The Investor SA

20 March, 2015

Martin Barwise

 

-Called the 400% man by 'market-watch' and The Next Warren Buffett by 'Forbes'. He is certainly one to watch out for-

 

Allan Mecham, the mastermind behind Arlington Value Capital, has done what only a few investors could ever pull off. And when investors asked how he finds his investment ideas, his answer was  simply: "Mainly  by  reading  a  lot". With no  MBA  degree , investors could  only describe  this  college dropout, as 'simply remarkable'.

 

Mecham is a Warren Buffett disciple, and  has  been obsessed with business and the markets from a young age. "I was 19" he recalls. "I was staying up till  3:30  am devouring this  stuff". He  attended  community  college  and  the University of Utah for two years before he left. He started to find his schoolwork boring by comparison, after  starting  an  investment club. He was able to land  a  job  through a  classmate who knew  people at  a  local mutual fund company, called Wasatch Advisors. He then decided to quit school and join the firm.

 

Mecham quickly made his mark in the firm, after making a memorable stock  pick. He recommended the company to buy a Health Service Company, which  ended  up  doing  quite well. Still this was only about a year before Mecham decided he could run money by himself. And in 1999, at the mere age of 22, Mecham launched his own fund called  Arlington. Mecham's writing style is quite similar to one Warren Buffett's. Both Mecham and Buffett follow the typical philosophy of value investing - Look for a company that's undervalued, then buy  its stock. Mecham and Buffett's investments seem to be quite similar as well. The Bank of America announced at the end of  2012's  first quarter that  Warren  Buffett  was  Bank  of  America's  biggest shareholder. Mecham  wrote  in  his  2013  annual letter that  Bank  of  America was his second biggest holding, after  Buffett's  Berkshire  Hathaway.

International Business Machines (IBM) is another investment Warren Buffett and Allan Mecham have in common.IBM made up for more than  7%  of

Mecham's Arlington Value Capital Hedge Fund, while 12% of Buffett's portfolio consists of IBM.

 

Mecham likes to think in decades, not quarters. This is a typical Warren Buffett follower, for one Warren Buffett said it is more useful  to  try  to  figure out where a company will be in 10 years or more. Mecham also believes in sticking to what he understands. "Over the past  16+ years, I've built up a base of companies that  I  understand well and would like  to earn at the right price. We tend to  stay within this small circle of companies, owning the same names multiple times. I'ts rare for us to buy a company we haven't researched and followed for a number of  years - We like to stick with  what we know.

 

"Ignore the economy". Another  thing  Mecham does differently, is the fact that he doesn't focus  on where the economy will be next quarter or where the  S&P  is headed. Mecham  instead  looks  for  more stable and defensive businesses that can thrive whenever bad times come. Many Wall Street

analysts build elaborate financial analyses to calculate a company's growth potential and earnings.Mecham believes that it will be more productive to use that time trying to understand a company and  its industry, management, competition and so forth. Mecham now manages a few hundred million in his fund, after starting with a mere $200.000 back in  1999 . His returns are outstanding, averaging returns of  18%  annually over the past decade. These  numbers  are  not  to  his  investors, so  his  gross returns are  even bigger than that. In his September  2012  letter, the fund manager of the Arlington  Value  Management  Ranger  fund stated that  Mecham posted a  41.85%  five year annualised gross return. Compared to other company funds, the Arlington Value Management Ranger fund came in second place in Morningstar's database of top performing funds. The Oeanstone fund came in first.

 

Arlington  even  managed  to  profit  a  turnover of 11%  during the crash of  2008, when Standard & Poor's 500 stock-index fell nearly 40% Arlington Value Capital has, to date, about  120  investors, with more than 75% of them being identified as "high net-worth individuals". According to regulatory filings, of the $80 million in the fund, more or less half is investors principal, and the rest profit. Mecham managed to, over a stretch of 12 years, earn a cumulative return of more than 400%, through investing in the stock of U.S companies. 400% is a gain that turns a $100 000 stake into a $500 000 jackpot! He is one of five people to have ever achieve this milestone, therefore landing him a spot in the elite 400% group.

 

Here are other elites who have also managed to pull off a 400% run:

 

Ken Smith

Company: Bar Harbor Bank Shares

400% run from October 1998

to September 200

(17 months)

 

Warren Buffett

Company: Berkshire Hathaway

400% run from July 1989

to February 1996(80 months)

 

Bill Miller

Fund: Legg Mason Opportunity Trust

Fund

400% run from April 1994

to April 2001

(85 months)

 

Sam Stewart

Robert Gardiner

Daniel Chace

Fund: Wasatch Micro Cap Fund

400% run from November 1999

to April 2007

(90 months)