Money Matters
4:00 am
Tue March 20, 2012

Could Allan Mecham be the next Warren Buffett?

Every investor dreams of beating the market. But very few money managers are able to pull it off on a consistent basis.

SmartMoney magazine recently profiled a fund manager who has beaten the odds. Allan Mecham, of Arlington Value Management, has racked up an impressive 400 percent gain in the past 12 years. An initial investment of $100,000 in his fund 12 years ago would be worth $500,000 today.

Mecham’s fund even made an 11 percent gain during the meltdown of 2008, when the S&P 500 plummeted 37%.

On this week’s Money Matters, financial commentator Greg Heberlein looks at Mecham’s formula for beating the market.

As listed in the SmartMoney profile, here’s how Mecham does it:

  • Ignore the economy and buy stable, defensive businesses.
  • Diversification is overrated. Six to eight stocks are plenty.
  • Forget complex spreadsheets and spend your time understanding a company and its industry.
  • Think decades, not quarters. Always take the long view.
  • Inactivity wins the day. Buy good companies and stick with them rather churn your portfolio.

Trying to beat the market is often a sucker’s game. Most of us are better off investing in a mixture of stock and bond index funds.

But it’s hard to argue with a 400% return.

Mecham’s fund is structured as a hedge fund. It’s not for most of us. It’s for people who can invest at least $1,000,000.

Even if you were able to pony up the million dollars, there’s no guarantee the winning streak will continue.

Almost every investment strategy eventually meets its Armageddon. 

Mecham’s lack of diversification is one of his keys to success, but it can also be viewed as his biggest vulnerability.

Can you put these principles to use? Most of us don't have the time to devote to researching companies like Mecham does. But it wouldn't hurt to keep some of these concepts in mind when managing your own portfolio.

Money Matters” is a KPLU feature covering the economy, investments and more. The feature is published here and airs on KPLU 88.5 during Morning Edition and All Things Considered on the second and third Tuesdays of the month. It also airs on Weekend Saturday Edition.