Boring Portfolio

Boring Portfolio
What a Company Won't Do

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (Oct 4, 1999) -- I didn't realize the other day that the Bore port was passing its first anniversary under the management of myself and Alex Schay. Well, Alex has since taken off for New York, but I'm still here. Year-over-year, the portfolio advanced 24.5% versus 27.84% for the S&P 500. All of the companies in the portfolio have had a good 1998-1999, which I don't boil down to how well their stock did or how much they grew. A management team can have a very good year when it chooses not to grow. For instance, a reader asked me in an email yesterday about the expiration of the letter of intent between Bore company Carlisle Companies (NYSE: CSL) and Titan Wheel (NYSE: TWI):

"Would you have some time to check into the real status of this deal?"

Here's how I responded:

"I won't be able to get anything out of the company, but my take on it is that Carlisle is demonstrating to Titan that it has the discipline to walk away from a deal if its terms can't be met. That's not just a negotiating posture, either. It's a principle they have, which is exactly why I maintain the investment in the company. They exercise this sort of discipline across the board on acquisitions, divestitures, operations -- every part of the business. I think if Titan can agree to the things Carlisle thinks it needs to make the combination a success, a deal will be met. Otherwise, Carlisle's management will walk away. Many companies can't resist the institutional imperative to grow, even through value-destroying acquisitions. Carlisle can resist that, which is what makes them special.

"Sorry if that doesn't address your question 100% directly, but I hope it assists you in thinking about their approach and this particular deal."

On its own, Carlisle's growth has been excellent since this portfolio invested in the company and since I took over the portfolio. But what I'm really looking for is rational managements that do deals that add value, not because that's what "the Street" wants. That's why Berkshire Hathaway (NYSE: BRK.A) accounts for a huge percentage of the portfolio's assets. The rationalization of Gateway's (NYSE: GTW) business over the last year+ has accounted for that company's growth and its presence in the portfolio. American Power Conversion (Nasdaq: APCC) is a company that kind of plugs along, dominating its market, and sticking to its business plan rather than running the company for Wall Street's benefit, as Whitney Tilson pointed out in this space a couple weeks ago.

What a company's management WON'T do is sometimes most emblematic of what the company is all about. Berkshire won't invest its capital in the technology "franchises" of today because it doesn't fully understand them and Carlisle isn't doing any acquisitions it believes will not be value-enhancing (the asking prices being a major moving part there, I believe), even though the company's track record of value creation in the 1990s has been heavily accented by acquisitions. I agree with these things wholeheartedly and I try to emulate them. In the short term, I think you can pay a price for this behavior. In the long term (over the course of an investing lifetime), however, I believe it's the only way to beat the market.

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