Reflecting on Six Decades of Active Investing
Our firm’s founder David D. Basten started investing when newspapers still relied on youthful carriers on bicycles and he built up a then-impressive sum of $400 to plug into the stock market.
A bit more than 60 years later, he’s still at it, although he’s upped the stakes, steering a firm running four distinct mutual funds.
Numerous lessons, as you’d expect, have occurred along the way, and many have resurfaced as the market has moved through many cycles.
For example, the Mag 7 draws a dry chuckle from David.
“Wall Street darlings tend to bump into each other and start to duplicate products that the others have,” he said. “The bigger the company, the closer it gets to diminishing returns, and I don’t know how far those returns are going to diminish before they’re no longer attractive.”
It’s a pragmatic approach that he has honed amid successes, setbacks, and a career dedicated to focusing on the investor.
“I look at things from a fear and greed standpoint—my fear grows when my greed grows and whenever I am confident that everything is good, I go ‘whoa,’” he said. “Being up 25% is a good thing for us today, but we have to put money to work today for the client who didn’t get that 25%, so we have to back away from our enthusiasm.”
David recounts some of his more memorable lessons here.
Straddle the Growth/Value Divide
Investors insist on splitting the value side of the market from the growth side, but I believe there’s nothing wrong with either side. Although, it can be challenging to find good growth stocks at value prices and value stocks that grow like growth stocks.
Nonetheless, by focusing on the center of those two market groups, I believe we’ll position ourselves to invest in growth stocks at attractive valuations and value stocks with growth potential. More specifically, I look to buy companies that:
- are really good at what they do
- have really good numbers
- compare well to their industry groups
- have management teams looking to the future rather than trying to hit home runs on a day-to-day basis
I appreciate the good characteristics of both value and growth stocks, so ever since I’ve run Yorktown Funds, I’ve focused on buying companies with attractive financials and innovative business models while keeping a close eye on how they perform. Some will probably be growth and some will probably be value.
It Started Early With a Single Stock
Carrying 92 papers daily for 4½ miles made me $20 a week as a kid and over time, I accumulated a fortune of $400. I could have bought a new bicycle or a shotgun or a set of golf clubs, but I wanted to put it into the market, and my father introduced me to a family member who was a stock broker. We discussed one company—Pan American Sulphur—which sounded good, produced a good product, and had a good market at the time.
It was selling at $10 a share and I bought $400 worth. It was terrific, and it quickly went up to $40 a share. I couldn’t believe how much money I’d made, but my father was adamant that investing is not an in-and-out deal. You must be patient. But the stock started to fall, and I listened to my father and I said I can hang in there. Unfortunately, the company went broke and I lost my entire investment.
It was one of those lessons that I tucked away and I’ve used throughout my investing experience to know those things do happen. And you don’t invest in one stock.
Nothing Beats Deep, Rigorous Research
I joined the Navy in my late teens and when I returned to civilian life, I discovered that the stockbroker I’d trusted to invest my inheritance had lost about 85% of it. Apparently, he’d been drawn to the many new issues in the market at that time and I wasn’t in a position to ask questions.
I determined I was going to straighten that out one way or another. So, I went around to different brokerage houses, talked to their research departments and got as much information as I could on companies that I found compelling. By this time, it was early 1973, the beginning of a horrible period for the market. I’d narrowed my focus to five companies and I kept watching their earnings, cash flows, product development, and revenues. My focus kept narrowing and finally at the bottom of the market in 1974, I was down to one company, American Medical International. It was a hospital management company that was expanding, had incredibly good management, and their earnings and revenues were growing very consistently—even as the stock went from nearly $50 to less than $3 a share.
No one believed the numbers and everyone was throwing the good out with the bad, but my father-in-law, who was in the investment business, comforted me by saying “sometimes you have to go against the flow and you have to be very, very knowledgeable about what you’re doing when the markets are at their worst.” I took that to heart in my continued research, to the point where I almost took a trip to the West coast to visit the management team and make sure it was a real company.
I never made the trip, but I did invest based on my deep research. About that time, the market started to turn, and not long after, I’d made back the money the stockbroker had previously lost.
Inspiration Can Come from Anywhere
Shortly after my American Medical International success, the U.S. entered a period of high inflation and I was left trying to find the real truth behind what to do and how to do it when it came to investing. I stumbled across the writings of two individuals who forced me to think differently—and helped me immensely.
The first was Harry Markowitz, an economist who opened my eyes to investing in a way that maximized return while reducing the risk. It was his efficient frontier theory that attracted me to him, as well as his thinking on building a portfolio: He said he was an economist, not an investor, but he would look at the whole market and buy as many good things as he could find and keep researching them. That made me realize that instead of looking at five stocks, I should look at 10. Or 20. Or 500.
Around that time, investment consultant Charles Ellis published Winning the Loser’s Game, which many point to for promoting index investing. Although I’ve never been an indexer, I believe this is the best investment policy book you can read. What makes sense in it?
- You need to know what you’re trying to accomplish.
- You need the right people around you.
- You need to make investments that make sense.
- You can’t pay too much in fees.
- You should be well-diversified.
If you follow such simple, straightforward policies, you feel comfortable with what you’re doing as an investment manager and it helps the clients feel comfortable, too.
Overconfidence Will Trip You Up
As the Magnificent 7 has risen, the group has grown to represent as much as 35% of the S&P 500 Index. That’s a significant overweighted position. And when times are good and all seven stocks blossom at the same time, the S&P 500 has done well.
But be careful what you wish for. Things will eventually change, they will change quickly, and it won’t be obvious before it happens. And once that direction changes, the whole market’s motion and movement needs to be reset to another area.
How do you avoid swinging for the fences with hot themes such as the Mag 7? You must remain almost locked into the fact that you don’t know when the turn will come. Every day, I acknowledge that, but I also know the companies that have the best set of numbers to be as equally weighted as possible. Among those, I don’t have a favorite 175th stock or a favorite No. 1 stock. I try to like my entire group of up to 200 stocks from the middle of the market—then I’m swinging more in the center of the market versus than at those outlandish success stories.
Family Ties it All Together
I’ve been blessed to build this firm with the efforts of my children, who have each brought unique skills and abilities to improve our work.
My son, David, has an amazing ability to keep numbers straight in his head. And although he challenged me on everything we did when he started with the firm, we eventually figured out how to work together. He’s also been an inspiration because he can do something I hate to do: hit the road and talk about my performance.
His younger brother, Austin, got a degree in business management and I figured he’d be the one to join me on the portfolio. But he hated it. Fortunately for us, 9/11 brought a wave of new regulatory issues and Austin was very interested in that aspect. So, he went to law school, studied securities law, and became our compliance officer.
My daughter, Brentz, was always good at math and picked up on newer technologies. In the 1980s, I started working with a group of retired nuclear engineers and I asked them to set up a series of analytics to look at the market in a different way. They did a great job and developed a process, and it was Brentz who took it over and operationalized it.
Ultimately, I’m proud of the way that I’ve built Yorktown Funds, learning from all of the lessons of the past and working alongside my children to achieve such long-term success.
A View From the Center of the MarketIn this webcast, our founder David D. Basten discusses his personal drive to provide steadier investment opportunities for nearly four decades. What began as a desire to help his mother preserve her inheritance grew into a strategy to help people like her: Individuals who don’t know much about the stock market, but deserve to benefit from its returns. |
|