Yacktman Managers Talk Strategy, Mindset, and Value

In an extensive interview with GuruFocus.com, Donald Yacktman, Stephen Yacktman, and Jason Subotky of the top-performing Yacktman Funds talk about their investment strategy, and where they’re finding value right now.

“The most important decision is the purchase price relative to the value of the investment,” the managers say when asked what the most important indicator they look at is. “The value of an investment is a function of the future cash flows generated from the current assets and the reinvestment of those cash flows by either the investor (reinvesting the dividends) or the management. The quality of the cash flows is a function of their degree of predictability. We believe it is better to analyze a business model by looking at the asset side of the balance sheet and determining how much cash is being generated by the assets necessary to run the business.”

The managers also say that they look for investments in places others are avoiding. “Many of the best investments involve short term negative news about the company, industry, or the economy,” the explain. “If negative news sends a stock or group of stocks lower, we individually examine each idea, and, if the price is right, make a purchase.” And, they add, they pay no attention at all to technicals, relative strength, momentum or chart patterns.

Determining a forward rate of return is key for the Yacktman managers, and they offer some insight into how they do that with one of their big holdings, Coca-Cola. They say that the stock trades at a free cash flow yield of about 5.25%, based on their normalized figures. To that, they then add in an expected 3% for inflation, and 2% for organic growth, which results in a strong total expected compound return over 10%.

The managers also stress the importance of discipline. They say they stay grounded by reading what “rational, intelligent and seasoned veterans” like Warren Buffett, Bill Gross, and Steve Romick write. “It can be overwhelming and confusing at times to read such a diverse range of views on managing money, but they all seem to have a common core belief — design a system that you believe in, and stick to it,” they say.

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