With Chuck Akre, Founder, Chairman, and Chief Investment Officer of Akre Capital Management
Continuing his series on Berkshire Hathaway, Steve speaks with Chuck Akre. Akre has regularly attended Berkshire meetings since he first bought shares in the mid-1970s. Chuck is a Wall Street veteran and the Founder, Chairman, and Chief Investment Officer of Akre Capital Management and other funds.
How To Invest Like Warren Buffett
Chuck’s investing philosophy is closely modeled after Warren Buffett’s, with a few modifications. For instance, Buffett tends to hold his investments over a very long period. However, Chuck sells shares when he believes a company is no longer “exceptional” enough to deliver market-beating returns.
Move Away From Distractions
Just as Buffett moved from New York to Omaha, Chuck too moved away from the hustle and bustle of New York. He set up his investment office in Middleburg, Virginia, a quiet one-traffic-light town. This allows Chuck to relax and focus on investing without the high-pitched social and professional distractions of NYC.
Cut Out The Noise Of Daily Financial News
Chuck thinks the financial media’s incessant focus on the investment news of the day could be detrimental to economic health. To him, investing is about putting together an investment thesis on sound analysis and modeling, with an expectation of what returns should look like over time.
It’s All About Rate of Return
At Akre Capital, rate of return is the bottom line for all investments. Calculating a rate of return (RoR) is easy for CDs and fixed income investments. However, it’s no easy task for stocks. Akre’s RoR methodology involves understanding the business by looking at the free cash flow per share. He forecasts the approximate growth of real economic value per share and adjusts this valuation model for share repurchases, dividends, etc.
Chuck also looks for companies with defensible “moats” that protect revenues from competitive pressure. He sees brick-and-mortar businesses rapidly succumbing to technological innovation. Even so, businesses with noticeable franchise value help an investor decide if they’ll deliver reasonable rates of return over time.
Through Chuck’s investment lens, Bitcoin falls squarely in the realm of speculation. However, its underlying blockchain technology does hold significant promise. Gold generates no earnings but has value as a hedge against inflation.
Active Versus Passive Investing
Onto the raging debate of active versus passive investments. Chuck believes markets cannot function efficiently if everyone plowed their money into passive investments. Akre Capital focuses on active management, dedicating resources to identify good investments. Their fees and expenses are well above passive index funds and have a 30-year track record of consistently beating the market.
The average investor doesn’t have the time or the training for active portfolio management and will do better with passive investments such as index funds. But even with that, the hundreds of ETFs and index funds make passive investing a minefield best navigated with a professional advisor.
Don’t Let The Macro Picture Dictate Your Investments
In closing, Chuck warns investors against making investment decisions solely based on macroeconomic trends. He uses an example that in 2005, at the peak of the housing market, Akre Capital hired an expert who delivered a thorough macroeconomic analysis on the real estate sector. Akre completely missed the issues that were evolving in the home building and housing financing industry that ultimately led to the crash.
Instead of making investment decisions based on the big picture, Chuck Akre recommends paying attention to the business models and valuations of individual companies. Focus on their strategies and think long-term.
On that count, he gives high marks to Buffett for his call to “buy America” in 2008. Even though the S&P 500 lost another 30% after Buffett’s call, he was clearly thinking as an true long-term investor who was confident that the American system would right itself. And so it did.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: My guest is Chuck Akre. He’s an American investor, financier, and businessman. He’s also the Founder, Chairman, and Chief Investment Officer of Akre Capital Management and other funds. Chuck is one of Berkshire’s legendary long-term investors, owning the stock since the mid-70s, and he’s been attending meetings regularly ever since.
Let’s talk with him and get his perspective on investing, Berkshire, and Warren Buffet. Hi, Chuck, welcome to the show.
Chuck Akre: Why, thanks very much.
Steve Pomeranz: I noticed that much of your investing philosophy, when researching you and your thinking, mirrors Buffet’s style. Is that a coincidence? Did you go to the same school or was it purposeful?
Chuck Akre: Well, the answer is it’s purposeful. I’ve tried to understand Buffett through his gracious teachings over the last 40, 50 years and have tried to take what parts appeal to me and work for me and have done so. And so the similarity is not a coincidence. I try to be, as I say, the best student from afar that I can be.
Steve Pomeranz: Well, you talk about from afar. I know that you moved your firm to Middleburg, Virginia, which is an hour outside DC and five hours from New York City. And it reminded me of Buffett moving from New York City to Omaha to get away from all the noise. Was that one of the reasons that you kept that distance?
Chuck Akre: Absolutely, I mean, we’re out here for two reasons. One is simply what we call the quality of life issue. But the second reason is to avoid that. For example, if my office were in Central Park South, taken as being the center of the universe for the investment community, for this example, I would know and see a thousand people who are very bright and very interesting. And I would be distracted from what I do well by getting involved in their thought processes. So here we are. We’re 35 minutes from Dulles airport. We can get anywhere in the world pretty quickly and yet, we have the ability to be here in a very beautiful, quiet location. We’re in a town that has one traffic light.
Steve Pomeranz: [LAUGH] You know, I know that I’ve written that most investors, I think, don’t really understand stock investing. They think it’s about the prices going up or down on a given day.
What’s the market going to do? Is it up 500 points, is it down? Or maybe dividends alone, or just maybe finding the new Amazon or Facebook. I know that Buffet is not in that world at all. He doesn’t even own a computer. He doesn’t know anything about those kinds of things.
So how is investing, the way you see it, different than these ideas of stock ownership that I think most people have?
Chuck Akre: Well, I think most people are encouraged by the investment world at large to be focused on what’s happening today. And it’s my view that if you focus on what’s happening today, that’s bad for your economic health. Investing, by definition, is putting together an idea, a business model, whatever, that you think will then unfold over a period of time.
And so you need to go into that investment with the idea that over a period of time, it will produce xyz result. And in our case, we measure everything by what we call rate of return. We think it absolutely is the bottom line of all investing. And it doesn’t make any difference whether you never met a CD you didn’t like, or you’re involved in venture capital.
All of them, I mean, you know as well as I do that there are businesses out there that will take your million dollars or 10 million dollars or whatever it is and place them in different financial institutions up to the amount insured by the federal government. And you will find that you’re getting different yields at each of those places because of the rate at which they compound and all kinds of things like that.
So rate of return is, we say, the bottom line of all investing. And it’s what we focus on. And we try very hard to avoid all of the day-to-day noise.
Steve Pomeranz: Well, let’s talk about rate of return. I mean, it’s easy to know what the rate of return is on a CD or a bond or any kind of fixed income investment. But it’s harder to determine what the rate of return is or is going to be going forward when you’re buying a company, which has so many variables. So how do you make that determination?
Chuck Akre: Well, it’s pretty simple. I mean, what we try to understand in a business is, at what rate is the shareholder’s economic value per share growing? And it is not a precise number. It’s an approximate number. And we find one of the ways to lead us to that is by seeing what amount of free cash flow per share is generated against the owner’s capital in the business. There are lots of other ways. There are plenty of places where that whole ROE valuation doesn’t work because of share repurchases or things of that nature.
But the idea is, we try to estimate what the growth in real economic value per share in a business is going to be. And that’s the work that we do, and it’s part of our judgement and so on. It’s part of what gives us whatever advantage we have.
Steve Pomeranz: Yeah, Warren Buffet talks about creating a moat or rather, buying companies that have created a moat around themselves. And there’s numerous ways to create this moat. But there is a lot of talk now about, with technology being what it is, that finding a company with strong long-term moats is becoming more difficult. Do you agree with that?
Chuck Akre: So we’re always looking for businesses that have some kind of a franchise value. And that franchise value gives them the freedom to price. And having that freedom to price is, in effect, the essence what an economic moat is. And many old-line ones are going away, and we saw the newspaper moats disappear largely 10 or 15 years ago.
And we’ve seen it in other businesses. And we see it in lots of retailing businesses these days, where traditionally, a moat might have been a brick and mortar building of a downtown department store. But no longer is that necessarily a viable form of retailing, lots of places. They are going away, yeah.
Steve Pomeranz: But where are you finding your moats now?
Chuck Akre: Well, you can just look at our portfolio, which is a matter of public record, and see, number one, that it does not change very much. And number two, you can conclude that we think there are moats that exist in maybe the majority of our businesses.
Steve Pomeranz: So this rate of return idea means to me that you would not invest in gold or Bitcoin or something that doesn’t generate earnings. It’s kind of a Buffett thing, is that correct?
Chuck Akre: Well, it’s only partially correct. The fact that somebody doesn’t generate earnings doesn’t necessarily mean that it won’t have a growth and intrinsic value.
But we don’t invest in gold, and we haven’t invested in Bitcoin. Intellectually, we’re interested in the whole idea of blockchain technology, and, of which Bitcoin is a part. But no, we’ve not invested in Bitcoin for reasons, well, reasons that precisely, you asked, which is that they’re really speculations at this point.
And that is, there’s people who are buying them, in the case of Bitcoin because they believe it’s going to go higher. And it’s betting on the price movement of shares. In the case of gold, gold typically does well when people lose confidence in the government or when there begins to be the confiscation of assets by the government by way of inflation.
Steve Pomeranz: Well, you’re an active money manager, and you are paid to find these companies and to steward this money for the long term. Buffett always talks about or recommends index funds to investors. What do you think of the idea that as an active manager, charging considerably more than most index funds do, that why should investors consider an actively managed fund? And I have a follow-up question on that with regard to Buffett. But how do you see the index fund world as it relates to the average investor? You think it’s a good thing?
Chuck Akre: Well, first of all, we really can’t logically imagine that the universe in which all investors invested in the index fund, that just wouldn’t work. The notion behind Buffett’s idea is that it is a perfectly reasonable choice for people who do not personally have the time or attention or skill set to make judgments about individual businesses. And so from that point of view, it’s a perfectly good idea. And even along with all kinds of active managers and hundreds and hundreds of ETFs and index funds are choices that an investor has to make.
And in amongst them, there might be hundreds of good choices. Investing in an ETF, for example, is really speculating on an individual asset class. And it’s nothing more than that. And investing in an index fund is saying, well, I’d like to try to do as well as the market.
We charge more than index funds do. And the reason we do, as we’ve said right from the start, is that our goal is to compound our client capital at an above-average rate while incurring a below-average level of risk. And across virtually 30 years in this business, in the investment management side of the business, we have achieved that, and we continue to achieve that. Whether we will tomorrow or not, I don’t know, but we’ve done so based on the process that you and I are chatting about, you’ve read about.
Steve Pomeranz: I read a quote from you that really fascinated me, and I really, too, do it myself. It has to do, getting back to this idea of the noise, you say, I do try to be well informed about world events at all times. I periodically get intrigued by the macro picture. And then I say, it’s also been my experience that I am at my worst as an investor when I am focused on the macro. And the macro is just observable, so you watch it, but it’s not actionable. Can you tell us a little bit more about that?
Chuck Akre: Sure, in 2005, I hired a person who had been a commercial banker at a Midwest bank, lending to the National Home Builders, and he was kind of an academic type. And I hired him because in 2005, we said, we think there’s some issues out here in the home building industry. The space between our office and downtown Washington DC is ground zero for all the National Home Builders. They’re all here, but we don’t even know what the problems are.
We don’t know what the questions are. Would you do us an analysis of the thing? And he made an analysis for us, and it came in the form of 120 graphs and this sort of stuff. And we failed to grasp, in that case, the issues that were evolving in the home building and the housing financing industry that in large measure led to the crash of the market.
If I am focused on economic events that I think are going to have a big impact, I’ve lost sight of the individual investments, the individual companies, the individual businesses. And I’m more likely to make a decision that’s based purely on the economics. And there are lots of terrific investors who do that real well.
It’s just not something that we do well. And we are far better off if we pay attention to the individual businesses. And I’ll give you a little more detail on that, actually.
Steve Pomeranz: Sure.
Chuck Akre: In 2008, in September, Warren Buffet went on TV and said, you should buy America, I am—because he thought the market had essentially bottomed.
The market through the S&P declined 35% more between then and March 9 of 2009.
Steve Pomeranz: I see.
Chuck Akre: And at the time, I said to myself, what is he thinking? And the answer that I come up with is quite clearly that he was an absolute true long-term investor.
He knew, had confidence, that the American system would right itself. And that owning these extraordinary businesses or outstanding businesses that generate huge amounts of free cash, while they will be possibly imperiled during an economic downturn, will nonetheless continue to do better than average. And in the long run, we’ll be fine with those.
And that has proven to be the case for him and for us. We had a couple, maybe two or three clients that withdrew from the market almost exactly at the bottom. And so they’ve missed all of the return that’s gone on since then because they got scared at the bottom.
And they might have gotten scared because of lack of confidence. They confused the issues with the bank regulators and this, that, and the other with what was really going on in the businesses. And as a result, they got kicked out at the bottom.
Steve Pomeranz: There’s the constant drumbeat in those periods of times from the media about all things negative and people forecasting the worst.
Chuck Akre: Absolutely, because it’s what attracts eyeballs.
Steve Pomeranz: Exactly, exactly. So even Buffet tells us that Berkshire itself has been down 50% in the time that he’s owned it. The stock price has gone down by 50% at certain times. I think a lot of people don’t realize that even with the great return that Buffett has achieved, there have been periods of time when the stock was really damaged, so to speak.
And yet he continued to build the company internally. It’s this internal engine of growth that really matters. The stock price itself may be too high, it may be too low relative to that growth or that rate of return. But yet holding on and holding for the long term and allowing that money to compound, tax-deferred, mind you, is a powerful engine. And you hold on to your stuff a long time too, right?
Chuck Akre: We do, so what we say is, we want to own exceptional businesses. And we’ll own them until they’re no longer exceptional. And I say that as opposed to people who say, well, you don’t sell, or you hold forever.
That’s not true, we just try to hold them until, in our view, they’re no longer exceptional, and we get that right most of the time.
Steve Pomeranz: My guess is that Chuck Akre, American investor and Chief Investment Officer of Akre Capital Management. Chuck, thank you so much for joining us today.
Chuck Akre: Thank you.
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