[MUSIC PLAYING] SAURABH MADAAN: Hello, everyone. I'm Saurabh Madaan, and welcome
to another of our special value investing talks. We have a very, very
special guest today with us. He is an investor
par excellence. He searches for
long-term compounders. But just speaking with him
before this talk began, I can also tell you that he
has a great sense of humor. So I hope we get to
see that in action live, as he asks you questions
and you ask him questions. So I'm going to do a very,
very brief introduction. Charles T. Akre, also
known as Chuck Akre is an American investor,
financier, and businessman. He serves on the board of
directors of the Enstar Group. He's also the founder,
chairman, and CIO of Akre Capital Management,
FBR Focus, and other funds. Akre Capital Management is
based in Middleburg, Virginia. So without any further
ado, over to Chuck Akre. CHUCK AKRE: Thank you, Saurabh. Great. So I just want to
clarify one thing. I've not been associated
with FBR Focus Fund since August of 2009. And that was a fund
that I ran previously, and before we started our own
fund in September of 2009. I just wrote down some notes,
and the headline in the notes said, The Peregrinations of
an English Major in Search of the Investment Puzzle. And Saurabh said that
he was interested and the group would be
interested in the whole way I got involved in this
and how it's evolved. And I started out as what
I call a know-nothing. I was a pre-med student
and then an English major. And so I had not had a single
business course of any variety when I started as a
stockbroker in July of 1968. So your quick math can tell
you how long I've been at this. Awhile. In Virginia, they
say, since dirt. And so I had, in effect,
really, a clean canvas, as to where I should go
and what I should do. And so, since I knew nothing,
my goal was to figure this out. And the investment
puzzle started out with what makes a
good investor and what makes a good investment? And I read voraciously
and still do. And in the early
works that I read that were very important to me
were books like John Train's "The Money Masters." It was the first written
story about Warren Buffett, other than a Forbes magazine
article and that sort of stuff And actually, in that, Buffett
outlines the only place that I've ever seen it. He gives the characteristics
of a great business and the characteristics of
what makes a great investor. And that was a very
important book to me. I've read things like the
"Intelligent Investor," Ben Graham wrote. In 1972, I came
across a book that was reviewed in "Barron's"
called "100 to 1 in the Stock Market," and it was
written by a Boston investment manager. His name was Thomas Phelps. SAURABH MADAAN: Phelps. CHUCK AKRE: And what
was interesting to me was that it really made
me come around and focus on the idea of compound return. He never actually explicitly
talks about compound return, but he identified roughly 350
businesses, public companies, that you could have invested in,
beginning in the mid-'30s, all the way up to '71, and
made 100 times your money. And in fact, there
were a couple instances where you'd have made 100 times
your money in just two or three years. A really quite
extraordinary thing. The difference in all
of those, of course, has to do with the rate at
which you compound your capital. And so that helped
me down that line. And I also read, then and still
do, lots of business biography, because it informs me
about human behavior. How people behave in their
business life and business world, and how that affects
what they're able to do. So as I said at the
beginning, the puzzle was, what makes a great investor,
and how do you identify this? How do you identify
a great investment, if, for example, you
have a private company? You can't just say, well, the
price of the stock went up. If it's private, there's no
public share price disclosure. So you know, the
simple way to describe it is if the pile of money
at the end of the year is bigger than at the
beginning of the year, you know it's been successful. But if you had a business that
had so much opportunity to grow that you invested
all the free cash, and so you didn't have a pile
of money at the end of the year, you invested it in
initiatives to grow, you have to go to your
accountant, or your bookkeeper, or go to your CFO, or
whatever, and he says, well, this is what your value
was at the end of last year, and this is what your value
is at the end of this year. And that's how you know if
a business is successful. And it's a really
important idea, because it just brings you back
to the simple issue of rate of return. And so, not only how much has
it gone up, but on an annualized basis, and then you have
things you can compare it to. So in that issue
about investors, what makes a great investor,
or one of the things you ask yourself, do
you take undue risks? How do you define the risks? How do you tell? Have you lost a
significant amount of money in an investment. Why do you think
you've done that? All of these are important as we
develop our skill as investors. And as I said, I had the
advantage of a clean canvas. That is, I knew nothing when
I came into the business. And I worked for a firm
that, when I joined it in July of 1968, was
the most important financial intermediary
in Washington, DC. It had financed Geico. It had financed Marriott. It financed all
the other companies that were public in
the Washington area. And the world was
changing rapidly, as it related to the investment
business and the brokerage business in the late
'60s and early '70s. And this firm
wasn't particularly well-suited to deal with that,
but they were financially very strong. And it gave me an
opportunity, as I say, to follow my own
nose in that business. And that's how it
all comes about. So when we get to
the piece about, well, what makes a
great investment, I go back to the issue
of rate of return. Sometimes, a great investment
might be simply described as, well, it met my goal. That doesn't tell you anything. Rate of return, we
say in our firm, is the bottom line
of all investing, and that's a really important
thing to think about. And so Saurabh and I were
talking before this chat today about businesses
that compound at 8% or 9%. And I said, you know, 8% or
9%, when you compare it to a 1 and 1/2% interest rate on the
10-year is pretty attractive. And everything's relative,
but I think rate of return is hugely important. And so then I went
to discover what the historical rates of return
were in all different asset categories-- stocks, bonds,
art, real estate, oil and gas, collectibles,
fancy cars, you name it. And when I was looking at this
over, maybe, 70 years now, or a 100 years, or
something like that, the data indicates that public
companies in the United States have compounded at roughly
between 9% and 10% a year. And that's better than all
other asset categories, and it's unleveraged. And so that causes me
to ask another question, and that other question
is, well, why is that so? Why isn't it 3% or
why isn't it 16%? And I'm not terribly
mathematically inclined, and so I use the term
that it correlates, but I don't do that with
a mathematical background. I'm just saying I observe that
that 9%, 10%, not too precise, is it approximates what
these companies are earning on the shareholders' capital. That is, we refer
to it simply as ROE. We look a little
bit more in depth, we're talking about
free cash flow return, you know, subtracting
maintenance, CAPEX, and that sort of stuff
on the owner's capital, the capital employed. And so I go from there
to posit the following. Our return in an asset
will approximate the ROE over a period of years,
given constant valuation and given the absence
of any distributions. So you all look up at me
and you say, well, you fool. Everybody knows you don't have a
constant valuation in the stock market. So we just work very hard to
have an attractive valuation at the start. And you know, as it relates
to compounding your capital, your opportunity for a
higher rate of compounding is enhanced by a lower
valuation at the start. I mean, it's just real simple. And I have a little bit of
an arithmetic proof of that, if you're interested. You take a $10 stock with a $5
book and $1 worth of earnings. So it's 10 times earnings,
it's 2 times book, and it's at 20% ROE. And you apply that
to the company and see what happens
to the stock price. So you add that dollar's
worth to that 20% ROE, you add that dollar to the
$5, you have a $6 book. Two times book is 12. You have a 10 times earnings. By the way, it's
$1.20 in earnings now, 10 times earnings is 12. So the stock price
moves identically with the ROE in the business. And on a constant valuation,
absent any distributions, that's sort of my
very modest level of a proof of this notion. And it's a valuable
notion that's served us well for a long period of time. So then my next
question is, well, how is it that we identify an
investment which will likely lead us to an above-average
rate of return? What are the characteristics,
and what kinds of businesses earn above average
rates of return? So we say very carefully that
we like to fish in the pond of high return businesses. And so it makes it much
easier for us to get our focus upfront, as we start
with the notion of, what kind of returns on capital
does that business earn? And just do something a little
bit interactive here today. If I asked Saurabh what
is the typical net margin of an American business
today in percentage terms, what would you say? SAURABH MADAAN: 10% to 15% CHUCK AKRE: So you
think it's 10, maybe a little bit above that. I'd suggest that
most people answer that it's probably in mid or
upper single digits, all right? And an investment that we own-- I'll come back
around to later on-- is MasterCard and Visa. And does anybody
want to guess what the net margins of
MasterCard, Visa are? AUDIENCE: 30, 40. CHUCK AKRE: There you go. So they're in the
mid-30s, you know? And you could cut
that in half twice, and at worst, it would
be an average business. It's extraordinary. And I actually was
talking to some people about this at the Munger
meeting the other day, people who are well-schooled in
the market, and good investors, and they had no idea. They just didn't
think of it that way. But that happens to be the way
we think about it, because we have this little idea that are
our returns will be affected by the quality of the business
and the rate at which it can grow the economic
value per share. And so, by the way,
and MasterCard, I can come back
to it, but it also then causes us to spend a lot
of time trying to figure out, well, why is that so? What is it about the essence
of that business that allows them to earn returns
that caused them to have a big bullseye on their
back, that everybody, all other companies want a
piece of a business that has returns that are that high? So in my office, for some
really unknown reason, I had on the desk an old
fashioned milking stool. And it had come to
me through my father, and it had come to him through
a business partner of his. And on the top of this platform,
it stands about that high, and it has three legs. And the first two
are in the front, and the third one is in
the middle, in the back, and they're splayed. And a farmer who was milking
his cow would grab that back leg and sort of just stick
it up under his behind as he sat down to milk a cow. This was in the old days
when they did it by hand. And so I was looking at that one
day, and I thought, you know, that's actually a
perfect construct for our notion about what
makes a valuable investment. We call it the
three-legged stool. So if you looked
at our material, our material is resplendent
with these three-legged stools. And the first leg of that-- and we just use this
as a shorthand version, a construct to help us
think in very simple terms about, well, how do you find
these great investments? So the first leg is this issue
of a high return business, an exceptional business. MasterCard is an
exceptional business. The average business earns, call
it 8% after tax on earnings, and MasterCard earns 34%. That's exceptional. I mean, even if the average were
10%, 10% would be exception. But I mean, MasterCard's 34%. My god, that's
really incredible. So the first leg of the
stool that we talk about is the quality of the
business enterprise. And we spend a lot
of time going down this road that we call, what's
the essence of this business? What is it about
the business that's causing this unbelievable
rates of return to occur? The second leg of the stool,
then, goes into the operations. It has to do with the
people who run the business. And the shorthand
version of that is, we want them to have
both skill and integrity. But what we say is
that they've got a demonstrated record of being
just killers at operating their business. But in addition to that,
they treat us as partners even though they don't know us. And it's a really
important idea, because the reverse
of that is somebody I heard describe the other day,
is talking like Warren Buffett and acting like Ronald Perlman. And there are people out
there, and you'll find them, you'll run across
them, who do whatever they can to make sure that
public shareholders don't get their fair share. And we don't want that. We want, the same thing
happens at the company level to happen at the
per-share level. And these are
wonderfully-skilled operators as well. So first leg is the
quality of the business. The second leg is
really the quality of the people who
run the business. And then the third
leg is the issue that really helps
create the value, and that's the reinvestment. And there's a book out,
pretty current now, called "Dear Chairman," and it's
about activists, and companies, and trying to change the
behavior of companies, typically, because of their
reinvestment histories. And if a business has a great
high return on the owner's capital, we would
love for them to be able to take all the free cash
they generate and put it back into that business
to continue to earn those high rates of return. It's way more efficient than
paying us a dividend and all of those things, and that's what
creates the compounding effect. And when I get around to
compounding, you know, I always use the example--
you all have seen it on the web-- about the penny. And so I'm going to ask
this engineer right here, would you rather have, in this
hand, $750,000, or a penny doubled every day for 30 days. So you want the penny, right? I knew that. So instead of $750,000, I'm
going to make it $2 million in my right hand, versus
the penny, doubled every day for 30 days. You still want the penny? So I figured that. How about $2 million and one? Well, I mean, this choice,
it was $2 million before, you still took the penny. I'm saying, how about if I
make it $2 million and one? AUDIENCE: That's a lot money. I'd pick the $2 million. CHUCK AKRE: Yeah, see? Now, who knows, right
off the top of the head, what that figure is? AUDIENCE: $10.8 million? CHUCK AKRE: Yeah,
it's $10.8 million. It's $10,737,000 or something
like that and some change. And so the simple arithmetic
is, it's 100% return for 30 periods, you know? And that's the power
of compounding. And so the really great
thing about compounding, I tell people is, if you have a
stock that's gone up 10 times, the next time it
doubles, it's gone up 20, and the next time it doubles,
it's going up 40 times. What? You know compound interest
and compound return is just-- it's staggering. Actually, I have a
correspondence with Warren Buffett about this,
and he always has said, as it relates to compounding,
either you get it or you don't. And I wrote him a
letter and I said, that was not my experience. My experience was, I didn't
get it until I experienced it. And that goes to this
whole issue of investing. I have never been able to learn
from other people's mistakes, you know? I have to make my own. [LAUGHTER] And so this process is
designed to help me, and my colleagues, and
partners have focus, as it relates to how
we're going to invest. Contrary to that
is everything you see on the TV in the morning, on
Squawk Box or all those things. And they have a
different business model. And their business
model is mostly supported by financial
institutions and other consumer institutions who
want your eyeballs. And if it's a brokerage
firm that's sponsoring it, the definition of a broker is
to create transactions, right? Your advertising
people, they want to create transactions, right? And what's the best way
to create a transaction in the brokerage industry? Create what I call
false expectations. And the false expectations
are the notion that XYZ Company earns
$1.37 in the quarter. And the first thing
that happens when they release their
quarterly reports is, everybody comes out and
says, oh, they earned $1 38. They beat by a penny. You better buy it. Or they earned $1.36. They missed by a penny. You better buy. Well, if you stop
and think about it, unless you're very
adept at trading the market on a daily basis,
it's a sure loser for you. It's bad for your
economic health. And as it relates to trading
the market on a daily basis, you know, there are very
powerful computer algorithms out there using all
kinds of information not available to most of us
that are competing against you. So I just make that observation. We try very hard to be investors
in the value of businesses, as opposed to speculators
in the price of shares. So now do you remember
what a penny doubled every day for 30 years is? [LAUGHS] [LAUGHTER] Don't lose sight of that. [LAUGHS] So we tell our clients
and our prospective clients that our goal is to
compound their capital at an above average
rate, while incurring a below average level of risk. So let's start with
the back end of that. What do we mean by a below
average level of risk? Well, the businesses
we own typically have the following
characteristics. They have more growth. They have higher
returns on capital. They have stronger balance
sheets, and frequently, lower valuations
than the market. So on their face,
they are less risky. It's just, it's observable. It doesn't have anything
to do with volatility, because our belief
is, volatility is a risk only in the short run. If you have an obligation
in a year to buy a house or to do something
like that, you probably don't want to speculate
with that cash that you have set
aside for that. But if it's five
years or three years, you have the ability,
put that money to work and have
it work for you. So volatility is not in
our lexicon, basically, in terms of risk. And we've already talked
about what average is, and we think average is roughly
high single digits, maybe low double digits,
and it has to do with what the overall
interest rate environment is. And so there are lots of
investors, Michael Steinhardt and people like that,
who retired with records of very high rates of returns. But that was
against the backdrop that, in January of
1981, the long bond, the 30-year treasury
yielded 15 and 3/8%, and prime rate was 21 and 1/2%. So it was in a backdrop
in which rates were much higher than they are currently. So returns in all businesses
are lower these days, and my guess is, average
these days would probably be at the low end of that sort
of high single digits number. And because it's an average
we're talking about, it does not mean that we will
have a return in any given year that's better than that. It means, to us, over a
period of 5 years or 10 years, our returns are very likely
to be well above that number. But I would say, observably,
maybe a third of the years in the last 25 we maybe
have done less well in them than the S&P, which, we use that
simply because it's available. We don't care what indices
people want to compare us to. That's their choice. We spend no time
thinking about that. And so, I border on
salesmanship here a little bit, and you can edit this
out, Saurabh, if you want. But the record that we have
accomplished for our clients, I'll give you some
numbers very quickly. Our separately-managed
accounts which we've been doing
for 27 years have compounded at 12.7%,
versus the S&P at that period of time of 9.4%. So you know it's
330 basis points over the market, compounded
annually for 27 years. We have a private investment
partnership that's been around for 23 years. And it's compounded it at 15
and 1/4%, net to the partners, versus 9.2% for the S&P during
that specific period of time. So 23 years, 600 basis
points over the market. We've run two mutual funds
in our life, the FBR Focus Fund and then subsequently,
the Akre Focus Fund. Those two records
combined, the number is 13.2%, versus 7.7%, 550
over the S&P for that period of time, 19 years. And then, simply the
fund that we currently manage, the Akre
Focus Fund, which has been in existence a
little over seven years, it's a 125 basis
points over the market. And the market has
been 13 and 1/2% in that seven-year
period of time. So I just say that, and I
don't print them for you, but I just say
that to say this is the outcome of
using this thought process in our investments. Saurabh has asked that maybe
we talk a couple of minutes about some examples. And going way back into
the '80s and early '90s, we invested in a company
called International Speedway Corporation. And International Speedway
had the characteristics of, it was 12 times earnings. It was at 25%, 26%
return on equity. It had an owner-operator
who owned 60% of the stock, and it had a lot of
growth in front of it, because it was the
dominant racetrack owner in NASCAR racing. And they owned International
Speedway, and Darlington, and Talladega. They went on to build some more. It's not a very attractive
business, in my mind, today for a bunch of reasons. The man who ran it, Bill
France, passed away. His daughter is taking it over. She doesn't have the same
skill set that he had. But during that
period of time, we made 10 to 20 times our
money on that business over more than 10 years. Another company that was also
in the entertainment-related business was a company
called Penn National Gaming. I mean, there's a lot of
serendipity about the way these things come out. A young man who was working
for me at the time, talking to another investor,
said to us, well, you ought to look at the 10-Q
of this company called Penn Gaming, and we did. And Penn Gaming at the
time, in Pennsylvania-- Saurabh was in
Philadelphia there-- in Pennsylvania had five
off-track betting parlors in Pennsylvania, and
they were limited by licenses in the state. There were only a total
of 23 in the state. So you had a high
barrier to entry because of a regulatory issue. And what was interesting
in this 10-Q was, the fifth off-track betting
location that they built cost them $2 million
to build it out. And they had $1.6 million
of operating income in the first 12 or 14 months. I'm saying, that's not a
bad business, you know? I took it upon myself
to go meet the CEO. We talked about the
importance of people. He was a real estate
developer by background. His father had control of this
old race track, Penn National Gaming, that had-- because
in Pennsylvania, they'd given the licenses for
the off-track betting to the legalized gambling
arena, the racetrack, the horse racetrack business,
and he was ambitious. And as a builder and developer,
he borrowed a lot of money in his lifetime. And he told me that he had
been able to avoid ever having his wife sign-- co-sign a loan. That's a really important
measure of risk understanding. And so I got involved. And it was after
that, that he bought another racetrack in West
Virginia, and about an hour and a half from
Washington and Baltimore, and converted that
into a casino that now has 5,000 slot machines. And he went on become
the largest non-Las Vegas and non-Atlantic City casino
operator in the country. And it's another case where we
made 10 to 20 times our money in our accounts. Again, this was a situation
of high returns on capital, low valuation, major
shareholder owner and operator, and a low valuation. It was a huge opportunity
for growth, going forward. And then, in current times,
we talked a little bit about MasterCard. Some things that are
interesting about MasterCard, we purchased originally
in February of 2010. And this is when the
Dodd-Frank discussions were going on in Congress
after the financial crisis, and more particularly, about
the Durbin amendment, which had to do with domestic
debit transactions. The long and short of it is, we
bought the stock at an average price of $22.20 in
February of 2010. Today, it's $109,
something like that. So we've made five times our
money in six years, seven, you know, something like that. And the reason was that
here is a business that had fantastic returns, as
we've already talked about. It had a low valuation. The valuation in
February of 2010 was something like
13 or 14 times. It was growing its free cash
flow per share at a rate much faster than that. And we had a good
thing happen with it, that we'd been to meet the
new CEO, Ajay Banga, who's a Punjabi, and a really bright,
interesting, lovely guy. And so, you and I
were talking earlier about the interaction of people. And so we see him in a
setting with other executives in his firm, and he's first
name basis, kidding with them. They kid with him. All of these things
are important. Just the things--
you know, I talked about reading
business biography, you get a feel for
how people behave, and how they deal with
their colleagues, and so on. And so we've made
five times our money in six short years in an
extraordinary business. Now, if you remember
what I talked about, the third leg,
reinvestment, their returns are so high that
they can't possibly find another place to reinvest
their money at that rate and get that return. So our compounding is diminished
modestly because of that. So they buy in scads of
stock, they pay a dividend, they invest a lot
in new technologies, all relating to what I call the
electronic exchange of value. I mean, that's really
the business they're in, and we don't know what form
factor it will take in years, but they're well-positioned
in all of the things that are going on today. Another company that
is relatively new to us is Moody's, and we bought
our Moody's originally in January of 2012. And we paid about $39, a
little less than $39 for it. Today, it's $110. And so we have a case
where we've made 2 and 1/2, 2 and 3/4 times our money. Again, the same idea,
a great business. After Dodd-Frank, the government
authorized another six or eight rating agencies to exist. I'm sure there's not a person
in this room who can tell you the name of any of them. It's a market-driven thing. It's not regulatory-driven. And so any company
that issues debt has to go out and
get a rating on it. And there are really
three rating agencies-- Moody's, S&P, and Fitch. The market is divided,
like, 40%, 40%, and 20%. Fitch has had 20%
for nearly 100 years. They just can't seem to grow
it any larger than that, and it's market-driven. And if you sit on the
board of a company that's about to raise
debt, and you go out and you don't get a
rating on your debt, and you have a bad effect in the
market, you have a liability. So it's a fascinating business
that, again, market forces allow it to have very high
returns on its capital. Another company that we've
been involved with for, gee, almost 10 years is
a company called Enstar. And I sat on their
board for five years because I wanted to
try to understand how the business
really operated, and it's a complicated business. They buy insurance
which is in runoff. And that is, operating insurance
companies periodically decide, well, we don't want to
be in homeowners anymore, or we don't want to be
in long haul trucking anymore, or whatever, and
they run that business off. And they're required
to keep assets to support those liabilities
by the regulators until that business is gone. And executives in
businesses like insurance who have aspirations
in their career would not like to be
placed in the runoff. It's sort of the back
room of the business. And this group of people
who started this company are chartered
accountants by training. And they're headquartered
in South Africa, and Dublin, and Bermuda, and London. And they travel
all over the world all the time, in
search of trying to find these little
pieces of business. I've seen instances where they
worked on a piece of business for five or six years. They're very patient,
very disciplined. And when I got involved
in this company in 2007, it had had a record
of compounding book value per share a
little bit north of 20%. But it was also
three times book. And I paid $102.90 for
my first shares in 2007. And today, it's
worth about $195. So it's not been a
very good investment. And you know, I mean, I've
essentially doubled my money, but it's taken 10 years. So that number, obviously,
roughly around 7%, compounded. But then the valuation got
more attractive periodically, and in 2009, I was able
to buy some stock at $56. So my return there
is nearly four times and that sort of stuff. And so, that goes back to this
issue I was talking about, your starting valuation. And you know, when I paid three
times book for this company in '07 and it had a history
of compounding book at 20%, had it been able to
continue to compound at 20%, I would have done much better. But their rate of
return has come down, just like it has
in all businesses, as we've had this secular
decline in interest rates for 36 years as a backdrop. Everybody's business returns
are lower, nearly everybody. And so those are sort of
five examples of businesses that we own or have
owned, where we've had these great returns as a
result of using this process, using our process, we call
it the three-legged stool, of identifying
businesses that we think are likely to give us a
return that's above average. I'm getting near the end here. You're getting anxious. I know that. So I'll give you a few
quotes out of Einstein, because I find him
simply a great thinker. You should make
everything as simple as possible, but no simpler. You'll have to think
about it a minute. The difference between
stupidity and genius is that genius has
its limits, you know? [LAUGHTER] We cannot solve our problems
with the same thinking that we used to create them, huh? The only source of
knowledge is experience. Imagination is more
important than knowledge. I told Saurabh that's
what it actually says on the front of my book. And the true test
of intelligence is not knowledge,
but imagination. So we put our own little
quote on the end of that. It's an old saw which says
that good judgment comes from experience, and experience
comes from bad judgment. [CHUCKLES] So in conclusion, we
work in a town with one traffic light. And I say it makes the decision
process so much simpler. Einstein, make things
as simple as possible. We tell people when they
get to the light, turn. Sooner or later, they'll
get to us in town. And what's really important is
that, in a campus like this, or in Central Park South in
New York, or in downtown San Francisco, or Los Angeles,
we'd be surrounded by hundreds of people who
are very bright and very interesting. And the reason we're in a
town with one traffic light, away from that, is that their
stuff would be intellectually appealing to us and
it would distract us from what it is we do well. And that's a really
important notion. Warren talked about
getting out of New York and going back to Omaha
when he was a young man. It's the same idea. And not that being in
your midst wouldn't be unbelievably fulfilling,
or being in New York, or something like that. It's that It distracts
us from what we do well. And so, that's a
really important thing, is you're thinking about
being an investor is to create the situation
for yourself, that you have the ability to apply what it is
that you've learned and found valuable in investing, as
opposed to listening what Squawk Box, or your next door
neighbor, or your suite mate says, something like that. Make things as simple as
possible, but no simpler. Imagination is more important
than knowledge, you know? So I say, simply use
your own observations. It's very important. Peter Lynch used to talk about
buying the things that you see happening. In the shopping center,
there's a new store and they're getting a lot
of traffic, or whatever. Do you all know
who Peter Lynch is? I mean, he had a
really unusual talent. He had 1,200 securities in
the Fidelity Magellan Fund. He ran it for eight
or nine years, and had a phenomenal
record and so on. But he had 1,200 securities. I mean, imagine. So I was in, seeing him one day. And what he would do-- we were
talking about this earlier-- is if he found an
industry that he liked, he would buy every
company in that industry, put them in his portfolio. And then he'd eliminate
them one at a time, as he kept honing in on who
were the best ones and so on. It's not a talent that I have. And then I say, just
because you have a big brain doesn't mean you
could be good at investing. And that's an
important thing, too. And finally, there
is no correct answer. There is no correct way. This is just the
way it works for us. I'm happy to have
the opportunity to share these few
thoughts with you. And I guess we'll
have a few Q&A. SAURABH MADAAN: Yes,
thank you so much. CHUCK AKRE: Right, thank you. Yeah. SAURABH MADAAN: If you can take
a seat, that'd be fantastic. [APPLAUSE] I just have couple of
quick questions for you. And thank you for showing us a
glimpse of the sense of humor that I was talking
to you guys about. Sort of just before the
talk started, you and I were talking about family. CHUCK AKRE: Yes. SAURABH MADAAN: And you were
talking about your kids. And if I remember
correctly, none of them are doing what you
did in your career. CHUCK AKRE: Correct. SAURABH MADAAN: And I
mean, over the years of successful investing,
by the numbers that you've shared with us, I'm sure you've
made a little bit of money for yourself. CHUCK AKRE: I'm not
worried about my next meal. SAURABH MADAAN: Yeah,
that's what I meant. I was just curious,
what are your thoughts? You said that you believe it is
important to let your kids have their own struggles in life. So talk to us a little bit about
family, about raising kids, about giving money away, maybe. CHUCK AKRE: So my
wife and I spend a reasonable amount
of time figuring out how we can put the money
to use in places that will be advantaged by it,
as it relates to the things that we're interested in, or
land conservation, health care issues, education, shelter,
things of that nature. And so we pursue
that significantly, as so many people do. And then it creates an
issue within the family, where we've developed an asset
base that we certainly never expected to have. And we've seen, particularly
where we live and work, in Middleburg Virginia-- You know, Paul
Mellon lived there, and Jackie Mars lives
there, and there's a lot of wealth in that area. And we've had a
chance to see people who have been, well, as we would
say, they're on scholarship, or they're on full scholarship. And we see some of those
whose lives are really up-ended because of the fact
that they have a vast amount of capital available to them. They don't have to
work, and they don't. And so, the phrase
that my wife and I use is, we don't want to deprive
our children of the opportunity to struggle. Struggle in my own life
has been very valuable. I was telling Daniel
yesterday, there have been a number
of times in my life, that if your glasses had the
right rose color in them, my assets would
equal my liabilities. But you had to have the right
color rose glasses, you know? And so those experiences
have been valuable to me as a human being, and as
an investor, and so on. And so, that's one of the things
that we think about, and talk about, and work out. SAURABH MADAAN: Thank you. That was great. You also mentioned that
you are a voracious reader. CHUCK AKRE: Yeah. SAURABH MADAAN: So
can you mention-- CHUCK AKRE: And a
slow reader, too. SAURABH MADAAN: And they say
that slow reading is actually real reading, but-- [LAUGHS] So I was curious. Name a few books, if
you can, that you think are maybe under-appreciated,
or a little bit under the radar, or
people would learn things from reading about them. CHUCK AKRE: Well, you know, I
mentioned that pretty new book out called "Dear Chairman." And actually, it's a lesson
in behavior of human beings. It's a lesson in thinking
about making judgments about whether or not
business executives use their assets well, in terms
of compounding their capital. I mentioned the book, "100
to 1 in the Market," that came out in '72. I've talked about that
a lot, and so people are reasonably familiar with it. But a few years ago,
they'd never heard of it. And the big idea in that is
the issue of compounding. Even though he doesn't
talk about that explicitly, he lists all kinds
of characteristics that you'd find in businesses
which might do this. Obviously, low valuations,
small value to begin with, all of those kinds of things. And maybe I'll think
of some others, but-- SAURABH MADAAN: Sure. Chris Mayer, I believe, has
done sort of an updated work-- CHUCK AKRE: Right. He did. SAURABH MADAAN: --in the
recent years on the same book. CHUCK AKRE: Yep. SAURABH MADAAN:
But I was curious. You have this workbench
in your portfolio-- CHUCK AKRE: Yeah. Yep. SAURABH MADAAN: --the last 10%-- CHUCK AKRE: Yeah. Yeah. SAURABH MADAAN: --of so
many small positions. And you mentioned this
idea of 100-baggers. CHUCK AKRE: Right. SAURABH MADAAN: So
I was just curious, what are some 100-baggers that
you see around that, you know-- CHUCK AKRE: Well-- SAURABH MADAAN: --you
can share with us? CHUCK AKRE: I've only
had two in my life. And I still own those two. SAURABH MADAAN: OK. CHUCK AKRE: And that's Berkshire
Hathaway and American Tower. SAURABH MADAAN: Right. CHUCK AKRE: And the
fact of the matter is, you only really need one. And I mean, and that's
a really important issue as it relates to investing,
is you really only need to have one great success. And that is, as it relates to
whatever your goals might be. And so the quest is,
for me, the search is trying to figure out what the
characteristics of those are. So if you think
about my comments, and three-legged stool,
and high return businesses, and so on, our view is
that, most of the time, you can buy these
exceptional businesses at reasonable valuations. So in today's market, you
can buy American Tower, or you can buy Moody's,
or you can buy MasterCard at probably something like 19
times next year's free cash flow, 2018. And that means an earnings
yield of 5% or 5.1%. If we're still at a 1.5%
interest rate environment, that's an attractive deal,
you know, that comparison. If the business does,
in fact, compound the free cash flow,
or book value, or whatever is appropriate for
that company, in the mid-teens and you pay in the upper
teens for it, we like to say, you'll get to heaven. [LAUGHTER] And you'll do so
without much risk. Periodically, the
market gives us an opportunity to buy one
of these great businesses at a discount. And then even more rarely,
it'll give us the opportunity to buy one of these at a steal. So Berkshire Hathaway, I started
buying back in the late '70s. And in the late '70s, my initial
purchases were at $105 a share, and that's the stock today, you
know, is at $250,000 a share. So that works. American Tower is, to
me, a business that is situated like Microsoft was. Microsoft was at the
intersection of the growth of the personal computer. They had the operating system. If you wanted a
personal computer, you ended up basically going
through that tollbooth, the Microsoft. And so it was a fabulously
profitable business. The growth of the wireless
communication business which, as we know, started
with 1G, and 2G, and 3G, and 4G, now they're
talking about 5G, each of those G's requires
a denser network of towers, more sophisticated
antennas, and so on. And the place they put
those are on the antennas, by and large, so that the tower
business is in that same-- is in a nearly identical kind
of position that Microsoft was. And I'm not a technology guy,
so I'm already over my head. But that's a really
important notion, in terms of the exceptional
nature of a business and the ability to grow it. And their marginal
return at American Tower for an additional
tenant above about 1.2, their marginal return is
in the high 90% range. It's unbelievable. So once they put
that asset in place and they get above breakeven,
the marginal return is in the 90%
range, north of 90%. And what American
Tower has done is they now are in 15 countries. And when we started
with them in 1999, they were in the United
States, Mexico, and Brazil. Now they're in total
of 15 countries, including United States. And all of the things that
were telephony-related in the late '90s were
the hottest things since the 4th of
July firecrackers. And 2000 came, and all
of those businesses fell off the cliff,
because they were levered. Well, American Towers,
levered 16 to 1. I mean, it's unbelievable. Their huge cash flow
businesses and so on. And they had to
de-lever that company, selling assets on a distressed
basis in a declining market. And in the beginning of
2002, the stock was $5. It had gotten as high
as in the $60s in '99. Beginning of 2002, it was $5. We bought a position at $5,
and we were really proud of it. In September, it was $2. AUDIENCE: [SCOFFS] CHUCK AKRE: We got on the
plane and went see the CEO in Boston, Steve Dodge. He was the founder. And what the market
was focused on was, they had about $6 billion of
debt, but they had $200 million that came due in November
of 2003, 15 months hence. And it was payable
in cash or shares at the option of the company. They were desperately
trying to raise cash. They couldn't use their
bank lines to pay that off. You can't use the bank to pay
off somebody else's capital. And so, the lower
the price went, the more dilution an
existing shareholder was going to have if they
used shares instead of cash. And in October, the stock got
to an inter-day low of $0.60. We bought several million
shares at about $0.80. I still own mine. We have many of our
clients still own theirs. That's the other example
of a north of 100-bagger. What was interesting was
that the business itself was a terrific business
masked by a bad balance sheet. And you had great
people working hard to get it straightened
out, to preserve their own investment, their
own foundations, and that sort of stuff. And it was just, so I
think to myself, well, did I make a mistake by not
really putting a lot of money to work? I was very timid. If I say we bought a few
million shares at $0.80, that's not a lot of money. And so, if I'd been
more confident, I would have put a
lot of money in there, and I'd be fighting with
Warren Buffett for the place on that list, you know? [LAUGHTER] But you get the idea. So the point is that,
periodically, you get a chance to buy one of these
great businesses at a bargain, and even, in a rare
opportunity, at just a steal. SAURABH MADAAN: Yes, Chuck. I have one final
question for you. There was a 2006
interview of yours that I was mentioning to you-- CHUCK AKRE: Yeah. SAURABH MADAAN: --before
we began the conversation. And Penn National Gaming, I
think, was one of the stocks-- CHUCK AKRE: Yeah. SAURABH MADAAN: --that was
a big part of your portfolio at that time, and so was
this company called Markel. So I remember the stock
price from that interview because it was 4-4-4. And today, it's roughly-- CHUCK AKRE: 9-9-9. SAURABH MADAAN: Yeah. It's slightly more than double. But it's also been
over 11 years. CHUCK AKRE: Yes. SAURABH MADAAN:
So the reason I'm asking is, does there
come a point, even in the life of a
good compounder, where the valuations are
becoming optimistic enough, and the future rates of
returns that you can see are low, where one should
maybe rotate or move from one position to another. How do you think about
selling, in other words? CHUCK AKRE: Well,
one side of that. I think the most
difficult thing to do in our business is to not sell
if you're a long-term investor. And that is, the ones
that are really great have been hard for
me to identify. It's taken me a long time to
understand how good the ones are that are really good. And almost everybody has less
time in the market than I do. But for those who have fewer
years experience, you know, if you get a
disappointing quarter or you get something like that,
temptation is often the sell. And if you've got
a really great one, that's probably a bad decision. Doesn't mean you can't
lighten up a little bit, and try to time it
and buy some more. We don't do that very well. So we try not to
fool around with. In the case of
Markel, like Enstar, they'd had a record of 20
years of compounding book value per share. In 2006, that was,
like, 20% a year. And so like Enstar, which
was three times book when I bought it, Markel
got to the point where it was 2 and 1/2 times
book or something like that. And the fact that
I've only doubled my money in 10 years, so 7%
return, is a result of that. By paying a valuation, which,
in hindsight, was too high, because the rate at which
they could compound book was less than I had
imagined it might be. Part of that backdrop
is this whole issue of this 36-year secular
decline in rates. All businesses have done less
well over the last 5 or 10 years because of the
decline in rates, and Markel is an example. And they've now, in
my mind, fully adopted the Berkshire model of creating
a business inside the holding company that's completely
away from insurance. They call it Markel Ventures. Got $1.2 billion in revenue,
as you said, about $130 million in EBITDA. So it's roughly at 10
times EBITDA margin. And that will give
them the flexibility of being able to put capital
to work, other than simply in a passive portfolio, rather
in an insurance business when rates aren't attractive to them. And they're one of the very
small number of insurance companies that have the
discipline of only putting money to work when
their expected return is a positive combined ratio. SAURABH MADAAN: So
talking of names-- I think we have
about a minute left-- you did mention
Visa and MasterCard, and I think you own both. You also mentioned Moody's,
and it a duopoly with S&P. CHUCK AKRE: Yeah. Right. SAURABH MADAAN: I
was wondering, what are your thoughts on
S&P as a business? It has the same market
shares, even outside the US, the similar structures. But, curious to hear what you think. CHUCK AKRE: So in
the last few weeks, Moody's announced that they'd
come to an agreement with, I don't know, a government
agency, the DOJ or somebody, in terms of paying a fine
relating to their activity around the crisis. The amount of the fine
was substantially lower than Wall Street expected. And S&P paid a much larger
fine more than a year ago, because the SEC had
the goods on them. They had a string of emails
about people inside talking about how this stuff was
crazy, and they didn't exist at Moody's. That is, if they existed, the
government never found them. And so, there is a
modest difference. And when the-- SAURABH MADAAN: So they might
have cultural differences. CHUCK AKRE: Cultural difference. And so, when John
Neff, my partner, joined the firm in
November of 2009, one of the names that he
suggested that we invest in was Moody's. And I said, oh,
we'll never buy that. I mean, their behavior
during the financial crisis was atrocious. He was a very patient guy. And he said, well,
I think you should meet this Ray, the CEO, and
the other people, and so on. And over the next
couple of years, I had the chance to go
and meet the executives two or three times, and I
made my own judgment about it. And so, it wasn't until
2012 that we actually bought Moody's shares. But again, it was not much
different, price-wise, than it had been in 2009 or '10. So that was an example. And what I've concluded
then, still believe, was their behavior during
that prior crisis was stupid, but it wasn't wrong
and it wasn't illegal. And you know, I mean, that sort
of stuff, as the e-mails showed was the problem at S&P, where
people thought what they were doing was just foolish. There was no such evidence
of that at Moody's. And so I think there's a
cultural difference of some-- so we haven't gone
over there at S&P. We did it in Visa, because
we have concentration limits in the mutual fund. We did it with SBA and
in the Towers space because we have
concentration limits. But we haven't done it
with S&P and Moody's. SAURABH MADAAN: OK. Great. CHUCK AKRE: Yeah. SAURABH MADAAN: We
are out of time. But thank you so much, Chuck. CHUCK AKRE: Thank you very much. SAURABH MADAAN: This
has been fantastic. CHUCK AKRE: Yeah. SAURABH MADAAN: Thank you all
for being a great audience. CHUCK AKRE: Great. Thank you all. [APPLAUSE]
