Donald Yacktman is a long term oriented investor who tends to run a focused portfolio of just 22 positions. He is also known to use derivatives and is happy to invest into small cap stocks. 

Investing Strategy: Focused Portfolio, Hedge Fund, Deep Value Investor, Small Cap stocks

1. Invest into Beach Balls

“We buy stocks that are like Beach Balls pushed under water” – Donald Yacktman  

This is a great analogy, a great company with bad sentiment from lets say a bad earnings release is like a beach ball pushed under water.

If a businesses fundamentals are improving then remember “the cream always rises to the top” , thus a bounce back is possible long term. 

2. Passion for Investing

“The Passion for investing is like a fire in the belly, either you have it or you don’t” – Donald Yacktman (Legendary Investor).

Many Great Investors I have studied have a true passion for the game. This is why we see investors such as Warren Buffett investing well into their 90’s! 

3. Be Principled

“The Difference between being Stubborn & principled is being right” – Donald Yacktman (Great Investor).  Many investors (&  people in life) will take a “stubborn” position on a subject.

This is ok & necessary at times, but whether that is a good decision will be based upon the outcome long term. Billionaire Investor Bill Ackman is quoted to have said:

“In Investing you can sometimes look silly for long periods, before being proven right”

4. Be a Value Investor

“I get a nosebleed if the PE Ratio is higher than 10” – Donald Yacktman (Value Investor).

  This is obviously meant as a joke, but is a true reflection of a classic value investors stance. If the stock is too highly priced relative to others than be aware. The PE Ratio, is the price to earnings ratio, this is amount investors are willing to pay for a given set of earnings.

The PE Ratio acts as a rule of thumb but is not a full proof method of valuation.

For that I suggest using a Discounted Cash Flow model, You can learn how to use this or just download our intrinsic valuations for many stocks in our Stock Research Platform. 

5. Use Private Market Value

“I want a stock which sells less than it’s private market value, what a rational person would pay to buy the whole company” – Donald Yacktman (Billionaire Investor).  

Imagine you are buying a company privately, how would you value it? You would look at the cash flows from the business, and perhaps compare prices to others in the area.

The same should apply when buying a stock, but often the madness of crowds take over & valuations can go euphoric!

6. Expect Volatility

“The Typical Large company stock will vary by 50% high to low each year” – Donald Yacktman (Billionaire Investor).

Expect volatility in the stock market, no stock goes straight up without corrections, pull backs and bad news at points.

This is normal and part of the business cycle. The goal is to decipher between a temporary setback or superficial bad news and a long term issue with the company.

7. Watch out for Bubbles

“Technology stocks are like Roman Candles, they go up like Rockets & flare out. Very few have withstood the test of time” – Donald Yacktman (Legendary Investor) – Dot Com bubble late 90’s. 

During the late 90’s stories about the potential of the internet got out of hand and this led to euphoria & madness in the stock market. Valuations reached all time highs before coming crashing down.

The Internet was a very real technology and it did change our lives, however that doesn’t mean any valuation can be paid. The majority of tech stocks such as pets.com “flared out” like roman candles. Only a “few have withstood the test of time”. The FAANG Stocks (Facebook, Apple, Alphabet, Netflix, Google) . 

8. Look for Predictable Cash Flows 

“It still boils down to “What you buy” and “what you pay” we want predictable cash flows long term. ” – Donald Yacktman (Billionaire Investor). 

9. Invest into Recession Proof Companies

“No company can be totally immune from disaster but ours tend to be recession proof” – Donald Yacktman (Billionaire Investor). 

“Recession proof” companies could be defensive stock such as those in the food or consumables industries. If there a recession & unemployment is high people will still need to eat. Whereas luxury retail brands or car makers may suffer. 

10. Buy Businesses not Trends

“Too Many people buy stories or trends, they don’t buy businesses” – Donald Yacktman (Legendary Investor)

There are plenty of ” Trends ” from electric vehicles to crypto currencies. Invested into these without understanding the individual businesses can prove to be disastrous. 

11. Buy with a Margin of Safety

“If you buy stocks at HUGE DISCOUNTS to value, it doesn’t matter what the market does” – Donald Yacktman (Investor). 

Buying stocks which are intrinsically undervalued by at least 25% gives you a “Margin of Safety”. This is a term commonly used by  Great Investors such as Benjamin Graham the father of Value Investing.

12. Buy Better than Average Companies

“We are trying to buy better than average companies at below average prices” – Donald Yacktman (Billionaire Investor).

This is similar to Warren Buffett’s quote of “buying a wonderful company at a fair price”. 

13. Momentum kills

“History is replete with Momentum investors who got killed on the downside” – Donald Yacktman (Billionaire Investor). 

Momentum is great when stocks are going up, but when stocks crash the momentum can drag returns down huge. If leverage was used then this can result in a disaster. For example Bill Hwang of Archegos Capital lost $20 Billion in 2 days! 

14. Fundamentals Prevail

“There is only so long you can hold a beach ball under water” – Donald Yacktman (Great Investor). 

Over the long term fundamentals prevail when investing into the stock market. If a company is consistently producing great cash flows and profits then the market will have to take notice at some point.

15. Have a Logical Investing Strategy

“The More logical investing strategy, the more likely it is to succeed” – Donald Yacktman (Billionaire Investor)

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Donald Yacktman Quotes