Investment PhilosophyMotivational

The 400% Man-A Lesson for Aspiring Investors

This afternoon I came across an article from Smart Money that is about a year old. I read it for the first time today, and it was one of those  pieces that you bookmark for reading again later. The piece was called “The 400% Man“, and had the intro tag line:

“How a college dropout at a tiny Utah fund beat Wall Street, and why most managers are scared to copy him.”

The article provides a great background into a guy from a small town in Utah decided to start a tiny investment partnership at age 22, with no MBA (no college education for that matter), no Wall St contacts, and no more than a measly $200,000 bucks. He then went on to increase the value of his partners’ capital by a factor of 5 (400%) over the next 12 years.

His name is Allan Mecham, and he is the founder of his firm called Arlington Value Management. It’s a very motivational piece to read-inspiring for any up and coming fund manager. Mecham’s fund now is significantly larger at $80 million, but still tiny by hedge fund standards. The piece makes it sound like Mecham is perfectly content to focus on investing, foregoing major efforts to market his fund and grow AUM. Mecham prints out articles each day that he wants to read (a man after my own heart…. Side Note: I much prefer paging through hard copies of Value Line and the Wall St Journal over viewing the same info on the web. This is despite the fact I spend most of my time on the web reading blogs, reports, filings, etc… I love the web, but there is just something more peaceful about reading a paper or a hard copy of an annual report as opposed to using the mouse to scroll through page after page…).

Mecham reads from a huge stack on his desk from an armchair next to the window. He reads quietly all day, looking for two or three great investment ideas per year. Yes, 2-3 new ideas per year. Although I haven’t looked into his fund, it sounds like he runs a very high concentrated low turnover value fund in the Buffett tradition- he wants wonderful companies at fair prices and he holds them for a long time. He started his fund in 1999 and in large part through incredible performance, has slowly been building his capital year after year. He even had a positive year in 2008-and it wasn’t due to shorting bank stocks, it was due to going long stocks like Autozone, which was up 11% that year.

While the storyline is inspiring, the second part of the tag line-“why most managers are scared to copy him” is where the real investing lesson is here. Mecham is successful in large part because he is unorthodox. Think about Buffett in the 1950’s and 1960’s while running his partnership-putting 40% into American Express, buying sleepy old banks in Rockford, Illinois, traveling around the Nebraska countryside drinking ice tea on front porches looking for available shares of Sanborn Map… Mecham might not be visiting neighbors in Utah, but the point is this: he is doing things most traditional money managers don’t do, such as:

  • He focuses on simple things (no complex ideas, no jargon, no spreadsheets, just common sense)
  • He concentrates his portfolio
  • He does his own research as opposed to reading analyst reports or secondary research
  • He doesn’t talk to company management
  • He reads SEC filings (the best investors do this, but the majority don’t; even most “pros” don’t)
  • He doesn’t trade much-he makes investments with a long term (5 years plus) view
  • He lives a peaceful (judging by the description in the article), presumably low stress lifestyle that includes reading and thinking.

Most of these are characteristics that are difficult for most professional money managers to follow. Mutual fund, and even many hedge fund managers are driven by keeping assets under management. Everyone wants good performance, but more importantly, everyone wants to keep their job. Doing something out of the ordinary can be career ending if it doesn’t work. But the catch 22 is that to have truly superior performance, you have to do things others aren’t doing. By very definition, superior performance is out of the ordinary, and so the process necessary to achieve that superior performance has to be out of the ordinary as well.

This is just what we try to emulate here at Base Hit Investing. We might be more diversified, but the process is similar: Look for value, often in areas with well known problems, knowing that the market systematically and consistently undervalues stocks in these types of situations. Methodically repeat a process flow over and over, looking for great investment opportunities, and patiently compounding one decision on top of another. Consistently practice this process flow, day after day, using simple value metrics that provide a slight edge-with the idea that collectively, the slight edge combined with many decisions over a long period of time leads to outstanding outperformance.

Mecham invests the way he wants to, using value as his guide, looking for great companies at fair prices, and he methodically has built a solid performance record, one good investment at a time. No MBA, no investment bank contacts, just a small office above a taco shop-and he beats the pants off the well resourced pros. Stories like this are like reading about how a guy like Tom Brady barely got into the NFL, drafted in the sixth round, destined to be a career 2nd or 3rd stringer…

It was a fun read. It’s always good to remember that to achieve extraordinary results, you have to do things that others aren’t doing. Sir John Templeton said it best:

“If you want to have a better performance than the crowd, you must do things differently from the crowd.

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14 thoughts on “The 400% Man-A Lesson for Aspiring Investors

  1. Dear Mr Huber,
    I’ve been reading your articles for the last 2 years and I must say they’re very brilliant and mind opener.
    I’m interested in the history of the stock market and would be very grateful if you can help me to find historical date of the NYSE since it’s establishment on 1792( weekly or monthly).
    Thanks a lot.

  2. Hi John:
    Love your site and your articles. Keep up the good stuff.
    I just wanted to leave a brief comment on this article, which I just came across, even though it’s a February post.
    I think this is a great story and the guy’s remarkable in his approach to investing, at such a young age.
    However, a 400% over a 12 year period does not sound like an outstanding performance to me. It’s an average of a little more than 12% per year, which no doubt is very good, but – in my humblest opinion – not great, especially when you’re running so little money in such a concentrated portfolio.
    Is there anything I’m missing here?
    Thank you
    All the best.

    1. Silvio,

      Thanks for the nice words and thanks for reading. Couple things regarding the math: 400% is actually about 14.5% annually over 12 years (don’t forget 400% is 5x, not 4x… I think you came up with 12% by thinking 400% is 4x. In other words, if you invested $1000 with Mecham at the outset, it would have been worth $5000 12 years later, not $4000-which would only be 300%).

      So obviously a big difference between 14.5% and 12% (as a coincidental and totally unrelated aside, those two numbers are significant to Graham as well: 14.5% being the net return to investors after the 25% profit fee and 12% being the average S&P return over the 20 year period Graham… okay I have a strange way of remember random unrelated numbers).

      So, you should be much more impressed now that you know he made 14.5% per year vs 12%- there is a big difference between those two numbers over long periods of time. But also, consider the environment he was working in. This wasn’t the Peter Lynch 80’s and 90’s…. Mecham started his fund at the end of one of the most scintillating bull markets we’ve ever seen. The S&P basically went nowhere for a decade. I’m not sure what the exact numbers are from 99-2011, but the S&P was likely flat or maybe positive 2 or 3% annually at the most.

      So Mecham outperformed the S&P by about 10% per year over that time, a feat that probably 1 in 200 professional managers do over the course of any given decade.

      Lastly: remember that (I believe this is the case at least) these are NET results to his investors. Someone could correct this if I’m wrong, but performance numbers with hedge funds are usually reported as net returns after the management and performance fees have already been collected. Mecham has a performance allocation, and I’m not sure if he has any management fee. He probably takes about 20% of the profits, possible after some hurdle rate… so…

      This means that the 14.5% annually is actually probably closer to 17-18% annually before his fees. Of course, if you invested in the fund, you’d use 14.5%, but if you want to evaluate his investment process, you’d want to know his gross returns, which would be somewhere around the latter figure.

      Anyhow, Mecham isn’t alone-there are certainly a few managers who have equaled or exceeded his performance, but he’s got to be on a short list of guys who have beaten the S&P by double digits or more during this secular bear market.

      Hope this helps… these are just my thoughts. I think Mecham is an extremely talented business investor. His style is much different than mine, and much more concentrated…. as you say, concentration can be viewed as a risk, but in Mecham’s case, he follows the Buffett idea that a concentrated portfolio of good businesses reduces risk and increases margin of safety.

      I personally prefer to be much more diversified and at this point, my style is completely different. But that’s a different discussion…

      Thanks again for reading and hope this helps. Feel free to let me know if you have other questions/comments…

      1. Hi John,

        I know you made this post a while back but I just saw it. You mention that there are other investors who have achieved a similar or better return over that time frame. I was wondering if you had the name(s) of any value investors for review.

        Thank You,

  3. Dear Mr.Huber,

    Your articles still amaze me and provide a great deal of information. I was wondering what would be different ways of “doing different things from the crowd?” In your opinion, what are some approaches that go against the crowd but still do remarkably well?

    1. Thanks. Doing things differently is really just a contrarian way of thinking. Value investors are typically contrarian thinkers, because undervalued assets typically have some sort of problem/pessimism surrounding it that makes others go “yuck”. Simply being contrarian doesn’t mean you’ll have success as an investor. It comes down to buying value (is the thing I’m buying worth a lot more than I’m paying for it?) As Graham said: “You are right not because the crowd agrees or disagrees with you, you are right because your facts and reasoning are right”.

      So thinking differently isn’t a sufficient condition for success in investing, but it is necessary. It’s just a way of viewing the world. Try to invert common perceptions that crowds have and view things from different angles…

  4. Dear Mr. Huber,

    I love your articles, and learn tremendously from them. I retired from the corporate world after 30 years at 54 years of age (2 months ago) and am learning as much as I can.
    Thank you for writing so well.

  5. About a week ago I called my cousin no her 60th. birthday. In the conversation she share her discovery of Allan Mecham. She said she would forward the information on him to me via USPS. It came yesterday. I opened it and read the 3 articles that she included. She has been an investor since June 2012. In her package she included their annual letters for 2013 & 2014. I marked up and underlined my copy as I read them. If you are interested I will send a copy of each.
    After I read her information I researched the web on Allen for the next 2-3 hours. Not a lot of articles but all good. Your cortical was the last one I printed out last evening but left it in the printer. Discovered it this morning. Just now read it including the 11 responses. I never read responses. The last response, one of your readers, asked you for a copy of Mecham’s annual letters. If this is still of interest let me know. Merrill

    1. Hi John (and Merrill)
      I have only recently discovered Allan Mecham as well and if you are still able to send the letters I would love to receive them as there is so little on the web. I am in Australia so if you email them I would appreciate it greatly.

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