Charlie Munger once wisely pointed out that it only takes one idea to build substantial wealth, noting that he estimated 75% of Berkshire Hathaway’s real wealth came from approximately one dozen investments over the past fifty years despite the company owning thousands of operating companies. Jesse Livermore, at the end of his life, once remarked that the real money that gets made over a lifetime is the result of sitting and compounding rather than selling and shuffling through various investments.
Between 2008 and 2012, MUFG Securities accumulated 13,868,474 shares of Visa (split-adjusted) at an average price of almost $21 per share. This was a total investment of approximately $300 million out of the company’s $4.5 billion overall portfolio, or approximately 6% of the client’s total overall investment capital.
Like many other investment managers, the portfolio managers at MUFG Securities no doubt recognized that Visa was and is the world’s largest retail electronic payments network providing processing services and payment product platforms. It is the dominant purveyor of credit, debit, prepaid, and commercial payments offered through its global payment network. It also provides fraud and risk management services and protections through its VisaNet subsidiary, which assumes liability risk against fraud for smaller financial institutions that do not have the capabilities to absorb that risk, either directly or through premium payments to an insurer that would accept such a risk.
Almost half of the global payments processing occurs between Visa and Mastercard. If you own shares of both Visa and Mastercard, you can watch two people swipe a payment ahead of you in line at the proverbial supermarket and know that, statistically, one of those transactions is generating a fee on your behalf.
The Visa business model is one of the most fascinating I have ever studied. The company built this $15 billion payment network, reinvests approximately $750 million to $1.25 billion into it each year, and then profits off of credit card swipes by collecting a transaction fee on each purchase. Since many of its fees are charged as a percentage of a transaction rather than as a flat fee, Visa shareholders are inherently hedged against inflation because higher prices means higher fees and also benefits from above-inflation price hikes because, again, higher prices means higher fees.
Since the transaction fees from each credit or debit transaction is so inherently scalable and not directly proportional to a fixed cost, Visa has enjoyed some of the highest sustainable profit margins in the history of capitalism. Right now, Visa’s net profit margins are between 49% and 52%. For comparison, the average corporation in the United States earns profit margins of 8.5%. Warren Buffett has famously touted Coca-Cola’s profit margins of 32%. Visa smashes the competition when it comes to net profit that flows to the benefit of shareholders for each dollar in revenue that it generates.
Clearly, the management team of MUFG Securities recognized these attributes when they dedicated slightly over 6% of client assets to Visa during the building of its investment position between 2008 and 2012. But what is more incredible is that, as Visa has grown profits at a rate of 21% annualized over the past seven years, the portfolio managers at MUFG resisted the urge to sell Visa stock even as the P/E ratio climbed from 20 to 30 and Visa stock came to account for an ever-increasing percentage of client assets.
Today, those 13.8 million shares in Visa are worth $2.6 billion. It owns 0.6% of the entire company. It has become an ever-increasing percentage of the client portfolios that total $8.3 billion in aggregate. If you are a client of MUFG, right now 31% of your assets would be in Visa stock on average.
Nearly every other manager would have “taken some money” off the table by now. Maybe for valuation reasons as the P/E ratio has crossed 30x earnings. Maybe for diversification reasons as some people don’t like the thought of a single asset becoming such an increasingly large aspect of their fortune. Maybe for legal reasons as a failure in Visa could cause some clients to sue MUFG’s management team for breaching the duty to exercise reasonable care by allocating such a high-percentage of the total investments to a single holding (as an aside, and as total speculation on my part, I would expect that MUFG requires its clients to sign a waiver that expressly permits them to hold concentrated positions to avoid this risk).
In any event, there are many forces that would militate against obtaining Visa’s extreme price appreciation and total returns over the past seven to eleven years that has turned almost every dollar invested into Visa into $10 in approximately a decade’s time.
It really is an incredible story of wealth creation. Yes, there is the always impressive part of recognizing a great business and putting some capital into it. But from there, it takes incredible mathematical thinking to recognize that the “Pareto effect” applies to investment returns wherein a small number of one’s total investments constitute the supermajority of returns (the typical shorthand is that 20% of one’s investments are responsible for 80% of one’s investment returns).
Most investment commentary talks about how hard it is to make money due to fluctuations in stock prices that generate paper losses that trigger panic selling. But sometimes it can be hard to make “the real money” when you see a particular investment increase in price because you feel an urge to “do something” when a meaningful investment doubles, triples, or quadruples in price. To that end, MUFG shows what is possible when an investor puts money into a great stock and then ignores the ever-present impulses that would lead one to sell a great investment even as its valuation becomes stretched and portfolio size becomes greater in response to a continuous stream of earnings growth.