• Chris Mayer

The Best Investors of All Time

Who are the best investors of all time?

You probably thought of Warren Buffett or Peter Lynch or John Templeton or other renowned money managers, past and present.

But did you think of the Walton family, the Rales brothers or Jeff Bezos?

Why not?

Yes, we tend to think of them as entrepreneurs. But they do own stakes in public companies just like any of those other investors. In this case, the public companies are Walmart, Danaher and Amazon, respectively. The returns on these stocks have been, well... let’s just say they would be the envy of nearly any traditional money manager you care to name.

Let’s think about Sam Walton for a moment. He opened the first Walmart store in 1962 at the age of 44 (then called Wal-Mart). In 1970, he took the company public. The IPO generated nearly $5 million, which doesn’t sound like much these days. The Walton family retained ~60%, which put the overall equity at about $13 million. The Walton family stake was worth about $8 million.

By 1985 -- a mere 15 years later -- Sam Walton was the richest man in America, per Forbes magazine, with a net worth of $2.8 billion. So, $8 million to $2.8 billion in 15 years -- a 350-bagger since the IPO. He stepped down as CEO in 1990 and died two years later with an estimated net worth of $25 billion, another 10x from ‘85. (I know I’m being a little casual about what’s Sam’s and what’s Walton family money, but I don’t think it matters much).

Fantastic returns. How did he get them? Essentially, he owned a great business and he didn’t sell. Why can’t we do the same?

The thoughts above are inspired by Mohnish Pabrai, the founder and portfolio manager of Pabrai Funds. He spoke at MOI’s Best Ideas conference on Monday. He talked about Nicholas Sleep, who managed Nomad Investment Partners from 2001-2013 and racked up net return of 18% annually. Pabrai recommended his letters, which I second. (You can find the complete set here).

Pabrai mentioned how Sleep told him the best investors were entrepreneurs who kept stock in their businesses. If we want the best returns, why don’t we adopt the same approach as these people? Why bother with economists, Fed watching, sell-side analysts, quarterly earnings, etc. etc.? Why bother with “taking profits” “trimming the position” and the like?

I love this message and I have talked and written about it before myself. In my book 100 Baggers, I note how many of these great stocks also have a person’s name attached to them that is almost synonymous with the business -- so much so that all I have to do is drop the name and you can think of the company. (I say “Bill Gates” and you say…)

As Pabrai said, no professional investor held Walmart from the IPO to, say, even 1985. We don’t know for sure, perhaps somebody did. But the point is the vast majority clearly did not. Many investors bought and sold Walmart over that time frame. Surely they would’ve been better off just sitting on the stock -- as the Waltons did.

Sleep wrote about this in his letter:

“Investors are broadly rational people (they all knew that Wal-Mart was a wonderful business) and fund managers operate under healthy profit incentives that ought to foster good outcomes, so why is it that no one but the founding Walton family owned Wal-Mart all the way through?” [Underline added].

Gosh, what a great question. I think reflecting on this question unlocks a wealth of investing wisdom.

First, we have to acknowledge, there are many possible answers to this question. One may be that many investors thought they were being smart and doing the right thing by selling when Walmart seemed to get expensive... and adding the proceeds to businesses that seemed less expensive and more attractive somehow. Sleep mentions this.

But investors frequently get this calculus wrong… and getting it wrong with a stock like Walmart is a catastrophic error as far as your returns go. In fact, any sale for any reason was a mistake. (Obviously, barring some urgent or unavoidable need to tap the funds…)

How to mitigate against making this mistake?

I think Sleep gives a great answer in his letter. I can’t say it any better so here is the excerpt:

“It could be argued that lots of things had to go right for Wal-Mart to grow for forty years. That is certainly true but, at its heart, a very few simple things really mattered. In our opinion, the central engine of success at Wal-Mart was a thrift orientation fueling growth with the savings shared with the customer. The culture of the firm celebrated this orientation and reinforced the good behavior. This is the deep reality of the business. This should have had the greatest weighting in the minds of long-term investors even if other things looked more important at the time. Instead investors may place too much emphasis on valuation heuristics, or margin trends, or incremental growth rates in revenues or any of the list above, but these items are transitory and anecdotal in nature.” [Underline added].

“A very few simple things really mattered...” and yet, to sell, investors must’ve focused on all kinds of things that didn’t matter over the long haul. I like that phrase, too, about investors paying too much attention to items “transitory and anecdotal in nature.” Yes.

The answer to Sleep’s great question, then, seems to be investors put too much weight on factors a business owner does not. A business owner seems to have a different set of concerns, focused instead on the “central engine of success” of the business and the culture that keeps it alive and thriving.

I’d say as long as the business continues to generate strong returns on capital and grows and seems likely to do it for years yet… probably best to leave it alone. You want to put as much capital as you can stand in these kinds of businesses.

To invest this way requires a complete change in the mindset of most people. And it explains why more investors don’t have 100 baggers to their credit. I live in a glass house on this topic myself. It has taken me more than a quarter-century to get here. That’s years of reading and reflecting and making a lot of mistakes. I have many scars. But I am also not much older than Sam Walton when he opened that first Walmart. Plenty of time yet…

Anyway, part of that change in mindset means a total change in the way you filter, process and weigh information. Look away from the economic forecasts, the quarterly earnings guesses, the precise valuation models, the charts, the news… Instead figure out what the “very few simple things” that really matter are, and focus on those.

And unlike a business owner, we have one great advantage -- we can own more than just one great business. We can create a portfolio of great businesses. We can buy a dozen and let them run. We can be wrong about a bunch and still get an excellent result.

I think if you are a business owner already, you have a better sense for how to behave as an investor in public equities than people who have never owned their own business. Pabrai mentioned how he did not entertain any offers for the GP of Pabrai Funds. That’s his business. He never thought of selling it, even when people approached him interested in buying a piece. He just said no. Because he knows it’s a really good business and he believes it will be worth a lot more in the future.

I am reminded of my banking days. (I left corporate banking in 2004, after a ten-year career). I had a customer who owned a business that he could’ve sold for a big number to a regional acquirer. I sometimes wondered why he didn’t just take the money and be done. But now, years later, I understand. He knew whatever the number, it was not enough. He would be giving it away. He understood the central engine of his success and was confident it had many years to run yet. He was right. A few years ago, I saw he finally did sell. It was for a number that would’ve been unimaginable 15 years earlier.

The power of compounding. We investors talk about it a lot, but it seems the great entrepreneurs, with their unshakable ownership stakes in really good businesses, really reap the rewards. We should learn to be more like them.

Thanks for reading.


Published January 19, 2021

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