George Michaelis
Market Wizards Index: +18.6%
Compound annual over 15 years
Fund or affiliation
- Source Capital
Methodology
- Emphasizes on sustainable ROE with low tolerance for risk. To "buy earning power at a discount".
Asset Categories Employed
- Stocks, distressed finance company senior debt, convertibles.
- Avoids complex derivatives.
Research/ Valuation Techniques Employed
- Rarely invests in themes like "Americans are getting older" type.
- Looks at companies with these features:
1. High ROA & ROE, high ROE should be sustainable;
2. Earning power not hostage to business cycle;
3. Successful for identifiable reasons. - Debt averse - average debt level at 15% of total assets.
- Never buys AA bonds, as against AAA ones. For 30 b.p. it is not worth it.
Trading Techniques Employed
- The lowest cash level was 10%; he had 20% cash before the 1987 crash.
- Michaelis tries very hard to avoid significant losses. He doesn’t mind lagging the averages if the market breaks away on the upside.
Philosophy and beliefs
- "Invest with the one hundred-year storm in mind."
- Not primarily motivated to maximize return because of low tolerance for risk.
- On derivatives: "Intellectual people are attracted to intellectually elegant conceptions, such complicated instruments are likely to distract them from the more fundamental truths."
History and other facts
- Train quoted Robert Kirby, head of Capital Guardian Trust, "Stocks are much more volatile than the businesses they represent."
- Warren Buffett often asks someone he’s talking on the phone "What are you buying?"
Examples
- Kellogg - economy of scale: being 2.5 times larger than its next competitor, even the management does a bad job for 4-5 years, basic profitability will not erode.
- Marsh & McLennan - tollgate for the largest companies.
- Bristol-Meyers - 35 years of consecutive earnings growth, at 25% ROE, excess cash, no debt.
Performance Record
- 18.4% over 15 years: "A calculation in the summer of 1988 showed that over the past 15 years the total return of Source Capital was exactly 3 times that of S&P 500: The gross gain was 1200%... exceeded by only 16 other funds...".
All International Welcome Messages: 1, 2, 3, 4, 5, 6, 7 & 8
