Barry Ritholz interviewed Will Danoff for his pod Masters in Business recently, and I highly recommend giving it a listen. For those not familiar with Danoff (I wasn’t until this pod), he is the manager for a Fidelity mutual fund called Contrafund which has smoked the S&P for the last few decades. Contrafund has $139bn under management and the returns are stunning – from Fidelity:
A $10K investment in the fund in 1990 would be worth over 2.3 times that of a hypothetical investment in its benchmark over the same period. On average, the Fidelity Contrafund has beaten the S&P 500 Index by 3.16% per year.
During Will Danoff’s tenure, Contrafund has outperformed the S&P 500 Index in 100% of rolling 10-year time periods.– Fidelity write-up on Contrafund
I found Danoff’s interview really approachable and enjoyed listening to him talk about his own approach. Danoff’s track record and approach to evaluating companies convinced me to dollar cost average into Contrafund immediately after the pod ended – the ticker is FCNTX for those interested. I’m excited to watch his portfolio (which has over 300 public and mostly large cap companies) now that I have skin in the game.
Some lessons learned and observations I had from the pod:
- Look for doubling of earnings in 5 years. This is a key question to ask yourself before you buy the company – how quickly can they double earnings?
- Think of how much to invest kind of like playing poker (pre-flop, flop, turn, river). As time goes on, you’re going to get more cards to tell you how much to bet. One example is SBUX – early in history they had stores in Pacific Northwest and it wasn’t known whether the concept would work outside of “tree-hugger” types (Danoff’s words :-)). At this point you maybe have a high card and a decent kicker – good potential but lots of room for failure. They then made stores work in Northeast and then management started showing math working on returns on capital for each new store opened – now maybe you think of this as getting a two pair or something good on flop. Bet more as good stories unfold. As more uncertainty around a company is removed because of great execution and proof in the data, it makes sense to increase your bets (as aside, I’ve often been hesitant to dollar cost average up and want to improve at this)
- Pay attention to what management has to say, and not necessarily their intent. Management is pitching you, the investor, for a reason – they need capital. What management is telling you about the business can inform an investment decision outside of buying the company management represents. Danoff tells a notable story about how when Ask.com (AskJeeves) pitched Fidelity, he got more insight into Google’s dominance at search and ended up investing in Google instead.
- What would the world look like without this company? This is another good framing question for company evaluation. Consider AMZN during COVID
- Companies can stay expensive relative to the market for decades. In cases where you think growth will continue and business quality is excellent, don’t let this dissuade you. Teams pay up for great athletes (ex. MJ on Bulls); great stocks are expensive and stay expensive
- Own best of breed – you’re not looking for someone who can bump market share from 1-5% – you’re looking for someone who can win the market who has incredibly high customer satisfaction
- There’s a reason indexes are hard to beat – the worst names get kicked out of the index and the best names become a larger percentage (think of FAANG representing big percentage of S&P return). How does your portfolio compare to the index? If the sectors you’re invested in are way different from the S&P allocation, you’re taking a big bet against the index
Anyways, thought this pod was excellent and recommend everyone give it a listen.