March 21st, 2016
Via Forbes, an interesting look at Allan Mecham:
A short while ago I was at a wedding in San Francisco when someone came up to me, clasped my hand in both of his, and began thanking me effusively.
He then introduced me to his wife, who also began thanking me.
The reason? Just over two years ago this couple had read an article I had written for Smart Money magazine about a young, unknown college dropout in Salt Lake City called Allan Mecham (The text of that article can be read here). Mecham ran a tiny investment fund, I reported – and was shooting the lights out. After reading the article, the couple had investigated Mecham further, and had then invested a good chunk of their savings with him.
The result? They’ve doubled their money, or better. In two years. Last year alone Mecham was up 52%. After fees.
No wonder they were so happy.
(These numbers are all pretax, of course).
For the past thirty years everyone on Wall Street has been looking for the Holy Grail of money managers, the “next Warren Buffett.” It’s always dangerous to make these kinds of predictions, but if Allan Mecham – currently just in his mid-30s - isn’t the genuine article, he’s doing a remarkably good impression of it.
He’s been crushing his competitors, and the indexes, since launching his investment firm, Arlington Value Management, in the final days of 1999.
The attached chart shows how you would have fared if you had invested a notional $100 in his initial fund at the start of 2000, and then rolled that money over to his new flagship fund, AVM Ranger, when it launched in 2008. The chart also shows how you’d have fared over the same time if you’d invested in Vanguard’s Total Stock Market index fund, which tracks the total U.S. stock market, or Warren Buffett’s investment vehicle, Berkshire Hathaway, over the same time.
Yikes.
The Mecham chart is net of fees. If you look at the gross returns – in other words how he would have done if he were just managing his own money – he isn’t up elevenfold. He’s up seventeenfold.
(Incidentally Arlington Value is a private investment fund, meaning it is only open to institutional money managers and qualified private investors).
My article about Mecham in Smart Money was the first to appear about him in a mainstream publication. He is publicity shy and reluctant to talk. I was initially skeptical when I first began reporting on Mecham. After all, how likely was it that a complete unknown could be turning in a performance unlike anything seen on Wall Street? I spent months talking to Mecham and Raybould, to their investors, to money managers who had invested in their fund, to former employers of Mecham’s, to their current auditors, and to their present auditors. I sat down and interviewed one money manager for hours about the due diligence that he, in turn, had done into Mecham.
I couldn’t find a chink in the armor.
The article appears to have opened the spigots to investors. At the time Mecham and his partner, Ben Raybould, had less than $100 million under management. Today it’s $470 million.
(If only Smart Money had fared as well. Soon after the article appeared,“Chandelier” Lex Fenwick, the erstwhile chief executive of Dow Jones, closed the venerable magazine down as part of the bizarre campaign which eventually secured him a fat severance check. On the other hand, when I recently sat down for lunch with Raybould, he paid for the meal and my iced tea, so my personal cup runneth over.)
What makes Mecham’s story especially interesting is that he has produced this extraordinary performance without being an astrophysics PhD or having access to a more powerful computer than anyone else. Most investors turn gooey-eyed over talk of “proprietary algorithms” or quantitative analysis. The more complicated it sounds, the more excited they get.
But Mecham hasn’t done things that are really complicated. He’s done things that are really quite simple. One of his biggest investment successes in recent years was to borrow money at low short-term interest rates and use the money to buy up a lot of stock of Buffett’s Berkshire Hathaway, at a time when that stock was very low and very cheap in relation to annual sales, per-share earnings and net assets.
Mecham doesn’t even like to build spreadsheets. He doesn’t care about the next quarter, he cares about the next ten years. He doesn’t subscribe to expensive data terminals. He rarely even uses the Internet. Mecham downloads company 10-K filings and reads and reads and reads… and thinks and thinks and thinks.
Mecham’s success should give heart to every private investor with a decent brain. It should also give heart to all of us who believe in the power of reason.
No, it doesn’t mean anyone could do this. Maybe no one could. But it does suggest that if someone follows his example they would actually have a decent chance of beating the market over time. The “Bogleheads” – fans of Vanguard founder John Bogle – and index fanatics say that isn’t possible, but Mecham’s record suggests otherwise.
What are Mecham’s rules? Here’s what Arlington says:
- “We believe that vigilance toward risk is central to achieving strong returns.
- We view stock as ownership in a business.
- We let market volatility work to our advantage.
- Arlington strives to be conservative, and invest with a margin of safety.
- We exercise patience and discipline to only invest in exceptional opportunities.
- We focus on businesses we thoroughly understyand.
- Arlington focuses on companies with staying power. We look for long-term durability and low rates of change.
- We look for honest, intelligent management teams with proven track records.
- We only invest when the price is attractive, which provides both a margin of safety and favorable prospective returns.”
Successful investing, according to an old saying on Wall Street, isn’t easy, but it is simple.
This entry was posted on Monday, March 21st, 2016 at 4:50 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
Educated at Yale University (Bachelor of Arts - History) and Harvard (Master in Public Policy - International Development), Monty Simus has lived, worked, and traveled in more than forty countries spanning Africa, China, western Europe, the Middle East, South America, and Southeast & Central Asia, and his personal interests comprise economic development, policy, investment, technology, natural resources, and the environment, with a particular focus on globalization’s impact upon these subject areas. Monty writes about frontier investment markets at www.wildcatsandblacksheep.com and geopolitical pressures in the global agricultural sector at www.seedsofarevolution.com.