Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

Bill Ruane Value Investing Strategy

In 1950, William Ruane, or Bill Ruane as he was known, took a course on value investing taught by Benjamin Graham and David Dodd at Columbia University despite having graduated from Harvard Business School.  One of his classmates was Warren Buffett, with whom he formed a friendship.

[mainbodyad]Years later, when Buffett dissolved his investment partnership, he recommended that any partners still interested in value investing put their money with Ruane, who had launched his own firm, Ruane, Cunniff.  The flagship value investing vehicle of the new firm was the Sequoia Fund, an open-ended mutual fund.

Over the next 38 years, the Sequoia fund outperformed the S&P 500 by compounding at 15% per annum versus 13% for the broader index. Ruane was concerned with protecting returns for his existing investors, so the fund was closed in 1982 and no one could purchase additional shares unless you had already had a stake in the fund.  This restriction remained in place until 2008.  This created a thriving underground market for shares of Sequoia, which were even listed for $1,000 on eBay so investors who wanted to acquire one share could join the fund, then qualify to invest additional money.

Although Ruane recently passed away, he remains forever enshrined in the pantheon of great value investing managers, proving that it is possible to beat the market with less risk by focusing on acquiring good stocks at fair prices.

How the Sequoia Value Investing Strategy Is Different

[mainbodyad]The Sequoia fund practiced value investing in the same way that Warren Buffett did, by taking concentrated positions in good businesses that appeared to be trading at attractive valuations.  This focus investing style was the other end of the value investing spectrum from Walter Schloss, Tweedy, Browne, and Benjamin Graham.  The fund, for instance, purchased large blocks of Berkshire Hathaway when it was trading at under $100 per share (compared to as high as $150,000 per share in recent years).  This allowed the value investors to steadily compound their money without a lot of activity or capital gains taxes.

Putting Together a Value Investing Portfolio Like Bill Ruane

To begin putting together a value investing portfolio modeled after the style of Bill Ruane, look for for the following things:

  • Get value wherever you can, meaning invest in both domestic stocks and international stocks.
  • You want strength on the balance sheet.  Value investing is about minimizing the downside and assets can help do that in the event something goes wrong.
  • Strong earnings for shareholders are important because it’s this cash that funds share repurchases, dividends, or expansion of the core, profitable business.
  • If stocks are expensive, park your money in U.S. Treasury bills.  Don’t think you must be invested at all times if stocks appear overvalued.
  • Never try to time the market.  If you find good value, buy it.  Your shares may fall another 30% or 50%.  If you were correct in your valuation, buy more.  You cannot know what the market will do today, tomorrow, or two years from now.  You can be fairly certain what it will do twenty years from now.  That needs to be your focus.
  • Look for companies with little or no debt that “generate enough free cash flow to be self-funding.  That is, they do not need to tap the capital markets to finance future grwoth or fund current operations.  That does not mean [they] will weather recession easily, but the ability to self-finance mitigates risk.”
  • Know your exposure.  Are your stocks dependent upon consumer spending?  Business spending?  Are they necessities?  Knowing the answer to this question will allow you to better assess your risks when a crisis hits the market, which it inevitably will.

More Information on Value Investing

For more information on value investing, read our value investing strategy guide.