A hedge fund manager who turned $126,000 into $500 million explains his Warren Buffett-esque investment process - and why he's not concerned with today's stock market valuation
- Dev Kantesaria, the founder and portfolio manager at Valley Forge Capital Management, is quickly growing his assets under management due to his long-term, systematic approach to investing.
- An avowed value investor, Kantesaria harps on making purchases in high-quality "compounding machines" that have organic growth, predictable earnings, pricing power, and cost efficiency.
- His long-term time horizon makes him immune to day-to-day market fluctuations, which is why he's "not concerned" at all with today's valuations.
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When Valley Forge Capital Management was founded in 2007, they had just $126,000 in assets under mnagement. Since then, they've grown to over $500 million in just 12 years.
Hundreds of millions of dollars in assets don't just happen upon portfolio managers. It's safe to say the firm is doing something extraordinary to have swelled to roughly 3,968 times their original size.
Dev Kantesaria, Valley Forge's founder and portfolio manager, attributes the firm's explosive growth rate to the adherence of strict investment principles and a long-term time horizon.
"We believe that the only way to outperform is a concentrated portfolio of your best ideas," he said. "Why would you want to invest in your 15th best idea?"
He continued: "A lot of portfolio managers are either taught or believe that they have to have 25, 30, 40, 50 names in their portfolio, which is absolute silliness."
This idea is at odds with the age-old investment advice that a well-diversified portfolio is the key to long-term success, but Kantesaria stresses that his point is mathematically sound. He notes that the more an investor adds to their portfolio, the harder it becomes to one-up the market.
For that reason, he only holds eight to 12 individual issues at a time. And in order to make sure he's only investing in the best of the best, he focuses on value and assess potential purchases with rigorous vetting and analysis.
"We buy companies that are generally monopolies or oligopolies in their respective industries," he said. "They have highly predictable earnings on a going-forward basis, they have strong organic growth - in contrast to most value investors who buy cigar butt stocks."
For the uninitiated, cigar butt stock is a beaten-up, run down issue that only has one or two "puffs" left in it.
If this strategy is starting to sound familiar, it's because the world's most famous investor, Warren Buffet, used a similar strategy to build his investment empire. Buffett only purchases companies with strong cash flows, high barriers to entry, a competitive moat, strong management, and a proven track record of success.
Kantesaria's approach is cut from the same cloth - and his swelling asset base suggests similar success.
Like Buffett, Kantesaria is also not concerned with the day-to-day fluctuations of the market, trade war, elections, or interest rates. His long-term time horizon leaves him immune to short-term hiccups and emotional market swings. A fallacy that many investors often fall prey to.
In addition to the attributes above, Kantesaria also assess the company's pricing power, volume growth, whether or not the product or service is essential, and how nimble the cost structure is.
Some of his favorites are: Fair Isaac (FICO), Moodys (MCO), Visa (V), and Mastercard (MA).
Once he buys, he holds for at least 10 years unless it reaches full value, or a risk value changes.
"I'm actually not concerned with anything on the equity side," he said. "If you're a long-term optimist about America and our economy, then I think today is a great entry point for the long-term investor."
He concluded: "Despite almost a 10-year bull market in equities, despite a positive year-to-date performance in equities, we're quite bullish on owning equities today."