Founder of Akre Capital Management Chuck Akre is famous for his contrarian approach to investing where he focuses on quality over quantity.
His approach towards investing, which he calls the “Three-Legged Stool,” is based on three eternal tenets that he uses to strategically plan and invest and which have served him in the long run.
Here are five most essential tenets drawn from Akre’s investment approach:
Invest in high quality businesses
Akre invests in high-quality businesses with extremely good business models and sustainable competitive edges. He seeks to invest in firms with high return on equity (ROE) and capital, which can perform well under different economic conditions. The focus here is to select solid businesses that are debt free and have a moat.
Focus on sound management
Akre places a strong focus on the quality of a company’s management. It is a given that an honest, devoted and sincere management goes a long way in defining a good organization. Akre wants managers with not just skills but also interests closely matching those of shareholders. Good financial decisions resulting in sustainable growth are needed through sound ethical management.
Emphasis on reinvestment opportunities
Akre prefers firms that reinvest profits in the firm’s future projects effectively rather than paying out as dividends or repurchasing shares gratuitously. This is a very important sign of growth. Generally, companies that reinvest profits focus on growth and are termed as growth stocks or businesses. Whereas, the ones which provide dividends are known as dividend stocks or companies. Growth reinvestment always aids future growth and shareholder value maximization.
Patience and long term mindset
Akre’s approach is best characterized by one of the key virtues of which it consists: patience. Similar to what the Warren Buffett thesis of buying and holding solid businesses for years together says: Patience in investing is the key to financial freedom. On similar lines Akre recommends that investments be kept for extended periods, giving time for the compounding magic to do its work in their favor. By not reacting to short-term fluctuations in the market, the investor can make high returns in the long run.
Disciplined valuation
Akre believes in the purchase of good companies at reasonable prices. He is sure that a reasonable price for good businesses has the ability to yield exceptional profits, whether or not the initial expense is large. Therefore, it is important to select good businesses at cheap valuations. This kind of selection leaves room for gains as the earnings of the businesses compound.
Therefore, Chuck Akre designed an investment strategy founded on the discovery of superior businesses with the capacity for long term growth. His suggestions are sound advice for investors who wish to ride out the turmoil of the financial markets and build long-term wealth. Therefore, it is always prudent for investors to heed to such words of wisdom and inculcate these ideas into their investing careers.
