The holidays are a great time to remember that there is so much to be grateful for, most especially for key people who influenced and supported us. For me, one of the most influential people in my life was my late mentor, Frank Sands Sr. Mr. Sands, or Frank as I knew him, was one of the greatest investors of our time and I had the great fortune to work closely with him for over 20 years, assisting him in building his firm, Sands Capital, from the early years (managing less than $100 million) to over $40 billion. Perhaps more important than the clear success of his firm, his greatest contribution to the investment management industry was truly pioneering the concept of concentrated growth, which was avant-garde at the founding of his firm and now—30 years later—more widely accepted as the best approach to active management.
Being a true philosopher of both the business of investment management and life in general, Frank was a fountain of wisdom. While we lost Frank recently, he lives on through his immense influence on the industry.
As we close out a difficult year for the equity markets and growth investing in particular, I find going back to “first principles” helps provide a bit of long-term perspective. Below I share my personal recollection of five points of wisdom I learned from my mentor that provides light on the path to successful long-term investing.
Wisdom Point #1: Concentrate on Your Best Ideas
Frank always liked to tell the story that when he first started out as a professional investor at a firm known as David L. Babson, he would notice that, out of the diversified portfolio they managed, the same group of holdings seemed to make the biggest contributions, year in and year out. Why not just own that group of companies? This was the first clue for him to develop an approach of concentrating on your “best ideas,” owning 25-30 holdings, or as he liked to put it: “Why own your 50th best idea?”
Recent academic studies have shown that less than 5% of publicly traded companies over past decades were responsible for the vast majority of the long-term returns in the market. Said another way, and using a favorite word of Frank’s, you want to avoid “mediocrity,” as most of the companies in the market are below average. Find those companies that are demonstrating above-average characteristics and focus on them.
Wisdom Point #2: Quality Will Out
Another favorite phrase for Frank was “quality will out,” or the idea that a quality leading company will win over the long term. He always focused on searching for the best companies within each industry, the ones that found ways to build the best products or services and related business models. While stocks in these businesses may go in and out of favor with Wall Street in the short term, their underlying qualities position them to deliver on the timeframe that matters the most: over multiple years. The corollary is that low quality will reveal its nature over time, too, so avoiding “below average” companies is critical for successful investors.
Wisdom Point #3: Aim for the Long-Term Viewpoint
Frank believed that Wall Street was way too short-term focused, and it blinded them to long-term opportunities. One of the things I remember most vividly was Frank using his favorite “red pen” to mark up research reports on companies published by the Street. He would wield that pen like a sword and slice up (by crossing out) anything that smacked of short-term thinking, such as 12-month price targets (who knows what a stock’s price will be in a year?) or discussion of why a truly great company should be sold because of some short-term headwind. Why would you sell Microsoft when they were just getting started “putting a computer on every desk,” he would say. He would always push the investment team to ignore the short-term noise and aim for the long-term viewpoint. He would probably say that Wall Street right now is too obsessed with short-term macro events that are unpredictable and placing too little value on the long-term opportunities. Focus on the “long-term prospects” and “less on the unknowable and unpredictable,” he would say.
Wisdom Point #4: Invest in Solutions (to Big Problems)
Frank was an optimist at heart and believed there was so much progress happening in our world. Yes, there might be big problems, but quality companies are creating solutions. I remember distinctly, when I first joined the firm, that the pharmaceutical holdings in the portfolio were heavily out of favor due to healthcare legislation that seemed to threaten the industry. Frank’s response: drug companies are not the problem. They are the solution to many different diseases, and they are truly great businesses. He felt so strongly about this he did two things that demonstrate conviction. First, he defended the investments by holding on to them through this difficult period. Second, he wrote a letter to his client base explaining his rationale. That is conviction. The result: the drug companies kept innovating and launching new breakthrough treatments, which sustained growth and led to strong stock performance.
Wisdom Point #5: Stock Prices Track Long-Term Growth in Earnings Power
One of Frank’s favorite statements to prospective clients was “the secret to stock price appreciation is long-term growth in earnings power.” Prospective clients would invariably lean in when he started that statement. Who doesn’t want to know the secret to stock price appreciation, right? And, you know what? Frank was right about this simple fact: while stock prices can meander up or down, they tend to correlate over the long term to growth in earnings and cash flow, particularly if it is generated in a sustainable and quality manner. Of course, to benefit from this dynamic, one must stick with your investments over multiple years and often through many short-term setbacks and economic environments. Easier said than done. Frank had a simple, but quite powerful way to instill conviction in each investment. Frank always liked to ask “What is special?” about a particular company we were researching, trying to get at the essence of what makes the company a compelling investment. He would always implore analysts to never forget that element, as it is what will help you persevere through temporary storms, so as to benefit from the long-term growth in earnings power.
Frank Sands, Sr. was a special person to me and many others, and he—and his wisdom—will never be forgotten.
