There aren’t many investors compounding capital at double digits over the course of decades and those that do are already well known (i.e., that guy from Omaha). However, in a small office above a taco shop, a man did just that.
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Allan Mecham ran a hedge fund called Arlington Value who has demonstrated the advantage in simplicity, long-term thinking, and the power of compounding.
Arlington Value doesn’t have a large team of analysts.
They don’t run advanced machine-learning algorithms or exploit esoteric satellite data and there’s not a single distinguished diploma on their walls.
Yet, Arlington Value has returned 18.36% CAGR over 11.5 years and its main fund, AVM Ranger Fund, has returned a mind-boggling 37.9% return since 2008. The man behind these numbers is Allan Mecham.
The less information you consume the more time you have to ponder the few critical bits that really matter.
Lesson 2: Selling Great Businesses Is Almost Always a Mistake
In a perfect world, we find businesses we love with management teams that know how to allocate capital well, and then we sit.
Fight the urge to sell a truly great business. They don't come around too often.
Lesson 3: Inactivity Is The Key To Success — Learn To Do Nothing
If you don’t have an ability to be patient, do nothing and wait for opportunities, you’ll never be able to hold on to great businesses. macro-ops.com/boredom-an-inv…
Lesson 4: Focus On The Long Term — Play For Keeps
Changing the time frame in which you think about investments leads you to spend most of your time thinking about the above items instead of the quarterly metrics that everybody else is so focused on.
Lesson 5: Concentration (Not Diversification) Is Vital To Outperformance
If you want to beat the market over the long-term, you need to make concentrated bets in companies you believe will earn higher returns on their capital than the general market.
Couple these concentrated bets with a long-term time horizon and steadfast determination to do nothing and you’re almost on your way to cloning Allan Mecham.
For those interested I've linked to Mecham's letters below. Shoutout to @FocusedCompound for the source material.
"In fact many were good ideas. Were there too many consumer startups? Yes! But there were also too many software companies, semiconductor companies, telecom equipment companies, and the list goes on and on.
As we later learned, over-funding (i.e., too many startups with too much capital) was the key issue, not the particular investment category. Low-cost, high-scale marketplaces do in fact exhibit increasing returns.
Successful investing is an active rebellion against one’s instinctual proclivity to sabotage long-term returns.
In a perfect world, investing is like gardening. You cut the weeds (losers) and water you flowers (winners).
In practice, investors do the opposite.
We tend to sell winning stocks too early (cutting the fruit) while desperately clinging to losing positions (watering the weeds).
This habit is called the Disposition Effect.
Coined by Shefrin and Statman in 1985, the Disposition effect explains the tendency for investors to cut their winners short while riding their losers lower.
It’s an academic way of saying, “most investors suck.”
A week ago, @SagaPartners said something that's stuck with me:
"A potentially great idea is when no one agrees with you. A potentially bad idea is when no one agrees with you."
I've thought about some ways to help investors think about these two conundrums ...
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1/ Determine what you are disagreeing over.
If you're on two different "logic" planets, the argument will fail because nobody's gonna listen from that starting position.
Find common principles on why you're wrong and go from there.
2/ Give fair weight to your "opponents" POV and credentials.
If you're pitching a media stock and @AndrewRangeley is ripping it to shreds, that matters *WAY MORE* than say, someone like me who has issues with one or two points.