Boring Portfolio

<THE BORING PORTFOLIO>
Boring Tenets, Part 2
More on our philosophies

By Dale Wettlaufer (TMF Ralegh)

BUFFALO, NY (July 12, 1999) -- Leaving off from Friday's introduction to our first tenet, Businesslike Approach to Transactions, here's the number in terms of portfolio turnover: If you have a 10-company portfolio and your turnover is 20%, you have to come up with two good ideas per year. If you have a 5-company portfolio and 20% turnover, you have to come up with one good idea per year. That's five good ideas every five years, not including portfolio inflows and outflows.

That means that you might not even come up with a good idea for two and a half years and then suddenly have two good ideas. In my experience, I've found that there's always value somewhere in the market. But it all depends on your circle of competence. If you know four industries very well, it might turn out that the market only serves up buying opportunities you would find attractive once in 18 months.

The Boring approach to investing is not at all like a mutual fund approach to investing, where one would have 100 positions in a portfolio and come up with 80 trades per year. We'd be much more like an individual company, where two or three big subsidiaries will dominate our economic future. When you look at mutual funds, you won't find more than one or two out of the thousands of funds out there that hasn't made a trade somewhere in the last three years. But you would find numerous companies that haven't made any acquisitions or divestitures for three years or, for that matter, even ten years.

Our approach to acquisitions or divestitures is this: A transaction that would substantially change the economics of the portfolio could happen at almost any time, because we don't hesitate to take large positions in things we like. But a transaction that changes the economics of the portfolio might also not occur for a number of years. A transaction will also not happen without our having thought about the company and industry in question for a long while.

Think of it this way. We lay up idea inventory over a number of years. Each year, the idea inventory grows. We see companies that we like, but we might not like them at a certain price or we might not have a full understanding of the company or the industry. In laying up inventory, each additional unit of inventory increases by some geometric proportion the value of the rest of the inventory, because an understanding of business (in broad terms) is somewhat like an understanding of the wide scope of history or mathematics -- the knowledge is cumulative. At some point, and we don't know whether that's tomorrow or three years down the line, we will run into opportunities to take down an idea from inventory and put it into action.

"Into action" means an idea where we think we can generate a supernormal return on investment without supernormal events in the business needing to come about to generate those returns. In other words, we prefer to buy high-quality companies at prices such that one does not need to assume extraordinary operating performance or even immediate market re-valuation of the company to generate supernormal returns on our capital.

To this end, we are not averse to owning technology companies, "Internet companies," or immature companies. To that end, as well, we are not averse to owning companies that carry seemingly high valuations. Some companies are demonstrably superior enterprises, for whatever competitive reasons, and should carry higher valuations. We seek to quantify and qualify those reasons beyond just saying "it's the leader in its market" or "it has great management," and we certainly avoid any reasoning based on what we think the market will do. If we were presented with three investment alternatives: 1.) You can buy a McDonald's franchise; 2.) You can take company "A" private at "X" dollars per share; or 3.) You can take a small minority interest in publicly-traded company "B," we would look at all three opportunities in pretty much the same way.

That is, we would try to gauge how much operating cash flow each business could generate over its lifetime. That's it. We wouldn't invest in company "B" because we think the Standard & Poor's might include it in the S&P 500 index, that an analyst might upgrade it next week, or that the market might decide it's worth 20 times earnings rather than 15x.

As much as we possibly can, we try to evaluate all investment opportunities irrespective of their status as publicly-traded companies, we attempt to value companies based on their ability to generate cash, we concentrate on areas of business where we believe we have an advantage over others in assessing the business, and we always look to widen our scope of knowledge to enrich our "idea inventory." Those are a few of the essences of a businesslike approach to investing.

Have a good Monday night. Questions, comments, and lower-intensity flames are welcome on the Boring Port message board.

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07/12/99 Close
Stock Change   Bid
APCC  -  7/16  21.06
BRKb  -7       2284.00
CSL   -  3/16  50.00
GTW   +2 1/8   69.75

                  Day     Month   Year  History
        BORING   -0.15%   3.45%   7.49%  44.33%
        S&P:     -0.30%   1.92%  14.40% 132.94%
        NASDAQ:  -0.09%   3.90%  27.26% 168.06%

    Rec'd   #  Security     In At       Now    Change
  8/13/96  200 Carlisle C    26.32     50.00    89.93%
  4/20/99  460 American P    14.48     21.06    45.49%
 12/31/98   12 Berkshire   2276.17   2284.00     0.34%
   2/9/99  100 Gateway 20    72.38     69.75    -3.63%


    Rec'd   #  Security     In At     Value    Change
  8/13/96  200 Carlisle C  5264.99  10000.00  $4735.01
  4/20/99  460 American P  6659.25   9688.75  $3029.50
 12/31/98   12 Berkshire  27314.00  27408.00    $94.00
   2/9/99  100 Gateway 20  7237.50   6975.00  -$262.50


                             CASH  $18091.65
                            TOTAL  $72163.40


</THE BORING PORTFOLIO>