Donald Yacktman: catch the wind

In 1999 his fund lost 16% while the market boomed. Investors pulled money out. The board wanted to fire him. All of Wall Street laughed. He still did not buy a single tech stock.

Three years later he was the only one left standing, while everyone else was clearing bodies.

The man in the Timex

In 2012, Donald Yacktman walked into a dinner with investment bankers in Austin, Texas.

He wore khakis. A Timex watch. Ordinary shoes.

At that point his funds managed nearly $15 billion. Morningstar had just named him Fund Manager of the Decade. The fund's ten-year cumulative return was 175%, against 35% for the S&P 500.

When the bankers asked for the secret, he made a weak joke, then said plainly: "Wait to buy wonderful businesses when they're going down. Then hold until they recover, and good businesses almost always recover. You don't need to be in and out constantly. You just need to catch enough favourable winds. And be very, very patient."

That sentence is his entire investment philosophy in one paragraph.

From chemical engineering to Wall Street

Donald Yacktman was born in 1942 in Salt Lake City, Utah. His father was in business, but he knew nothing about investing or finance as a child.

Growing up in the Sputnik era, when America was infatuated with science and engineering, he entered university in chemical engineering. Not out of passion. Because people told him he was good at maths and science, so obviously that was the path.

He switched to economics. Graduated magna cum laude from the University of Utah. Then took an MBA with distinction at Harvard Business School.

In 1968 he joined Stein Roe & Farnham, a well-regarded Chicago asset manager, and stayed fourteen years as a quiet portfolio manager.

During that time he did what very few young people will: he learned from others not to copy them, but to understand why they did what they did, extract the essence, then build his own system. He read Benjamin Graham. He tracked dozens of fund managers, keeping files on them for fifteen years. Not to imitate, but to synthesise.

Fifth in the country, and the cost of a reputation

In 1982 Yacktman moved to Selected Financial Services to manage Selected American Shares. Over eight and a half years running it on an equity mandate the fund ranked fifth in the country. In 1991 Morningstar named him Portfolio Manager of the Year.

But in 1992 the company was bought by Kemper. Yacktman left, and this time he built from scratch.

He founded Yacktman Asset Management in April 1992. In its first year Fortune listed his new fund among "10 funds with the potential to shine". US News and World Report called it one of the five most distinctive funds on the market.

Money poured in. The reputation came fast.

Then things got difficult.

The biggest failure, and the 90% of shareholders who saved him

In the late 1990s the American market was in a tech frenzy. The Nasdaq rose hundreds of per cent. Every fund poured money into internet, software and telecoms.

Yacktman did not buy.

Not because he did not know. Because he saw no intrinsic value there. Companies with no profit, no cash flow, no tangible assets, at sky-high valuations. He refused.

The result: in 1998–1999 his fund lost 16% while the market around him boomed. Investors withdrew and the fund shrank from more than $1 billion to $360 million. The independent board began questioning how he ran it, partly because he was buying small caps while the prospectus said large caps.

A proxy fight erupted in 1998. The SEC investigated. The press covered it heavily.

Yacktman faced a choice: wait to be fired, or fight.

He fought. And 90% of shareholders voted for him; the old board had to resign.

He won the fight. But he lost nearly $750 million of assets under management in the process, and spent millions on legal and proxy costs.

"It was a horror story," he said later. "We had nothing in tech, and it was the worst possible time for value managers."

The renaissance, and why failure is the best evidence

2001: the S&P 500 fell sharply after the dot-com bubble burst. The Yacktman fund rose.

2002: the market fell over 20% again. The Yacktman fund rose more than 10%.

2008–2009: the global financial crisis. The S&P 500 fell over 20%. The Yacktman Focused Fund rose nearly 25%. The Yacktman Fund rose nearly 18%. In 2009, as markets recovered, Focused rose 62% and the Yacktman Fund 59%.

The years he was mocked and lost investor money for not buying tech are precisely the years that proved him right. Discipline while isolated by market noise is what produces long-term alpha.

In 2010 Morningstar named him Fund Manager of the Decade. In 2011 he was a finalist for Domestic-Stock Manager of the Year.

From a fund nearly broken in 1999, Yacktman Asset Management accumulated more than $30 billion under management at its peak.

The triangle: three conditions before buying

Yacktman does not complicate his philosophy.

Every investment must satisfy at least one of three criteria:

A good business. High share in its core market. High cash return on tangible assets. Low capital requirements. Fast repeat purchase. Long product life cycles. Distinctive franchise characteristics.

Shareholder-oriented management. Not overpaying themselves. Allocating cash wisely. Reinvesting in the business and still having enough to buy back stock when the price is attractive.

A low purchase price. The stock selling below what a private investor would pay for the whole company. And buying only when the price is near the bottom of its high-low cycle.

He calls this the "triangle of success". All three is ideal. One is enough to look. None, and you pass.

Forward rate of return: a stock as a bond

But Yacktman's most elegant tool is one he developed himself: the forward rate of return.

He looks at a stock the way he looks at a bond.

When a bond's price falls, its yield rises. The same logic applies to stocks: when the share price falls, the forward rate of return rises. Like a ball pushed under water, the deeper you push it, the harder it springs back.

The formula: forward rate of return = normalised free cash flow yield + real growth + inflation

Then compare that number against long-dated government bond yields. If a stock offers a forward rate of 15% while the government bond offers 5%, that 10-point gap is the risk premium and the reason to buy.

In practice: he has held PepsiCo since 1999. To him PepsiCo operates like a AAA bond, a mature business with low fixed assets, low cyclicality, steady cash generation. When PepsiCo's forward rate is attractive he buys more. When it is less attractive than other opportunities, he trims to rotate to a higher rate.

This is where Yacktman differs from many other value investors: he does not hold the portfolio rigidly. He continually looks for a stronger card in the deck, like playing gin rummy, discarding the weak card and replacing it with a stronger one when the market sells off.

In Vietnam the same thinking applies by comparing a stock's forward rate of return against the 10-year government bond (currently around 5%). A good business selling at a forward rate of 12–15% hands you a 7–10 point gap over the risk-free asset, and that is a real margin of safety, not a theoretical one.

The man apart from the noise

What few know about Yacktman is that he joined the Mormon Church at fifteen, during a period when his family broke apart and both parents remarried several times. He went to faith as an anchor.

"Joining the Mormon Church was the best decision I ever made," he said in an interview at Google. "It helped me see everything over a very long time frame and recognise that the highest priorities in life are my wife and family. Business was never the number one priority. So whether I made X or Y never changed my lifestyle. I have never been a big spender. I give away more than I spend."

That faith shows in his personal life. When his daughter Jenny suffered a stroke in 2004 and was left "locked-in", conscious but unable to move, Yacktman moved the whole family from Chicago, where he had lived 38 years, to Austin, Texas. He spent years beside his daughter, paying no attention to reputation or market pressure.

Yacktman Asset Management had eight employees. He answered his own phone. No PR department. Meeting someone, he sat still, listened, and never raised his voice. People meeting him for the first time often mistook him for a church minister rather than a man managing tens of billions.

The QuietVC lesson

Donald Yacktman is not the investor who appears on CNBC every week. He has no view on the European debt crisis. He does not forecast rates. He does not predict the market.

He does one thing: wait for a good business to fall in price, buy, and hold.

When the market was frantically buying tech in 1999, he did not buy. Not because he was afraid, but because he saw no attractive forward rate. He was willing to pay for that with his reputation, with investor withdrawals, with a proxy fight costing millions, as long as his process was not broken.

And the process was right.

For a Vietnamese investor the lesson is not "buy PepsiCo". The lesson is: build a clear set of criteria, a good business, shareholder-oriented management, an attractive price against the risk-free bond, then have the discipline to do nothing when the market does not meet them. Especially in Vietnam, where speculative waves appear regularly and crowd pressure is intense, Yacktman's patience is worth more than any technical tactic.

Keep a process. Repeat the process. Do not change it because of outside noise.

"Discipline means continuing to have a process and using that process over and over until it becomes something reproducible, because you have enough faith in it." — Donald Yacktman

See also: what a margin of safety is and Walter Schloss, 47 years consistent with the balance sheet.

Silent discipline. Compound value.