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Brian Yacktman: The Next Generation of Intelligent Investors

Recently, my Texas Lutheran University students welcomed Brian Yacktman on campus to lecture on life, entrepreneurship and investing.

At 37, the father of six looks young and has a calm demeanor. However, don’t let his youthful appearance deceive you. As a dyed-in-the-wool value investor, he has earned respect.

The Yacktman name is quite familiar to those in the value investing community. Brian’s father, Don, is a legendary money manager overseeing more than $30 billion.

However, instead of riding dad’s coattails, Brian decided to venture out on his own—at the ripe old age of 27. I’ve known some investors who set up shop in their 20s, but I’ve never met one who succeeded in establishing a publicly traded mutual fund. However, that is what happened when he launched the YCG Enhanced Fund.

It wasn’t immediate success, though. Initially, Yacktman’s in-laws were living with him and real estate was a precious commodity. As such, his bathroom became his first “office.”

Additionally, Yacktman had convinced a classmate to move his family half-way cross-country to join him in Austin. The classmate was working in the investment business and had a $65 million client who they thought would be “Client #1.”

As with many start-up ventures, hurdles mounted. The big money client never materialized and the stock market slumped under the Great Recession. Yacktman was forced to liquidate his life savings to pay his staff and keep his family afloat. For two years, the young investor went backwards, selling off savings to take care of his staff and expanding family. Finally, when he was in a position to take his first paycheck, it was a whopping $1,000.

Fortunately, the young investor had a pretty good teacher growing up and knew the importance of frugality and a long-term vision. As he discussed this, he explained all financial transactions are investment decisions. During the long two years without an income, he knew smart investing was forgoing consumption today to derive benefit later. I certainly did not have his maturity or discipline at that age.

One student asked a question about the risk of starting his firm versus the risk of the stock market. Yacktman explained that unlike Wall Street’s traditional view, risk is not the volatility of a securities price. Rather, risk comes from the loss of capital or the permanent destruction of a business’s ability to generate cash flow and value. This applies whether discussing publicly traded securities or his fledgling firm.

It also led to an unconventional, but interesting concept. Even if a business’s earnings are volatile, Yacktman stated it is not risky if earnings are highly probable to be greater in the future. Conversely, an asset with no volatility could be very risky if it does not maintain its long-term value.

In elaborating, Yacktman said that over decades cash is very risky as it is guaranteed to lose its purchasing power net of inflation. That contradicts the theory that “cash is king”—at least over long periods of time.

Yacktman then shifted the discussion to the concept of diversification. He said the intelligent investor must not confuse diversification with di-worsification—meaning more is not always better. Expanding upon this he stated, do you want to own a concentrated core group of 20 or 30 securities—or, does it make sense to own your 100th best idea? In discussing this, he was referencing that a portfolio generally achieves diversification once it contains about 30 different companies. Beyond that, you are just watering down your performance.

In just ten years YCG has grown to $450 million in assets under management. Although that would be enough to put a smile on most people’s faces, the value investor has very different motives for finding happiness and purpose.

He counselled the students that the reason he is in the investment business is to help others. This was blatantly clear during the 2008 meltdown of the markets as people grew increasingly concerned, yet struggled to find answers and understanding. Yacktman added that each student should seek a career path that consumes them, offering that true joy comes from serving others—this is true whether in business, family or friendships.

Although that may not be the typical message delivered by Wall Street, Yacktman’s message resonates well with Main Street. It reinforces that through patience, persistence, and serving others, one can be successful in business without compromising their values.

Dave Sather is a Certified Financial Plannerand owner of Sather Financial Group. His column, Money Matters, publishes every other week.