Peter Lynch disciple William Danoff runs a $120 billion fund for Fidelity. He reveals the 4 exact qualities that must be met before he buys something - and shares his keys to becoming a great investor.
- William Danoff, portfolio manager of Fidelity's Contrafund (FCNTX), has a simple set of investment criteria that he strictly adheres to.
- He was mentored by renowned investor Peter Lynch in the late 1980s and early 1990s.
- Danoff applies "look before you leap" logic to all of his holdings, and vigorously vets issues before incorporating them into his portfolio.
- Today, the Contrafund is heavily invested in forward-looking technology companies.
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William Danoff, portfolio manager of Fidelity's Contrafund (FCNTX), had a mentor that most investors dream of: legendary asset manager Peter Lynch.
In fact, Danoff served as portfolio assistant for the Lynch-run Magellan Fund in 1989 and 1990 before setting off to head his own fund.
"In the great words of Peter Lynch, who's the mentor of everybody here at Fidelity (who just celebrated his 50th year of service here): 'We get offered a lot of blind dates and our job is to ask for a picture,'" Danoff said on "The Long View," an investing podcast. "That's sort of what I do well, I think."
Of course, Lynch's quip wasn't meant as dating advice. He's talking about investing - and Danoff applies Lynch's "look before you leap" logic to his own style of asset management.
"I think about trying to understand the facts, trying to use my accumulated industry and company knowledge to anticipate the future - and often it's really just: 'Is this company going to be bigger, and better, and stronger 5 years from now than it is today,'" he said. "I'm not in the business of trying to figure something out a nanosecond faster than somebody else."
Currently, the Contrafund has about 24% of their holdings in technology. Facebook (FB), Amazon (AMZN), Microsoft (MSFT), Salesforce (CRM), and Alphabet (GOOGL) all occupy spots in the top ten.
But before these issues were welcomed into Danoff's portfolio, each security went through a rigorous vetting process. The four qualities he looks for are listed below, in bold.
Investment qualities
"Historically, I have found that if you can identify people that you trust - that are extremely knowledgeable about their industry and enthusiastic about their company - and, in some cases, ideally, are founders of the company ... the company is an expression of who they are and what they are, and they really want to grow the company ... then that's the perfect situation," he said.
He added: "Especially if it's a good business and they have a differentiated product offering and a great value proposition."
To further expound on his criteria, Danoff provided an example from the 1980's. At the time, he was a retail analyst covering Costco (COST) - a company that was just starting to catch the eye of investors.
"I remember the early days of companies like Costco," he said. "When you look back over a 20-year time horizon, you just see a pattern that you want to replicate going forward. And that would be: A special business that delights their customer, an owner-operator, free cash flow generative, high return, and hopefully with barriers to entry."
Customer delight is something that Danoff often emphasizes - and it's reflected in his portfolio. Currently, he has a massive, $4.4 billion position in Salesforce.com (CRM).
"I was a little late to the software as a service sector - and then I went to Dreamforce, which is Salesforce.com's user conference out in San Francisco," he said. "I was just blown away by the enthusiasm of the employees and the customers. And you know, that can be priceless in terms of your appreciation of the strength of a franchise."
Along with customer delight, Danoff also shares an affinity for businesses that are low capital intensive, have high margins, and appeal to a global audience. He references Apple (AAPL) as an example of such, and calls the confluence of their business practices "a very sweet combination for shareholders."
Currently, Danoff has $2.6 billion invested in the technology giant.
But his analysis doesn't stop there.
When it comes to red flags, Danoff steers clear of issues in capital-intensive, highly regulated industries. He says he "doesn't have time" for mounting losses and stagnant earnings-per-share growth.
With all of that under consideration, Danoff shares what he calls the "key" to becoming a great investor.
"I think the key to being a great investor is being open to new ideas, learning from new ideas, and finding that right balance between waiting for the right moment," he concluded. "That's what my business really is: trying to identify great management teams and great companies, and just let them do the hard work."
