This interview originally appeared on the Inside Value website in January 2007.
Luck favors the prepared. That describes my opportunity to meet David Carr and Larry Coats, investment managers at market-beating Oak Value Capital Management in Durham, N.C.
Mysteriously, a quarterly report from Oak Value appeared in my inbox. Perplexed why I received it but impressed by what it said, I wrote back. Apparently, the folks at Oak Value liked my article about how Berkshire Hathaway
That's when that "meant to be" feeling came over me and inspired an idea (yes, I get them once in a while): Let's get to know these guys better. Little did I know that this chance encounter would generate such an unexpected treat. Start here and read the interview all the way to the Foolish fun at the end of Part 6.
Learning to Invest
David Meier: Tell us a little bit about yourselves, how you got interested in investing, and when you realized that value investing was the right thing for you?
David Carr: I was fortunate to meet one of my former partners in high school. His uncle had been a classmate of Warren Buffett's at Columbia and studied under Benjamin Graham. So early on, he took us under his tutelage and began to teach us a bit about value investing. Fortunately, our first exposure was to Buffett and to thinking about investing in that format.
In the early years, we began to wonder if there was a magic formula somewhere and how it worked. Our dream was to one day manage money and to put into play some of the beliefs and theories that we had learned. Over time, we began to do that and eventually realized there wasn't a magic formula and instead concentrated on business models and companies. The rest is history.
Larry Coats: I came at investing from a completely different angle. I grew up the son of a small-town banker and developed an interest in finance. After graduate school, I worked for Andersen Consulting, now Accenture
After I left Andersen and got into the investment business with a small regional investment firm here in North Carolina, I met David and his partner. Through the years, as we talked about Graham and Buffett, and Buffett's notion of the moat and castle, I ended up going back to my early teachings from graduate school, where I had learned about Harvard professor Michael Porter. He had written a textbook on competitive analysis, and maybe 15 or 17 years ago, as David and I were talking, it occurred to me one day that there was a common thread.
As Buffett puts it, Porter writes books about it and Buffett makes billions from it. But they are exactly the same concept in terms of focusing on the predictability of a business model being determined by its position relative to customers, suppliers, competitors and complementary products. So with that as a framework and having known David since the inception of the firm, I joined them at the end of 1993 as a partner.
DM: I didn't know you had that kind of a tie to Warren Buffett. Do you think he's happy to see 9% of your portfolio in Berkshire Hathaway?
DC: Honestly, I don't know if he is happy. I think he thinks about his shareholders as an amorphous mass of people he has obligations to. He does know of the respect we have for him and for his and Charlie [Munger]'s teachers. As much as anything else, their willingness to opine on the world around them and, as Charlie says, be exemplars -- whether it's about how they run their business or how they treat other people -- are some of the most important messages we can all gather.
LC: There is an interesting exercise, and we have done this -- go all the way back to the original Buffett partnership letters and read them sequentially through even the most recent annual report. You will see Buffett's thinking and approach change in the late '70s and early '80s as he begins to focus more on business models and the quality of businesses, where "quality" is defined not only by the current economics but by the future predictability thereof and the ability to grow without requiring excess capital.
That focus on the business model is one that comes to us not only from Buffett and Munger's teachings but from the concepts that Porter demonstrates, as well as our experience looking at literally hundreds and thousands of businesses we've visited over the last 12 or 15 years. So the people who have influenced us are not only Buffett and Munger and Porter, but all of these business managers we've met through the years and the tidbits of learning from each of them that helped us put together a view of what the economic business model of a company looks like.
DC: We don't believe that Buffett really teaches anyone to manage money, because the way he did it, and his history and his vehicle today, are a different methodology. What he can teach are goals, methods, and important issues. For us, early on we realized that we didn't know enough. So we got on the road and started visiting companies. I don't think that notion and that effort of visiting companies and gathering information and defining our business models in our minds would have been anywhere near as relevant if we didn't also have that structure from Charlie and Warren to think about it. But just the same, if we had just sat in our office and not gone out, I don't think we would have really ever really truly understood the importance of a business model.
LC: We believe if you can't understand a business, you can't value it. If you can't value it, you shouldn't own it. What does it take for us to be able to understand a business, in terms of this model and the economics, kind of soup-to-nuts or raw material to finished goods? What does it take for us to be able to understand a business?
In some businesses, that requires that you go visit the company, spend time with management, and spend time in its operations. Other businesses have relatively straightforward business models, and our experience allows us to analyze those models more efficiently. But at the end of the day, you have to have understanding in order to come to a point of prudent decision-making, and that is what we are focused on, is getting the understanding around the businesses that we are considering for the portfolios.
In Part 2, we'll dig into the portfolio a bit to get their thoughts on some stocks.
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Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. He's ranked 7,979 out of 30,725 rated investors in CAPS. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.