AP Photo/Richard Drew
- Chuck Akre - the founder of Akre Capital Management, which oversees over $10 billion - says brainpower alone will not make you a good investor.
- He outlines the single attribute he looks for in a potential investment, and discusses how he keeps his investment philosophy as simple as possible.
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You don't need a PhD to be a successful investor. And if you do have one, you're not guaranteed anything.
If you disagree with that statement, just take a look at Long-Term Capital Management.
Despite being run by Nobel Prize-winning economists, the $126 billion firm promptly collapsed after a plan they believed to be foolproof failed to pan out. It didn't matter that their leaders were some of the brightest minds in the world.
Their intellectual overconfidence - and the massive, immovable leverage that resulted - worked to their disadvantage. Still, many believe that the only way to prosper in financial markets is by employing a quantitatively complex approach.
But Chuck Akre - the founder of Akre Capital Management, which oversees over $10 billion - says this notion is simply untrue. While he's not entirely discrediting those who focus on academia, he prefers to keep things simple.
And given Akre has been in the asset-management industry for more than 25 years, he has plenty of experience dealing with traders of all types.
"I have, in my career, run across literally thousands of people who are very, very bright, who are not necessarily good investors," he said on a recent episode of the "Invest Like the Best" podcast. "And so pure knowledge is, in and of itself, not a ticket to being a good investor."
Akre himself is no slouch. His firm's flagship mutual fund - the Akre Focus Fund - resides in the 95th percentile relative to peers over the past five years, according to Bloomberg data. Akre also manages several hundred million dollars in two long-short equity private investment funds.
So what is Akre's self-described simple secret to achieving outperformance? He narrows it down to a single attribute: pricing power.
He uses an anecdote to demonstrate his thesis:
"It's a holiday weekend - a big holiday weekend. Your wife is having 100 people to a party in 2 hours, and the toilets are stopped. You will pay that plumber whatever he asks, as long as he can get there before the party. That's pricing power. So I'm always looking for ways to understand pricing power, because pricing power is key."
It was this thinking that prompted Akre to open a position in Mastercard in 2010 - a decision that's paid off with a handsome return of roughly 1,200%.
"I would just say that you could cut the margins in half, twice, and you'd still be above average for an American business," Akre said of the credit card giant. "So, clearly something extraordinary is going on there."
He continued: "We spent time trying to figure out what's causing that. We think we know, and we've quit talking about it."
Akre's simplicity-based strategy shares common threads with that of Warren Buffett.
Buffett has a box on his desk labeled "Too Hard," for companies that fall outside of his circle of competence. He doesn't need to over-complicate his investments and strategies. And he's constructed some of the most incredible returns by sticking with an extremely simple, long-term value approach.
If the sixth-richest man on planet earth has a no-frills, plain-vanilla strategy to investing, then it's probably not necessary to over complicate your thinking either.
But that doesn't mean you can't be creative.
"Imagination and curiosity are what's hugely important," said Akre, further outlining his philosophy. "And we've discovered things over the years, purely by being curious, and continuing to keep involved in the search process to find these exceptional businesses."
In the end, you don't need a genius-level IQ to be a successful investor. You need to be imaginative and curious to find opportunities that others have overlooked.
Keep this in mind the next time you make an investment. It may save you from a painful experience.