Well-branded companies with low input costs and fat margins tend to treat owners very, very well when bought at fair prices and held for long periods of time.
The interview is worth checking out—Yacktman does an excellent job of explaining his long-term philosophy. Essentially, he focuses on the best quality companies and then chooses the ones traded at good valuations, and he is only willing to go down a couple tiers in quality during crisis situations (what he calls “disruptive markets”) in which the lower quality companies get so much cheaper in relation to high-quality blue chips that the margin of safety in terms of price justifies pursuing higher returns through lower quality companies. In my case, there is a certain lower quality threshold I’d never cross (for instance, I’d never own Alcoa, Best Buy, or the New York Times because it is essential that you identify the right time to get out in order to make money with companies like that), but that is up to your own personal investing style.
Yacktman is one of the most sober, contemplative, truly long-term oriented professional investors of the past several decades. It’ll be worth your time to check out his interview with Consuelo Mack.
Originally posted 2014-01-05 22:56:19.