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How about a 400 percent return?

By Judy Martel · Bankrate.com
Tuesday, February 21, 2012
Posted: 7 am ET

The investing world is abuzz over the success of an unassuming 34-year-old college dropout who isn't big on spreadsheets, market predictions or algorithms. Yet, in the 12 years he's run his money management business, he's earned a cumulative 400 percent.

A few stock mutual funds have done as well or better than Allan Mecham, but the vast majority fall short. In an interview with Smart Money magazine, Mecham says he achieves a steady return by investing in large U.S. companies such as Pepsico and AutoZone, but adds that you won't find Apple in his portfolio. "Our portfolio is not one to get you excited," he says.

Mecham dropped out of University of Utah after two years and says he began "devouring" reading material related to investing. He raised just under $200,000 in seed money to start his company, Arlington Value Management, at the age of 22. Today, he has approximately $80 million under management. Clients typically have to invest at least $1 million with his firm.

Some of Mecham's common-sense tactics include focusing on only a few, solid stocks (he holds between six and 12), and instead of paying attention to the next quarter, he focuses on the next decade. A fan of Warren Buffett, he adopts some of the same criteria for companies he buys. He seeks those with good long-term prospects, strong cash flow and management, and high barriers to entry for the competition. He takes his time with his research, saying if he finds two new ideas a year, it's "phenomenal." Once he's researched a company, he settles in for the long haul instead of trading frequently in response to short-term economic news. "Activity is the enemy of returns," he says.

Experts point out some potential risk to his portfolio, namely the lack of diversification, but it's hard to argue with his style or his results. He even managed to make a profit in 2008, when Standard & Poor's 500 index lost 37 percent. As an example, he began buying stock in AutoZone, maker of car parts, in 2005 because he thought it was "countercyclical." That turned out to be true during the recession, when people were keeping their cars longer, rather than trading them in for new. His portfolio includes fast food, health care, tobacco and consumer products.

Not everyone has the time and talent to develop a portfolio with outsize returns. And with just a dozen or so stocks and no fixed income, you'd have to really know your stuff. But taking into account even a couple of his ideas, such as ignoring the short-term chatter and focusing on company fundamentals rather than hype, will go a long way toward investing success.

What do you think of Mecham's approach?

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1 Comment
Dmitry
February 21, 2012 at 6:18 pm

12.25% annual return reinvested gets you 400% over 12 years.

Not bad.

But I still would not give him a million. In fact, I'm amazed how 22 year old college dropout managed to raise $200,000.

I recall that after dot com bust there was a great period (2003) during which you could double your money by throwing darts into financial section of a newspaper and buying stocks with holes.
I had number of investments sold with 2-3-400% gains at that time.

But kudos to Allan and best of luck to him. Hope he can generate even more buzz 12 years from now. If anything, it shows that many fund managers not worth their salaries and/or "carried interest".