There was a good article in the Wall Street Journal this morning: Sequoia Fund Sticks to What Works – WSJ.com. This fund is worth studying as they have one of the best long-term investing records that you’ll find anywhere. If you had invested $ 10,000 when the fund started on July 15, 1970 and you reinvested all capital gains and dividends, it would have been worth be worth $1,848,293 on December 31, 2009. This is a compounded annual gain of 14.3%. (No adjustment was made for taxes.)
A 2008 article in Morningstar explained the fund’s secret sauce by saying there is no secret sauce.
Outstanding implementation of a straight-forward process is Sequoia’s hallmark. Simply put, the team executes better than nearly everyone else. Chatting with Goldfarb reminded me that Sequoia usually makes its money buying proven firms that are hiding in plain sight. This isn’t cigar-butt investing. Goldfarb and his team don’t bet on struggling firms with uncertain futures or on flavor-of-the-month newbies. Rather, they focus on understandable businesses that consistently generate strong returns on equity. Passionate managers with skin in the game are icing on the cake. That’s it. Like Buffett, the Sequoia team’s preferred holding period is forever.
The fund has built its success by doing in-depth research and focusing its capital on good businesses with good management. And they are long-term investors. My Investing Blueprint comprises the same proven principles.
I went back and read the fund’s 2009 annual report and offer the following observations. The first regards the opportunity to invest in a number of mega-cap stocks that are currently cheap relative to the S&P 500 index such as Johonson & Johnson, Procter & Gamble, Coca-Cola and Exxon. They prefer to invest in situations where their research gives them an edge. (No edge = no investment.)
We get a good question from time to time asking why we don’t simply own blue chips. Clearly, stocks like Johnson & Johnson, Procter & Gamble, Coca-Cola and Exxon are attractive relative to the Index. Our stock selection tends to be driven by research, and we strongly prefer to own businesses where we believe — not always correctly — that we have an edge in information. Simply put, we try to know more about our portfolio companies than other investors do. That helps us make good decisions. We don’t own many mega-cap businesses in large part because we don’t think we could have an advantage in research. Johnson & Johnson has 22 businesses that generate more than $1 billion a year in revenue. It would be nearly impossible for us to know more than “Mr. Market” does about JNJ, and so we tend to avoid the stock (we avoid technology stocks for similar set of reasons). This is not a commentary on JNJ so much as on our investment process. Even when blue chips are tempting, we know that our discipline has helped us avoid mistakes over the years. We might in the future own specific blue chip stocks, just as we own Berkshire or Wal-Mart, but we probably won’t ever buy a basket of stocks because they appear cheap.
They have made a decision to pay more attention to macro-economic factors. However, they are not trying to make any macro-economic predictions; they are simply trying to think though how macro-economic factors would impact their investments. This is a modest but realistic approach to thinking about macro economic issues and is consistent with Bruce Greenwald’s thought’s on lessons learned from the financial crisis.
Finally, they do not make the mistake of confusing risk and volatility. Like Buffett, they prefer a lumpy 15% to a smooth 10%. (For the record, I’m not sure the smooth 10% is even available anymore, if it ever was.)
While our 2009 results were disappointing, we know that a concentrated portfolio of stocks will not track the results of the S&P Index closely from year to year. Over time, a well selected portfolio should outperform the Index.
There is a lot to learn from this fund and the way they do business.
Here are some links you may find helpful.
- 2009 Annual Report
- 2009 Investor Day Transcript
- 2008 Investor Day Transcript
- 2007 Investor Day Transcript
- Current Holdings