Mr. Compounding Machine: Charles Akre

This article is part of a series on learning from the greatest investment managers. Start off at the beginning.

I have a regret. I never tried to meet Charles Akre of Akre Capital Management while I lived in Northern Virginia. This quote from his most recent shareholder letter says everything about why I admire him:

"When a high-quality management team is coupled with a high-return business with ample reinvestment opportunities, we have what we have described over the years as a "compounding machine" -- a business that can compound our capital for long periods of time at an above average rate."

Boy, the next time I'm at Fool HQ, I'm making a call.

Simple, but not easy
Akre's philosophy is very simple. It works on the premise that the market allocates capital to the highest returns over long periods of time. So if you can pay good prices for companies that can generate high rates of returns over long stretches, you will be rewarded with higher prices.

If only it were that easy -- you still have to find the companies, figure out why they'll generate good returns, and then buy them for less than they're worth.

Fortunately, we get to see the master at work via his 13-F filing with the SEC. Here's what he's been buying, with the number of shares in thousands:

Been busy buying
According to the filings, Akre has been buying shares of automobile-finance provider AmeriCredit since 2003. AmeriCredit provides automobile dealers with financing options mainly to the subprime market. True to form, this is a company that generates very high returns on equity and has been doing it for quite a while.

I have to defer to others on the next two companies: Pinnacle Entertainment and Isle of Capri Casinos. The only thing I know about gambling is that I'm no good at it and the house is always ahead. So for more on these two casinos, you can read what Jeff Hwang has to say here and here.

Getting back to a company I know a bit more about ... I am not surprised to see Akre buying more shares of O'Reilly Automotive. This is a company that seems to be getting better as it grows, and it's a retailer that I recommend you watch. That's because its returns are increasing as it gets larger -- something that is very hard to do, and something Akre searches for relentlessly.

Akre and I don't agree on Pool Corp. as an undervalued investment. And don't worry, I know he's the pro and I am the underling. So given his big increase in the number of shares owned, I think the prudent thing would be for me to go back and look at my valuation. After all, the company creates lots of value and operates in a fragmented market that it can influence over time.

Akre also opened two new positions this quarter: information-protection and document-storage company Iron Mountain, and trucking company Knight Transportation. From a financial point of view, Knight fits the Akre mold. But it is interesting to hear that many investors, citing cost advantages, are allocating money to railroads and not trucking companies. That's the beautiful thing about investing: You don't have to follow the crowd to make money.

Iron Mountain is a bit more of a conundrum. You have to exclude goodwill from the return calculations to get up in to the 14% range. That's certainly not bad from a RANTW perspective, but Akre must be thinking that number is going to expand.

The Foolish bottom line
I agree with Akre's thinking about searching for companies that create high returns on capital and then waiting for them to come to you at a great price. In fact, I've written about that very strategy plenty of times. So let's do two things. First, let's keep learning from Akre Capital Management. And second, I'll find his phone number and see whether he'll let me pick his brain some more for a future Foolish interview.

Up next, the titan from Tennessee, Mason Hawkins.

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Retail editor and Inside Value team member David Meier does not own shares of any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.