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  • Chris Mayer

Trade for Show, Hold for Dough


I’m a sucker for investing memoirs, letters and columns written by practitioners. Even when they are bad, they still offer something useful to learn. I feel like I’ve lived vicariously through all their experiences. And I hope it makes me a better investor today. Besides all that, I just enjoy reading them. The ups and downs of the investing life, the intellectual puzzles, the cast of characters and flow of events, the high stakes involved – hard to beat it.

Anyway, during this lockdown, I have occasionally re-read or dipped into older books sitting on my shelves. In the last few days, I reread portions of Bullishly Speaking.

Bullishly Speaking

“Buying into good growing companies and having the willpower and patience to hold one’s position over a long period of time permits the magic of compound growth to come into play; the results that can be attained are almost unbelievable.”

- S. Allen Nathanson, Bullishly Speaking

S. Allen Nathanson wrote a series of columns called “Bullishly Speaking” from 1966-1973 (with a few articles in 1980). His friend David Seidenfeld collected these and published them. (Link)

The columns are quirky and digressive and sometimes feel dated, but they are always well-written and, at times, even witty. The investing wisdom is timeless.

Nathanson firmly believed the best way to big money in the markets is to buy good companies and hold on. (“Trade for show, hold for dough,” as he liked to say). No surprise, I agree with him.

But as he says, no matter how much you read about it or are told about it, you won’t become sold until you have “an experience…”

What kind of experience? A mystical visitation by the investing gods? A thunderbolt to the brain that finally makes you give up on trading low price-to-book stocks? No.

The experience Nathanson means is holding a stock for many years and seeing it rise multiples of what you paid for it.

To whit: You buy a stock that trades at a reasonable multiple, thinking it might increase earnings per share 12% or so a year. Over the next seven years, through peaks and valleys, the stock more or less winds up where you thought it might. You double your money. Slow work, yet a nice result.

You keep holding it. Then over the next seven years, earnings growth picks up a bit and the multiple expands. At the end of fourteen years, you find yourself with a stock that trades for 8-12x what you paid.

A pretty extraordinary result, but it took a long time. And it involved a long stretch of time where it was boring, where you had to sit on your hands despite many stocks zipping by yours. You had to do nothing, even though the headlines of the day – the siren songs of finance – implored you to do something…

“If you have ever had this happen to you then you really know what the stock market profits are. I’ve had it happen to me enough times to tell you that there is no greater thrill in the stock market. In addition, occasionally – but not too often and when I least expected it - the earnings and the price-earnings ratio have risen in quite a short amount of time, and poof, I was pleasantly surprised to find myself hold a stock selling at many times what I had paid for it.

“It takes experiences like these to solidify one’s philosophy that the key to success in the stock market is based on long-term investing and to realize that those who pay too much attention to the wiggles have picked a most difficult, if not impossible, way to be financially successful in the marketplace.”

Big returns are back-end loaded. That’s the key message. Nathanson is probably wrong about having to have the experience. I think people can learn it before they do it. But perhaps there is some truth in what he says.

The company I want to write about today is one I think Nathanson would’ve liked.

Brown & Brown: Resilience

The cover of Brown & Brown’s 2019 annual report reads “Built to Last.” That seems right. With a recipe of an ownership-driven culture, low leverage and strong free cash flow, this insurance broker has been a durable winner. (I first wrote about Brown in a June post).

If you invested $10,000 in Brown & Brown (ticker BRO) when it went public in 1993, you would’ve had $481,500 at the end of 2019 – not including dividends.

But, it’s not as if it went up every year. And there were stretches where it did nothing at all. For example, in 2006 it was $16 per share. By October of 2015, it was still $16. Between these two points, it had been nearly cut in half. So that’s 9 years. And for most of that time, you were under $16.

This happened in the middle of a 10x run. In 2000, shares traded hands for about $3 per share. Today they go for $35 – and the shares were as high as $48 and change in February.

So, to reiterate: If you bought Brown & Brown in 2000 and left it alone for 20 years, you were up more than 10x. That included 9 years where the stock went nowhere and a stretch where it nearly halved.

This is why investing is hard. This is why nabbing multi-baggers is hard. (Those elusive 100-baggers!) It requires what seems like the simplest of things – that you just hold on – but turns out to be brutally difficult for most everyone.

I expect Brown will continue their winning ways, even through the pandemic. Brown reported earnings earlier this week. They had a strong quarter, but the market seemed to shrug it off. The look ahead is everything now, and it’s mostly guesswork…

I am not concerned. This is one of the most resilient businesses in my portfolio. It has increased revenue every year it’s been public, except 2009. Sales that year fell 1%.

Of course, the pandemic is different. Still, most of Brown’s people are working from home. Insurance policies are still being renewed. If there were a year-over-year decline in sales, I would expect it to be slight. We will see. It doesn’t really matter anyway. The long-term value of the firm and its ability to grow is barely affected by what happens this year.

As I mentioned, Brown & Brown is an insurance agency, which seems like nothing exciting. But the business has some wonderful qualities. And it is well managed with thoughtful capital allocation.

First, this business generates a lot of free cash flow. In the last decade, on average, it converted about 24% of sales to free cash flow:

And that free cash flow stream has been growing:

Over the last 12 months through 3/30, Brown generated $640 million in free cash flow. At yesterday’s close, you’re getting better than a 6% free cash flow yield.

The company grows through acquisitions, which is the primary way it spends its free cash flow. Usually I’m wary of acquisitive companies. Most don’t do it well and they destroy value. But it appears to be a core competency at Brown given their track record. In 2019 alone, they acquired 23 agencies and $105 million in revenue. They will also opportunistically buy back their stock.

There is nothing gaudy here. No blazing growth numbers or eye-popping margins. Just good numbers, steadily reported, year after year… and over a period of years, you get that magical result that so captivated Nathanson.

Brown also checks some hard-to-check boxes for me. I want high insider ownership. Ideally, I want the people in charge and the employees to own a lot of stock. Incentives and skin in the game are important to me. At Brown & Brown, the management and employees -- teammates as they call them -- own about a third of the company, starting with the Brown family at ~15%.

The company traces its roots to 1939, when Adrian Brown opened an insurance agency in Daytona Beach, FL. His son, Hyatt Brown, joined the family business in 1959. He is chairman today and still owns a lot of stock. His eldest son, J. Powell Brown is CEO. He’s been groomed for the role from a young age. I think he is a capable CEO and a good capital allocator. Just listen to his conference calls or read his annual letter.

Here is an excerpt from the 2019 letter:

“At Brown & Brown, we think long term and not merely quarter-to-quarter. We think about next year, three years from now, five years from now, and beyond, with our focus on cash flows and how to invest them wisely. By operating this way, we have consistently outperformed the S&P 500 and the other publicly traded insurance brokers…

“These results would not have been possible without our teammates, the commitment we have to our customers, and our unique company culture. We also deliver the highest cash flow from operations as a percentage of revenues of any of the publicly traded brokers, on average approximately 100% higher. We have been doing this for decades, even while growing the company significantly. We believe at the end of the day, growth of cash and conversion of revenues into available capital are key to driving shareholder value.”

That’s what you want to hear. I think the management team is focused on the right things, which is no small matter. It’s another hard-to-check box for me.

Culture is, in general, under-appreciated by most investors. By culture, I mean the sense of doing things right. It means treating your employees and customers well. It means having a sense of purpose and fair play and a way of behaving that permeates the organization. At Brown & Brown, it’s almost palpable in everything you read and everyone you talk to. I don’t know how you’d test it, but I suspect a strong culture correlates with long-term value creation.

There is a lot more to the business than what I’ve covered in this too brief note. But I wanted to share it because Brown & Brown exemplifies what I’m looking for. (If you know any businesses like this, please write me!) Brown & Brown also stands as a great example of the virtues of buying and holding good businesses. The results you can attain, as Nathanson says, are “almost unbelievable.”

Brown & Brown is one I intend to sock away and let the magic of compounding do its thing.

Thanks for reading!


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Published April 29, 2020

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