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Recently, GuruFocus readers asked successful investor Chuck Akre their investing

questions. In his comments, he discusses LAMR, AM, MA, M!L, "#$$, L#%G, #&',
R(&, )% and AR(.
*e +ill also ,e hosting a follo+-u. /0A +ith Chuck. If you have further questions for
him, .ost them in the comments ,elo+, and he +ill re.ly.
1. I have a couple of questions for Chuck on Lamar (LAMR).
What does he think the ultimate ratio of diital !ill!oards to total !ill!oards "ill !e
for the compan#$ I have heard an#"here from %&' (& or 1)& over the ne*t
decade. Also' does he think smart phones hurt !ill!oards or enhance them$ I
!elieve this important !ecause an i+hone is reall# ,ust a mini personal !ill!oard. It
could hurt the overall appeal of !ill!oards or could !e used to interact "ith them.
Lastl# on capital allocation' the Reill#-s seem ver# capa!le !ut at the top of the last
c#cle the# paid a special dividend and !ouht !ack stop at prices a!ove toda#-s
stock price. .o #ou think the# learned a lesson and that capital allocation oin
for"ard "ill !e different$ Would love to hear his thouhts. /hanks.
1Akre2 hree questions3 a4 I have no idea +hat the ratio of digital ,oards to the total +ill
,e, ,ut I do kno+ that there is a very large u.side o..ortunity. 54 &mart .hones are
indeed mo,ile ,oards, and again I have no vie+ on +hether they +ill su..lant fi6ed
,oards, or rather enhance them through a mo,ile link of some sort. Lots of .ossi,ilities.
C4 Certainly in hindsight the s.ecial dividend and share re.urchase +as fu77y thinking.
More recently the o.tion strike re.ricing 8although the dollar amount remained constant4
continues to reflect .oorly on a cor.orate governance .hiloso.hy. Fortunately the
,usiness seems to ,e run reasona,ly +ell. I am told that 5rent McCoy9s role at the firm is
to oversee ca.ital allocation issues, and so +e might e6.ect im.rovement.
0. 1o" much do #ou think #our returns "ould have increased in 0))2 if #ou
considered the macro picture into #our stock selection$
1Akre2 Munger and 5uffett said at the :;<; annual meeting that they +ould not ,e
attracted to any manager +ho +ent to cash during the crisis. =o+ever, they held :;> to
?;> cash during the crisis, giving them great o..ortunities and reducing their e6.osure
to the do+nside. (ur returns of course +ould have ,een ,etter if +e had had the insight
and courage to go to cash, ,ut +e did not. *hat I have said is that I +ant to ,etter
incor.orate my @+orld vie+A into my security and .ortfolio decisions, +ith a vie+ that +e
might ,etter. *hat the ,alance of :;;B and :;<; have taught us is that things +ere not a
s ,ad as they felt at the time, as .ortfolio values have recovered nearly all the lost
ground. It Cust felt a+ful going through the @trou,les.A
%. I also o"n Markel (M3L) shares and I reall# like the compan# and consider it a
permanent holdin (unless it trades at %* 45).
What is #our estimated rane for the 45+6 ro"th rate over the ne*t 1) #ears$
What-s #our opinion on the companies that comprise Markel 5entures$ 1ave #ou
verified the prices paid$ 1o" a!out the qualit# of the individual !usinesses and
their competitive advantaes$
1Akre2 I think under their current structure 8es.ecially investments to ,ook value4 they
should ,e a,le to com.ound ,ook at a lo+- to u..er-teens annual rate. I have not
e6amined the 'entures ,usinesses closely as M!L has had limited disclosure. I have
s.oken +ith the C#(s of several at various functions and they are the ty.es you +ould
e6.ect. &everal are gro+ing ra.idly, and several are the ty.es I call @send the check to
(maha.A
7. I noticed #ou scaled !ack #our position in +enn 8amin (+9::). What are #our
thouhts of this compan# oin for"ard$
1Akre2 "eter Carlino 8C#( 0 chairman4 is the ,est in the ,usiness at com.ounding the
shareholders9 ca.italD *e continue to ,elieve that the tri.le head-+inds 8com.etition,
ta6es and sluggish economy4 Cust make it more difficult no+.
(. As a student dreamin of a career like #ours' I "as hopin that #ou could ive
me some advice on findin some ood topics for "ritin a thesis;essa# a!out. <f
course' I=m lookin for topics that "ould help me in a stock>pickin career.
1Akre2 Com.ound returnsD
?. Recentl# I have !een "atchin stocks "ith a!solutel# no compan# revenue take
off on @paid promotions.@ Most nota!l# L9A8 "ent from B).1) to over B1) and
!ack do"n. Cammin Cava "as similar in its performance to a hih of B?.%( from
!elo" B1. What do #ou consider to !e the sinle most important factor in
considerin investin in stock' technical anal#sis' due dilience or ne"s$ If ne"s
is the most important' ho" can one @predict@ that a stock "ill run' or is it simpl#
risk$
1Akre2 Fundamental analysis is the most im.ortant. (ne needs to kno+ +hat one o+ns
as an investor. (f course if s.eculation is your game, you can try anything.
D. I=m plannin to take CEA and learn to !ecome a ood value investor. I=m a!out to
start m# ,o! at +"C and after three #ears to enter into an investment !ank and "as
"onderin' "ill auditin help me achieve m# oal$ /hank #ou.
1Akre2 Accounting is the language of ,usiness, so anything you do to im.rove your
understanding of accounting is valua,le. I don9t .ersonally ,elieve that an investment
,ank role +ill hel. you ,ecome a ,etter value investor, as their focus 8rightly so4 is on
creating transactions.
2. In a past shareholder letter' #ou e*pressed concerns a!out the so>called
recover# (hih unemplo#ment and "eak consumer). Would #ou please share #our
current vie" on this topic and ho" it relates to market e*pectations movin
for"ard$ Also' "ould #ou relate this same question to #our e*pectations for the
portfolio=s performance$
1Akre2 I continue to ,elieve that the current high levels of unem.loyment and
underem.loyment +ill continue to hold ,ack recovery. his ,ackdro. quite logically +ill
affect the investment climate. Further, I have no .rediction a,out ho+ any of our
investments +ill .erform over the ,alance of the year 8or even ne6t year for that matter4,
,ut I do kno+ that each +ill gain in economic value .er share ,oth this year and ne6t.
=o+ the market values that is unkno+n.
F. :o" that #ou are !einnin to think of the macroeconomic factor' "hat are the
most ke# factors #ou are lookin at$
1Akre2 I have al+ays tried to ,e tuned in to +hat is ha..ening in the +orld around me, ,ut
since the end of :;;E, I have ,een trying to ,etter integrate that vie+ into individual
security selections.
1). 1avin lost a !undle this #ear on a delisted stock' I have to !e ver# cautious of
!oth compan#>specific risk and macroeconomic risk. In #our opinion' should a
risk>averse investor "ait to see if the E9. ends G90 in the ne*t "eeks;month
!efore deplo#in cash that is quite limited$ I am also of the ae (mid>()s) "here I
should have a much smaller percentae invested in riskier equities compared to
someone 0) #ears m# ,unior. I am thinkin of sta#in in cash for at least a month'
then venturin !ack dependin on the outcome of E9. chanes !efore the end of
summer. I "ill never make up for the F)& do"nside I e*perienced' !ut if I catch a
!ottom in commodities ,ust after a G9% (if such happens) or after the market is
finished "orr#in a!out the ramifications after G90 ends' 0)10 miht !e a ood
#ear for another oil stock run since it is a presidential election #ear.
1Akre2 "erha.s your .ersonal financial goals aren9t suited to your .lan of s.eculation, and
at the same time you cannot reach your goals +ithout s.eculation. If that is the case you
have a real dilemma. As an investor, I have found very little success at trying to time my
.ortfolio .urchases and sales around macroeconomic events. Instead, I try to understand
the ,usiness 8using my three legged stool model4 and make .urchases +hen the
valuation is attractive.
11. M# first question is on portfolio manaement. Hou run a ver# concentrated
portfolio "ith a ver# lo" turnover I 07 stocks "ith D(& of assets in top 1)
holdins "ith an averae turnover of 10&. 1o" do #ou manae to maintain such a
lo" turnover concentrated portfolio "hen #our assets are ro"in' "ithout
compromisin the price discipline required of a value investor$ +ut another "a#' I
imaine that "hen a ne" position is initiated' the marin of safet# is lare. 4ut'
sa#' as ne" assets roll in over time' #our top 1) positions have moved up. /hen
addin to these positions lo"ers the marin of safet#' and addin a ne" position
dilutes the portfolio concentration. Hou have manaed such a portfolio ver# "ell.
Can #ou ive us #our thouhts on this topic$
I recentl# heard #ou sa# that #ou !elieve that MasterCard (MA) has the potential to
!e a (>1)* !aer over the ne*t decade. Can #ou tell us more a!out #our thouhts
on MasterCard and "h# it has the potential to !e a multi>!aer$
Can #ou tell us a!out another one of #our favorite multi>!aers that #ou held in
the past !ut #ou do not hold an#more or is no" a smaller position$ Wh# did #ou
decide to lo"er the position siJe (or eliminate the position)$
Lastl#' can #ou tell us a!out one of #our larer positions in the past that did not
"ork out as e*pected$ What "ent "ron$
1Akre2 Fou have hit on a very im.ortant issue +hich affects all .ortfolio managers, and
that is ho+ one .uts cash to +ork, es.ecially +hen valuations are less attractive. And
further, you correctly understand that the margin of safety is lo+er +hen the valuations
are e6tended. My e6.erience is that I have tried several methods, a4 allocating funds
across the .ortfolio, ,4 .lacing funds in only the to. fe+ that are chea.est, and c4 holding
cash for e6tended .eriods. he resultsGhey have all had their .luses and failures. (ne
sim.ly has to continue to look for the characteristics +hich attract them and strike +hen
they are attractively .riced. It certainly distorts the relative concentrations in the .ortfolio,
,ut that is the outcome of a dynamic .ortfolio.
Re3 MA. I do not recall saying that MA +as a .otential H or <; ,aggerI ho+ever, I do
,elieve that is .ossi,le. #6amine the net margins of ,oth ' and MA and dream a little. &o
the key then is reinvestment. It +ill ,e very hard to find things to s.end their money on
that have the ty.es of returns that they already develo.ed internallyD
&ee question JK.
10. /eenae clothin is a touh !usiness. 6inificant market shares are ained and
lost !ased on merchandisin decisions. 1o" did Aeropostale fit the @three>leed
stool@ model of Akre Eunds$ Can #ou tell us more "hat attracted #ou to this
!usiness$
1Akre2 *e ,elieve the shares are remarka,ly chea.. he com.any has no de,t and a
very long history of success in the .reteen and teenage. hey +ill either get the current
issue straightened out or they +on9t. If they do not, I ,elieve +e are +ell .rotected in our
.urchase .rice, and if they get it right, +e +ill ,e +ell re+arded.
1%. 1i Chuck' I am ,ust !einnin to kno" a!out #our ne" fund and #our positions
and the three>leed stool in investin. I "ould appreciate to kno" more a!out it.
1) 1o" #ou can define the interit# and capa!ilit# of manaement !# readin their
"ritin and "atchin their actions$ .o #ou often talk to them or use a scuttle>!utt
approach (like +hil Eisher)$
0) 1o" do #ou decide that the compan# has reinvested the e*cess cash profita!l#
"ith hih return$
%) Eor the famous position of #our fund in American /o"er (AM/)' I have scanned
their performance over the last 1) #ears usin Morninstar. /heir return on equit#
is not hih' the lon>term de!t level is nearl# dou!le the amount of equit#' and no"
the free cash flo" sta#s at B?D) million. It definitel# is not ver# attractive at the first
look. 1o" do #ou calculate the return on o"ner=s capital for AM/$ And "ith this
price valuin the compan# at B01 !illion' is that too e*pensive$ What=s the
calculation to determine it$
1Akre2 First question. Investing is a,out gathering data .oints 8good M5A +ord4 and
digesting them in your o+n neural net+ork. If you have .re.ared yourself +ell, then the
outcome 8your Cudgment4 +ill ,e useful. Charlie and *arren are al+ays talking a,out
lifetime learning. his is +hat I mean ,y .re.aring yourself +ell. &o, after a +hile, you
,egin to recogni7e as.ects of human ,ehavior +hich you9ve seen ,efore. Fou learn to
.ick it u. from conversations, s.eeches, +ritings, etc.
&econd question. It is an outcome from sim.le o,servation. Fou can do either a .recise
calculation, or an a..ro6imate calculation ,ased on the information the com.any
su..lies.
hird question. Re3 AM L the incremental returns on ca.ital are off the charts at AM.
For e6am.le once ,eyond :.< tenants .er to+er, the returns on incremental ca.ital are in
the B;> range. &econd, +e have actually had a change in management at AM, +here
the founder, &teve Modge, and at least t+o CF(s have moved on to other o..ortunities.
he ,usiness is so good that it has .ros.ered under ne+ leadershi.. he current
chairman and C#(, )im aiclet, is +orld class. hird, their reinvestment has ,een a mi6
of adding ne+ to+ers, ,oth greenfield and ,y acquisition, and the ,alance has ,een used
to strengthen their ,alance sheet, and then .ursue share re.urchases. he net result has
,een a gro+th in economic value .er share +hich +e calculate to ,e a mid- to u..er-
teens rate since :;;:. he .roof is in the gro+th in the ,usiness9 cash flo+, to+er count,
etc. Its current valuation is at the to. end of our a..etite, and the com.any is in our mind
one of the ,est ,usiness models e6tant today.
17. I kno" that #ou are a @!ottom>up@ investor' !ut do #ou think that there are an#
companies that #ou "ould look at more closel# due to the @!a!# !oomers@ shiftin
their mone# into retirement accounts or spendin their mone#$
1Akre2 he investment management ,usiness is one of the ,est ,usinesses to o+n.
1(. Guite impressed "ith #our approach to investin "here #ou look at ro"th and
value !oth. M# questions areK
1) 1o" does a retail investor conduct the kinds of research #ou do in terms of
talkin to manaement' suppliers' competitors etc.$
0) If #ou have a !usiness that historicall# enerated hih returns on invested
capital and is availa!le for a reasona!le or cheap price' !ut the manaement has
made some e*pensive acquisitions in the recent past and its re>investment efforts
have either failed to produce results or the manaement appears clueless a!out
this' "ould #ou pass on such a compan#$ What "ould #ou recommend to
manaement of such a compan#$ 4u# !ack shares like craJ#$ +a# out D(& of ECE
in the form of cash dividends$ I am sure #ou can uess man# names that fit this
description.
%) What kind of moat' pricin po"er' competitive ede do #ou see in the discount
retailers in #our portfolios like Ross 6tores Inc. (R<6/)' /CA Companies (/CA) and
Aeropostale (AR<)$
7) Comin to American /o"er' "hich has !een a multi>!aer for #ou' does
valuation come into the picture in terms of sellin... or as lon as #ou see the
ro"th and re>investment opportunities' #ou are a patient share holder$
() Wh# did #ou sell 9nsco +lc. (965)$
1Akre2 /uestion one. It may ,e a little more difficult for an ordinary investor to get access
to all the things you mention, ,ut the financial filings are al+ays going to get you most of
the +ay home. Fou also certainly have the o..ortunity to check +ith su..liers, etc., Cust
as a so called .rofessional +ould.
&econd question. *e are al+ays trying to understand ho+ the management thinks a,out
the reinvestment issue. *e +ill make o,servations, and occasionally unsolicited
suggestions. 5ut human ,ehavior comes into .lay, and if they Cust don9t @get itA +e move
on, or reclassify the o..ortunity.
hird question. he moat for the discount retailers you mention is shallo+ and narro+,
and in our mind consists of a rock-solid ,alance sheet, and a +ell-develo.ed
merchandising skill.
Fourth question. &ee / J<? a,ove.
1?. Can #ou tell us ho" #ou et comforta!le "ith Lamar=s hue inde!tedness of (*
.e!t;94I/.A$ As manaement is revivin !ack its cape* to 1)) million' it seems
unlikel# that pa#in do"n de!t is a hih priorit# oin for"ard.
/he lon>term opportunit# from diital !ill!oards is hue I onl# 1'0)) off the
17?'))) !ill!oards are diital toda#. Lamar can easil# et to (& or D'%)) of these
!oards !ein diital over the ne*t fe" #ears. /hat is a!out ?*. /he economics of
diital are amaJin "ith a!out 1)* hiher revenue' !reak>even in less than a #ear'
and ver# hih incremental 94I/.A marin relative to traditional !ill!oards. 6o'
"hen the local advertisin markets recover' the# "ill !e read#. M# question is I is
this similar to #our take on Lamar$ And if so' "hat is Mr. Market missin here$
1Akre2 Re LAMR.he ,usiness can easily su..ort a leveraged ,alance sheet. he
management has in the .ast chosen to leverage u. the ,usiness through a share
,uy,ack and a s.ecial dividend. In hindsight, it +as a .oor decision, as they nearly ,roke
a ,ank covenant in :;;E, and the refinancing to remedy +as 8is4 very costly. 5ut the facts
remain that it is a +ide moat ,usinessI advertising s.ending in the N& is gro+ing again
8al,eit ,etter in the national than local markets4, the digital o..ortunity is very attractive,
and the shares are modestly valued ,y the market. I sus.ect that the market is reacting
to t+o things at least. (ne, that the management has a s.otty record on reinvestment,
and t+o, that the @localA market is lagging the national ad market in recovery. Also see
ans+er J<.

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