To The Moon

Source: WSJ Chuck Akre founded Akre Capital in 1989, as of the first quarter of 2022, has $14.6 billion worth of assets under management. In 2020, Chuck leave as manager of the fund. He leaves us with a legacy of not only 19% annualized returns from 2010-2020; 15.42% annualized returns over the 30 years from 1990-2020; and positive returns for 28 of the 30 years. This still does not include the returns earned by the base of FAANG and tech giants like Tesla. What he left behind was more than a knowledge of the long-term compounding machine and the so-called "three-legged stool theory" of investment philosophy to obtain compound interest. Charles T. "Chuck" Akre, Jr. Akre was raised in Washington D.C. and graduated from Blair Academy. He originally planned to get into a medical school but later decided against it and switched to securities business in 1968. Akre was heavily influenced by Thomas Williams Phelps' book "100 to 1 in the Stock Market" and Warren Buffett, and Akre bought Berkshire Hathaway stock in 1977 when it was trading at just $120. He held several positions in Johnston, Lemon & Co., ranging from stock broker to CEO of the asset management division and director of research. In 1989, he established his own firm, Akre Capital Management, which operated under the umbrella of Friedman, Billings, Ramsey & Co. until going independent in 2000. While managing the FBR Focus Fund, Akre moved his firm to the town of Middleburg, Virginia in 2002. Middleburg boasts one stoplight and a lot of farmland, and Akre considers the location to be a strong advantage for the firm, as it frees them from the distractions of a city. Akre spends a lot of time reading, which is how some investment ideas come to life. Akre believes that imagination is just as important as knowledge, even more. Knowledge in itself is not a sufficient condition to be a good investor. Over the years, Akre has gone on to discover some opportunities that started out of pure curiosity and continue to engage in a search process to find out which are the best business models. Three-Legged Stool Approach The three-legged stool is a reference to a three-legged milking stool that he keeps in his office. If you look closely, the three-legged bench is actually sturdier than the four-legged one. It can easily adapt to uneven ground in a way that a four-legged bench cannot. Akre liked this concept and began to liken it to the visual construction of an investment idea. Reflected in his investment theory, the three legs that represent Akre's investments are Excellent managers with a proven track record (management team) Significant and enduring competitive advantage (business model) Long-term growth/reinvestment opportunities (reinvestment opportunities) and, together with an attractive purchase price relative to the cash flow generated by the company. The above constitute the four elements of a good investment. The compounding machine formed with the above approach is able to generate returns to shareholders over time at high rates of compound interest with little risk of permanent loss of capital (other than temporary quoted losses.) Akre believes that long-term holdings of companies that conform to the three-legged stool theory can enjoy returns of 10bagger or even 100bagger. The three-legged stool theory and cases Source: masterinvest The first leg: the business model Akre also calls this a moat, which includes: patents, regulatory programs, captive-type business, scale, low-cost production, and lack of competition. For Akre, it is important to try to understand what kind of model leads the company to have good returns and what are its prospects. Case Study: Bottlenecked Business a) is located in a different industry and region and has significant, global, long-term growth opportunities to offer. b) These opportunities are disproportionately made a market advantage for the business due to sustainable competitive advantages (hence the bottleneck vision). c) enjoys superior economics, often with benefits superior to those of the industry and customers the firm serves. However, qualifying cases for bottleneck businesses abound in Akre's portfolio, with $American Tower(AMT)$ and $MasterCard(MA)$ together accounting for a significant portion of Akre's investable assets. How do these companies fit into this bottleneck business concept? These two businesses can have large, global, long-term growth opportunities offered by multiple industries and regions. American Tower's cell tower assets in 17 countries are a bottleneck for long-term mobile and data growth. The business spans countries, wireless carriers, cellular manufacturers and connected devices. For MasterCard, he owns a payments business with a growing market share and profits from a growing share of global electronic payments, a business that spans countries, retailers, online, offline and mobile commerce. Opportunities are disproportionately converging on these two companies due to sustainable competitive advantages. American Tower's business benefits from the need for RF physical addressing (both spectrum reuse and signal propagation physics) and the deployment of carrier co-location on Macro Tower, as well as good service efficiency. MasterCard's leading global payments network is the result of a powerful network effect that addresses the dual dilemma of merchant acceptance and consumer use of payments, as well as the global need for payment system standards and innovation. Superior economics, usually corporate superior to the industries and customers the business serves. American Tower's free cash flow margin (as measured by operating adjusted funds) exceeds 40%, with revenue on a high-priced, multi-year lease that increases annually. And, the company charges an additional annual maintenance fee of less than 10% of annual revenue. MasterCard has a free cash flow margin of over 40%, an unlevered free cash flow return on assets of over 30%, and over half of its revenue is tied to transaction volume, thus providing natural inflation protection. The second leg: management There is an interesting exercise. One question reports particularly wanted to ask CEOs was how do you measure your success in running your business? Some of them are sure to say, "Well, the stock price went up," or "We met our profitability targets." Or "We accomplished everything the board asked us to do," and so on. In some rare instances, some CEOs articulate their understanding and thoughts on compounded economic value per share growth. That concept is paramount. In addition, Akre often asks himself if management sees public shareholders as partners, even though they don't know them. akre's life experience is that once someone puts their hand in your pocket, they will continue to do so later. Akre examines the company first, because Akre has determined that professional managers are killers at running a business. Case Study: international speedway One of the three best public companies in NASCAR racing. When Akre first invested in ISCA in 1987, the metrics were as follows: a return on net assets in the mid-20% range, a net profit margin of over 50%, a compound annual growth rate of 28% in book value per share, no financial leverage, a moderate valuation, attractive price growth potential, and a large, over 50% insider ownership. Akre had held shares in International Expressway for many years and had good experience with returns that were roughly 10 to 20 times the cost, depending on when the shares were purchased. Later, when Akre became concerned about management's attitude towards various aspects of the business, he sold all his shares. The CEO passed away and his family members were running the company. In addition, Akre was concerned about the track of their business as times changed. Therefore, Akre's decision to sell was a judgment call related to the second leg, the management model. The third leg: reinvestment Running a successful business is often faced with the decision: what to do with the cash income? There are two possibilities. First, they can keep the cash and invest it to increase the value of the business. This is reinvestment. Or, companies can pay some or all of their cash to shareholders as dividends. Profitability is essentially the definition of compound interest. In the long run, Akre strongly believes that the compound growth rate of a business's value will approach its reinvestment return. With an exceptional reinvestmentist at the helm, even an ordinary business can become an extraordinary compounding machine. Berkshire Hathaway is a good example of a company that started as a struggling textile mill and turned into the compounding machine it is today. However, it is common to see investors and pundits prioritize dividends. The reality is that dividends are the way to get an average return. And Akre's goal is clearly to seek above-average returns. Superior reinvestment is the path to that return. This is simply because the market recognizes and pays a high price for companies that have a high return on invested capital. The price a shareholder pays for a superior business is usually several times the actual capital invested in that business. And, unfortunately for dividend-centric investors, it is the ratio of market price to invested capital that determines the return to shareholders on any earnings paid as dividends. Case Study If a business has a potential return on capital of 21%, but investors pay 3 times the market price for the stock, then a 100% dividend on all earnings would only give investors a 7% pre-tax return. While the underlying business model may be outstanding and may be run by outstanding people, the lack of reinvestment opportunities and the decision to pay 100% of earnings will result in a shareholder return that is only average. On the other hand, if all earnings were retained and reinvested at the same 21% rate, shareholders would not receive dividends, but the business would grow its capital and earnings at a rate of 21% per year. In the long run, if the stock is purchased at a reasonable multiple, its market price will grow more or less in line with the growth rate of capital and earnings. In this example, shareholders will build capital gains at a growth rate close to the underlying 21% as long as the runway of excellent reinvestment opportunities persists. Most importantly, the shareholder will enjoy income tax deferral. If you know any business that can retain 100% of its earnings and reinvest at 21%. Different businesses in Akre's portfolio have different reinvestment strategies. Some specialize in acquisitions, while others rely heavily on reinvestment opportunities generated by organic growth, such as buying fixed assets and adding inventory, which may be necessary to expand sales and earnings. Some companies have reinvestment strategies that allow them to speculate across a variety of asset classes and industries, and these management teams continually evaluate where the best opportunities are to reinvest capital and increase book value per share. Source: geoinvesting The Art of Selling Akre's investment philosophy is to concentrate investments in a small number of growing and competitively advantageous businesses. Akre does its best to stay the course over the long term so that capital can compound as the business grows. Akre ignores political and macroeconomic influences on the market when making decisions. What may surprise many is that neither valuation nor price targets can influence their sell decisions. Obviously, sometimes they think it is appropriate to sell. In these cases, it is usually because of an adverse change in the business itself. The determination to hold on is a very important aspect of the investment philosophy, but it is not always well understood. At its core is the power of compound interest. The wrong decision to sell makes gaining compounding growth impossible. Circumstances in which Akre believes a sale is appropriate and necessary include, but are not limited to: (1) The business is no longer growing at an above-average rate. (2) Its competitive advantage is impaired. (3) An adverse change in management. Slowing Growth: Akre's basic philosophy is that the return as an investor is the growth in the economic value per share (whether defined in terms of book value or free cash flow, and always on a per share basis) of the business close to the investment. In order to generate above-average returns over the long term, they believe they must invest in businesses that continue to grow at an above-average rate; when growth slows, they would also expect returns to decline as well. Loss of competitive advantage: The business is in a constant state of change. Changes in technology, distribution, or regulation can erode a company's competitive advantage. Even the most successful companies must reinvent themselves periodically to keep themselves available to adapt and change as the world evolves. Moats must be dredged and raised from time to time. Failure to do so may result in a gradual erosion of competitive advantage or its complete disappearance. Management: Akre places great importance on the need for companies to have managers with excellent skills and integrity. Long-term investments result in a preference for companies with multiple generations of management. Successions are not always up to the task. Over time, Akre Capital learned not to make immediate judgments in order to give new management enough time to settle in. At some point, however, they had to communicate to management that a new management team that did not meet expectations could result in a sale of shares. The sale would free up funds to invest in what they thought would be a better business. However, Akre tips must be beware. Selling some familiar assets and buying something new that looks better is a dangerous game. Do you agree with chuck Akre's investment principle？ What is your investment principle? More reading: Bryan Lawrence's Investment Framework: 5-question Filter for Potentially Great Investments Warren Buffett on Market Corrections: When to Keep, Sell or Buy? Source: 他山之石观投资, Saint Paul