"Wait for the Right Price"
Morningstar opens its 16th annual investment conference in Chicago on June 23, three days of trading investment ideas among some of the mutual-fund industry's most accomplished portfolio managers, including Brandywine Fund's (BRWIX ) Foster Friess and Oakmark Fund's (OAKMX ) Bill Nygren. My bet is that some of the fund pros will also be seeking out Morningstar's own equities strategist, 35-year-old Mark Sellers, for a tip or two.
On June 17, Sellers' twin portfolios –- the Hare and the Tortoise -- marked their third year in operation with a record that left most fund veterans in the dust. Both are live demonstration portfolios that Morningstar started with $100,000 each and are tracked in a monthly newsletter.
The Hare portfolio, which focuses on large-cap growth stocks, returned an average of 2% over the three years. That compares to a loss of 2.1% for the Standard & Poor's 500-stock index in the period and was good enough for the Hare to outperform 96% of the large-cap growth funds tracked by Morningstar. The Tortoise portfolio, which tilts toward value stocks, did even better, outperforming 99.86% of all large-cap funds, with an annual average return of 12%.
What advice does Sellers have for investors? Plenty -- but you don't have to travel to Chicago to find out. In Part 1 of this two-part Q&A with BusinessWeek's Robert Barker, he describes his strategy and talks about some of his successes (Part 2 will run on June 25). Edited excerpts of their conversation follow:
Q: What's working so well for you? A:
Q: What's working so well for you?
A:It's so simple, it's almost embarrassing. You have a "watch list" of companies that you would want to buy at the right price. And you just watch that list every day, and when a stock hits your price, you buy it. And then you just hold on to it.
We didn't do much trading. The last year, over the trailing 12 months, the turnover in the Tortoise portfolio was only 18%, and the Hare was 34%.
Q: How many names are on your watch list? A:
Q: How many names are on your watch list?
Q: Isn't that a lot to keep tabs on? A:
Q: Isn't that a lot to keep tabs on?
A:Well, you do this 10 hours a day for years on end, and you start to develop what [Berkshire Hathaway (BRKA ) Chairman Warren] Buffett calls a "circle of competence." And when you have that circle of competence, you just expand it year after year after year, and eventually you can follow a few hundred companies with wide economic moats.
Q: Economic moats? Companies with these end up on your watch list? A:
Q: Economic moats? Companies with these end up on your watch list?
A:These are companies that are in a stable, predictable industry, and in a good position within the industry, so...competitors aren't going to come in and breach the moat. One in every six companies that Morningstar covers, or about 15%, we consider a wide-moat firm.
Q: Go on. A:
Q: Go on.
A:The biggest difference between a good investor and a great investor is the discipline to wait for your price. I'm firmly convinced that anybody could do what we did over the past three years if they were just willing to wait for the right price before putting money to work.
Q: It's nice, I guess, that you can make your living without having to put money to work. You can just carry a big cash balance and earn 1% on it. A:
Q: It's nice, I guess, that you can make your living without having to put money to work. You can just carry a big cash balance and earn 1% on it.
A:That's exactly right, but...I see the cash as providing me with an option to buy if stocks are irrationally depressed. I would rather hold some of the portfolio in the form of an option. A key element of any great long-term investment strategy should be to always have some firepower sitting there ready to be used.
Q: Give me an example or two of a stock that you bought last year that had been on your watch list and was irrationally depressed? A:
Q: Give me an example or two of a stock that you bought last year that had been on your watch list and was irrationally depressed?
A:One that we bought recently was Sallie Mae (SLM ) [formally known as SLM Corp.]. It's by far the largest student-lending company.
The government now is allowing Sallie Mae to privatize, which gives it a lot of opportunities, as well as a threat if it's not disciplined in its underwriting. But I think that scares some of the investors who have owned it before, so it's been volatile recently. I've been waiting on [Sallie Mae] three years.
Q: What was your average cost? A:
Q: What was your average cost?
Q: What else have you bought recently? A:
Q: What else have you bought recently?
A:First American Financial (FAF ) is one that we've bought a couple of times on the way down. This is the second-largest title-insurance company. Of course, people are really scared with mortgage rates going up...so anything mortgage-related has gotten hit. It has 40% of its market value in cash.
It's rated A-plus by Moody's (MCO ), a very strong balance sheet, a management team that has been there for a long time. It has really increased shareholder value, it's buying back stock, pays a decent dividend and they're second in a very healthy, very attractive and lucrative industry, which is title insurance
Q: I believe Fidelity National Financial (FNF
) is No. 1 in title insurance. A:
Q: I believe Fidelity National Financial (FNF ) is No. 1 in title insurance.
A:It is. And we own it, too.
Q: I gather it's undergoing a big corporate change –- what's going on there? A:
Q: I gather it's undergoing a big corporate change –- what's going on there?
A:Fidelity National is spinning off its information-services unit later this year or early next year. Something like 40% of the company is comprised of this information-processing unit, which is somewhat similar to Fiserv (FISV ), and Fiserv has a [price-earnings ratio] of 20, 21, 22, something like that.
So that 40% of the company, if it's valued like Fiserv, would have a p-e of $20. You're almost getting the title insurance for free. When they do the spin-off, there's going to be a lot of value unlocked.
Q: So you still see Fidelity National as a buy at $36 or $37 a share? A:
Q: So you still see Fidelity National as a buy at $36 or $37 a share?
A:Yes, I do -- if you've got a one- or two-year time horizon so that the spin-off happens and the effects start to be more fully understood by the investment community. When I bought the stock, I bought it before the spin-off was announced.
Q: Bill Foley is going with the spun-off information-services company, not staying with the parent title company, right? A:
Q: Bill Foley is going with the spun-off information-services company, not staying with the parent title company, right?
A:He's going to be chairman of the title company and CEO of the spin-off. It's a sole proprietor, a single guy at the top, who's used to getting his way. But he has built the company from almost nothing up to be the dominant leader in a pretty healthy field. He gets paid accordingly, which is disappointing to some people, but he's probably worth it. I'm not real concerned with the overvaluation.
Note: In Part 2, Sellers talks about the investments that didn't work out so well and the companies he still has his eye on.
Edited by Patricia O'Connell