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The Three-Pronged Strategy: Price, Quality, Cash Management


The veteran investor Donald Yacktman walks us through his investment process and top picks.

Donald Yacktman has worked as an investor for more than 40 years and, over those many decades of managing money, he's noticed a trend among investors: Their time horizons keep shortening.

"There is less investing and more speculating," he says. "My advice to investors is to have more patience. Most people invest like it's a one-year process. People should focus much more on the long term and invest accordingly."

Yacktman, 68, is president of Yacktman Asset Management and, along with his son Stephen and co-manager Jason Subotky, captains The Yacktman Fund (YACKX).

The investment team likes to think of their approach as fusing the best features of growth and value investing, which has led them to put money to work right now in high-quality, brand-name companies like Coca-Cola (KO) and Procter & Gamble (PG).

Morningstar analysts covering YACKX emphasize that it's suffered dry spells but, they note, the fund has clearly distinguished itself as a winner over the long haul.

Through February 11, YACKX's 10-year annualized return of 12.62% beats the S&P 500 by 13.32 percentage points and leads its Morningstar rivals by 10.07 percentage points, clinching the number-one spot in its category.

Morningstar awards the fund five stars, its highest rating.

YACKX, with $1.5 billion in assets, has an expense ratio of 0.95%, and requires a minimum investment of $2,500.

Recently, we caught up with Yacktman at his office in Austin, Texas, where he chatted with us about his investment process, top picks and offered some career counseling.

You've talked about how trying to predict where the market is headed is just a giant waste of time for investors. How come?

Donald Yacktman:
The ultimate decisions boil down to what you buy and what you pay for. Unless you use indexes, and try to judge the overall market, it does come down to just that. I never watch the business news. I roll my eyes at their questions because they are so short-term oriented. That's why they don't have me on too often. I'm just not that interesting.

Does your view on the economy play a role in your investment process?

Not really. Here is the problem: I've seen people do the top-down thing. You spend all this time talking about the economy and guessing what industries to buy and guessing what companies were best in that industry. But, most of the time, that's in the price anyway. It's just a waste of time. It's all about individual opportunities.

Walk us through your investment process.

I think of it in terms of a triangle. The first leg is the price. If you don't get the price right then the rest won't work out well.

Can you give us an example?

Yacktman: Let's take Coke, which is one of our biggest holdings. Now, back in 1998, it was selling as high as $89 per share. We had no interest. In the last 12 years, every year, earnings have gone up. Dividends have risen almost every year. It's a great business. Once it got down to the 40s, given what's out there and what's available, it looked like a layup to us, and we started to accumulate it.

Minyanville: What is the next leg of the triangle?

Yacktman: We need to determine the quality of the business. Every business, ultimately, you can put on a grid. If one axis was capital intensity and the other axis was economic sensitivity, you could plot every business on there. We are looking at returns on tangible assets. What drives that? Low capital intensity and very little economic sensitivity.
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No positions in stocks mentioned.
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