“Chuck Akre’s Powerful Concept”
Chuck Akre is a famous investor and again, being a nerd, I have read every single one of his letters. Akre does not refer to himself as a value investor, but rather a compounding investor. He spends his time searching for compounding machines and then holds them indefinitely. What makes a compounding machine? Akre has narrowed it down to what he calls, his 3-legged stool concept:
Extraordinary Business
High return on equity and cash flow
Pricing Power
Solid Balance Sheet
2. Talented Management
High integrity
Long term vision
3. Great reinvestment opportunities and track record
Disciplined reinvestment
When we started AH 13 years ago, we did not invent anything. We were both students of great investors, having read everything written by Buffett, Munger, Marks, Akre, Sleep, Klarman, and others. We copied their ideas and applied them to a HoldCo buying SMB businesses. Here are our three tenets:
Buy companies we understand with histories of producing attractive cash flow returns.
Run by people we want to work with.
Pay a fair price for the business.
Akre’s third point, great reinvestment opportunities, is where the HoldCo structure shows its value. I am not limited to reinvesting in the companies I own. If a better opportunity arises through acquisition, I can capitalize on it. Some of our businesses churn out consistent cash flow every year but do not need much capital to grow. Through the holding structure, we take those funds and reinvest them in other opportunities, compounding them at a faster rate than if we had paid a dividend or tried to force invest the funds into the company that produced them.
Here is a quote from Akre which I love as it applies to what we do:
“To think like a compounding investor is very natural for people who buy small or private businesses. The private investor wants to concentrate carefully on a few business investments and hopes the accountants will report back consistently at the end of each year that equity per share has grown. Private investors don’t think about trying to dart in and out of investments on a daily or monthly basis.”