Value investor Donald Yacktman, 72, has returned an annual average of close to 10% over the past 15 years in his two flagship funds — double the S&P 500 Index.
What is the biggest risk that investors face right now?
The stock market is not cheap.
Is that why you’ve been holding a lot of cash lately?
Yacktman Asset Management manages close to $30 billion. In 2007 and today, we’ve had a fair bit of cash. We were at about 20% at the end of the third quarter of 2013. Usually, as the market goes up, our cash tends to build. Because we’re investing from the bottom up, not the top down, the cash is a residual. That’s telling you how hard it is to find stocks to buy.
What about the argument that investors hire a manager to pick stocks, not to hold cash?
Our primary goal is to protect our clients’ money, and there are two sides to that. One is protecting it against bad decisions—buying things that are overpriced. The other is to protect against inflation. You have a tough period now, because cash doesn’t earn anything. If it earned something, our cash position would probably be even higher.
Your holdings aren’t little-known stocks. Are you just buying at the right price?
Yeah, price is critical. But the second thing is time horizon. We view every stock as if it were a long-term bond. And we’re looking at risk-adjusted forward returns. The Cokes, Pepsis and P&Gs become our triple-A bonds.
So how do you identify a bargain?
Companies that tend to have consistently high returns usually have low fixed assets and low cyclicality. You will rarely see things like airlines, automobiles or steel companies or, for that matter, banks in our holdings.
Your staff is very small, right?
We have about a dozen full-time people. Five are what I would call analytical staff. We aren’t into body count. When I organized the company, I had the goal of trying to farm out everything except for the judgment part. Basically, the only thing we do is make purchases and make analytical decisions. There are a few critical variables, and most of them can be figured out on the back of an envelope.
How do you decide when to buy?
The easiest is when the market comes down. By the end of 2008, we had all our money invested. I’d said, “If you can’t find bargains in this environment, there’s a disconnect.” Then the market went down another 20%. In this business, you’re wrong almost all the time. It’s just a matter of degree, because nobody buys at the bottom or sells at the top.
What are other good times to buy?
Another one is an industry thing. For instance, you have a lot of health care issues in the United States. Everybody gets nervous, and they knock down the price of companies in that industry.
Have you bought any health care stocks recently?
Things in that area were disruptive in 2012. We now have big positions in C.R. Bard, Stryker and Johnson & Johnson. So three of our top 12 are in the medical device area.
What about BlackBerry? You were a prominent investor recently.
That’s an example of something company-specific. We’ve had back-and-forth positions in BlackBerry within the last year or two. When it got creamed, we bought it. We ran the share price up into the teens and we eliminated probably 90% of it. We should have got rid of all of it.
And you made money on it?
So how do you get out of a dog like BlackBerry?
I think the secret is to be incredibly objective and patient. First of all, don’t buy more. Also, stocks tend to fluctuate about 50%, from low to high, over 12 months. You’ll usually have opportunities to re-evaluate and exit.
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