Tuesday, March 20, 2012

"Portfolio Management is Easy - It's the Research That's Hard"

My wife Christina and I took our daughter Caroline to the University of Virginia (UVA) on Sunday for a visit. Caroline was accepted by UVA last January.

I won't dwell on our visit other than to say that UVA is a terrific place in all respects.

While Caroline has not yet made her final decision, she seems to be leaning toward UVA, and we would be thrilled if that was direction she took.

Caroline spent Sunday evening in the dorms with some of the current students, so Chris and I had the chance to have dinner with a couple of friends of ours that live in Charlottesville.

Our friends moved to Virginia a couple of years ago, and absolutely love the lifestyle.  Interestingly, although Charlottesville is obviously best known for UVA, it is also the home of a number of prominent hedge fund investors, including a guy named Ted Weschler.

You probably haven't heard about Ted Weschler, which is apparently just the way he likes it.

However, Ted and his partner manage about $2 billion from a small office in Charlottesville, and their returns have been spectacular: +1,236% over the last 11 years.

Despite his efforts to keep a low-key profile, Mr. Weschler came to the attention of the financial press last September when he was asked by Warren Buffett to help run Berkshire Hathaway's $52 billion equity portfolio. Weschler will be partnered with another succesful investor named Todd Combs, who joined Berkshire in 2010.

As it turns out, Mr. Weschler is a next-door neighbor of our friends from Charlottesville, so naturally I asked the question:

"What's Ted Weschler like?"

The answer:  He's a very likeable, down-to-earth fellow who just reads all the time.

Put another way, other than the fact that he commutes to Omaha, Nebraska, every week, Ted Weschler lives a very ordinary life.

I'm always struck by how unexciting the lives of most prominent investors tend to live.  While the popular media always focus on flashing screens and rapid-fire trading, the best investors seem to spend months learning and studying before making any allocations of capital.

Buffett, for example, has been described as a one-person learning machine.  His partner Charlie Munger has said that if you put a clock on Buffett's typical day you would find that he spends the vast majority of his time reading and talking to other investors he respects.

It sounded like Ted Weschler spends most of his working days in the same fashion.  He reads, studies, and only occasionally makes investment changes. And, like Buffett, his investment portfolio contains relatively few positions.

Here's how Reuters described the investment portfolio of Peninsula Capital Advisors, Weschler's investment vehicle last fall:

Weschler has overseen a very concentrated portfolio with DirecTV, DaVita, which runs kidney dialysis centers, and Liberty Media ranking among his biggest and most recent holdings.

In total, he held fewer than a dozen publicly traded U.S. stocks at the end of the second quarter, according to his most recent regulatory filing. He is not required to list stocks he may be shorting or otherwise betting against.


Modern portfolio theory teaches that a concentrated portfolio is too risky for the average investor, which I generally agree with.  However, if you have a knack for uncovering hidden value, and are willing to spend the hours making sure you truly understand the companies in which you are investing, a portfolio consisting of just a dozen stocks could actually prove to be the correct strategy.

During our dinner I was reminded of the conversation that I had with a veteran investor years ago.

We were talking about the markets, and I had just mentioned that managing a portfolio in volatile markets can be very stressful.

This investor looked at me and scoffed.

"Portfolio management is easy. With today's technology, all it takes is a couple of clicks with your index finger to make an trade."

"No, what's hard is research.  Finding the right stock or bond takes a lot of work if you are to be successful."