As a young man, Eckart Weeck spent summers helping his father sell cars in Princeton, New Jersey. But one fateful day he stumbled upon a Berkshire Hathaway annual report and, after reading it cover to cover, he began devouring everything Warren Buffett had written on investing.
It was an epiphany for the young man who until then had been a disenchanted biology major. When Weeck’s father sold his interest in the dealership, it cemented Weeck’s decision to pursue a newfound passion.
Fast forward some 35 years and like his idol Buffett, Weeck prides himself on finding good investments in the most unlikely of places. Weeck eschews securities-picking programs and artificial intelligence when it comes to making investment decisions.
Instead, he peels back the layers when investigating a potential investment. His “deep dives” routinely consist of number crunching, projection analysis, management assessment and opportunity evaluation, and even then, he’s admittedly had his share of blow-ups.
While acknowledging that his long-term, buy-and-hold strategy is not for everyone, this senior managing director and senior portfolio manager at Highlander Capital Management in Short Hills, New Jersey, has no plans to change as the firm manages about $220 million in client assets.
That said, Weeck isn’t all work, no play. He also takes part in charity functions, such as the annual fundraising event for the Hudson County Detectives Association, which is a local police benevolent group that aids police officers’ families in need.
Q: How did your education and early business experiences shape your investing views?
ECKART WEECK: When I entered the securities business in the early 1980s I had a very good mentor who had been an analyst. He emphasized the importance of paying attention to details and to view this business as buying ownership interests in companies. Once clients accept that, they often see their investments from a more businesslike standpoint.
Has your approach cost you clients?
Over the years a few clients have left us and we’ve turned some away simply because we felt they would not be compatible.
What might Buffett say to that?
Buffett once used a baseball analogy where the investor is the batter and the stocks are pitches. The advantage the batter has is that there are no called strikes. You can wait indefinitely until the “fat pitch” arrives before swinging. The “fat pitch” of course being an investment you’re fairly certain is dramatically undervalued.
Once we have identified what we believe to be an undervalued company, we add it to the portfolio with the obvious expectation that it will increase in value over time. We use much of the same type of analysis when buying bonds except we approach the decision-making process from a creditor standpoint rather than that of an owner. The important message to clients is that they begin to think about their portfolios as representing ownership interests in a variety of companies and industries rather than just a flashing number on a screen.
How did your method perform in 2008?
The S&P 500 index returned -37.00% in 2008 including dividends. Our composite account returned -24.98% for the year. Results for our composite, since inception on 1/1/2000 and through 12/31/2017, was +314% vs. 157.7% for the S&P 500 with dividends. Annually, that works out to 8.21% for the composite and 5.40% for the S&P 500.
How did your clients react to this news?
Investors often confuse volatility with risk. Most understood, a few walked away. Investors with short attention spans generally do not do well in such a climate. These types often feel compelled to act due to short-term circumstances. This is counter to our philosophy. We were actually buying during this period. The atmosphere on Wall Street was like being at a distressed sale.
Do you hedge your portfolios?
We don’t hedge our portfolios. As long as the price of a security remains below our appraisal, we’ll continue to own it or buy more.
Sometimes it simply takes a while for others to come around to your point of view. That can occur through the security being bid up to a level more in line with its intrinsic value or through a buyout.
Can you give some examples?
We had Yum! Brands (formerly Tricon Restaurants) in the early 2000s. I liked that it was converting to franchise ownership. It would be less capital intensive for the corporation. This we anticipated. We did not see the company venturing into China and the success it would have there.
We purchased a company called Airgas when it had a market cap of less than $100 million. Twenty years later it was purchased by Air Liquide for more than $10 billion.
On the flip side we invested in Teva Pharmaceuticals when they purchased Allegan’s generic drug business. It looked like a good acquisition from a debt standpoint. But we did not see the across-the-board drop in generic drug prices coming. We bought it in the low $30s, it dropped to $11 and has hovered in the low $20s. It’s part of the game.
How do you manage volatility in your investments and how do you explain this to your clients?
We measure risk as the likelihood of the permanent loss of capital, which is a very different measurement than how much one stock price moves relative to another. There’s no way to avoid volatility if you own common stocks.
Borrowing from Benjamin Graham’s Mr. Market allegory, the market is there to serve you, not guide you. If you understand how to value a business utilizing fundamental analysis, and due to volatility, or algorithmic trading, Mr. Market is willing to sell you an ownership interest in that business at 50 cents on the dollar, you ought to take advantage of the opportunity or you’re in the wrong industry.
What are some investment areas to which investment advisors should be paying greater attention?
Advisors should ignore products that are overly complicated or serve no legitimate investment purpose. Many ETFs marketed today amount to nothing more than a short-term, leveraged bet on an index or asset class. I’m not sure how they improve the investment landscape.
Advisors also should be wary of anyone promoting a “timing service” that purports to be invested in stocks when the market goes up and cash when it goes down. These never work.
What do you wish more clients knew about this business?
Many advisors “outsource” the actual money management to a variety of managed account programs. Once outsourced, the accounts are usually immediately fully invested according to a model and then periodically “tweaked.” The tweaking often involves the sale of a security or fund whose short-term performance has been poor in favor of a security or fund whose short-term performance has been good — effectively sell low, buy high.
The problem with this is that almost all strategies will experience periods of underperformance. And since any given strategy can underperform for months, sometimes years, all you’re really doing is generating activity rather than adding value.
Briefly describe your investment philosophy, basic strategy and for which client types they might be appropriate.
We have three principal strategies: capital appreciation, balanced, and fixed income. The capital appreciation accounts are invested primarily in equities, although when the opportunity presents itself, we may use lower-rated bonds as equity surrogates.
We explain that we are business analysts not stock markets forecasters, and our job is to identify undervalued businesses, not to try to figure out in which direction the stock market is likely headed.
Tell us about your research/security selection process? What’s different about it?
Many of our clients were, or currently are, business owners. Once we introduce the mindset of thinking about their portfolios as a collection of ownership interests in different businesses, we point out that unlike private, non-publicly traded businesses, stock prices bounce around a lot more than the value of a privately held concern.
When an owner leaves the office each evening there is no big green or red arrow outside indicating whether the company’s value increased or decreased that day. If that same owner were in the process of negotiating the sale of their company, the asking price would depend principally upon value of the cash flow, or in some cases real estate or equipment, not whether an event like Brexit took place or a particular election outcome was considered favorable or unfavorable.
We invest in a company when we think we’re buying it at a significant discount to its intrinsic value. These discounts can appear for a variety of reasons. An underperforming division can mask the true profitability of a firm. Other times an entire industry falls under a cloud, taking all stock prices associated, even peripherally, down with it. Or sometimes the entire investment herd panics and everyone simultaneously runs for the exits.
We are agnostic with respect to market cap. We’ve had meaningful positions in companies with market caps ranging from $150 million to $300 billion and are comfortable holding cash when we do not see suitable opportunities.
Can you elaborate on your process?
We like good businesses at attractive valuations and consider ourselves to be disciplined buyers. We don’t experience a lot of turnover in our accounts. We’ve owned many businesses for years, some for decades. If you buy into a well-run business at a reasonable valuation, that’s run by capable and honest management who are not only good at running the business, but skilled at making prudent capital-allocation decisions, you are very likely to have a good outcome. If you repeat that process with a portfolio of 15-20 companies sharing those characteristics, your returns over time should be more than satisfactory.
We also eat our own cooking. I invest individually and for my family in many of the securities we own for our clients. We spend a good deal of time researching existing holdings and examining potential new investments that ultimately we choose not to purchase. Although that may not show up as activity on the account statement, it is necessary and while fairly time consuming, adds to the overall knowledge base.
Joseph Finora is a consultant to wealth advisors. He can be reached at firstname.lastname@example.org.
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