The 400% Man - MarketWatc14h

9/6/2014 The 400% Man - MarketWatch
http://www.marketwatch.com/story/the-400-man-1328818316857#tabs 1/39
Latest News
5:00 P.M. ET
The best places to retire abroad with friends

4:25 P.M. ET
Updated Nishikori upsets top-seeded Djokovic in U.S. Open semifinal

4:15 P.M. ET
Updated Obama to delay executive action on Immigration

3:36 P.M. ET
Updated The 10 traits that can make you an irrational millionaire

3:34 P.M. ET
Why and where Goldman Sachs is having a very good year

1:19 P.M. ET
Under Armour edges out Adidas in U.S.

1:15 P.M. ET
Colombian inflation more than expected in August

12:00 P.M. ET
5 risks Alibaba IPO investors should know about

11:15 A.M. ET
At the NYSE, Larry Kofsky previews the week ahead

10:55 A.M. ET
Porsche 911 Carrera makes shift work wonderful

10:36 A.M. ET
Updated Buying an iPhone 6? Youll also need to buy a whole new wardrobe

10:35 A.M. ET
Updated Why Apple investors should ignore the iPhone 6 hype

10:33 A.M. ET
Updated How to get the new iPhone 6 for free

10:32 A.M. ET
Updated The fattest states in America

10:30 A.M. ET
Updated The best places to retire abroad with friends

10:26 A.M. ET
Are millennials really 'super savers'?

10:24 A.M. ET
Updated Serena Williams to play her BFF Caroline Wozniacki in the U.S. Open final

10:24 A.M. ET
Updated Your safe money-market fund may be at risk

10:22 A.M. ET
Updated 9 reasons why saving $1 a day builds fortunes

10:21 A.M. ET
Updated Why you might be saving too much for retirement

Log In
Dow
17,137 +67.78 +0.40%
Nasdaq
4,583 +20.61 +0.45%
S&P 500
2,008 +10.06 +0.50%
Home
News Viewer
Video
Radio, Podcasts
First Take
Games
Blogs
Portfolio
My MarketWatch
News Viewer
Markets
Markets Stream
U.S.
Europe/Middle East
Emerging Markets
Asia
Canada
The Tell
Columns
Market Snapshot
Movers & Shakers
Currencies
Futures Movers
Pre-Market News
Tools
Earnings Wall
Markets Overview
IPO Calendar
Earnings Calendar
Currency Tools
Futures Contracts
Market Screener
Hulbert Interactive
Investing
Stocks
Mutual Funds
ETFs
Options
Bonds
Commodities
Currencies
Futures
Hedge Funds/Insider Trades
Getting Started
MarketWatch Adviser
Columns
Options Trader
Revolution Investing
Tools
Stock Screener
Funds Finder
ETF Screener
Options Screener
IPO Calendar
Earnings Calendar
More...
Trading Deck
.
Personal Finance
10 Things
Big Spender
Real Estate
Spending & Saving
Taxes
Columns
Brett Arends
Bill Bischoff
Amy Hoak
Chuck Jaffe
Jennifer Openshaw
Jennifer Waters
Tools
Credit Card Screener
Funds Finder
Today's Rates
Retirement
RetireMentors
Encore Blog
Real Estate
Taxes
Retire Here, Not There
How-to Guides
Social Security
Estate Planning
Events
Columns
Robert Powell's Retirement Portfolio
Andrea Coombes's Working Retirement
Tools
Retirement Planner
How long will my money last?
Economy
Federal Reserve
Capitol Report
Economic Report
Columns
Darrell Delamaide
Irwin Kellner
Rex Nutting
Tools
Economic Calendar
Industries
Banks
Tech
Cars
Energy
Retail
Sports
More...
Blogs
Health Exchange
Energy Ticker
Columns
Energy Stocks
Financial Stocks
Retail Stocks
Tech Stocks
Tools
Industry Analyzer
My MarketWatch
Portfolio
Watchlist
Alerts
Games
SmartMoney Get email alerts
The 400% Man
By Brett Arends
Published: Feb 13, 2012 12:03 p.m. ET
Last Updated: Feb 21, 2012 8:44 a.m. ET
Shares 256
36

179

41

By
BrettArends
Columnist
On a fall day in 2010, half a dozen wealthy investors and portfolio managers converged on an office in midtown
Manhattan. These were serious Wall Street moneymen; in aggregate, they handled more than a billion dollars.
They had access to the most exclusive hedge funds and investment partnerships and often rubbed shoulders with
the elite of New York, Greenwich and Palm Beach.
But on this day, they had turned out to meet an unknown college dropout from Utah -- and to find out how he
was knocking them all into a cocked hat.
The unknown, Allan Mecham, had been posting mind-bogglingly high returns for a decade at a tiny private-
investment fund called Arlington Value Management, and the Wall Streeters were considering jumping on board.
For nearly two hours, they peppered him with questions. Where did he get his business background? I read a
lot, he replied. Did he have an MBA? No. I dropped out of college. Did he have a clever computer model or
algorithm? No, he replied. I don't use spreadsheets much. Could the group look at some of his investment
analyses? I don't have any of those either, he said. It's all in my head. The investors were baffled. Well, could he
at least tell them where he thought the stock market was headed? "I don't know," Mecham replied.
When the meeting broke up, "most people left the room mystified," says Brendan O'Brien, a New York City
money manager who was there. "They were expecting to see this very sharp-dressed, fast-talking guy. They
were saying, I don't get it, I don't understand why he wouldn't have a view on the market, because money
managers get paid to have a view on the market." Mecham has faced this kind of befuddlement before -- which
is one reason he meets only rarely with potential investors. It's tough to sell his product to an industry that's used
to something very different. After all, according to their rules, he shouldn't even be in the business to begin with.
Over a 12-year stretch, through the end of 2011, Mecham, now a mere 34 years old, has earned an astounding
cumulative return of more than 400 percent by investing in the stock of U.S. companies -- many of them larger
ones like Philip Morris, AutoZone and PepsiCo. That investment performance leaves the stock market indexes
and most mutual funds trailing far in the dust. Of the thousands of mutual funds in America, only a smattering of
stock-oriented funds have done better, according to Lipper. Arlington, which is structured like a hedge fund, has
put most firms in that category deep in the shade as well. It even managed to turn a profit during the crash of
2008, when Standard & Poor's 500-stock index fell nearly 40 percent. And Mecham has done this mostly while
sitting in an armchair, in an office above a taco shop, in downtown Salt Lake City.
Mecham doesn't look, talk or act like a typical Wall Street manager. He's soft-spoken. He doesn't use jargon.
He dresses like he works in a bookshop, with a patterned shirt and a plain tie. And the story of his success,
arguably, says a lot about the flaws of the fund-management industry. By his own account, and those of other
investors who have vetted his fund, Mecham has no secret sauce or amazing algorithm; what's extraordinary
about this young man is how ordinary he is. But his investment approach relies on a handful of common-sense
tactics -- focusing on just a few stocks, for example, and avoiding or ignoring short-term statistical analysis --
that big money-management firms either can't use or are reluctant to try. Skeptics and admirers alike agree that
Mecham's approach involves a higher-than-usual potential for hefty losses. Russ Kinnel, director of fund
research at Morningstar, says most fund customers would be unlikely to take that chance. "Pension funds,
consultants, investors in general are quite benchmark-centric," Kinnel notes; they get uncomfortable when their
money managers deviate.
But that notwithstanding, it would be a bit of a stretch to characterize Mecham as a rebel -- this is a man, after
all, for whom one of the highlights of the past year was a trip to Omaha. (He took his girlfriend to Warren
Buffett's annual investment conference.) As does virtually every other manager in the business, Mecham says he
would like to raise more capital to invest -- his firm is small, with $80 million under management. But for now,
the handful of pros who have jumped on his bandwagon are happy to have the fund remain undiscovered. It's
clear that several think they're onto something special.
After the awkward New York meeting, O'Brien, who runs Gold Coast Wealth Management, was sufficiently
intrigued to do more digging -- and after spending months talking with Mecham and checking his results, he got
on board, investing more than $1 million with the Utah unknown. "To use a sports analogy," O'Brien says, finding
Mecham was like "one of the rare few times when a star free agent becomes available in the beginning of his
prime."
It's sensible these days for investors to approach the story of any stock market wunderkind with caution -- all the
more so in the private-investment world, where money managers operate without the checks, balances and
scrutiny that large mutual funds endure. Many such funds don't have to register with the Securities and Exchange
Commission, especially if they're small and if big research companies like Morningstar don't track their
performance. With the minimum stakes in such funds often very high -- at Arlington Value, the ante is typically at
least $1 million -- investors have an even bigger incentive to do their own due diligence. (O'Brien, for instance,
says he spoke to Arlington's auditors to confirm the investment figures, then did a background check on the
auditors.) Factor in that the history of Wall Street is littered with the careers of investment hotshots who flamed
out, and betting on a manager ultimately becomes a leap of faith.
Rul e-Breaker's Rul es
Money pros who know him say none of Allan Mecham's investing tactics are astonishingly difficult --
but for various reasons, most investors don't use them.
Ignore the economy. Where is the economy going next quarter? Where is the S&P headed? Mecham says he
ignores those issues; instead, he looks for stable, defensive businesses that can thrive whenever bad times come.
Don't diversify. Most mutual funds own dozens or even hundreds of stocks (regulations usually require them to
own at least 15). But to outperform with a big portfolio, a manager has to outsmart the market simultaneously on
a raft of securities. Smaller funds and private-investment funds, which are not under the same requirements, can
rely on just six or eight stocks.
Don't sweat the spreadsheets. Many Wall Street analysts build elaborate financial analyses to calculate a
company's earnings growth and other patterns. But some say it's more productive to use that time trying to
understand a company and its industry -- the management, the competition, the customers and so on.
Think decades, not quarters. Shareholders and managers tend to focus on companies' announcements of
quarterly or annual earnings, and whether they beat or miss analysts' estimates. But some managers -- including
one Warren Buffett -- say it's more useful to try to figure out where a company will be in a decade or more.
Don't just do something. Stand there! One of the toughest things for investors to do is to sit still and do
nothing -- especially when nervous clients demand that they respond to short-term fluctuations in the market. But
most of the time, say a few contrarians, inactivity is the right longer-term move. It's about "keeping emotions from
corroding the decision process," says Mecham.
In Mecham's case, that faith resides in someone whose background is highly unusual for this industry. Mecham
attended a community college and the University of Utah for two years -- but soon after starting an investment
club, he says, he found his schoolwork boring by comparison. He would read books about investing and
business. "I was 19," he recalls. "I was staying up till 3:30 a.m. devouring this stuff." Salt Lake City is a cohesive
town where people know each other, and a classmate knew people at Wasatch Advisors, a local mutual fund
company. Mecham landed a job there and eventually decided not to go back to school, choosing to stay on with
the firm instead.
Mecham's Wasatch bosses say they remember him as a good, but not unusually good, employee who made one
memorably successful stock pick, recommending that the firm buy a health-services company that did quite well.
Still, it was only about a year before Mecham decided he could run money himself. He raised seed capital -- less
than $200,000, he says -- from a handful of local investors led by Robert Raybould, a former real estate
developer who is the father of Mecham's childhood friend Ben Raybould. And in 1999, Mecham launched his
fund -- at the well-seasoned age of 22.
Since then, word of mouth has drawn more assets to Arlington, with Ben Raybould acting as Mecham's partner
and the fund's main salesperson; regulatory filings show that the firm has about 120 investors, with more than 75
percent of them identified as "high-net-worth individuals." According to Raybould, of the $80 million in the fund,
about half is investors' principal, and the rest, profit. But Mecham says his habits today are roughly the same as
they were back when he had $200,000 to invest. He sits in that armchair by the window, carefully reading
company filings and other records from atop a giant pile of material that he prints out each day. (Mecham prefers
to read only on paper, not online -- old school.)
His investment approach will be familiar to anyone who has been even a casual follower of Buffett. Mecham
looks for businesses with great long-term prospects, great management, strong cash flow and big defensive
"moats," or barriers to entry for potential competitors. And he stresses the importance of sitting still and doing
nothing. "Activity is the enemy of returns," says Mecham. "If I find two new ideas a year, that's phenomenal."
Two ideas a year adds up to a pretty small portfolio -- Mecham typically owns between six and 12 stocks.
(That's one thing that sets him apart from mutual fund managers; because of industry regulations on
diversification, traditional funds typically have to have at least 15 holdings.)
The names of the stocks from which he has made his money over the years tell a lot of the story. They're not
exactly glamorous or sexy businesses. (Mecham has never owned Apple. "Our portfolio is not one to get you
excited," he jokes.) Some are well known, such as PepsiCo, fast-food giant Wendy's, health care firm Wyeth,
consumer-products company 3M and Buffett's Berkshire Hathaway. Others are less so, like Watsco, a $2
billion company that's the U.S.'s largest distributor of air-conditioning equipment and supplies. Mecham says he
loves the company's management and business model, but the choice was an industry pick as well -- in much of
the country, he notes, when your air-conditioning system breaks down, getting it fixed "isn't a want, it's a need."
Another little-known favorite, Heico, makes components for jet engines. Mecham's argument for the stock is
brief, straightforward and Buffett-like: There are huge barriers to entry, he says, the replacement cycle is driven
by regulation, and customers are not aggressive about demanding lower prices.
Indeed, Mecham can tell a good story like this about any stock he owns. But he writes these stories by himself,
based on his own research -- unlike most fund managers, he generally doesn't meet company management.
That's partly a function of his fund being small; he's not in a position to buy huge stakes that can make or break a
company. But Mecham doesn't like meeting management even where it's possible. "Management is usually
likable," he says. "They'll never tell you things are going to hell in a basket." Indeed, Arlington's worst patch came
from getting too close to a company: local Internet retailer Overstock.com. Ben and Robert Raybould take the
blame for persuading Mecham to invest in it and then persuading him to hang on when the stock cratered in
2005. Mecham called the decision "management by committee." The fund dropped by a third that year, while the
market rose. Mecham argued with his backer, and in the aftermath, Raybould agreed to leave Mecham alone.
(Overstock.com President Jonathan Johnson declined to comment about the stock price, but says he knows and
likes Mecham.)
It was a very different story in 2008, Wall Street's annus horribilis, the year of Bear Stearns and Lehman
Brothers. The financial meltdown was an event that blew up almost every smart money manager from Boston to
Beijing. The S&P crashed 37 percent. Most actively managed stock funds did worse, and those that cut their
losses often did so by fleeing stocks for cash. Arlington? It doubled down, loading up on stocks that would do
well in a downturn.
An El i te Cl ub
A 400% gain, which turns a $100,000 stake into a $500,000 jackpot, is a hall-of-fame feat for money
managers. Below, some of the few who have pulled it off.
Warren Buffett
Holding company: Berkshire Hathaway
Market cap: $191 billion
The 400% run: 80 Months. july 1989-February 1996
The Oracle of Omaha has punched his 400 percent membership card more than once. This run, capped
with a 57 percent gain in 1995 alone, got a boost from Buffett's famous investment in Coca-Cola, which
he bought in 1988. Berkshire's recent returns haven't been as dramatic, but the company largely managed
to avoid stumbles that have tripped up other well-known managers over the past decade.
Kenneth Smi th (wi th others)
Fund: Munder Growth Opportunities (MNNAX)
Assets: $460 million
The 400% run: 17 Months. october 1998-February 2000
This fund, formerly known as Munder NetNet, epitomized the industry's embrace of the dot-com era.
After it nearly tripled investors' money in 1999, its assets ballooned to more than $11 billionand then
the bubble burst. In the three years that followed, the fund lost 85 percent of its value. Over the past
decade, though, Growth Opportunities, which has shuffled its management team, has beaten the market
handily.
Bi l l Mi l l er
Fund: Legg Mason Capital Management Value Trust (LMVTX)
Assets: $2.6 billion
The 400% run: 85 months. April 1994-April 2001
Miller, who quintupled investors' money in just seven years, attributes gains during this period to savvy
tech calls: buying names like AOL and Dell early, then selling ahead of the tech crash. But he will be
stepping down from the fund in April on a less triumphant note. After a series of big bets on banks went
sour during the financial crisis, he has trailed the S&P 500 in five of the past six years.
Sam Stewart, Robert Gardi ner, Dani el Chace
Fund: Wasatch Micro Cap (WMICX)
Assets: $275 million
The 400% run: 90 months. november 1999-April 2007
This fund managed a four-bagger in less than eight years by finding bargains among companies valued
below $1 billion. The bad news: Small firms "struggled mightily" when financing dried up during the
recession, according to Wasatch founder Sam Stewart. Micro Cap lost roughly half its value in 2008, but
investors who stuck with it have beaten the S&P 500 by three percentage points a year, on average, over
the past decade.
-- By Ian Salisbury
One was AutoZone, the chain that made more than $8 billion in revenue in 2011 selling car parts directly to
consumers. Mecham had been building a stake since 2005, and he was convinced it was a "countercyclical
stock" that would thrive even in a poor economy -- when consumers are hurting, he explains, they keep their old
cars longer and fix them themselves. AutoZone stock gained more than 16 percent in 2008; since then, it has
more than doubled. Mecham also zeroed in on Canadian insurance company Fairfax Financial Holdings. Wall
Street had dumped the stock overboard in the panic, but Mecham had actually read the company's filings -- and
he knew most of its assets were in Treasury bills and other ultrasafe positions. Arlington added to its already
large position, and Fairfax rose 12 percent in the last two months of the year. The result: Arlington as a whole
was up a remarkable 11 percent in 2008 and another 59 percent in 2009. No public equity mutual fund in
America came close.
So why don't other mutual fund managers think and act like this? Bonnie Sewell, a wealth manager at American
Capital Planning who oversees money for high-net-worth clients across the country, says concentrated portfolios
can prove incredibly volatile. She says she wouldn't bet more than about 10 percent of a portfolio on an
individual manager like Mecham, no matter how good, because of the inevitable risk -- or even likelihood -- that
what goes up will come down. Regardless of their strategy, even managers with terrific track records can get
cocky or complacent, or they can just make mistakes.
As investing sages like Buffett often point out, people on Wall Street are also subject to enormous career
pressure to conform. If they took a big bet, like Mecham's on Fairfax, and it didn't work out, clients would bolt,
and they typically would be fired or pushed out. But no one would get fired for missing an opportunity like that.
The same goes for how managers react to short-term news in the market. Mecham says one of his big
advantages over Wall Street managers is that he is free to ignore "noise" -- like the quarterly obsession over
short-term earnings, which often drive stock prices sharply up and down as investors stampede in herd behavior.
The first question he asks of any investment, he says, is where it will be in 10 years or more: "You have to have a
high degree of confidence in the cash flows over the next decade." Mecham says that in contrast, the typical
mutual fund manager is like someone who's hired to run a marathon -- only to have his clients announce that
they're going to compare his time every 100 meters with that of an Olympic sprinter running a dash. "It's a
myopic process," he says, with resignation.
Where does Arlington head next? Mecham says he won't compromise his strategy to play the Wall Street game.
That leaves Ben Raybould battling to market a fund, and a manager, that many other money managers can't even
understand. Mecham is bemused that so many people expect him to hold a broad basket of stocks and follow a
benchmark, such as the S&P 500. "It's laughable to think that in this competitive world, you're going to find
brilliant ideas every day," he says. "The world's just not set up that way."
More News from MarketWatch
Top Stories
Trending
Recommended
Your safe money-market fund may be at risk
How two days as a car salesman made me a smarter car buyer
Obama to delay executive action on Immigration
Apple, GoPro gains help boost tech stocks
MarketWatch Partner Center
Brett Arends
Brett Arends is a MarketWatch columnist. Follow him on Twitter @BrettArends.
We Want to Hear from You
Join the conversation
Comment
Powered by Livefyre
More Headlines
Sign in
3 people listening

0 comments
+ Follow Share Post Comment
Retirement
How two days as a car salesman made me a smarter car buyer
Personal Finance
Porsche 911 Carrera makes shift work wonderful
Personal Finance
10 things life coaches wont tell you
Personal Finance
IKEA channels Apple in bookbook product announcement
Industries
MarketWatch
Site Index
Topics
Help
Feedback
Newsroom Roster
Media Archive
Premium Products
Mobile
Company
Company Info
Code of Conduct
Corrections
Advertising Media Kit
Advertise Locally
License our Content
Broker Center
Your Ad Choices
Dow Jones Network
WSJ.com
Barron's Online
BigCharts
Virtual Stock Exchange
Financial News Online
WSJ.com Small Business
Visit Full Site Back to Top
Copyright 2014 MarketWatch, Inc. All rights reserved.
By using this site you agree to the Terms of Service, Privacy Policy, and Cookie Policy.
Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-
day data provided by SIX Financial Information. Intraday data delayed per exchange requirements. S&P/Dow
Jones Indices (SM) from Dow Jones & Company, Inc. All quotes are in local exchange time. Real time last sale
data provided by NASDAQ. More information on NASDAQ traded symbols and their current financial status.
Intraday data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices
(SM) from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is at
least 60-minutes delayed. All quotes are in local exchange time.
Enter a symbol or keyword
Advanced Search
LatestNews

The 400% Man - MarketWatc14h

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

The 400% Man - MarketWatc14h

Hochgeladen von

Copyright:

Verfügbare Formate

9/6/2014 The 400% Man - MarketWatch

Das könnte Ihnen auch gefallen