Master Series: David Rolfe
If you enjoy learning from other investors, John Garrett’s Masters Invest website is a goldmine with a vast library of resources including interviews with some of the most successful investors around, some not particularly well known. These interviews show how even these investors learn from others though not necessarily to emulate them but evolve their own styles off them. Here’s one with David Rolfe of Wedgewood partners.
David starts of by defining his ‘edge’:
“Every successful active manager has a competitive edge. And it must be repeatable. Focus is our edge. We have layered in a synthesis of the classic tenets of both growth company and value investing. Specifically, we want to own a select list of companies that are competitively advantaged earning high returns on capital, but also have the ability to reinvest a healthy portion of retained earnings at continued high rates of capital. We then try to have patience to buy at intelligent valuations. Rinse and repeat. But not too often. Our annual portfolio turnover is typically between 20 to 25%.”
Much like the legendary Howard Marks who earlier this year in a memo shared how he changed his mind about technology investing and valuations, David shares why an open mind is key to investing:
“Investing in ‘technology’ stocks has evolved over the years. Particularly in the so-called capital ‘V’ value crowd….It wasn’t that long ago the value investing mindset was ‘there’s no such thing as value in tech, period. Technology stocks don’t have ‘moats.’ You don’t know what the business models are going to look like, so how can you even estimate five or ten years out’….Well, fast forward today, and much has changed. ‘Tech’ has become quite common place across the investment style spectrum. Heck, even notable ‘deep value’ guru Seth Klarman at Baupost currently has big positions in both Facebook and Google.
…we first invested in Apple in ’05. It wasn’t that long ago obviously that Apple was mainly hardware and some software and people viewed it as classic hardware tech, maybe a bit consumer discretionary tech. It really wasn’t doing much enterprise business. Then all of a sudden, the iPod appears and boom, then here comes the iPhone and the evolution of Apple to a consumer staple began in earnest. Heck, the early iPods and iPhones were always at my kid’s heads. To my kids, it wasn’t even discretion, it was a utility. Sauerkraut and asparagus are discretionary to my children (laughs). So Apple’s a great example I think of how tech has morphed, and next thing you know, Buffett has a multi-billion dollar position in Apple, you know, the guy who swore off technology.
About how his thinking about valuations has evolved in the face of falling cost of capital:
“Where we have evolved, and I think every investor has had to evolve is the Fed’s growing influence in financial markets, even back to the infamous Greenspan Put back in the late 1980’s. Back in the day the phrase ‘Don’t Fight the Fed’ was stamped on rookies’ foreheads on the first day in investing boot camp. We can thank Marty Zweig for those pearls of wisdom. When one looks back on the DotCom boom/bust and the housing boom/bust and today with QE Infinity, it seems that the Fed has become both the arsonist and the fireman. Prior to say 2012, before central bankers barked ‘do whatever it takes’ to today’s yield control, when interest rates were allowed to find more free-market based levels, if a business was growing at say 12%, then the max P/E one might pay would be a high-teen multiple, certainly no more than say 22X unless it was a truly exceptional company. Fast forward today, 35 to 40X is the new 22X in the zero. It’s not the ‘Powell Put’ any longer, it’s become the ‘Powell Trampoline’.
And so what we’ve done over the last number of years is we have not been as steadfast to sell a stock outright because of valuations, we’ve been slower to trim it and conversely pay up a bit and build positions more slowly too. That said, we’ve maintained the discipline to sell even the best of businesses when valuations get absurd. Such was the case of our sale on NVIDIA last September.
When you look at the current valuation of our portfolio, if somebody were to have a crystal ball and they were to show me today the valuation, say, on a trailing or forward basis, if you would show me what the valuation is today, say, 10 years ago, certainly 15 years ago, I would have thought I’d gone mad.
But I think that’s been a rational, intelligent adjustment to make. Let’s face it, growth companies tend to be longer duration assets. Interest rates get lower, the valuation gets higher. We’ve learned or adjusted to the environment. Of course, the catch is that we all know if Powell & Company announce on morning, ‘no more QE’ we all know what would happen to the stock market. It would be October 19th, 1987, The Sequel.”
“I need to have a page in our pitch book on the top 10 worst investment decisions at Wedgewood Partners in our 29-year history. And the one thing they all have in common, it’s not necessarily valuation, it’s we didn’t understand how good and how resilient the business model was. We owned Home Depot for quite a while and we thought there were some problems, and there were for a few quarters or so, but we didn’t get back in. Medtronic, same type of thing, Microsoft, Intuitive Surgical and United Healthcare and Amazon and Analog Devices and Apple Materials! I will admit to you, one of the hardest things when you’re managing public money is on the one hand you have to take the long- term view, but you’ve got this quarterly score card, yearly scorecard, and I’d be less than honest if it hasn’t affected us from time to time. When I think of the money that we left on the table in some of these stocks, it would have … well, the numbers would have been even better.”
Don’t miss the book recommendations at the end.