For the past 3 years, value stocks have been out of favor, but the tide is turning. Randy McDuff, one of the Marketocracy Masters profiled in the book �The Warren Buffetts Next Door�, is up 9.70% so far this year. It just goes to show you that even in a bad market (the S&P 500 is down 3.38%), there are still pockets of opportunity to make money.
Randy�s investment style is very much like Warren Buffett�s. Over the past 10 years, the compounded annual growth rate of Buffett�s Berkshire Hathaway Class B shares (BRK.B) is 5.20% while Randy�s RMG1 model portfolio is 25.91%. Both did much better than the S&P 500 which delivered 2.54% a year, including dividends. This long term track record of outperformance is the best evidence we have that both men are skilled investors. You can view Randy�s track record here.
More recently, however, both Buffett and Randy have disappointed their investors as value stocks have been out of favor. For the past 3 years, Berkshire�s B shares returned just 2.55% a year and Randy 3.01%. Both trailed the S&P 500's return of 12.42% by a wide margin.
But Randy is ahead of the S&P 500 by 13.08% so far this year which indicates to me that the tide has turned for his style of value investing. Warren Buffett�s Bershire B shares are behind the S&P 500 this year, but by a much smaller margin (only 2.40%).
The difference between Buffett and Randy this year is big and I think its attributable to the fact that Randy is swinging at his fat pitches, while Buffett is putting money into financials and technology, two sectors in which he does not yet have a great track record. While IBM (IBM) and Bank of America (BAC) have some of the strong consumer brand characteristics of the stocks Buffett has done well with in the past, they are not squarely in his sweet spot.
In contrast, Randy is doing well this year with many of the same stocks in which he has made a lot money in the past. His strategy of buying companies that are becoming global monopolies due to economies of scale, government policies, or protectable product innovation has performed well for the past 10 years, and is starting to do well again.
A good example of the kind of stock that fits the profile of Randy�s fat pitch is Mastercard (MA) which is currently one of his top five positions. He first bought the stock in 2006 at about $46 shortly after it�s IPO. When Mastercard dropped 33% in 2008, during the financial crisis, Randy bought more. Today the stock is trading over $359 a share and is up 60.57% in 2011 year to date. When he first bought the stock, he told me it was because Mastercard and Visa are the only two companies that have the scale that is required to cost-effectively process credit and debit card transactions on a global basis and, at that time, Visa wasn�t yet a public company.
No investor can perform well all of the time because no one, not even Warren Buffett, is skilled at picking stocks in every sector, every style, and in any kind of market. Every great investor learns to recognize opportunities that their track record shows they can hit out of the park.
To define a manager�s fat pitch, I look for the common characteristics of the stocks in which a manager has made money on in the past. My challenge is to put the manager on my investment team only when I see the market offering the manager his fat pitch so he can hit it out of the park for us.
When I look at Randy�s portfolio, I see a group of stocks that have increased their sales and earnings at a time when the U.S. and European economies have been stagnant. As long as the global economy is growing, the market is going to be throwing Randy his fat pitches. This is why I am going to put more of our clients� assets in his model portfolio.
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