Donald Yacktman's Investment Strategy. "A low purchase price covers a lot of sins."

 

Donald Yacktman's Investment strategy and methodology. “A low purchase price covers a lot of sins.”

https://myinvestingnotes.blogspot.com/2010/02/investment-strategy-and-methodology-low.html

Executive Summary: Donald Yacktman's Investment Strategy

For the disciplined, long-term investor, Donald Yacktman's approach offers a masterclass in rational, cash-flow-focused value investing. The core takeaway is this: Invest like you're buying a bond with a growing coupon, not trading a stock ticker.

Here’s the actionable framework:

1. The Guiding Principle: The "Forward Rate of Return"
This is the heart of the strategy. When evaluating any stock, calculate its expected annual return as:

Forward Rate of Return = Current Free Cash Flow Yield + Annual Growth in Free Cash Flow + Inflation Adjustment.
For example, if a stock trades at a price that gives an 8% free cash flow yield and you expect 5% growth, your estimated return is ~13%. This metric directly competes with bond yields and other stocks.

2. Market & Macro View: Ignore the Noise, Focus on the Business

• Do Not try to time the market or predict economic cycles. It's a distraction.

• Do assess how a specific business will perform through cycles. Avoid assuming peak earnings or margins will last forever.

3. Cash is a Strategic Outcome, Not a Market Bet
Your cash balance is a natural result of your investment criteria, not a tactical forecast.

• Cash rises when you can't find stocks meeting your minimum required return (e.g., 30% in 2007).

• Cash falls when bargains are abundant (e.g., 0% in late 2008).

• Holding cash is acceptable; forcing investments in an overvalued market is not.

4. The Sell Discipline: It's All About Relative Value
Forget price targets. You sell for only two reasons:

1. The stock's forward rate of return has fallen below your minimum threshold.

2. You find a significantly better opportunity with a higher risk-adjusted return.
   This process naturally trims winners and recycles capital into undervalued assets.

5. The Ultimate Margin of Safety: A Low Purchase Price
Yacktman’s key adage: "A low purchase price covers a lot of sins." Even if your analysis is slightly off, a cheap entry point provides critical protection against permanent capital loss.

Current Application (as of early 2010):
Following this framework, Yacktman finds value in high-quality businesses with predictable cash flows that are temporarily out of favor—like media (News Corp, Viacom) and consumer staples (PepsiCo). The model demands patience and the courage to buy during declines, but it systematically directs capital to its most efficient use.

Investor's Bottom Line: Yacktman’s strategy is a powerful, self-correcting system. It removes emotion and macro speculation, replacing them with a cold, comparative analysis of cash flow returns. For an investor seeking to build wealth over decades, this discipline of buying "dollar bills for 40 cents" and holding until the value proposition erodes is a timeless and effective approach.