Most investors are aware of the successful investments of Warren Buffett (Trades, Portfolio). Like so many billionaire investors, the Oracle of Omaha's investment strategy and the stocks he owned to get where he is today have been analyzed again and again. The same can be said for other well-known investors such as Charlie Munger (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Carl Icahn (Trades, Portfolio).
But spending too much time concentrating on these high-profile investors is, in my opinion, a mistake. There are many other successful hedge fund managers and business owners out there who had achieved equally impressive returns, although they might not have the same kind of media profile as the billionaires listed above.
One of these fund managers is Norbert Lou. If you've not heard of Lou before, he's the founder and portfolio manager of Punch Card Management.
Punch Card Management
It isn't easy to find information on this fund manager online. Lou rarely gives interviews, and his letters are seldom published publicly. However, in November 2015, Santangel's Review posted an in-depth analysis of the asset manager, his background and style.
Lou's "greatest differentiator," the Review noted, was his ability to find "rare undervalued and underfollowed" companies that can compound intrinsic value at an extraordinary rate for long periods.
One of his greatest investments was NVR Inc. (NVR, Financial), a small home builder. According to the Review, Lou first noted the company in around 2000 after it announced a stock repurchase program for $100 million. The firm's market value at the time was $275 million. He allocated 35% of his mother's portfolio to the stock at prices of between $25 to $40 per share. Over the next 19 years, the value of the stock rose to $4,000. These early years taught Lou a lot about the power of compounding.
According to the Review, he looked at selling the stock after it rose in value substantially, but he couldn't find any other investments to replace it. The Review noted:
"Norbert could not help noticing how much easier it was to watch NVR compound over time, now that the hard work of analyzing it was already done. By March 2000, the stock was above $54. "By buying a great stock and just hanging on, I ended up seeing how that could work out better than a lot of strategies," he said. "That really had an impact later on how I viewed the ideal investment.""
According to SEC filings, NVR was just one of four stocks Lou owned in his portfolio at the beginning of 2020. That suggests he had a similarly concentrated portfolio up until that point.
After finally divesting NVR, Punch Card owned just three stocks at the end of September 2020. These were Berkshire Hathaway Class A shares (BRK.A, Financial), Ally Financial Inc (ALLY, Financial) and Winnebago Industries Inc (WGO, Financial). Berkshire was the largest with a 45% portfolio weight.
If there's one thing we can learn from this fund manager, it is the value of patience. Finding an excellent investment is hard. Finding two is even harder. Therefore, it does not make any sense to sell a good company just because you think you may have found something more interesting elsewhere. Holding onto good companies is the best decision any investor can make.
That said, many won't find this easy. Sitting on your hands and waiting for years on end is hardly exciting. Research shows that is where so many investors go wrong; they overtrade and don't hold on to good businesses. Lou cracked this code a long time ago. He realized that the hard work was finding good firms in the first place. Once you're past that stage, it pays to sit back and let the company compound itself.
Disclosure: The author owns shares in Berkshire Hathaway.
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