Let Your Winners Run | Denewiler Capital

Observations on the Market //

Let Your Winners Run

Written by Greg Denewiler, CFA® // April 25, 2023

When it comes to investing, 25 years is forever; certainly longer than most investors are willing to wait. Now that we are at the beginning of the first quarter 2023 earnings reporting season, you can already see the “what if” playing out. No matter how positive a company’s earnings might be, investors are nervous about what may come next. We haven’t even touched on the political polarization that will come in the next 18 months. How is an investor supposed to navigate the coming winds of change, which could look more like a hurricane? The answer may have been provided in Saturday’s Wall Street Journal: “How to Pick a Stock for the Year 2048.”



Jason Zweig reports that Thomas Gayner, who is the chief executive of Markel Corp. (MKL) (an insurance company similar to Berkshire Hathaway), has established and funded a student investment fund at Delaware State and the University of Virginia. This project is unique from an investing perspective because once roughly 20 stocks are purchased, the holdings cannot be sold for 25 years. There will be a total of about 40 students between the two schools participating in the project, and it is worthwhile to read the article for more details. Instead of just paraphrasing, let’s consider how versions of this strategy have worked in the past.



The first and probably most obvious comparison would be Berkshire Hathaway. Warren Buffett is well known for owning some of his investments for decades. Though Berkshire’s strategy has somewhat changed recently, Berkshire still holds several companies they have had since the 1990s — two of which are Coke and American Express. If you had invested $10,000 in BRK 35 years ago, you would now have almost twice as much money as if you had invested it in the S&P 500. The 25-year time horizon has inarguably worked for Berkshire. Markel also has a very long-term investment focus, which is probably why Mr. Gayner decided to fund the project. Over the same 25 years, Markel’s stock price has beat the S&P 500 by more than 25%. According to Markel’s 2022 annual report, 42% of the current portfolio is in their top 10 holdings, which is what can happen when long-term holdings turn into substantial winners. It has worked for Berkshire and Markel.



Jason Zweig also mentions the Corporate Leaders Trust which is currently managed by Voya. The fund was started in 1935 with 30 companies and a mandate to never sell or add to any of the holdings. Dividends were reinvested and any stock sales resulting from a cash buy-out were reinvested in the remaining companies as well. The prospectus for the fund shows the net asset value in 1941 at $8,799. As of the end of 2021, it was $34.4 million (compared to the S&P 500, which would have been $25.4 mil). There were only 566 investors in the fund in 1941 — bet you wish your grandparents were one of those 566. The fund now holds 20 companies, and the largest position is a railroad. The trust has also beaten the S&P 500 by over 40% in the last 25 years. The lesson here is that the losers can only go to $0, while the winners can go far beyond a 100% gain — if you let them.



You may be thinking that the Berkshire’s, Markel’s, and Voya’s of the world are large corporations who have the resources to find big winners. While that is true, there is also Ronald Read, the gas station attendant and part-time JC Penney’s janitor. He spent his entire life buying and holding blue chip companies amassing almost $8 million of stock certificates which were found in his bank safe deposit box at the time of his death. They were not all winners, but most were held for decades.



Jason says he was struck by how the students referred to their holdings as “companies” and “businesses.” When you hear about investing contests, everyone refers to their holdings as stocks, never companies. That alone is one of the best lessons we should continually remind ourselves of: these are companies, not stocks. Here are quotes from two of the students from the two schools involved in the project: “If we and our successors can pick only a few winners, they’ll drive the returns, and our losers won’t matter.” “It really forces you to think of businesses in a different way: Can it survive 25 years?”



Investing in companies that compound their cash flow over decades takes a mindset, and a point that is easy to miss is that it allows you to make mistakes. A company’s stock price that goes to $0 is a big deal in the short term but quite likely becomes a rounding error after a few decades.


Observations On The Market No.382

About The Author:

Greg Denewiler, CFA®
Owner & Chief Investment Advisor at Denewiler Capital Management