Circle of Competence

With much thanks to one of my favorite blogs, Controlled Greed, I found a terrific article written by the Canadian magazine Moneysense.

The article is called The Next Buffetts, and it profiles 4 investors whom are thought by many to be “Buffett-like.” While this is a recurring article topic, (remember The Buffetteers?) I find each one to be enlightening in that I often discover an investor previously unknown to me.

Who is that diamond in the rough this time?

That’d be Mr. Timothy McElvaine. Mr. McElvaine runs the McElvaine Investment Trust, a Canadian trust, similar to a partnership, with free range to invest in anything, anywhere, at any time. According to the website, McElvaine has returned an amazing 20.4% (before incentive allocation) since 1996, vs. 9.6% for the TSX/S&P blended index.

What’s more, Mr. McElvaine has now underperformed the index for four running years. It toys with my investing ambitions to think that he has underperformed for nearly half a decade , yet he still has beaten the market by over 10% on an annualized basis! What that means is, before he began underperforming, he had a margin of superiority over the market of nearly 20% annually over a 7 year period. Truly astounding numbers.

The most impressive fact I left out: In the 11 year life of the trust, he has not had one down year. Sound familiar? I believe was it Warren Buffett who, during his partnership days, beat the market by a fat margin for 13 years without a down year. If you think (as I do) that Mr. McElvaine will resume his outperforming ways in the coming years, it’s feasible that by the 13 year mark, he’ll be up on the indicies by 12-13% annually, or more, without a losing year.

Let me pick my jaw up off the floor before I continue…

With these unbelievable numbers, I had to check out his website to look for partner letters, and luckily enough, they were there.

Suffice to say, the letters were everything I’d hoped. He outlines his major investment tenets, provides humorous analogies for the market and life, and even tells us about a few specific investments he’s made in the past. Reading them, I was reminded of the first time I read those magical Buffett Partnership letters. While it’s impossible to compare any investor to Warren Buffett, McElvaine’s writing forced me to make the analogy in my head.

My advice to you? Read the letters, soak them up, and then read ‘em again. Any investor, young or old, could benefit from applying the principles laid out in Mr. McElvaine’s thinking. The simplicity of merely finding a handful of business selling for way less than they are worth inoculates the reader.

Mr. McElvaine lays out three basic investing tenets in every letter, and they are thus:

“As I get older in this business, I value certainty more and more. Let me clarify what I mean. I am not referring to a prediction of what is going to happen to the stock price. I am referring to certainty over the items I focus on. As discussed in the past, these are:

1. What I think the company is worth

This is always a guess at a broad range. It does not depend solely on assets on hand.

2. How volatile I think this rough estimate of worth is

This is a stress test of item 1. I think about the story of the three little pigs. The
grass house and the stick house, from the perspective of a pig hoping for longevity,
are much more “volatile” structures than the brick house.

3. Do I think management and the board are working for or against us.”

In essence, Mr. McElvaine is saying that the best approach is buying businesses with stable value, for much less than that value, with a management that won’t destroy it in the meantime.

You could do worse than to follow his advice.