Three Longs & Three Shorts

Columbia University students interview John Huber of Saber Capital Management

We found this interview with an American fund manager, John Huber, in a newsletter published by the students of Columbia Business School. In this piece, Mr Huber talks about his training & evolution as an investor and his investment philosophy. The piece is interesting because it reinforces learnings on three subjects that we spend a lot of time thinking about: (1) the diminishing relevance of formal education relative to the ability to continuously learn & upgrade skillsets throughout one’s career; (2) the growing relevance of offering high quality investment products with low or no fixed fees whilst sharing in the upside generated by the fund; and (3) the tendency of investors with well-researched highly concentrated portfolios to outperform everybody else.
Starting with the first of these three subjects, Mr Huber says that he actually focused on journalism whilst at university. Serendipity and self-training, rather than a formal qualification, helped him to become a professional investor: “Initially, I didn’t think I’d actually pursue investing as a career because I went to school for journalism; I thought I’d pursue investing as a hobby. My dad was an engineer by trade, but he was an avid investor for his own account, and I thought I’d follow that path. But I picked up a book called “The Warren Buffett Way” at the library one day in college, and that was the first time I’d ever read anything on Buffett’s approach, and it was just one of those game changing moments.
That book articulated a concept that I superficially understood but didn’t fully have ingrained, which was the idea that a stock shouldn’t be thought of as a number on screen, but rather as a piece of a real business run by real people with real assets, and real cash flows…
I spent about seven or eight years investing in real estate prior to setting up my partnership, and that was a great learning experience and a way for me to build up capital that I used to seed the investment firm that I wanted to set up. By about 2013, I had felt like I had enough personal capital saved to launch the partnership. That’s when I started Saber Capital.”
Secondly, with regards to his revenue model and his “skin-in-the-game”, Mr Huber has consciously emulated Warren Buffett: “Saber manages an investment fund modeled after the original Buffett Partnership fee structure. Investors in the fund pay no management fees, and Saber only gets compensated for returns that exceed 6% annually. John and his family have nearly all of their net worth invested right alongside investors.”
Thirdly – and this is the most interesting part of the interview – Mr Huber’s study of a range of legendary American investors has taught him that superior returns can come from a very specific style of investing: “Buffett taught me that a stock should be thought of as a piece of a business and the importance of having a long-term time horizon. Charlie Munger taught me the importance of patience, really waiting for the obvious ideas and doing nothing in between. Peter Lynch taught me the importance of focusing on great businesses that can compound over time. The simple idea is that if you can find one or two big winners, they can do a lot of the heavy lifting for your portfolio over time, and they can make an enormous difference. Those are all philosophies that are core to my approach today….I can say my portfolio typically has between five and 10 stocks. I think the average position in my portfolio is probably around 10%. I consider a double position, or a very high conviction position, to be upwards of 20%. If the business continues to perform well, and the fundamentals continue to move in the right direction, I tend to let those businesses continue to compound over time.
That’s one thing I’ve learned – when you have a great business, the best thing to do is sit on it and don’t touch it. The natural outcome of this is that the best investments in your portfolio become a bigger percentage of the pie…
My empirical observation at the core of my philosophy with Saber is that the best investments in the stock market will come from the best businesses over time. I like the methodical nature of some of the investors like Ben Graham and Walter Schloss, but I think the reality is the world is dynamic and ever-changing. The speed at which information travels is so fast. Competitive advantages that used to be very durable and very long term in nature are now getting attacked and disrupted. I think a lot of the techniques that statistical value investors used to use are no longer relevant. For example, price to book is no longer relevant because most of the assets on a company’s balance sheets are intangible assets now….
Saber’s philosophy is really simple: invest in great businesses. There are two main categories of investments that I think my portfolio has had over time. One is what I call dominant moats. These are really durable, high-quality, strong businesses with great balance sheets and very entrenched business models. They also tend to be mature. They’re not necessarily growing at fast rates. But these are businesses that have what Buffett would call a really strong moat.
The great thing about the stock market that stock prices fluctuate to a much greater extent than the underlying business values. This is common knowledge, but it’s worth pointing out. I have a chart that I’ve updated over the years that has the top 10 mega caps in the S&P 500. It shows you that in any given year, even the largest stocks in the market, the top 10 most valuable and most well-followed companies, have stock prices that fluctuate by 50% or so.
That tells me that stock prices move around much more than underlying values do. Therein lies the opportunity as value investors; there will be times where you can buy these great, mature, well followed businesses at a discount. Those tend to come around every so often, and I have a watch list of companies that I follow. From time to time, you’re able to buy these great businesses at a discount. If you can buy a dollar for 70 cents, and the dollar is growing at 7% or 8%, that can be a nice investment over the medium term, as the market tends to revalue that over time.
Then the second category are what I call emerging moats, and these are the compounders. These are the companies that have really high returns on capital, long growth runways, and are developing a strong lead. Oftentimes they exhibit characteristics like a network effect, or some sort of feedback loop that grows stronger as the business grows, and, they have a long runway for reinvestment. Classic examples of this are stocks like Walmart, Home Depot, Starbucks, back in the ’70s, ’80s, and ’90s, where they could reinvest capital into new store locations at 30% returns for a very long time. That leads to a very high rate of compounding over the long run.
Today, the examples might be companies like Copart, Etsy, or Facebook. One key difference with many of today’s compounders are that their products are often digital, which can be created and replicated instantly at very low marginal costs. Returns on capital of these companies aren’t tethered to constraints of the physical world, and this means many internet businesses can grow to global scale very quickly and can become much larger than we would have previously thought possible….”