BF Anderson Private Portfolio Management

This morning Andy was featured in the Baton Rouge Business Report. Below is the article in full:

On the Record: B.F. ‘Andy’ Anderson 

By David Jacobs
Monday, August 9, 2010

B.F. “Andy” Anderson first learned about investing during after-school sessions with his grandfather, who, after a little TV and a bourbon and 7UP, liked to peruse the Wall Street Journal stock page. Anderson’s first buy was Gulf States Utilities, which his grandfather liked because it paid a dividend. He lost every penny. Call that his first lesson: Look for growth, not dividends.
Anderson, president/senior portfolio manager of B.F. Anderson & Company, a private portfolio management company on South Acadian Thruway, has had his share of good and bad years over his stock-picking career. He bought Amazon.com as soon as it went public and rode tech stocks to huge years in the late 1990s. Conversely, he pulled out of the market completely and went to cash in 2000 and 2008. He says he was essentially flat over the past decade.

But since its inception in 1995, he reports the portfolio he manages has returned 8.44% to investors after fees. That compares to a 7.56% increase in the Dow Jones Industrial Average and a 6.21% rise in the S&P 500. Nothing to write home about, but more than enough of a profit to show he knows what he’s doing, he says. For 2009, Money Manager Review listed him 13th nationally among multi-cap growth managers.

Solid returns are nice, but what he’s really searching for is the next superstar company that could make Anderson and his clients, who invest a minimum of $500,000 each, truly wealthy. He’s hunting a “black swan,” a term popularized by writer Nassim Taleb to describe rare, hard-to-predict, world-changing events. Catching that swan takes luck, but he says one must also be ready to grab that once-in-a-lifetime opportunity when it comes along.

1. You warn against being highly diversified. Why?

We’re of the opinion that diversification is for amateurs. If you study people like Warren Buffett, you’re going to find that they made their money from concentration of their portfolios. You could have had a mutual fund that owned Walmart back in 1971, but if you didn’t have a concentrated position in it, you really didn’t make any money. You’re much better off trying to find that next Walmart or that next Coca-Cola than putting your money in 10 different mutual funds, because everything’s so damn watered down. How many investments do you need to make in order to eliminate as much risk as possible? It’s about 16.
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2. Why stocks?

Historically, stocks are where the action is. The beauty of the stock market is you’ve got liquidity. If you screw up, you can get out of that investment within 24 hours. We try not to screw up, but if we make a mistake, we’re out within 24 hours. If the [mistake is] going to hit the fan, it’s going to hit it within 24 hours.

3. When do you dump a stock?

Usually, if the earnings disappoint. We have to bite our nails every earnings season. If we’re looking at a company that’s projected to do a billion dollars in revenues, and they come in at $900 million, we’re going to dump them because something’s wrong. We can always buy it back. Let’s say we’re looking for earnings to be up 75%, and they come in at 50%. Something’s not right. We don’t want any problems. We only invest in companies with zero problems.

4. You’re not a buy-low, sell-high kind of guy.

Absolutely not. Buffett bought GEICO and Coca-Cola because the companies were making a ton of money. He didn’t buy them because their stock price was low. He bought them because they were profitable. We’re doing the same thing, looking at return on equity, quarterly earnings, sales growth, things like that. Common sense.

5. But you want companies with room to grow. Take Apple, which you’re very high on. It’s one of the most hyped companies in the world; it’s huge, more than 800 mutual funds own a piece. How do you know it still has upside?

My biggest concern about Apple is if something happens to Steve Jobs. The guy’s obviously a genius. I think 90% of the time, the answer to this problem is to identify those people, and I think the only way you can identify them is through the numbers. As long as they continue to deliver the earnings and the sales, sky’s the limit.

6. How did you hit No. 1 with Money Manager Review after 2007?

We found a company called First Solar. We bought it at $30, right after they went public, and it went to $300. We were up 68% in 2007. 2007 was our “black swan” event. Track record means absolutely nothing because it’s all history. In fact, some studies say you’re better off hiring managers that have a bad track record because it comes back around. The point of a track record is, this guy knows what he’s doing. Use it as a general guideline.

7. Why do you say we’re in the early stages of a bull market?

We’re following five indexes. The first one is the Nasdaq. We have to get at least three out of five of these above the lower moving average, and the lower moving average has to turn up. It really hasn’t turned up yet, but it’s moving sideways, and we know as long as it holds up around here [points to a chart on his iMac], it’s going to turn up. We also look at the Merrill Lynch technology stocks. Technology stocks are the key to this country. When business spending picks up, they’re buying computers. Here’s the New York composite. Here are the small-cap stocks. Here’s the S&P 500. It looks like the tides are coming in.

8. So you’re not predicting anything. You’re following the trends, and the key is to be in on a trend early, before the masses jump back in.

Absolutely.

 9. Trying to find the next Walmart is a pretty low-percentage play. An investor could do everything right and still never hit that home run.

Right. This is a battle, and it’s not about investment success. It’s about survival. You only live once. Do you want to spend your life not ever having the hope of having a black swan event? I want to at least have the possibility of it. If I put my money in mutual funds, I’m putting the white flag up. You run the risks, and you survive long enough so that when the black swan event hits, which is the bull market, you’re there. You’ve got to put yourself in the position to be lucky. I’m at the plate, and I’ve got my bat.